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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, 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 November 8, 1999 there were 17,173,952 shares of registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and March 31, 1999.................................................. 3
Unaudited Interim Consolidated Statements of Income for the
Three and Six Months Ended September 30, 1999 and 1998 ............. 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Six Months Ended September 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 ..................................... 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................... 21
Item 6. Exhibits and Reports on Form 8-K ............................................ 21
SIGNATURES ............................................................................. 23
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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,
1999 1999
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash ............................................................. $ 2,590 $ 1,551
Accounts receivable, net of allowance for doubtful accounts of
$6,949 and $2,857 at September 30, 1999 and
March 31, 1999, respectively ................................. 149,800 139,864
Inventories, net ................................................. 120,867 107,918
Prepaid expenses and other current assets ........................ 5,768 4,982
Deferred tax asset ............................................... 2,087 137
------------ ------------
Total current assets ............................... 281,112 254,452
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ................................ 42,070 37,807
Leasehold improvements ........................................... 4,959 2,399
------------ ------------
47,029 40,206
Less - Accumulated depreciation and amortization ................. (23,515) (20,296)
------------ ------------
Net property and equipment ......................... 23,514 19,910
OTHER ASSETS ......................................................... 12,414 12,070
EMPLOYEE RECEIVABLE .................................................. 501 485
EXCESS OF COST OVER NET ASSETS ACQUIRED, net ......................... 30,097 28,962
------------ ------------
Total assets ....................................... $ 347,638 $ 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
September 30, March 31,
1999 1999
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 82 $ 146
Trade accounts payable ........................................... 100,905 103,179
Accrued expenses ................................................. 13,113 12,363
------------ ------------
Total current liabilities .......................... 114,100 115,688
------------ ------------
LONG-TERM DEBT, less current portion ................................. 71,103 43,021
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at September 30, 1999 and March 31, 1999; none issued
and outstanding .............................................. -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at September 30, 1999 and March 31, 1999;
17,171,452 and 17,162,382 shares issued and
outstanding at September 30, 1999 and March 31, 1999,
respectively ................................................. 172 172
Additional paid-in capital ....................................... 87,702 87,394
Retained earnings ................................................ 76,936 71,801
Deferred compensation ............................................ (176) --
Other comprehensive income ....................................... (2,199) (2,197)
------------ ------------
Total shareholders' equity ......................... 162,435 157,170
------------ ------------
Total liabilities and shareholders' equity ......... $ 347,638 $ 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 Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales ....................................................... $ 246,689 $ 220,151 $ 479,926 $ 442,740
Cost of sales ................................................... 220,762 193,428 426,733 389,490
------------ ------------ ------------ ------------
Gross profit ............................................ 25,927 26,723 53,193 53,250
Selling, general and administrative expenses .................... 24,098 17,145 43,386 33,947
Acquisition related costs ....................................... 249 130 619 535
Reversal of loss on disposition of business ..................... (1,000) -- (1,000) --
------------ ------------ ------------ ------------
Income from operations .................................. 2,580 9,448 10,188 18,768
Interest expense ................................................ 1,020 789 1,770 1,641
------------ ------------ ------------ ------------
Income before income taxes .............................. 1,560 8,659 8,418 17,127
Provision for income taxes ...................................... 608 3,378 3,283 6,408
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change .... 952 5,281 5,135 10,719
Cumulative effect of accounting change, net of tax .............. -- -- -- (405)
------------ ------------ ------------ ------------
Net income .............................................. $ 952 $ 5,281 $ 5,135 $ 10,314
============ ============ ============ ============
Net income per common share:
Basic:
Income before cumulative effect of accounting change ..... $ 0.06 $ 0.31 $ 0.30 $ 0.62
Cumulative effect of accounting change, net of tax ....... -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income ............................................... $ 0.06 $ 0.31 $ 0.30 $ 0.60
============ ============ ============ ============
Diluted:
Income before cumulative effect of accounting change ..... $ 0.05 $ 0.30 $ 0.29 $ 0.60
Cumulative effect of accounting change, net of tax ....... -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income ............................................... $ 0.05 $ 0.30 $ 0.29 $ 0.58
============ ============ ============ ============
Weighted average common and
common share equivalents outstanding:
Basic .................................................... 17,171 17,105 17,168 17,055
Diluted .................................................. 17,365 17,723 17,581 17,769
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,
----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 5,135 $ 10,314
Adjustments to reconcile net income to net cash used
in operating activities --
Depreciation and amortization ............................ 4,020 3,176
Provision for doubtful accounts .......................... 5,354 1,073
Deferred stock compensation .............................. 16 --
Deferred income tax benefit .............................. (1,950) (82)
Changes in operating assets and liabilities --
Accounts receivable .................................. (14,625) 1,810
Inventories, net ..................................... (11,844) (14,624)
Trade accounts payable and accrued expenses .......... (1,579) (15,248)
Income taxes payable ................................. (809) (920)
Prepaid expenses and other current assets ............ (435) (1,300)
------------ ------------
Net cash used in operating activities ........... (16,717) (15,801)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (6,887) (3,607)
Acquisitions of businesses, net of cash acquired ............ (2,325) (2,886)
Advances to employees, net .................................. (79) (54)
Increase in other assets .................................... (344) (3,302)
------------ ------------
Net cash used in investing activities ........... (9,635) (9,849)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ................. 27,723 28,311
Payments on capital leases and notes payable ................ (112) (5,022)
Net proceeds from exercise of stock options ................. 116 1,829
Distributions to former shareholders of The Tape Company .... -- (973)
------------ ------------
Net cash provided by financing activities ....... 27,727 24,145
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH ................................ (336) 579
------------ ------------
NET INCREASE (DECREASE) IN CASH ................................. 1,039 (926)
CASH, beginning of period ....................................... 1,551 2,087
------------ ------------
CASH, end of period ............................................. $ 2,590 $ 1,161
============ ============
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 ("Daisytek"), 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 transaction management services and
e-commerce logistics business solutions. The Company, through its wholly owned
subsidiaries in the U.S., Canada, Australia, Mexico, Singapore and Europe, 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 September 30, 1999, its results of operations and its
results of cash flows for the six months ended September 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. PUBLIC OFFERING OF PFSWEB COMMON STOCK
On September 23, 1999, PFSweb, Inc. filed a registration statement for an
initial public offering ("IPO") of 3,100,000 shares of common stock. PFSweb also
granted to the underwriters an option to purchase 465,000 additional common
shares to cover over-allotments. The net proceeds after IPO expenses are
intended to be used for the repayment of PFSweb Inc.'s intercompany payable to
Daisytek ($22.3 million at September 30, 1999), acquisition of certain assets
from Daisytek for approximately $5.4 million, and to finance future capital
expenditures and working capital needs of PFSweb. The Company will use the
proceeds from the repayment of the intercompany balance and the transfer of
assets to PFSweb to pay down its revolving line of credit facility. Upon
completion of the IPO, the Company will own approximately 82.2% of the capital
stock of PFSweb, or approximately 80.1% if the underwriters exercise their
over-allotment option in full. Subject to certain conditions, the Company
intends to separate PFSweb by distributing its ownership in PFSweb common stock
to Daisytek shareholders through a tax-free spin-off. There can be no assurances
that the planned IPO or spin-off will be consummated.
PSFweb, Inc. has authorized 6,000,000 shares of PFSweb, Inc. common stock
for issuance under two 1999 stock option plans (the "Option Plans"). The Option
Plans, which are currently administered by the Compensation Committee of the
Board of Directors of PFSweb, Inc., provide for the granting of incentive awards
in the form of stock options to directors, executive management, key employees,
and outside consultants of PFSweb, Inc. and its subsidiaries. The right to
purchase shares under the stock option agreements typically vest over a three
year period. Stock options must be exercised within 10 years from the date of
grant. Stock options are issued at fair market value. In July 1999, PFSweb.,
Inc. issued options to purchase 1,344,250 common shares at $10.45. In August
1999, PFSweb, Inc. issued options to purchase 32,250 common shares at $13.00.
All of these options are subject to a three year
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vesting schedule under which no options vest for three years, subject to
acceleration, in part, upon completion of the spin-off of PFSweb, Inc. from
Daisytek.
3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Six Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
Cash paid during the period for:
Interest .......................... $ 1,374 $ 1,460
Income taxes ...................... $ 5,624 $ 7,413
4. COMPREHENSIVE INCOME (IN THOUSANDS):
Three months ended Six months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income ............................... $ 952 $ 5,281 $ 5,135 $ 10,314
Comprehensive income adjustments:
Cumulative translation adjustment ... (322) (308) (2) (435)
-------- -------- -------- --------
Comprehensive income ..................... $ 630 $ 4,973 $ 5,133 $ 9,879
======== ======== ======== ========
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. 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 Six Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
NUMERATOR:
Income before cumulative effect of
accounting change ....................... $ 952 $ 5,281 $ 5,135 $ 10,719
Cumulative effect of accounting change ........ -- -- -- (405)
---------- ---------- ---------- ----------
Net income .................................... $ 952 $ 5,281 $ 5,135 $ 10,314
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ..................... 17,171 17,105 17,168 17,055
Effect of dilutive securities:
Employee stock options ...................... 194 618 413 714
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions ....................... 17,365 17,723 17,581 17,769
========== ========== ========== ==========
Net income per common share:
Basic:
Income before cumulative effect of
accounting change ................... $ 0.06 $ 0.31 $ 0.30 $ 0.62
Cumulative effect of accounting change .... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income ................................ $ 0.06 $ 0.31 $ 0.30 $ 0.60
========== ========== ========== ==========
Diluted:
Income before cumulative effect of
accounting change ................... $ 0.05 $ 0.30 $ 0.29 $ 0.60
Cumulative effect of accounting change .... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income ................................ $ 0.05 $ 0.30 $ 0.29 $ 0.58
========== ========== ========== ==========
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT 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 six month periods ended
September 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
---------- ---------- ---------- ----------
Three Months Ended September 30, 1999
Net sales ...................................... $ 197,943 $ 24,454 $ 5,132 $ 227,529
Operating contribution ......................... 7,694 1,650 85 9,429
Three Months Ended September 30, 1998
Net sales ...................................... $ 175,242 $ 26,797 $ 2,696 $ 204,735
Operating contribution ......................... 8,292 521 765 9,578
Six Months ended September 30, 1999
Net sales ...................................... $ 376,019 $ 47,015 $ 10,137 $ 433,171
Operating contribution ......................... 13,335 3,329 743 17,407
Six Months ended September 30, 1998
Net sales ...................................... $ 353,045 $ 53,272 $ 4,620 $ 410,937
Operating contribution ......................... 15,875 2,152 1,276 19,303
Assets
September 30, 1999 ............................. $ 266,739 $ 50,911 $ 29,988 $ 347,638
March 31, 1999 ................................. 198,527 48,295 69,057 315,879
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.
The Company's segments are presented on the same basis as the Company's
management reviews the results of operations. The PFSweb segment information
presented differs from the financial statements of PFSweb, Inc., which were
prepared on a carve-out basis and include an allocation of certain Daisytek
corporate expenses and infrastructure.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the table above, and for management purposes, PFSweb net sales are
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 Sept. 30, Six Months ended Sept. 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Segment net sales ............ $ 227,529 $ 204,735 $ 433,171 $ 410,937
Adjustment for PFSweb ........ 19,160 15,416 46,755 31,803
------------ ------------ ------------ ------------
Consolidated net sales ....... $ 246,689 $ 220,151 $ 479,926 $ 442,740
============ ============ ============ ============
Reconciliation of segment operating contribution to consolidated income before
taxes is as follows (in thousands):
Three Months ended Sept. 30, Six Months ended Sept. 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Segment operating contribution ................... $ 9,429 $ 9,578 $ 17,407 $ 19,303
Acquisition related costs (a) .................... 249 130 619 535
Incremental charges (b) .......................... 7,600 -- 7,600 --
Reversal of loss on disposition of business ...... (1,000) -- (1,000) --
Interest expense ................................. 1,020 789 1,770 1,641
------------ ------------ ------------ ------------
Consolidated income before income taxes .......... $ 1,560 $ 8,659 $ 8,418 $ 17,127
============ ============ ============ ============
(a) These charges relate to the Professional Tape Products segment.
(b) Incremental charges have not been allocated to the reportable segments.
These charges relate to certain repositioning and separation activities
associated with the PFSweb, Inc. planned initial public offering, certain
other charges as a result of these activities, to increase allowances
for bad debts and other charges.
7. SUBSEQUENT EVENTS:
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc., a privately held, specialty wholesaler of copier and
fax consumables for approximately $27.4 million in cash and the assumption of
liabilities of approximately $7.0 million.
On October 15, 1999, the Board of Directors declared a dividend
distribution of one preferred stock purchase right (a "right") for each share of
the Company's common stock outstanding on October 25, 1999. Each right entitles
the registered shareowners to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $70.00, subject to adjustment.
The rights are not currently exercisable, but would become exercisable if
certain events occurred relating to a person or group acquiring or attempting to
acquire 15 percent or more of the outstanding shares of common stock. The rights
expire on October 25, 2009, unless redeemed or exchanged by the Company earlier.
On October 29, 1999, the Company amended one of its unsecured revolving
line of credit agreements (the "Facility"), effective November 1, 1999, to
increase the maximum borrowing availability from $85 million to $105 million.
This amendment also provides for the release of PFSweb, Inc. and its
subsidiaries as guarantors of the Facility upon (i) the effective date of the
IPO of the shares of the common stock of PFSweb, Inc. and (ii) the payment from
PFSweb, Inc. to Daisytek in settlement of the outstanding payable to Daisytek.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb, Inc. following the completion of the IPO. The Facility has also been
amended to increase the interest rate, effective March 1, 2000, to Eurodollar
rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%.
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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). This report on Form 10-Q also
contains other forward-looking statements, including those related to an
anticipated initial public offering and spin-off. Consummation of the
transactions is uncertain and realization of the anticipated results could take
longer than expected and implementation difficulties and market factors could
alter anticipated results. Actual results could differ materially from those
projected in the forward-looking statements.
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 transaction management
services and e-commerce logistics solutions on an international basis. Services
include order management, customer care services, billing services, information
management and distribution services. 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.
In June 1999, Daisytek created a separate wholly-owned subsidiary named
PFSweb, Inc., to become a holding company for PFSweb upon completion of an
initial public offering (the "IPO"). Daisytek plans to divest PFSweb, Inc. in
two stages. The first stage involves the sale and issuance of common stock of
PFSweb, Inc. in an IPO. The second stage, planned to occur in the year 2000,
involves Daisytek distributing to holders of its common stock all of its
remaining interest in PFSweb, Inc. through a tax free spin-off transaction in
which the shares of PFSweb, Inc. would be distributed to Daisytek common
stockholders on a pro-rata basis.
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
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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 into Latin America and throughout much of the rest of the world. The
Company believes that its 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 that 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 this industry. 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. On October 1, 1999, the Company acquired certain assets
and liabilities Arlington Industries, a U.S. based wholesaler primarily focused
on copier and fax consumable supplies.
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1999 AND 1998.
Net Sales. Net sales for the three months ended September 30, 1999 were
$246.7 million as compared to $220.2 million for the three months ended
September 30, 1998, an increase of $26.5 million, or 12.1%. Net sales for the
six months ended September 30, 1999 were $479.9 million as compared to $442.7
million for the six months ended September 30, 1998, an increase of $37.2
million, or 8.4%. Computer Supplies net sales increased 13.0% in the quarter
ended September 30, 1999, compared to the same period in fiscal year 1999. Sales
in the international computer supplies operations increased 23.8% in the quarter
ended September 30, 1999, compared to the same prior year period. All
international regions grew strongly, in excess of 20% or more over last year,
except for the Latin American business, which was negatively impacted by
tightening credit policies. For the first time in several quarters, net sales in
the U.S. computer supplies operations also showed slight year on year growth.
PFSweb net sales increased during the second 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 8.7% in the second quarter of fiscal year 2000 compared to the same
period in fiscal year 1999 due primarily to price degradation in certain product
lines and the disposition of the Steadi-Systems professional hardware business.
Gross Profit. The Company's gross profit as a percent of net sales was
10.5% for the three months ended September 30, 1999 as compared to 12.1% for the
three months ended September 30, 1998. The Company's gross profit for the
quarter was negatively impacted by certain incremental charges of $3.2 million.
These charges were partially offset by incremental monies earned under vendor
incentive programs. Management currently expects that the Company's profit
derived from these vendor programs will be lower during the third quarter of
fiscal 2000 compared to the second quarter of fiscal 2000. Gross profit as a
percent of net sales was 11.1% for the six months ended September 30, 1999 as
compared to 12.0% for the six months ended September 30, 1998. Excluding certain
incremental charges of $3.2 million, gross profit as a percent of net sales was
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11.8% for the six months ended September 30, 1999. The decrease in the Company's
gross profit as a percentage of net sales was primarily due to competitive
pressure in the U.S., including the incremental charges previously discussed, 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 September 30, 1999
were $24.1 million, or 9.8% of net sales, as compared to $17.1 million, or 7.8%
of net sales, for the three months ended September 30, 1998, excluding
acquisition related costs in each period and the reversal of loss on disposition
of business. SG&A expenses for the six months ended September 30, 1999 were
$43.4 million, or 9.0% of net sales, as compared to $33.9 million, or 7.7% of
net sales, for the six months ended September 30, 1998, excluding acquisition
related costs in each period and the reversal of loss on disposition of
business. The increase in SG&A expenses as a percentage of net sales for the
first half 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.
SG&A expenses for the quarter ended September 30, 1999, included incremental
charges of $4.4 million. These charges are primarily related to certain
repositioning and separation activities associated with the PFSweb, Inc. planned
initial public offering, certain other charges as a result of these activities,
and to increase allowances for bad debts related primarily to issues in the
Company's Latin American accounts receivable. Over the next few quarters, the
Company expects to record additional incremental charges of $1.5 million to $3.5
million for the remainder of these activities, as well as for legal and
professional expenses related to an unsolicited acquisition offer, and for
acquisition expenses related to the purchase of Arlington Industries on October
1, 1999.
Acquisition Related Costs. During the quarter ended September 30, 1999, the
Company recorded costs of approximately $0.2 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 $0.1 million related to accounting, legal and other costs applicable to
the acquisition of The Tape Company.
Loss on Disposition of Business. In fiscal 1999, the Company recorded a
charge of $2.8 million related to the disposition of its professional tape
hardware business. In the quarter ended September 30, 1999, the Company reversed
$1.0 million of this charge related to facility lease termination costs, since
management now believes it will be able to avoid some of these costs.
Interest Expense. Interest expense for the three months ended September 30,
1999 was $1.0 million as compared to $0.8 million for the three months ended
September 30, 1998. Interest expense for the six months ended September 30, 1999
was $1.8 million as compared to $1.6 million for the six months ended September
30, 1998. Interest expense was higher during the first half of fiscal year 2000
primarily due to higher debt balances offset by lower interest rates. Higher
debt balances are a result of business acquisitions and higher working capital
levels. The weighted average interest rate was 6.2% and 6.8% during the six
months ended September 30, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate was 39.0% for the three
months ended September 30, 1999 and 1998. The effective tax rate for the six
months ended September 30, 1999 and 1998 was 39.0% and 37.4%, respectively. The
increase in the first half of fiscal year 2000 was primarily due to the impact
of the pooling of interests with The Tape Company in the first quarter of fiscal
year 1999.
PRO FORMA PRESENTATION
The following is a pro forma historical financial presentation of the
Daisytek International business units, excluding PFSweb, Inc., for the current
fiscal year to date and the last fiscal year. The presentation below considers
certain reorganization activities as a result of the planned separation of
Daisytek and PFSweb, Inc. and excludes incremental costs of $7.6 million related
to a) this planned separation, b) increases in allowance for bad debts, and c)
other charges. The presentation below also excludes acquisition integration
costs, loss on disposition of business and cumulative effect of accounting
change.
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Daisytek based the following pro forma data on available information
and certain estimates and assumptions. Daisytek believes that such assumptions
provide a reasonable basis for presenting the results of Daisytek International,
excluding PFSweb, on a stand alone basis. This pro forma financial information
does not reflect what our results of operations may be in the future.
Fiscal 2000
----------------------------------------------
June 30, Sept. 30, 6 Mos.
1999 1999 Total
------------ ------------ ------------
Net sales ........................................ $ 230,046 $ 242,876 $ 472,922
Cost of sales .................................... 205,464 216,238 421,702
------------ ------------ ------------
Gross profit ................................. 24,582 26,638 51,220
Selling, general and administrative expenses ..... 17,971 18,339 36,310
------------ ------------ ------------
Income from operations ....................... 6,611 8,299 14,910
Interest expense ................................. 652 871 1,523
------------ ------------ ------------
Income before income taxes ................... 5,959 7,428 13,387
Provision for income taxes ....................... 2,324 2,901 5,225
------------ ------------ ------------
Net income ....................................... $ 3,635 $ 4,527 $ 8,162
============ ============ ============
Net income per common share:
Basic ........................................ $ 0.21 $ 0.26 $ 0.48
Diluted ...................................... $ 0.20 $ 0.26 $ 0.46
Fiscal 1999
------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, FY
1998 1998 1998 1999 Total
-------- -------- -------- -------- --------
Net sales ........................................ $221,585 $218,394 $223,481 $237,622 $901,082
Cost of sales .................................... 196,293 193,256 198,811 212,103 800,463
-------- -------- -------- -------- --------
Gross profit ................................. 25,292 25,138 24,670 25,519 100,619
Selling, general and administrative expenses ..... 17,754 17,598 17,648 18,322 71,322
-------- -------- -------- -------- --------
Income from operations ....................... 7,538 7,540 7,022 7,197 29,297
Interest expense ................................. 933 829 845 467 3,074
-------- -------- -------- -------- --------
Income before income taxes ................... 6,605 6,711 6,177 6,730 26,223
Provision for income taxes ....................... 2,318 2,618 2,409 2,625 9,970
-------- -------- -------- -------- --------
Net income ....................................... $ 4,287 $ 4,093 $ 3,768 $ 4,105 $ 16,253
======== ======== ======== ======== ========
Net income per common share:
Basic ........................................ $ 0.25 $ 0.24 $ 0.22 $ 0.24 $ 0.95
Diluted ...................................... $ 0.24 $ 0.23 $ 0.21 $ 0.23 $ 0.91
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the six months ended September 30, 1999, net cash of $27.7
million was provided by financing activities, compared to net cash provided by
financing activities of $24.1 million for the six months ended September 30,
1998. Cash provided by financing activities was generated primarily from
proceeds from revolving lines of credit during the six months ended September
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 six months ended September 30, 1998. Included in cash
flows from financing activities for the six months ended September 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 six months ended September
30, 1999 and 1998, was $16.7 million and $15.8 million, respectively. Working
capital increased to $167.0 million at September 30, 1999 from $138.8 million at
March 31, 1999. This increase of $28.2 million was primarily attributable to 1)
growth in the Computer Supples and PFSweb business units, requiring working
capital, 2) product sourcing in the Computers Supplies segment becoming
increasingly impacted by suppliers' programs, which provide increased incentives
to purchase higher levels of inventory; 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.
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Funds used for investing activities during the six months ended September
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 $6.9 million and $3.6 million during the
six months ended September 30, 1999 and 1998, respectively. These capital
expenditures consisted primarily of additions to upgrade the Company's
management information systems and expansion of its PFSweb distribution
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.
At September 30, 1999, the Company's unsecured revolving lines of credit
provided for borrowings up to approximately $109 million. There were outstanding
balances on the lines of credit totaling $70.8 million at September 30, 1999,
leaving approximately $38 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 September 30,
1999. On October 29, 1999, the Company amended one of its unsecured revolving
line of credit agreements (the "Facility"), effective November 1, 1999, to
increase the maximum borrowing availability from $85 million to $105 million.
This amendment also provides for the release of PFSweb, Inc. and its
subsidiaries as guarantors of the Facility upon (i) the effective date of the
IPO of the shares of the common stock of PFSweb, Inc. and (ii) the payment from
PFSweb, Inc. to Daisytek in settlement of the outstanding payable to Daisytek.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb, Inc. following the completion of the IPO. The Facility has also been
amended to increase the interest rate, effective March 1, 2000, to Eurodollar
rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%.
The Company believes that international markets represent further
opportunities for growth. The Company attempts to protect itself from foreign
currency fluctuations by denominating substantially all of its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company has
entered into various forward Canadian and Australian currency exchange contracts
in order to hedge the Company's net investment in, and its intercompany payable
applicable to, its Canadian and Australian subsidiaries. The Company has the
following forward currency exchange contracts outstanding as of September 30,
1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
Canadian Dollars $12.3 million Sell Canadian Dollars November 1999
Australian Dollars $ 2.6 million Sell Australian Dollars February 2000
Australian Dollars $ 6.5 million Sell Australian Dollars October 1999
As of September 30, 1999, the Company had incurred unrealized losses of
approximately $0.1 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, if the planned IPO of PFSweb, Inc. is completed, it will generate net
proceeds of approximately $35 million. Daisytek will receive proceeds from
PFSweb, Inc. for repayment of its intercompany payable ($22.3 million at
September 30, 1999) and
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acquisition of certain assets for approximately $5.4 million. Further, 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 $70.8 million at September 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 $354,000 annualized, based on the outstanding balances of the
revolving lines of credit at September 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 the future, the Company's foreign currency
exchange risk will include the Euro. 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 September 30, 1999. If the foreign
exchanges rates of the Canadian and Australian currencies fluctuate 10% from the
September 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, web hosting, 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"), such as equipment or
mechanical systems which contain embedded technology such as micro-controllers.
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 has completed the remediation of its mission-critical IT
applications software and is scheduled to complete remediation of its
non-mission critical applications software by November 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 November 1999.
The Company believes that it has completed approximately 95% of the initiatives
necessary to fully address potential Y2K issues relating to its systems and
operations. The projects comprising the remaining 5% of the initiatives are in
process and expected to be completed by December 15, 1999. The Company believes
that other projects not related to the Y2K issue have not been delayed or
negatively affected by the initiatives addressing the Y2K issue. The following
table represents the schedule and status of the Company's Y2K initiatives:
YEAR 2000 INITIATIVES TIME FRAME % COMPLETE
- --------------------- ---------- ----------
Initial IT systems identification and assessment ............................ 4/97 - 6/97 100%
Remediation and testing regarding core distribution systems ................. 7/97 - 11/98 100%
Remediation and testing regarding purchased software systems ................ 7/97 - 10/99 100%
Upgrades to telecommunications systems ...................................... 9/97 - 4/99 100%
Desktop systems identification and remediation .............................. 7/97 - 11/99 95%
Remediation and testing for automated warehouse equipment systems ........... 7/99 - 12/99 80%
Service provider assessment ................................................. 1/99 - 8/99 100%
The Company has initiated 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. The Company is
satisfied that its major suppliers and large customers are either appropriately
prepared for the Y2K issue or that the Company's engagement with them will not
be adversely affected by the Y2K issue. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely or properly 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 continues to grow through business acquisitions. All
acquisitions of the Company have been converted to the Company's operating
system, except Arlington Industries. The Company believes the Arlington
Industries system is Y2K ready based primarily on assertions by the vendors of
the system.
The Company conducts electronic data interchange (EDI) with its customers.
Most of these customers have converted their EDI transaction sets to Y2K
compliant versions. The Company believes that it will be able to conduct
business with these clients regardless of whether or not they convert to Y2K
compliant versions. The Company believes that the EDI transactions it uses with
certain PFSweb clients are not significantly dependent on Y2K compliance and
that it will be able to accept transactions from, as well as send transactions
to, these clients regardless of whether they are Y2K compliant or not.
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The Company utilizes a significant amount of automation technology in its
distribution centers. In order to strengthen the reliability of certain
components of the automation network, the Company has under taken an upgrade
project in its Memphis distribution facility. The Company anticipates completion
of this project by December 15, 1999. This project will also make this network
Y2K compliant. The Company's service providers have certified all of the other
distribution automation used by the Company as Y2K compliant.
The Company has initiated formal communications with its significant
service providers to determine the extent to which it is vulnerable to those
third parties' failure to remediate Y2K. However, there can be no guarantee that
the systems of these service providers on which the Company's operations rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's operations, would not have a
material adverse effect on its business. The Company is developing contingency
plans to address the risks created by third parties' failure to re-mediate Y2K.
These plans include procuring alternative sources of services such as
telecommunications and transportation when the Company is able to conclude that
an existing supplier of services will not be Y2K ready. The Company is scheduled
to complete these contingency plans by November 1999.
During the six months ended September 30, 1999, the Company incurred
approximately $0.2 million of expenses related to Y2K. In total, the Company has
incurred, through September 30, 1999, approximately $0.7 million of expenses
related to Y2K. The Company's budget for the assessment and remediation of Y2K
is 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.
Under the most reasonably likely worst case scenario, the Company does not
anticipate more than isolated, temporary disruptions of its operations caused by
Y2K failures affecting either its operations or those of its major customers.
The Company expects that its technically trained personnel, working in
cooperation with major customers and key service providers, should be able to
address Y2K system issues that may arise. To the extent that the Company's
systems or those of its key providers are unable to provide services due to Y2K
issues, the Company believes that it may have to use one or more of its
contingency plans that would, in the short-term, involve numerous operational
inconveniences and inefficiencies that would increase costs and divert
management's time and attention from its ordinary business activities. Many
risks, however, such as the failure to perform by public utilities,
telecommunications providers, and financial institutions, and the impact of the
Y2K issue on the economy as a whole, are outside our control and could adversely
affect the Company and its ability to conduct business. While the Company
believes that it has made a significant effort to address all anticipated risks
within its control, this is an event without precedent; consequently, there can
be no assurance that the Y2K issue will not have a material adverse impact on
the Company's financial condition, operating results, or business.
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 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.
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SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine the specific 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 its clients' business and their sale of their products.
Accordingly, management must rely upon the projections of its PFSweb clients 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 20, 1999 the Company held its Annual Meeting of Stockholders. The
following matters were acted upon and votes cast or withheld:
1. Election of two Class II directors:
Mark C. Layton:
For: 12,907,570 Withheld: 888,693
Timothy M. Murray:
For: 12,908,184 Withheld: 888,079
2. Appointment of Arthur Andersen LLP as auditors for the 2000 fiscal year:
For: 13,778,503 Against: 1,760 Abstained: 16,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
---------------- ----------------------------------------------------
3 Amendments to the Bylaws of the Company, adopted on
October 15, 1999 (incorporated by reference from
Form 8-K filed on October 19, 1999).
4 Rights Agreement, dated as of October 15, 1999,
between the Company and ChaseMellon Shareholder
Services, LLC, which includes the Certificate of
Designations in respect of the Series A Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase
Series A Preferred Stock as Exhibit C. Pursuant to
the Rights Agreement, Right Certificates will not be
mailed until after the Separation Date (as defined
therein) (incorporated by reference from Form 8-K
filed on October 19, 1999).
10.1 Seventh Agreement to Credit Agreement dated
September 10, 1999 between Daisytek Incorporated, as
Borrower, Daisytek International Corporation and
Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, Bank One, N.A., and
Chase Bank of Texas, N.A., as Lenders
10.2 Eighth Agreement to Credit Agreement dated September
30, 1999 between Daisytek Incorporated, as Borrower,
Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and State Street Bank
and Trust Company, Bank One, N.A., and Chase Bank of
Texas, N.A., as Lenders
10.3 Ninth Agreement to Credit Agreement dated October
29, 1999 between Daisytek Incorporated, as Borrower,
Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and Citizens Bank of
Massachusetts, Bank One, N.A., IBM Credit
Corporation, and Chase Bank of Texas, N.A., as
Lenders
10.4 Asset Purchase Agreement dated September 30, 1999,
by and among Arlington Industries, Inc., Craig Funk,
Arlington Acquisition Corp., and Daisytek,
Incorporated.
10.5 Form of Change in Control Severance Agreement dated
October 15, 1999 between Daisytek International
Corporation and each of its executive officers.
10.6 Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.7 Lease Contract between Transports Weerts and
Priority Fulfillment Services Europe B.V.
10.8 Commitment Letter dated September 9, 1999 between
The Bank of Nova Scotia and Daisytek (Canada) Inc.
27.1 Financial Data Schedule for the six months ended
September 30, 1999
27.2 Financial Data Schedule for the six months ended
September 30, 1998
b) Reports on Form 8-K:
Form 8-K filed on October 4, 1999 reporting Item 5, the Company's press
release announcing that its subsidiary, PFSweb, Inc., filed a preliminary
registration statement on Form S-1.
Form 8-K filed on October 19, 1999 reporting Item 5, the Company's Board
of Directors declared a dividend of one preferred share purchase right on
each outstanding share of common stock to shareholders of record on
October 25, 1999.
21
22
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 15, 1999
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
-------------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Vice President - Finance
22
23
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3 Amendments to the Bylaws of the Company, adopted on October
15, 1999 (incorporated by reference from Form 8-K filed on
October 19, 1999).
4 Rights Agreement, dated as of October 15, 1999, between the
Company and ChaseMellon Shareholder Services, LLC, which
includes the Certificate of Designations in respect of the
Series A Preferred Stock as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Series A Preferred Stock as Exhibit C. Pursuant to
the Rights Agreement, Right Certificates will not be mailed
until after the Separation Date (as defined therein)
(incorporated by reference from Form 8-K filed on October
19, 1999).
10.1 Seventh Agreement to Credit Agreement dated September 10,
1999 between Daisytek Incorporated, as Borrower, Daisytek
International Corporation and Borrower's Subsidiaries, as
Guarantors, and State Street Bank and Trust Company, Bank
One, N.A., and Chase Bank of Texas, N.A., as Lenders
10.2 Eighth Agreement to Credit Agreement dated September 30,
1999 between Daisytek Incorporated, as Borrower, Daisytek
International Corporation and Borrower's Subsidiaries, as
Guarantors, and State Street Bank and Trust Company, Bank
One, N.A., and Chase Bank of Texas, N.A., as Lenders
10.3 Ninth Agreement to Credit Agreement dated October 29, 1999
between Daisytek Incorporated, as Borrower, Daisytek
International Corporation and Borrower's Subsidiaries, as
Guarantors, and Citizens Bank of Massachusetts, Bank One,
N.A., IBM Credit Corporation, and Chase Bank of Texas, N.A.,
as Lenders
10.4 Asset Purchase Agreement dated September 30, 1999, by and
among Arlington Industries, Inc., Craig Funk, Arlington
Acquisition Corp., and Daisytek, Incorporated.
10.5 Form of Change in Control Severance Agreement dated October
15, 1999 between Daisytek International Corporation and each
of its executive officers.
10.6 Industrial Lease Agreement between Shelby Drive Corporation
and Priority Fulfillment Services, Inc.
10.7 Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
10.8 Commitment Letter dated September 9, 1999 between The Bank
of Nova Scotia and Daisytek (Canada) Inc.
27.1 Financial Data Schedule for the six months ended
September 30, 1999
27.2 Financial Data Schedule for the six months ended
September 30, 1998