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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] 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
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DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2421746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: 972-881-4700
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by a 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 [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 19, 2000 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System) was
$213,405,551.
As of June 19, 2000, there were 17,643,711 shares outstanding of the
registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the proxy statement for the annual meeting of
shareholders to be held during 2000 are incorporated by reference in this Form
10-K.
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INDEX
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 18
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 59
SIGNATURES............................................................. 63
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Unless otherwise indicated, all references to "Daisytek," "we," "us" and
"our" refer to Daisytek International Corporation, a Delaware corporation, and
its direct and indirect subsidiaries, including Daisytek, Incorporated, the
Company's primary operating subsidiary. All references to "PFSweb" refer to
PFSweb, Inc., a Delaware corporation, and its subsidiaries. References in this
Report to the Company's fiscal year means the 12-month period ending on March 31
of such year.
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PART I
ITEM 1. BUSINESS
GENERAL
Daisytek is a leading wholesale distributor of computer, copier, fax and
office supplies products, professional audio and video tape products and also a
leading provider of transaction management services to both traditional and
electronic commerce (or e-commerce) companies. We operate in three business
segments: (1) Computer and Office Supplies; (2) Professional Tape Products; and
(3) transaction management services conducted by our majority owned subsidiary,
PFSweb, Inc. ("PFSweb"). These reportable segments are strategic business units
that offer different products and services and are managed separately, based on
fundamental differences in their operations. We sell our products and services
in the United States, Canada, Australia, Mexico, South America, the Pacific Rim
and Europe. We believe we are one of the world's largest wholesale distributors
of computer supplies, office products, and film and tape media.
Our Computer and Office Supplies segment began operations in the United
States in the 1980's and expanded internationally into Canada in 1989, Mexico in
1994 and Australia/Asia in 1996. This segment distributes over 10,000 nationally
known, name-brand computer and office supplies products to over 30,000 customer
locations. These products are manufactured by over 150 original equipment
manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Sharp, Okidata,
Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. On October 1,
1999, we acquired certain assets and liabilities of Arlington Industries, Inc.,
("Arlington") a privately held, specialty wholesaler of copier and fax
consumables. Subsequent to our year-end, on May 3, 2000, we acquired certain
assets and liabilities of B.A. Pargh LLC ("B.A. Pargh"), a wholesaler of office
products. The B.A. Pargh acquisition will add an additional 7,000 office
products and supplies which are shipped to over 20,000 customer locations.
Our Professional Tape Products segment began in 1998 and currently
distributes more than 3,000 professional tape products to over 26,000 customers
primarily in the United States. Our customers primarily include production and
broadcast companies, advertising and governmental agencies, cable television
providers, educational institutions and healthcare providers. Our professional
tape products include videotape, audiotape, motion picture film and data storage
media.
PFSweb is an international provider of business infrastructure solutions
for manufacturers, distributors and retailers that enable to rapid development
and deployment of traditional and e-business strategies. PFSweb offers a
complete array of services to support its clients' current and future business
initiatives. PFSweb's solutions include professional consulting services, order
management, web-enabled customer care services, billing and collection services,
information management and international fulfillment and distribution services.
PFSweb currently provides traditional and e-business infrastructure solutions to
over 30 clients that are positioned as market leaders in a range of industries,
including apparel, computer products, printers, sporting goods, cosmetics and
consumer electronics, among others.
Financial information relating to our segments and geographic areas can be
found in Note 11 of the Consolidated Financial Statements included in this
document.
On December 2, 1999, PFSweb (NASDAQ: PFSW) sold to the public 3,565,000
shares of common stock at $17 per share in an initial public offering (the
"Offering"). Through our ownership of 14,305,000 shares of PFSweb common stock
outstanding, we retain about 80.1% of the total equity in PFSweb. Net proceeds
of the Offering aggregated $53.0 million and a portion was used by PFSweb to
repay us for outstanding intercompany debt of approximately $27 million and to
purchase all fixed assets at our Memphis distribution facility, as well as
certain information technology assets, for $5.0 million. Daisytek used its
portion of the proceeds to repay bank debt. In connection with the Offering,
Daisytek and PFSweb entered into a five year agreement in which PFSweb will
provide certain transaction management services for us.
In June, 2000, we received a private letter ruling from the Internal
Revenue Service (the "IRS Ruling") regarding the tax-free treatment of the
distribution of our remaining ownership in PFSweb to Daisytek common
shareholders on a pro-rata basis. As a result, on June 8, 2000, the Daisytek
board of directors
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approved plans to effect the complete separation of PFSweb from Daisytek and
have authorized the distribution to our shareholders of all of our 14,305,000
PFSweb shares in a transaction known as a spin off. The distribution is payable
at the close of business on July 6, 2000 to shareholders of record as of June
19, 2000 (the "Record Date".) The shareholders as of the Record Date will
receive a pro rata distribution of about 0.81 shares of PFSweb stock for each
share of Daisytek stock they own on that date.
BUSINESS
Computer and Office Supplies
The Computer and Office Supplies segment distributes over 10,000 computer
supplies products to over 30,000 customer locations, including value-added
resellers ("VARs"), computer supplies dealers, office product dealers, contract
stationers, buying groups, computer and office product superstores, groceries
and drugstores, dot.coms, and other retailers who resell the products to
end-users. Computer supplies revenues, which have been adjusted to reflect IBM
product revenues activity for the entire year, represent 89.5% of our total
revenues in fiscal 2000. We believe we are one of the largest independent
wholesale distributors of computer supplies products in the world.
The Computer and Office Supplies segment sells primarily nationally known,
name-brand computer supplies products manufactured by over 150 original
equipment manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Sharp,
Okidata, Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. The
Computer and Office Supplies products include laser toner, inkjet cartridges,
copier and fax supplies, printer ribbons, diskettes, optical storage products,
computer tape cartridges and accessories. These products are used in a broad
range of computer and office automation products, including laser and inkjet
printers, photocopiers, fax machines and data storage products. As a result of
the B.A. Pargh acquisition, this segment will now include approximately 7,000
additional office products and supplies, such as envelopes and business forms,
writing instruments, paper, office machines and all desktop supplies which are
shipped to over 20,000 customer locations.
The Computer and Office Supplies segment utilizes sophisticated
telemarketing, direct mail programs, frequent innovative sales promotions and
electronic commerce technology to market computer supplies products throughout
the United States, Canada, Mexico, Australia and Latin America, as well as other
international markets, including the Pacific Rim.
UNITED STATES COMPUTER AND OFFICE SUPPLIES
Daisytek began its Computer and Office Supplies business in the United
States in the 1980's. We operate sales offices in Plano, Texas, and we service
the United States and some international markets by distributing our products
through a centralized distribution center in Memphis, Tennessee, which is
operated by PFSweb. Most of our domestic computer supplies products are shipped
via Federal Express which, together with PFSweb's centralized distribution
center, enables us to accept orders for computer supplies products until 10:30
p.m. Eastern Standard Time (EST) and offers our customers next business day
delivery of product in stock. Additionally, through our acquisition of Arlington
in October, 1999, we operate sales and distribution facilities in Libertyville,
Illinois; Kearny, New Jersey; Atlanta, Georgia; Los Angeles, California; and
Miami, Florida. Arlington ships the majority of its products via Federal Express
and UPS. Our U.S. computer supplies revenues represent 63.1% of our total
revenues for fiscal year 2000.
INTERNATIONAL COMPUTER SUPPLIES
We expanded our computer supplies business internationally by entering the
Canadian market in 1989, Mexico in 1994, Australia in 1996 and Singapore in
1997. To service these markets we began to operate smaller regional sales and
distribution centers in these countries. In addition, we operate a regional
sales office and distribution center in Miami, Florida, which services certain
Latin American markets. Our international computer supplies revenues represent
26.4% of our total revenues for fiscal 2000. Effective March 31, 2000, we
elected to close our Singapore operation and consolidate the remaining business
activity into our Asia Pacific headquarters in Australia.
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Professional Tape Products
In 1998, Daisytek added its Professional Tape Products segment with the
acquisitions of The Tape Company, Inc. ("The Tape Company") and Steadi-Systems,
Ltd. ("Steadi-Systems"). On March 31, 1999, we purchased the professional tape
division of Videotape Products, Inc. ("VTP"). In connection with this purchase,
we also sold certain assets of Steadi-Systems' professional hardware division to
VTP. The Professional Tape Products segment is based in Chicago, Illinois, and
operates as a distributor of media products to the film, entertainment and
multimedia industries. The Professional Tape Products segment distributes more
than 3,000 professional tape products to over 26,000 customers primarily in the
United States. Professional Tape Products include videotape, audio tape, motion
picture film, and data storage media used in professional video and audio
production. Customers include production companies, post-production operations,
educational institutions, broadcast stations, corporate in-house production
facilities, healthcare providers, advertising and governmental agencies,
surveillance and security operations, cable television providers and event and
wedding videographers. Professional Tape Products revenues represented 8.8% of
our total revenues in fiscal year 2000.
PFSweb
PFSweb provides proven, fast and secure business infrastructure solutions
for manufacturers, distributors and retailers that enable the rapid development
and deployment of traditional and e-business strategies. Their solutions are
flexible, dynamic and specific to each individual client business case, allowing
them to offer a complete array of services to support our clients current and
future business initiatives. PFSweb's infrastructure is seamlessly integrated
with their clients' systems, thereby making them transparent to their clients'
customers while they handle the lifecycle of the transaction "from the click of
the mouse to the knock at the house."(SM) PFSweb offers their services as
integrated solutions, which enable their clients to outsource their traditional
and e-business infrastructure needs to a single source allowing for greater
focus on their core competencies. PFSweb provides a broad range of services,
including order management, web-enabled customer care services, billing and
collection services, information management, international fulfillment and
distribution services and professional consulting services. PFSweb operates in
the United States, Canada and Europe. PFSweb currently services over 30 clients
including IBM, Hewlett-Packard, Adaptec, adidas, Xerox, Thomson Consumer
Electronics, Nokia, ISA International plc., Emtec, American Eagle Outfitters and
Sharper Image. Daisytek currently operates in this business through its 80.1%
ownership in PFSweb.
PRODUCTS AND SERVICES
Computer and Office Supplies
Daisytek distributes more than 10,000 different computer supplies products.
We regularly update our product line to reflect advances in technology and to
provide a wide range of the most popular products. Our major product and service
categories can generally be classified as follows:
Non-Impact Printer Supplies. Non-impact printer supplies include toner
cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and
fax supplies. Non-impact printers, such as laser printers, personal copiers and
fax machines, continue to grow in popularity and have a wide range of
applications.
Magnetic Media Products. Magnetic media products include computer tapes,
data cartridges, diskettes, optical disks, compact disc recordable drives and
media, zip drives and media, and other products which store or record computer
information and are used in a variety of computers ranging from notebook and
personal computers to large mainframe computer systems.
Impact Printer Supplies. Impact printer supplies include printwheels,
ribbons, elements, fonts and other consumable supplies used in impact printers
ranging from electronic typewriters to high-speed dot matrix printers. While new
technology is moving toward non-impact printing, we believe that a base of
impact printers, such as dot matrix printers, are still in use and require a
continuing amount of computer supplies products.
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Accessories and Other Products. Accessories sold by the Computer and Office
Supplies segments include cleaning supplies, disk storage boxes, data cartridge
storage, racks, surge protection devices, workstation accessories and anti-glare
screens. We also sell a number of other products such as specialty paper,
banking supplies and selected business machines.
Due to the acquisition of B.A. Pargh, subsequent to our March 31, 2000 year
end, about 7,000 products, such as envelopes and business forms, writing
instruments, paper, office machines, and all desktop supplies, have been added
to Daisytek's Computer and Office Supplies product range.
Professional Tape Products
Professional Video and Audio Products. We sell more than 3,000 professional
tape products. Professional video and audio products include digital and analog
formats of professional video and audio recording media, the majority of which
are cassette based. We also sell motion picture film, disc-based media such as
recordable compact discs and recordable DVD, and data storage media products
that are used in the editing and archiving of video and audio productions.
Custom logo VHS tapes and recordable compact discs, which are foil-stamped or
silk-screened with the customer's logo and program information are also sold.
Accessory items, such as videotape cases, sleeves, labels, audio tape reels,
storage/mailing boxes, and high density media storage systems, such as shelving
or cabinets, are also available for sale.
PFSweb
PFSweb provides proven, fast and secure business infrastructure solutions
for manufacturers, distributors and retailers that enable the rapid development
and deployment of traditional and e-business strategies. PFSweb designs diverse
solutions for Fortune 500, Global 1000 and brand name clients around a flexible
core business infrastructure that includes:
- Professional consulting services, including a consultative team of
experts that tailor solutions to each client and consistently seek out
ways to increase efficiencies and produce benefits for the client.
- Order management, including real-time integrated order processing
solutions that specifically allow for complete access and visibility to
inventory availability, credit authorization, order status, and shipment
tracking;
- Web-enabled customer care services, including customer care centers
utilizing voice, e-mail, and Internet chat communications that are fully
integrated with real-time systems and historical data archives to provide
complete customer lifecycle management;
- Billing and collection services, including secure on-line credit card
processing, fraud protection, invoicing, credit management and
collection;
- Information management, including real-time data interfaces, data
exchange services and data mining;
- International fulfillment and distribution services, including warehouse
management, inventory management, product warehousing, order picking and
packing, transportation management and product return administration; and
SUPPLIERS
Our Computer and Office Supplies products are manufactured by over 150
original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark,
IBM, Sharp, Okidata, Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and
Maxell. During fiscal year 2000, approximately 79% of the Computer and Office
Supplies product net revenues were derived from products supplied by the
Computer and Office Supplies segments' ten largest suppliers. The sale of
Hewlett-Packard and IBM products combined accounted for approximately 55% of
Computer and Office Supplies net revenues, with the sales of the other eight
largest suppliers each accounting for between 2% to 6% of Computer and Office
Supplies net revenues.
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Our Professional Tape Products are supplied by over 30 manufacturers,
including Sony, Fuji, Quantegy, Maxell, Panasonic, BASF, TDK, Kodak, JVC, and
Russ Bassett. During fiscal 2000, approximately 86% of the Professional Tape
Products net revenues were derived from products supplied by the segment's five
largest suppliers, with the sales of the remaining suppliers each accounting for
less than 5% of Professional Tape Products net revenues.
Many of our suppliers offer rebate programs under which, subject to us
purchasing certain predetermined amounts of inventory, we receive rebates based
on a percentage of the dollar volume of total rebate program purchases. We also
take advantage of several other programs offered by many of our suppliers. These
include price protection plans under which we receive credits if the supplier
lowers prices on previously purchased inventory and stock rotation or stock
balancing privileges under which we can return slow moving inventory in exchange
for other products. In addition, in order to introduce new products, many
suppliers will permit us to return all unsold inventory after an introductory
trial period. Material changes by one or more of our key suppliers of their
pricing arrangements or other marketing programs may have a material and adverse
affect on our business.
Our purchases of computer supplies and professional tape products inventory
are closely tied to sales and are generally based upon the sales volume of the
most recent six to ten week periods. Some of our suppliers require minimum
annual purchases, which, for fiscal year 2001, will aggregate approximately $76
million.
We have entered into written distribution agreements with Hewlett-Packard,
Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata and many of the other
major suppliers of the products we distribute. As is customary in the industry,
these agreements generally provide non-exclusive distribution rights, have
one-year renewable terms and are terminable by either party at any time, with or
without cause. We consider our relationships with our major suppliers to be
good. However, we cannot assure you that a material change in the relationship
with one or more of our major suppliers may not have an adverse effect on our
business.
Although we purchase most of our products directly from authorized U.S.
manufacturers, we also import products from foreign sources, particularly when
fluctuations in foreign exchange rates or product prices make it attractive to
do so. Similarly, depending upon product pricing and availability, we also
purchase products from secondary sources, such as other wholesalers and selected
dealers, rather than directly from the manufacturer. We utilize our ability to
purchase imported and secondary source products in order to provide our
customers with competitive prices and a wide range of product lines. In order to
ensure that such imported and secondary source products are not produced by
unauthorized manufacturers, we have established various procedures which we
believe enable us to identify unauthorized products and, to the extent possible,
return such unauthorized products to the foreign or secondary source.
Nevertheless, we can not assure you that we will be completely successful in
such efforts or that such imported and secondary source products will continue
to be available or that any lack of availability may not have a material adverse
effect on our business.
SALES AND MARKETING
Computer and Office Supplies
The Computer and Office Supplies segment utilizes sophisticated
telemarketing, direct mail programs and frequent innovative sales promotions and
other marketing efforts to market its computer supplies products. International
computer supplies sales accounted for approximately 29.5% of our total computer
and office supplies net revenues in fiscal 2000, and we believe that
international markets represent further opportunities for growth. Daisytek began
its international computer supplies presence with sales and distribution
operations in Canada. To service the growing Latin American market, we opened a
sales office and distribution center in Mexico City, Mexico in November 1994 and
opened a similar facility in Miami, Florida, in January 1996. Additionally, in
October 1996, we acquired a computer and office automation supplies wholesaler
in Australia. There can be no assurance that we will be successful in these or
other international efforts or that the risks inherent in international
operations, such as currency fluctuations or the political or economic
instability of certain foreign countries and regions, such as Mexico and Latin
America, will not have a material adverse effect on our business.
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The customer and prospect database for computer supplies products includes
United States, Canadian, Australian, Mexican, Latin American, and other foreign
computer supplies dealers, office product dealers, VARs, buying groups, computer
stores, contract stationers, computer and office product superstores, catalog
merchandisers, drug and grocery stores, mass merchandisers, direct mail
marketers, college bookstores, dot coms and other resellers. We currently ship
our computer supplies products to over 30,000 customer locations. The
traditional computer supplies customer is a small to medium sized reseller who
does not have the resources to establish direct purchasing relationships with
multiple manufacturers and, instead, must rely on wholesale distributors like
us. We also sell our products to a number of large customers, including computer
and office product superstores, contract stationers and grocery and drugstores,
which benefit from our product breadth, timely delivery of fast-moving products,
and efficient distribution of a variety of product lines to multiple locations.
Similarly, we offer these advantages to some of the emerging customer groups,
such as dot.coms. No single customer accounts for more than 10% of the total
computer supplies sales for any of the fiscal years ended March 31, 2000, 1999
and 1998.
Our computer supplies sales and telemarketing department is divided into
several groups or teams, each having its own particular sales objective. For
example, the Retail Department focuses specifically on large computer retailers
and office product superstores. Similarly, separate groups of sales
representatives are responsible for a select group of national accounts, such as
contract stationers, office products dealers and buying groups, while other
groups focus on new accounts, VARS, convenience stores and mass merchant
customers, existing business or international and export sales. Each sales team
is led by a business manager and a pricing broker and is supported by a group of
highly trained in-bound call center specialists who are dedicated to serving
each customer's unique needs. We believe this sales structure ensures the
highest level of service for our customers. By utilizing sophisticated
telemarketing software and call management systems, including caller
identification, sales representatives are able to verify customer account
numbers and contact persons and quickly identify a customer's buying patterns,
recent purchases, credit availability and other sales and marketing information.
The telecommunications software also enables sales and marketing management to
better identify, control and monitor sales representatives' prospecting activity
with customers.
We provide extensive training for new computer supplies products sales
personnel with special emphasis on the need for regular customer contact, prompt
response to customers' demands for product information and the continuous need
to inform customers of technological advancements and new product introductions
by our suppliers. Together with our major suppliers, we provide our sales
personnel with ongoing product-specific training and education emphasizing
computer supplies as well as new technologies, new products, new product
applications and vertical market intelligence.
In order to maintain our position as a low cost wholesale distributor, we
regularly monitor the efficiency of our sales staff. By utilizing sophisticated
telecommunications equipment, we are able to measure the number of calls being
fielded by a sales representative, their success rate in terms of orders
obtained compared to calls taken and customer service statistics, such as
abandoned call rates and average response times. Our sales force receives a base
salary as well as varying sales incentives based on gross profit margin
achievements. In addition, a number of suppliers periodically offer sales bonus
programs in connection with specific product sales campaigns, which can further
augment a sales representative's compensation.
One of our primary marketing tools in the computer supplies business is a
quarterly catalog, known as the "Book of Deals." In order to promote our image
as a low cost wholesaler and provider of value-added services, the Book of Deals
usually highlights a theme related to specific products, customer services or a
combination of the two. Our domestic computer supplies business presently
distributes a total of approximately 45,000 catalogs and contract price books to
its active customers in the United States each quarter. The international
computer supplies business distributes a separate Book of Deals designed
specifically for the Canadian, Mexican and Australian markets. Other
catalog-type marketing tools used by our computer supplies segment include
customized catalogs produced by us for resellers to distribute to their end-user
customers. The computer supplies business also utilizes direct mail vehicles,
such as flyers, postcards and mini catalogs, which announce new product line
additions or special promotions and are usually inserted in the Book of Deals or
mailed directly to customers. We also market our products through trade show
exhibits, trade publication
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advertising, and are increasingly utilizing Web-based vehicles such as the
Daisytek internet site (www.daisytek.com), permission based e-mail broadcasts
and internet advertising.
Although the Book of Deals remains one of the primary marketing tools for
sales of computer supplies products, we also use electronic commerce marketing
tools as well. We believe we have established ourselves as a leader in the
deployment of electronic commerce in the computer supplies products industry.
These tools are designed to win further market share and to reduce cost in the
customer relationship by automating information flow. By accepting both
externally developed commercially available technologies as well as internally
developed proprietary technologies, we can offer a suite of electronic commerce
solutions including: traditional X.12, proprietary EDI, and integrated FTP;
third party software systems such as DDMS, Copas, and The Systems House;
Internet, intranet, and extranet systems.
During fiscal year 1998, Daisytek introduced its exclusive online ordering
and information system known as "SOLOnet." SOLOnet provides customers with
on-line ordering capabilities, fingertip access to up-to-date pricing, product
and order information, search and retrieval capabilities based on part numbers,
manufacturers, product description, retail price, machine compatibility and
other factors, and convenient access to manufacturers' product literature and
training videos, and allows customers to view their own account information.
We have developed technology that is specifically targeted at quickly
integrating and synchronizing our systems with those of our customers and
clients with a high degree of accuracy and reliability. Using our suite of
e-business applications, we can enable our customers and clients to easily
integrate their Web sites or ERP systems to our systems for real-time
transaction processing without regard to their specific hardware platform or
operating system. This application suite is an open systems XML-based set of
products that allow for quick implementation and universal compatibility. This
high level of systems integration allows our customers and clients to
automatically process orders, process credit card payments, obtain shipment
tracking information and transact other key e-commerce information. We also have
developed systems to track information sent to us by customers and clients as it
moves through our systems in the same manner a package would be tracked by a
carrier throughout the delivery process. Our systems enable us to trace at a
detailed level what information was received, transmission timing, and any
errors or special handling that had to take place to process it and what was
transmitted back to the client.
Many of our computer supplies manufacturers provide us with cooperative
advertising programs, marketing development funds and other types of incentives
and discounts which offset the production costs of our quarterly Book of Deals,
other published marketing tools and other related costs.
Professional Tape Products
The Professional Tape Products segment markets its products through the use
of direct-mail campaigns, trade show exhibitions, industry-publication
advertising, web-based lead generation techniques, manufacturer-sponsored
frequent buyer promotional programs, and various other marketing efforts
primarily to its customers in the entertainment industry, broadcast television
stations, educational institutions, advertising and governmental agencies and
cable television providers. Professional Tape Products are delivered to more
than 26,000 customers located primarily in the United States.
The Professional Tape Products segment employs several account executives
in the field who cover major markets in the United States. Account executives
actively solicit new business through personal sales calls to high-volume
customers, maintaining regular customer contact, responding to customers' demand
for product information and informing customers of technological advancements by
professional tape products suppliers. Account executives are teamed with inbound
customer service personnel who supplement customer service by providing a high
level of personalized service and stability to the customer.
The Professional Tape Products segment utilizes a sophisticated
telemarketing approach to obtain new business in remote geographic areas and to
develop business in a higher number of middle to lower volume accounts located
in major markets. Telesales account executives are supplemented by national and
regionally
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targeted marketing efforts, are provided incentives to increase call-to-order
ratios and utilize sales automation software to increase efficiency and track
performance.
The Professional Tape Products segment provides extensive training to all
customer contact personnel, including outside account executives, telesales
account executives and customer service teams. Ongoing product-specific training
is provided in conjunction with the major manufacturers, with emphasis on
emerging technologies, suggestive selling and customer relation techniques.
The Professional Tape Products segment publishes and distributes a catalog
semiannually and maintains a web site and online catalog. Several web-based
techniques are used to generate sales leads through responding to customer
demand for product and technical information. The Professional Tape Products
segment, with certain of its suppliers, offers quarterly promotions to its
customers. With these programs, Professional Tape Products customers earn and
accumulate points on select purchases, which can be redeemed for merchandise
like cameras, video equipment or service.
PFSweb
PFSweb target clients include brand name manufacturers looking to quickly
and efficiently implement business initiatives or introduce new products or
programs, without the burden of modifying or expanding their current
infrastructure and technology capabilities. PFSweb also targets retailers
seeking to open Web sites to expand their sales through new channels and
distributors seeking to reduce costs. PFSweb's services are available for a
multitude of industries, including:
- Manufacturers such as IBM (printer and media supplies), Adaptec (computer
accessories), adidas (a sporting goods manufacturer), Emtec (formerly
BASF Magnetics) (data media and audio visual products), Xerox (printers
and printer supplies), Thomson Consumer Electronics (televisions and
consumer electronics), NokiaUSA.com (cell phone accessories), and
Hewlett-Packard (computer networking equipment);
- Retailers such as American Eagle Outfitters (fashion apparel), and the
Sharper Image (work and home luxury accessories);
- Distributors such as Daisytek (computer supplies, office products, and
film and tape media), ISA Ltd. (computer and office supplies in Western
Europe); and
PFSweb reaches these clients through a direct sales force, telemarketing,
trade shows, trade journal advertising, our Web site and direct mail programs.
PFSweb also pursues strategic marketing alliances with Web design firms and
e-commerce consultants to provide referrals and customer leads.
PFSweb's direct sales force is comprised of dedicated sales professionals
whose compensation is tied to their ability to expand our relationships with
existing clients and attract new clients. PFSweb also employs highly trained
implementation managers whose responsibilities include the oversight and
supervision of client projects and maintaining high levels of client
satisfaction.
MANAGEMENT INFORMATION SYSTEMS
Daisytek maintains advanced management information systems and has
automated virtually all key business functions using on-line, real time systems.
These on-line systems provide management with information concerning sales and
margins, inventory levels, customer payments and other operations which are
essential for us to operate as a low cost, high efficiency wholesale
distributor. These systems also serve as the platform from which we offer our
PFSweb services.
The implementation of these systems has allowed us to offer an advanced
suite of electronic commerce tools to our customers so that we can communicate
with their computer systems and automatically process, send and receive purchase
orders, invoices and acknowledgments. We offer "customer links" to provide
customers with direct access to a proprietary database to examine pricing,
credit information, product description and availability and promotional
information. This link also allows customers to place orders
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directly into our order processing system. These systems also allow us to offer
similar features to our customers through SOLOnet.
We have also invested in advanced telecommunications, voice response
equipment, electronic mail and messaging, automated fax technology, scanning,
wireless technology, bar coding, fiber optic network communications and
automated inventory management. We have developed and utilize telecommunications
technology which provide for automatic customer call recognition and customer
profile recall for inbound telemarketing representatives and computer generated
outbound call objectives for outbound telemarketing representatives.
Subsequent to the spin-off of PFSweb, Daisytek's and PFSweb's information
systems databases will be segregated with each company retaining ownership and
maintenance authority for its individual system and database. In connection with
the transaction management services agreement described in "Spin-off of PFSweb
from Daisytek," Daisytek operates certain of its information systems on a
hardware platform owned by PFSweb. This service is included in the scope of
transaction services that PFSweb performs on our behalf.
We plan to continue to invest in various management information systems
enhancements and upgrades to improve efficiency, monitor our operations, manage
inventory risks and offer faster and higher levels of service to our customers
and vendors.
DISTRIBUTION OF PRODUCTS
We believe that the computer supplies and professional tape products sold
by us are particularly suited to cost-effective overnight delivery because of
their unique value to weight characteristics. We have entered into an agreement
with Federal Express whereby almost all of our domestic computer supplies
package orders are shipped via Federal Express, except for certain "heavyweight"
packages or as otherwise requested by the customer. In addition, substantially
all of these same products are distributed from PFSweb's centralized
distribution center in Memphis, Tennessee. Daisytek and PFSweb have entered into
a five year agreement in which PFSweb will provide certain transaction
management services for us. This distribution center is located about four miles
from the Memphis International airport, where both Federal Express and United
Parcel Service operate large hub facilities. We believe the combined effect of
the agreement with Federal Express, our relationship with PFSweb and it's
centralized distribution model and the center's location allows us to offer our
customers next business day delivery in most areas of the United States.
Distribution centers for other countries are located in Toronto, Vancouver,
Mexico City, Sydney and Miami, Florida for distribution to Latin America.
Arlington has distribution centers located in Libertyville, Illinois; Kearny,
New Jersey; Atlanta, Georgia; Los Angeles, California and Miami, Florida for
distribution to Latin America.
Our Professional Tape Products segment operates regional warehouses to
effectively service its local markets on a same-day basis. Regional professional
tape products warehouses are located in Chicago, Illinois; New York, New York;
Hollywood and San Francisco, California; Atlanta, Georgia; Philadelphia and
Pittsburgh, Pennsylvania; Detroit, Michigan; Minneapolis, Minnesota; Cincinnati,
Ohio; Dallas, Texas; Kansas City, Missouri; and Seattle, Washington. In
addition, the Professional Tape Products segment utilizes the distribution
facility in Miami, Florida, to service the local market.
On December 2, 1999, in connection with the PFSweb Offering, PFSweb
purchased from Daisytek certain fixed assets in our over one million square foot
central distribution complex in Memphis, Tennessee. This complex contains
computerized sorting equipment, powered material handling equipment, scanning
and bar-coding systems and automated conveyors, in-line scales and digital
cameras to photograph shipment content for automatic accuracy checking. The
receiving and material handling system at the Memphis distribution complex
includes several advanced technology enhancements, including:
- radio frequency technology in product receiving processing to ensure
accuracy;
- an automated package routing system; and
- a "pick to light" paperless order picking system.
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These advanced distribution systems provide PFSweb the ability to warehouse
an extensive number of stock keeping units, SKUs, which range from high-end
laser printers to wide-leg blue jeans, while at the same time retaining the
ability to pick, pack and ship single SKUs to individual customers in
fulfillment of customer orders.
As part of a transition services agreement entered into with PFSweb on
December 7, 1999, Daisytek continues to provide PFSweb with regional customer
service, warehouse and distribution facilities in Canada. In Europe, PFSweb
operates a 150,000 square foot distribution center in Liege, Belgium, which
opened in fiscal 2000. PFSweb maintains relationships with a number of shipping
companies to provide up to next business day delivery on domestic package
orders, truck shipments on larger domestic orders and a variety of air and
surface delivery options for international orders.
All Daisytek and PFSweb facilities are leased and the material lease
agreements contain one or more renewal options.
EMPLOYEES
As of March 31, 2000, we employed about 1,676 persons, including 1,273
persons employed within the United States and about 403 persons employed outside
of the United States. Of the total number of employees, about 1,605 were
full-time and 71 were part-time. None of our employees are represented by a
labor union, and we have never suffered an interruption of business as a result
of a labor dispute. We consider our relations with our employees to be
favorable, and we believe we will be able to continue this relationship by
various employee incentive and participation programs, including employee stock
option and stock purchase plans.
COMPETITION
Most, if not all, of our computer supplies and professional tape customers
maintain several sources of supply for their product requirements. Accordingly,
our Computer and Office Supplies segment competes with product manufacturers,
general office supply wholesalers, other national and regional wholesale
computer supplies distributors, computer hardware and software distributors and,
to a lesser extent, non-specialized wholesaler distributors. The Professional
Tape Products segment competes with product manufacturers, mail-order houses,
video and audio equipment distributors, and other regional and local
professional tape distributors. Competition in the distribution business is
generally based on price, breadth of product lines, product and credit
availability, delivery time and the level and quality of customer services. The
Computer and Office Supplies and Professional Tape Products segments compete
primarily on the basis of their ability to offer competitive prices and quality
service while maintaining a high level of operating efficiency. We believe our
competitive advantages over product manufacturers and other wholesale
distributors include, among others, our ability to:
- efficiently maintain a wide selection of name brand products in stock
ready to be shipped on a same-day basis and delivered overnight;
- efficiently distribute our products;
- provide innovative and high quality value-added customer service
programs; and
- respond to changing customer demands and product development.
The market for our outsourcing services is highly competitive. PFSweb
competes with vertical outsourcers, which are companies that offer a single
function, such as call centers, public warehouses or credit card processors,
many of which have greater capabilities for the function they provide. PFSweb
also competes against in-house operations of potential clients, regional and
national logistics providers, telemarketing firms, public warehouses and
shipping and trucking companies.
Although many of our outsourcing competitors can offer one or more of our
services, we believe our primary competitive advantage is our ability to offer a
wide array of services that cover a broad spectrum of e-commerce transaction
management functions, including order processing and shipment, credit card
processing
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and customer service, thereby eliminating any need for our clients to coordinate
these services from different providers. We believe PFSweb is unique in offering
our clients an adaptable consultative solution that also provides physical
infrastructure for their business to handle all of their order processing,
customer care service, billing, information management and product warehousing
and distribution needs. PFSweb also competes on the basis of certain additional
factors, including:
- operating performance and reliability;
- ease of implementation and integration; and
- price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is becoming more competitive
and, in the case of our outsourcing services, still evolving, and we may not be
able to compete successfully against current and future competitors.
REGULATION
Our businesses are either subject to or may be affected by current and
future governmental regulation in many different jurisdictions. The rules,
regulations, policies and procedures affecting these businesses are constantly
subject to change.
The Internet Tax Freedom Act bars state and local governments from imposing
taxes on Internet access that would subject buyers and sellers of electronic
commerce to taxation in multiple states. This Act is in effect through October
2000. If legislation to extend this act or similar legislation is not enacted,
Internet access and sales across the Internet may be subject to additional
taxation by state and local governments, thereby discouraging purchases over the
Internet and adversely affecting the market for our PFSweb services.
SPIN-OFF OF PFSWEB FROM DAISYTEK
History
The PFSweb business unit was formed in 1991 as a subsidiary of Daisytek
named "Working Capital of America" whose purpose was to provide inventory
management, direct shipping to end users, and accounts receivable collections
for Daisytek customers and other third parties. Until 1996, this business unit
was comprised of operations both at Working Capital of America and at Daisytek.
As the business gradually developed, this business unit recognized an
opportunity to expand its business and capitalize on Daisytek's strengths in
customer service, order management, product fulfillment and distribution, and
provide these services on an outsourcing basis. Since 1996, the operations of
this business unit have been primarily focused in a Daisytek subsidiary,
Priority Fulfillment Services, Inc. PFSweb was formed in 1999 to be a holding
company for PFS and to facilitate the Offering and spin-off from Daisytek. In
December 1999, PFSweb completed the Offering and entered into various agreements
with Daisytek relating to the spin-off. Under these agreements, the spin-off was
conditioned upon, among other things, the receipt of a ruling by the Internal
Revenue Service that, among certain other tax consequences of the transaction,
the spin-off would qualify as a tax-free distribution for U.S. federal income
tax purposes and would not result in the recognition of taxable gain or loss for
U.S. federal income tax purposes to Daisytek or its shareholders. On June 8,
2000, Daisytek received the IRS Ruling and the Daisytek board of directors
approved the spin-off and authorized the distribution of 14,305,000 shares of
PFSweb common stock to the Daisytek common stock holders of record on June 19,
2000. The distribution is payable at the close of business on July 6, 2000.
Daisytek's Ongoing Relationship With PFSweb
Daisytek will continue to have significant ongoing relationships with
PFSweb following the spin-off. Daisytek and PFSweb are parties to various
agreements providing for the separation of their respective business operations.
These agreements govern various interim and ongoing relationships between the
companies, including the transaction management services that PFSweb provides
for Daisytek and the
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transitional services that Daisytek provides to PFSweb and a tax indemnification
and allocation agreement which governs the allocation of tax liabilities and
sets forth provisions with respect to other tax matters.
All of the agreements between Daisytek and PFSweb were made in the context
of a parent-subsidiary relationship and were negotiated in the overall context
of the spin-off. Although we generally believe that the terms of these
agreements are consistent with fair market values, there can be no assurance
that the prices charged to or by each company under these agreements are not
higher or lower than the prices that may be charged to, or by, unaffiliated
third parties for similar services.
Master Separation Agreement
The Master Separation Agreement sets forth the agreements between Daisytek
and PFSweb with respect to the principal corporate transactions required to
effect the transfers of assets and assumptions of liabilities necessary to
separate the PFSweb business unit from Daisytek and certain other agreements
governing this relationship thereafter.
Transfer of Assets and Liabilities. Following completion of the PFSweb
Offering, Daisytek transferred to PFSweb all of the fixed assets in Daisytek's
Memphis distribution facility as well as certain assets associated with
providing information technology services and the stock of several subsidiaries
of Daisytek representing the business operations of PFSweb, and PFSweb
transferred to Daisytek approximately $5.0 million in cash and assumed
approximately $0.3 million of capital lease obligations, as well as the
operating lease obligations related to these assets. PFSweb also repaid to
Daisytek, from the net proceeds of the Offering, the aggregate sum of
approximately $27 million, representing the outstanding balance of PFSweb's
intercompany payable to Daisytek.
Indemnification. PFSweb agreed to indemnify Daisytek against any losses,
claims, damages or liabilities arising from the liabilities transferred to
PFSweb and the conduct of the PFSweb business after the completion of the
Offering. Daisytek agreed to retain, and indemnify PFSweb against, any losses,
claims, damages or liabilities arising from the conduct of the PFSweb business
prior to the completion of the Offering.
Initial Public Offering and Distribution Agreement
General. Daisytek and PFSweb entered into an Initial Public Offering and
Distribution Agreement which governs their respective rights and duties with
respect to PFSweb's Offering and the spin-off, and sets forth certain covenants
to which they will be bound for various periods following the Offering and the
spin-off.
Preservation of the Tax-free Status of the Spin-off. Daisytek has received
a private letter ruling from the Internal Revenue Service to the effect that the
spin-off will qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code (the "Code") to Daisytek and its shareholders. In
connection with obtaining such ruling, certain representations and warranties
were made regarding Daisytek, PFSweb and their respective businesses. PFSweb has
also agreed to certain covenants, discussed below, that are intended to preserve
the tax-free status of the spin-off.
Certain Acquisition Transactions. Until two years after the completion of
the spin-off, PFS has agreed not to enter into or permit any transaction or
series of transactions that would result in a person or persons acquiring or
having the right to acquire shares of its capital stock that would comprise 50%
or more of either the value of all outstanding shares of its capital stock or
the total combined voting power of its outstanding voting stock.
Continuation of Active Trade or Business. Until two years after the
completion of the spin-off, PFSweb has agreed to continue to conduct its active
trade or business (within the meaning of Section 355 of the Code) as it was
conducted immediately prior to the completion of the spin-off. During such time,
PFSweb has agreed not to:
- liquidate, dispose of or otherwise discontinue the conduct of any
substantial portion of its active trade or business; or
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- dispose of any business or assets that would cause it to be operated in a
manner inconsistent in any material respect with the business purposes
for the spin-off as described in the representations made in connection
with Daisytek's request for the IRS Ruling.
Continuity of Business. Until two years after the completion of the
spin-off, PFSweb has agreed that it will not voluntarily dissolve or liquidate;
and, except in the ordinary course of business, neither it nor any of its direct
or indirect subsidiaries will sell, transfer, or otherwise dispose of or agree
to dispose of assets (including any shares of capital stock of its subsidiaries)
that, in the aggregate, constitute more than 60% of its assets.
Intracompany Debt. Until two years after the completion of the spin-off,
PFSweb will not be able to have any indebtedness to Daisytek, other than
payables arising in the ordinary course of business.
These covenants will not prohibit PFSweb from implementing or complying
with any transaction permitted by the IRS ruling or a tax opinion.
Other Covenants Regarding Tax Treatment of the Transactions. Daisytek
intends the transfer of assets and liabilities from Daisytek to PFSweb as
provided by the master separation agreement (the "Contribution") to qualify as a
reorganization under Section 368(a)(1)(D) of the Code (a "D Reorganization").
Until two years after the completion of the spin-off, PFSweb has agreed not to
take, or permit any of its subsidiaries to take, any actions or enter into any
transaction or series of transactions that would be reasonably likely to
jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, including any action or transaction that
would be reasonably likely to be inconsistent with any representation made in
connection with Daisytek's request for the IRS Ruling. PFSweb has also agreed to
take any reasonable actions necessary for the Contribution and the spin-off to
qualify as a D Reorganization.
Cooperation on Tax Matters. PFSweb and Daisytek have agreed to various
procedures with respect to the tax-related covenants described above, and PFSweb
is required to notify Daisytek if it desires to take any action prohibited by
these covenants. Upon such notification, if Daisytek determines that such action
might jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, Daisytek will either use all commercially
reasonable efforts to obtain a private letter ruling from the IRS or a tax
opinion that would permit PFSweb to take the desired action or provide all
reasonable cooperation to PFSweb in connection with PFSweb obtaining such an IRS
ruling or tax opinion. In either case, Daisytek has agreed to bear the
reasonable costs and expenses of obtaining the IRS ruling or tax opinion, unless
it is determined that PFSweb's proposed action will jeopardize the tax-free
status of the spin-off or the qualification of the Contribution as a D
Reorganization, in which event PFSweb will be responsible for such costs and
expenses.
Indemnification for Tax Liabilities. PFSweb has generally agreed to
indemnify Daisytek and its affiliates against any and all tax-related losses
incurred by Daisytek in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent it is
caused by any breach by it of any of its representations, warranties or
covenants. If PFSweb causes the spin-off to not qualify as a tax-free
distribution, Daisytek would incur federal income tax (which currently would be
imposed at a 35% rate), and possibly state income taxes on the gain inherent in
the shares distributed, which would be based upon the market value of the shares
of PFSweb at the time of the spin-off. This indemnification does not apply to
actions that Daisytek permits PFSweb to take as a result of a determination
under the tax-related covenants as described above. Similarly, Daisytek has
agreed to indemnify PFSweb and its affiliates against any and all tax-related
losses incurred by it in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent
caused by any breach by Daisytek of any of its representations, warranties or
covenants.
Other Indemnification. PFSweb has generally agreed to indemnify Daisytek
and its affiliates against all liabilities arising out of any material untrue
statements and omissions in PFSweb's prospectus and the registration statement
of which it is a part and in any and all registration statements, information
statements and/or other documents filed with the SEC in connection with the
spin-off or otherwise. However, PFSweb's indemnification of Daisytek does not
apply to information relating to Daisytek. Daisytek has agreed to indemnify
PFSweb for this information.
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Expenses. In general, PFSweb agreed to pay substantially all costs and
expenses relating to the Offering, including the underwriting discounts and
commissions, and Daisytek has agreed to pay substantially all costs and expenses
relating to the spin-off.
Tax Matters
Daisytek and PFSweb have entered into a tax indemnification and allocation
agreement to govern the allocation of tax liabilities and to set forth
agreements with respect to certain other tax matters.
Generally, under the Code, PFSweb will cease to be a member of the Daisytek
consolidated group upon the completion of the spin-off or whenever Daisytek owns
less than 80% of PFSweb's outstanding capital stock.
Daisytek generally will pay all taxes attributable to PFSweb and its
subsidiaries for tax periods or portions thereof ending on or before the
effective date of PFSweb's Offering, except to the extent of any accruals on the
books and records of PFSweb or its subsidiaries for such taxes under generally
accepted accounting principles. Thereafter, for tax periods or portions thereof
during which PFSweb is a member of the Daisytek consolidated, combined or
unitary group, PFSweb will be apportioned its share of the group's income tax
liability based on its taxable income determined separately from Daisytek's
taxable income, and PFSweb will pay its calculated taxes to Daisytek, which will
then file a consolidated, combined or unitary return with the appropriate tax
authorities. There may be certain U.S. state or local jurisdictions in which
PFSweb will file separate income tax returns, not combined or consolidated with
Daisytek, for such tax periods. In that circumstance, PFSweb would file a tax
return with the appropriate tax authorities, and pay all taxes directly to the
tax authority. PFSweb will be compensated for tax benefits generated by it
before tax deconsolidation and used by the Daisytek consolidated group. PFSweb
will prepare and file all tax returns, and pay all income taxes due with respect
to all tax returns required to be filed by it for all tax periods after it
ceases to be a member of the Daisytek consolidated, combined or unitary group.
Daisytek is responsible for most U.S. tax adjustments related to PFSweb for
all periods or portions thereof ending on or before the effective date of the
Offering. In addition, PFSweb and Daisytek have agreed to cooperate in any tax
audits, litigation or appeals that involve, directly or indirectly, periods
prior to the time that PFSweb ceases to be a member of the Daisytek consolidated
group. PFSweb and Daisytek have agreed to indemnify each other for tax
liabilities resulting from the failure to cooperate in such audits, litigation
or appeals, and for any tax liability resulting from the failure to maintain
adequate records.
Notwithstanding the tax allocation agreement, for all periods in which
Daisytek owns or owned 80% or more of PFSweb's capital stock, PFSweb will be
included in Daisytek's consolidated group for federal income tax purposes. If
Daisytek or other members of the consolidated group fail to make any federal
income tax payments, PFSweb will be liable for the shortfall since each member
of a consolidated group is liable for the group's entire tax obligation.
Under the tax indemnification and allocation agreement, Daisytek has agreed
to indemnify PFSweb against any taxes resulting from the failure of the spin-off
to qualify for tax-free treatment, except that PFSweb will be liable for, and
will indemnify Daisytek against, any taxes resulting from the failure of the
spin-off to qualify for tax-free treatment if it is the result of PFSweb
engaging in a "Prohibited Action" or the occurrence of a "Disqualifying Event."
Neither PFSweb nor Daisytek have the option to rescind the spin-off if tax
liability results.
A "Prohibited Action" is defined as:
- if PFSweb takes any action which is inconsistent with the tax treatment
of the spin-off as contemplated in the IRS Ruling; or
- if, prior to the spin-off, PFSweb issued shares of stock or took any
other action that would result in it not being controlled by Daisytek
within the meaning of Section 368(c) of the Code.
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A "Disqualifying Event" includes any event involving the direct or indirect
acquisition of the shares of PFSweb's capital stock after the spin-off which has
the effect of disqualifying the spin-off from tax-free treatment, whether or not
the event is the result of our direct action or within PFSweb's control.
Transaction Management Services Agreement
PFSweb and Daisytek have entered into a transaction management services
agreement which sets forth the transaction management services that PFSweb
provides for Daisytek. Under this agreement, PFSweb provides a wide range of
transaction management services, including information management, order
fulfillment and distribution, product warehousing, inbound call center services,
product return administration and other services.
The agreement has an initial term of five years from the completion of the
Offering, although either party has the right to terminate the agreement at any
time, without cause. If Daisytek terminates the agreement without cause,
Daisytek must provide at least 180 days' prior notice and pay PFSweb a
termination fee. If PFSweb terminates the agreement without cause, PFSweb must
provide at least 365 days' prior notice and Daisytek does not have to pay any
termination fee. In addition, if there is a change in control of Daisytek,
PFSweb may terminate the agreement upon 90 days' prior notice and Daisytek does
not have to pay the termination fee. During the term of the agreement, Daisytek
pays PFSweb service fees based upon a percent of Daisytek shipped revenue.
PFSweb and Daisytek have agreed that these fees are based upon certain
assumptions regarding the nature, cost and scope of the services PFSweb will be
providing under the agreement. If these assumptions should materially change,
PFSweb and Daisytek have agreed to negotiate in good faith an adjustment to the
fees payable to PFSweb under the agreement.
During the term of the agreement, PFSweb has agreed not to engage, on its
own behalf, in the business of selling or distributing, on a wholesale basis,
any Daisytek products. This will not restrict it, however, from providing
transaction management services to third parties who may be engaged in the
business of selling or distributing, on a wholesale basis, the same or competing
products.
As part of the restructuring of PFSweb's arrangements with IBM, PFSweb has
also entered into transaction management agreements with Daisytek to provide
transaction management services, on a worldwide basis, in connection with
Daisytek's distribution of various IBM products. Under these agreements, PFSweb
receives service fees based upon a variable percent of Daisytek's gross profit
arising from its IBM product sales. These agreements are coterminous with
PFSweb's IBM agreements which, generally, have terms of one to two years,
although IBM may terminate these agreements at any time.
Transition Services Agreement
Upon completion of the Offering, Daisytek and PFSweb entered into a
transition services agreement. Under this agreement, Daisytek provides PFSweb
with various services relating to employee payroll and benefits, use of
facilities, and other administrative services. Daisytek will provide PFSweb with
these services until the completion of the spin-off (the "Transition Period"),
except that, with respect to any particular service, PFSweb may, upon notice to
Daisytek, either terminate the Transition Period as of an earlier date or extend
the Transition Period for up to one year from the completion of the Offering.
The agreement requires PFSweb to use all commercially reasonable efforts to
obtain these transition services from a source other than Daisytek prior to the
conclusion of the Transition Period. If, however, PFSweb cannot obtain any
transition service from a source other than Daisytek and the transition service
is necessary for PFSweb to continue to operate its business, then, PFSweb may
require Daisytek to continue to provide the transition service for an additional
period not to exceed six months.
Generally, PFSweb will pay Daisytek for these transition services an amount
equal to the cost historically allocated by Daisytek to PFSweb's business,
adjusted to reflect any changes in the nature, cost or level of the services so
provided. If PFSweb requires Daisytek to provide it with any transition service
after the expiration of the Transition Period, PFSweb will pay Daisytek the fair
market value of these services.
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Substitute Stock Options
In connection with the completion of the spin-off, all outstanding Daisytek
stock options will be adjusted and replaced with substitute stock options as
follows:
Options held by Daisytek employees who transfer to PFSweb will be replaced
(at the option holder's election to be made prior to the spin-off) with either
options to acquire shares of PFSweb common stock or options to purchase shares
of both Daisytek common stock and PFSweb common stock, which may be exercised
separately (the "Unstapled Options"). Options held by Daisytek employees who
remain with Daisytek will be replaced (at the option holder's election to be
made prior to the spin-off) with either options to acquire shares of Daisytek
common stock or Unstapled Options.
In, general, the adjustments to the outstanding Daisytek options will be
established pursuant to a formula designed to ensure that: (1) the aggregate "
intrinsic value" (i.e. the difference between the exercise price of the option
and the market price of the common stock underlying the option) of the
substitute options will not exceed the aggregate intrinsic value of the
outstanding Daisytek stock options which are replaced by such substitute option
immediately prior to the spin-off, and (2) the ratio of the exercise price of
the options to the market value of the underlying stock immediately before and
after the spin-off is preserved.
Substantially all of the other terms and conditions of each adjusted
substitute stock option, including the time or times when, and the manner in
which, each option will be exercisable, the duration of the exercise period, the
permitted method of exercise, settlement and payment, the rules that will apply
in the event of the termination of employment of the employee, the events, if
any, that may give rise to an employee's right to accelerate the vesting or the
time or exercise thereof and the vesting provisions, will be the same as those
of the replaced Daisytek stock options, except that option holders who are
employed by one company will be permitted to exercise, and will be subject to
all of the terms and provisions of options to acquire shares in the other
company as if such holder was an employee of such other company.
Although it is not possible to specify how many shares of Daisytek common
stock or PFSweb common stock will be subject to substitute stock options in
replacement of Daisytek stock options until after the spin-off, it is possible
that Daisytek and PFSweb shareholders may experience some dilutive impact from
the previously described conversion.
No adjustment or replacement will be made in or to outstanding PFSweb stock
options as the result of the spin-off.
ITEM 2. PROPERTIES
Our Computer and Office Supplies and PFSweb businesses are headquartered in
a 65,419 square foot central office facility located in Plano, Texas, a Dallas
suburb. Daisytek has recently signed a seven year lease on 46,000 square feet of
new office space in Allen, Texas, a Dallas suburb, which will become the new
corporate headquarters for Daisytek after the PFSweb spin-off is completed.
PFSweb operates an over one million square foot central distribution complex in
Memphis, Tennessee, which is utilized by all of our business segments. We also
operate regional sales and distribution centers in Toronto, Ontario; Vancouver,
British Columbia; Mexico City, Mexico; Sydney, Australia; and Miami, Florida,
which are utilized by our international Computer and Office Supplies business.
PFSweb's European sales and distribution operations are headquartered in Liege,
Belgium. Our Professional Tape Products business is headquartered in Wood Dale,
Illinois, a Chicago suburb. The Professional Tape Products segment also operates
regional offices in New York, New York; Hollywood and San Francisco California;
Atlanta, Georgia; Philadelphia and Pittsburgh, Pennsylvania; Detroit, Michigan;
Minneapolis, Minnesota; Cincinnati, Ohio; Dallas, Texas; Kansas City, Missouri;
Seattle, Washington; and Miami, Florida. Arlington is headquartered in
Libertyville, Illinois and operates regional offices in Kearny, New Jersey;
Atlanta, Georgia; Los Angeles, California; and Miami, Florida.
All of our facilities are leased and the material lease agreements contain
one or more multiple year renewal options.
16
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
Daisytek is involved in certain litigation arising in the ordinary course
of business. Management believes that such litigation will be resolved without
material effect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Daisytek's Common Stock is listed and trades on the Nasdaq Stock Market
under the symbol "DZTK." The following table sets forth for the period indicated
the high and low sale price for the Common Stock as reported by the Nasdaq
National Market:
<TABLE>
<CAPTION>
PRICE
--------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
Fiscal Year 1999
First Quarter............................................. $26 7/8 $21 1/4
Second Quarter............................................ $27 $16 3/4
Third Quarter............................................. $23 1/4 $12 3/4
Fourth Quarter............................................ $23 1/2 $15 1/4
Fiscal Year 2000
First Quarter............................................. $18 7/8 $12 1/2
Second Quarter............................................ $17 1/16 $ 9
Third Quarter............................................. $24 1/2 $13
Fourth Quarter............................................ $25 1/8 $13 1/2
</TABLE>
As of June 19, 2000, there were approximately 4,200 shareholders of which
88 were record holders of the Common Stock.
Daisytek has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends on its Common Stock in the foreseeable
future. We currently intend to retain all earnings to finance further
development of our business. The payment of any future cash dividends will be at
the discretion of our Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the company and general business conditions. We refer you to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
18
<PAGE> 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of income data for each of
the fiscal years ended March 31, 2000, 1999, and 1998, and the selected
consolidated balance sheet data as of March 31, 2000 and 1999 have been derived
from our audited consolidated financial statements, and should be read in
conjunction with those statements, which are included in this document. The
selected consolidated statements of income data for the fiscal years ended March
31, 1997 and 1996 and the selected consolidated balance sheet data as of March
31, 1998, 1997 and 1996 have been derived from our consolidated financial
statements, and should be read in conjunction with those statements, which are
not included in this document. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto which are included elsewhere in this document. The following
selected consolidated financial data for fiscal years 1998, 1997, and 1996 has
been restated to combine the results of operations and financial positions of
Daisytek with The Tape Company, which was acquired by us during June 1998 and
accounted for as a pooling of interests.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues................................................ $1,060,147 $908,630 $800,112 $639,511 $492,097
Cost of revenues............................................ 957,006 800,263 712,568 571,448 437,970
---------- -------- -------- -------- --------
Gross profit................................................ 103,141 108,367 87,544 68,063 54,127
Selling, general and administrative
expenses.................................................. 90,844 70,648 55,974 41,870 32,565
---------- -------- -------- -------- --------
Income from operations before acquisition and disposition
costs..................................................... 12,297 37,719 31,570 26,193 21,562
Acquisition related costs................................... 619 1,111 735 -- --
Loss on disposition of business............................. (1,000) 2,800 -- -- --
---------- -------- -------- -------- --------
Income from operations...................................... 12,678 33,808 30,835 26,193 21,562
Interest expense............................................ 4,035 2,797 3,134 1,847 1,542
---------- -------- -------- -------- --------
Income before income taxes.................................. 8,643 31,011 27,701 24,346 20,020
Provision for income taxes.................................. 4,670 11,823 10,185 8,432 6,725
---------- -------- -------- -------- --------
Income before minority interest and cumulative effect of
accounting change......................................... 3,973 19,188 17,516 15,914 13,295
Minority interest........................................... 566 -- -- -- --
Cumulative effect of accounting change, net of tax.......... -- (405) -- -- --
---------- -------- -------- -------- --------
Net income.................................................. $ 4,539 $ 18,783 $ 17,516 $ 15,914 $ 13,295
========== ======== ======== ======== ========
PER SHARE DATA:
Net income per common share:
Basic
Income before cumulative effect of accounting change.... $ 0.26 $ 1.12 $ 1.20 $ 1.14 $ 0.98
Cumulative effect of accounting change, net of tax...... -- (0.02) -- -- --
---------- -------- -------- -------- --------
Net income.............................................. $ 0.26 $ 1.10 $ 1.20 $ 1.14 $ 0.98
========== ======== ======== ======== ========
Diluted
Income before cumulative effect of accounting change.... $ 0.25 $ 1.08 $ 1.14 $ 1.08 $ 0.92
Cumulative effect of accounting change, net of tax...... -- (0.02) -- -- --
---------- -------- -------- -------- --------
Net income.............................................. $ 0.25 $ 1.06 $ 1.14 $ 1.08 $ 0.92
========== ======== ======== ======== ========
Weighted average common and common share equivalents
outstanding:
Basic................................................... 17,248 17,101 14,541 13,909 13,577
Diluted................................................. 18,186 17,789 15,318 14,801 14,489
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $153,921 $138,764 $123,986 $ 82,389 $ 58,453
Total assets................................................ 372,746 315,879 257,845 185,226 135,477
Total debt.................................................. 44,823 43,167 19,926 31,116 17,069
Shareholders' equity........................................ 210,686 157,170 137,731 70,383 53,720
</TABLE>
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto appearing
elsewhere in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document and the documents incorporated by reference into this annual
report on Form 10-K contain both historical and forward-looking statements. All
statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. You can identify these statements by the fact that they do not
relate strictly to historical or current facts, but rather reflect our current
expectations concerning future results and events. They include words such as
"anticipate," "will," "expect," "estimate," "believe," "intend," "plan,"
"could," "may," "future," "target", and similar expressions and variations
thereof. Forward-looking statements relating to such matters as our financial
condition and operations are based on our management's current intent, belief or
expectations regarding us or our industry. These forward-looking statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.
Certain factors, including, but not limited to, 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, the planned spin-off of PFS web, and the regulatory
and trade environment (both domestic and foreign) could cause our actual results
to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. There may be additional risks that
we do not currently view as material or that are not presently known.
OVERVIEW
Daisytek is a leading wholesale distributor of computer, copier, fax and
office supplies products, professional audio and video tape products and also a
leading provider of transaction management services to both traditional and
e-commerce companies with operations in three business segments: (1) Computer
and Office Supplies; (2) Professional Tape Products; and (3) transaction
management services conducted by our majority owned subsidiary, PFSweb, Inc.
("PFSweb".) These reportable segments are strategic business units that offer
different products and services and are managed separately, based on fundamental
differences in their operations. We sell our products and services in the United
States, Canada, Australia, Mexico, South America, the Pacific Rim and Europe.
Our Computer and Office Supplies segment began operations in the United
States in the 1980's and expanded internationally into Canada in 1989, Mexico in
1994 and Australia/Asia in 1996. This segment distributes over 10,000 nationally
known, name-brand computer and office supplies products to over 30,000
customers. These products are manufactured by over 150 original equipment
manufacturers, including Hewlett-Packard, Canon, Sharp, Lexmark, IBM, Okidata,
Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. We believe we
are one of the world's largest wholesale distributor of computer supplies,
office products, and film and tape media. The B.A. Pargh acquisition will add an
additional 7,000 office products and supplies which are shipped to over 20,000
customer locations.
Our Professional Tape Products segment began in 1998 and currently
distributes more than 3,000 professional tape products to over 26,000 customers.
Our customers primarily include production and broadcast companies, advertising
and governmental agencies, cable television providers, educational institu-
20
<PAGE> 23
tions and healthcare providers. Our professional tape products include
videotape, audiotape, motion picture film and data storage media.
PFSweb is an international provider of business infrastructure solutions
for manufacturers, distributors and retailers that enable to rapid development
and deployment of traditional and e-business strategies. PFSweb offers a
complete array of services to support its clients' current and future business
initiatives. PFSweb's solutions include professional consulting services, order
management, web-enabled customer care services, billing and collection services,
information management and international fulfillment and distribution services.
PFSweb currently provides traditional and e-business infrastructure solutions to
over 30 clients that are positioned as market leaders in a range of industries,
including apparel, computer products, printers, sporting goods, cosmetics and
consumer electronics, among others.
During December 1999, we completed the first phase in our plan to spin-off
PFSweb through the completion of an initial public offering of PFSweb stock. In
connection with the second phase of this process, we received a tax ruling
request from the Internal Revenue Service which indicates that the distribution
of Daisytek's remaining 80.1% ownership of PFSweb to the Daisytek shareholders
will be a tax-free transaction. The date of record for purposes of determining
shareholders entitled to receive this distribution is June 19, 2000 and the
distribution is scheduled to occur on July 6, 2000. Once this occurs, PFSweb
will operate as a separate company and Daisytek will not retain any ownership in
PFSweb. As a result, the following business strategy discussion relates only to
the Daisytek business, excluding PFSweb.
BUSINESS STRATEGY
Daisytek's focus is as a low cost distributor in the growing computer and
office supplies industry in the United States and international markets. We base
our continued growth on the following strategies:
1) Expansion of our existing product offering to include a full line
of office products;
2) Growth of our customer base by investing in the development of
emerging customer channels, particularly in electronic commerce;
3) Development of client services related to our competencies in
customer care and demand generation;
4) Expansion of our product and service offerings into new
international markets; and
5) Actively pursue acquisitions, where appropriate, to support both
operating and financial strategies.
Our Computer and Office Supplies segment specializes in computer supplies
that have longer life cycles and lower risk of technological obsolescence than
hardware and software products. We believe 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 we distribute. Continuing automation of the workplace
and the tremendous growth in color printing technologies that use consumable
supplies at higher rates also fuel the demand for the computer supplies product
offering. We offer these products to our domestic 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. We plan to expand sales to existing customers including those in the
contract stationer, VAR, computer and office-product dealer, and superstore
channels.
We began our expansion of products to include a full line of office
products through the acquisition of B.A. Pargh, which was completed in May 2000.
This acquisition adds nearly 7,000 products to our existing product lines. In
addition, it brings new customers that previously have not purchased from us.
The consolidation in the office products industry has required dealers to focus
on gaining efficiencies in their business. As a result, there is an emerging
segment of office product dealers, particularly large contract stationers, who
possess their own distribution and delivery infrastructure and who are
aggressively seeking a lower cost alternative to the traditional higher cost
office products wholesale model. Our low cost distribution model, coupled with
our relationship with PFSweb, positions us to take advantage of the demand for a
lower
21
<PAGE> 24
cost distributor. B.A. Pargh's primary markets are in the Central and Eastern
United States and in Puerto Rico.
We are also focusing on new customer channels such as mass merchants,
grocery and convenience stores, direct mail marketers and internet business
sites. We have dedicated an internal team to leverage its experience in
e-commerce, telemarketing and computer supplies to assist these customers in
including our growing line of products into their own offerings. We intend to
use our suite of electronic services, our lower cost distribution model, our
expanding offering of products, along with our experience in selling computer
and office consumables to aggressively market to these new and emerging
channels.
Daisytek has been testing new service programs with various suppliers and
business partners. These programs build on Daisytek's core competencies in
customer service and proactive demand generation. In these programs Daisytek
takes over, on behalf of the supplier, the management of customer relationships
in defined parts of the supplier's or partner's existing business, or possibly
in new business areas. Services provided fall under categories including
database management, proactive outbound telemarketing, high level customer
support and proactive e-marketing. These services will be provided by a newly
established, wholly-owned subsidiary of Daisytek, under the name Virtual Demand,
which will charge fees on a transaction basis to our clients. A dedicated sales
team has been formed and is currently marketing these service programs to a
variety of companies.
We continue to research new markets to expand our international computer
supplies business. Many international markets have exponentially higher growth
opportunities for consumable computer supplies than the United States.
Presently, we operate sales and distribution centers in Canada, Mexico and
Australia and export products into Latin America, the Pacific Rim and throughout
much of the rest of the world. Our computer supplies experience and broad
product range place us in a competitive position in emerging international
markets.
We plan to enhance growth by seeking strategic acquisition opportunities in
our computer and office supplies business, or to add selected product lines and
customers that can capitalize on Daisytek's expertise in distribution and
call-center management, or that may add technology and service offerings to our
business. In this regard, on October 1, 1999, we acquired certain assets and
liabilities of Arlington, a domestic based specialty wholesaler primarily
focused on copier and fax consumable supplies. Additionally, on May 3, 2000, we
acquired certain assets and liabilities of B.A. Pargh a wholesaler and reseller
of traditional office products.
Daisytek Stand Alone (Excluding PFSweb, Inc.)
The following is an unaudited adjusted historical financial presentation of
the Daisytek business units, excluding PFSweb, for fiscal 2000 and 1999. This
information is supplemental and is not intended to be presented in accordance
with generally accepted accounting principles. The presentation takes into
account certain one-time costs of reorganization activities as a result of the
planned separation of Daisytek and PFSweb and includes the estimated impact of
the transaction management services agreement between Daisytek and PFSweb for
all periods presented. In addition, this presentation excludes what management
believes are certain operating costs of $11.1 million during fiscal 2000 that we
believe to be incremental to normal operations. These incremental costs relate
primarily to the planned separation, certain other charges as a result of the
separation activities, an increase to the allowance for bad debts primarily
related to Latin American accounts receivable, legal and professional fees
related to an unsolicited acquisition offer, costs related to the closing of
Singapore and other operating charges during such periods. The presentation also
excludes acquisition related costs, loss on disposition of business, minority
interest and cumulative effect of accounting change.
We based the following data on available information and certain
assumptions. We believe that such assumptions provide a reasonable basis for
presenting our results, excluding PFSweb and adjusting for the
22
<PAGE> 25
transactions described above. This financial information does not reflect what
our results of operations may be in the future.
Adjusted Statements of Income Data:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
2000 1999
------------ ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $1,040,579 $901,082
Cost of revenues............................................ 928,490 795,442
---------- --------
Gross profit.............................................. 112,089 105,640
Selling, general and administrative expenses................ 85,184 76,343
---------- --------
Income from operations.................................... 26,905 29,297
Interest expense............................................ 3,980 3,074
---------- --------
Income before income taxes................................ 22,925 26,223
Provision for income taxes.................................. 8,940 9,970
---------- --------
Net income.................................................. $ 13,985 $ 16,253
========== ========
Net income per common share:
Basic..................................................... $ 0.81 $ 0.95
Diluted................................................... $ 0.77 $ 0.91
Weighted average common and common share equivalents
outstanding:
Basic..................................................... 17,248 17,101
Diluted................................................... 18,186 17,789
</TABLE>
Adjusted Balance Sheet Data:
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Working capital............................................. $125,949
Total assets................................................ 317,155
Total debt.................................................. 42,144
Shareholders' equity........................................ 172,549
</TABLE>
23
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth consolidated results of operations and other
financial data from Daisytek's audited consolidated statements of income.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------
2000 1999 1998
----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues.............................................. $1,060,147 $908,630 $800,112
Cost of revenues.......................................... 957,006 800,263 712,568
---------- -------- --------
Gross profit.............................................. 103,141 108,367 87,544
Selling, general and administrative expenses.............. 90,844 70,648 55,974
---------- -------- --------
Income from operations before acquisition and disposition
costs................................................... 12,297 37,719 31,570
Acquisition related costs................................. 619 1,111 735
Loss on disposition of business........................... (1,000) 2,800 --
---------- -------- --------
Income from operations.................................... 12,678 33,808 30,835
Interest expense.......................................... 4,035 2,797 3,134
---------- -------- --------
Income before income taxes................................ 8,643 31,011 27,701
Provision for income taxes................................ 4,670 11,823 10,185
---------- -------- --------
Income before minority interest and cumulative effect of
accounting change....................................... 3,973 19,188 17,516
Minority interest......................................... 566 -- --
Cumulative effect of accounting change, net of tax........ -- (405) --
---------- -------- --------
Net income................................................ $ 4,539 $ 18,783 $ 17,516
========== ======== ========
PER SHARE DATA:
Net income per common share:
Basic
Income before cumulative effect of accounting
change............................................. $ 0.26 $ 1.12 $ 1.20
Cumulative effect of accounting change, net of tax... -- (0.02) --
---------- -------- --------
Net income........................................... $ 0.26 $ 1.10 $ 1.20
========== ======== ========
Diluted
Income before cumulative effect of accounting
change............................................. $ 0.25 $ 1.08 $ 1.14
Cumulative effect of accounting change, net of tax... -- (0.02) --
---------- -------- --------
Net income........................................... $ 0.25 $ 1.06 $ 1.14
========== ======== ========
Weighted average common and common share equivalents
outstanding:
Basic................................................ 17,248 17,101 14,541
Diluted.............................................. 18,186 17,789 15,318
</TABLE>
CONSOLIDATED RESULTS
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
The following discussion relates to Daisytek, including its majority-owned
subsidiary, PFSweb. These are historical results and may not be representative
of our results after the planned spin-off of PFSweb.
Net Revenues. Net revenues for the year ended March 31, 2000 increased
$151.5 million, or 16.7%, to $1,060.1 million as compared to $908.6 million for
the year ended March 31, 1999. Computer and Office Supplies net revenues
increased 18.7% for the year ended March 31, 2000, compared to the year ended
March 31, 1999. The Computer and Office Supplies business segment includes our
domestic and international computer supplies operations and IBM product sales.
The net revenue increase in the Computer and Office
24
<PAGE> 27
Supplies business compared to the prior year is primarily attributable to the
Arlington acquisition, growth in the international computer supplies business,
and growth in IBM product sales. U.S. computer supplies net revenues, excluding
Arlington and IBM product sales, declined by 1.4% compared to the prior year.
This business experienced a decline in the first quarter of fiscal 2000 compared
to the prior year's quarter, but improved to low single digit growth rates in
the remaining quarters of the year. Over the last two years, the growth in sales
for the domestic computer supplies business has slowed from previously realized
levels. We believe this reduction is due, in large part, to slower industry
growth, large channel shifts, turmoil in certain customer segments and slower
printer placements.
Net revenues in the international computer supplies operations increased by
22.0% for the year ended March 31, 2000 compared to the prior year. We
experienced growth in all international subsidiaries within this segment, with
particularly strong growth rates in Mexico and Australia. Effective March 31,
2000, we elected to close our Singapore operation and consolidate the remaining
business activity into our Asia Pacific headquarters in Australia. Net revenues
related to our IBM product sales increased due to higher sales volumes under
both our North American and European distributor agreements. Professional Tape
Products net revenues decreased 9.4% for fiscal 2000 compared to the prior year
due primarily to price degradation in certain product lines and the disposition
of the Steadi-Systems professional hardware business in March of 1999. We may
continue to experience price degradation in our Professional Tape Products
segment in the future, which might have a negative impact on future growth
rates. PFSweb also experienced an increase in its service fee-based activity as
a result of new contracts and expansion of existing contracts.
Gross Profit. Gross profit as a percent of net revenues was 9.7% for the
year ended March 31, 2000 as compared to 11.9% for the prior year. Our gross
profit for the year was negatively impacted by certain incremental operational
charges of $5.0 million. These charges represent costs related to the closure of
our Singapore operations, inventory and vendor program settlements, and certain
other charges. We believe that these charges are incremental to normal
operations; however, there can be no assurance that we will not experience
certain of these incremental charges in the future. Excluding these incremental
charges for the year, our gross profit was 10.2%. The decrease in our gross
profit as a percent of net revenues was primarily due to our previously
announced focus on the key balance sheet areas of inventory and accounts
receivable during the latter half of fiscal 2000. In order to make improvements
in this area, we avoided certain vendor incentive programs, that for comparative
purposes have been previously reflected in our prior year results. Additionally,
in order to improve inventory levels, we entered into certain isolated
transactions to sell certain inventory at lower than usual margins. During
fiscal 1999, we were also able to take advantage of certain enhanced product
sourcing opportunities which did not continue in fiscal 2000 and, thus,
negatively impacted the fiscal 2000 gross profit percentage on a comparative
basis. Additionally, the gross profit percentage declined in the international
computer supplies business due primarily to growth in international retail
business, which typically carries lower margins. Also contributing to the
overall decline in gross profit percentage was the revenue growth in IBM product
sales, which are also typically at lower margins. The Company's gross profit
percentage was also negatively impacted by incremental costs associated with
PFSweb's large number of new client implementations. The Company believes that
competitive pressures in the Computer and Office Supplies operations and
potential price degradation in the Professional Tape Products business may
continue to impact gross margins during the next year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the year ended March 31, 2000 were $90.8
million or 8.6% of net revenues, as compared to $70.6 million, or 7.8% of net
revenues for the year ended March 31, 1999, excluding acquisition related costs
and the amounts related to the disposition of business in each period. The
increase in SG&A expenses and the related increase in SG&A as a percentage of
net revenues for fiscal 2000 is primarily attributable to (i) the acquisition of
Arlington on October 1, 1999, (ii) the investments in resources and technology
to implement new contracts and further develop infrastructure for PFSweb and,
(iii) a reduction in net revenues to large office superstores, which typically
have lower SG&A expense ratios. This impact on the SG&A percentage was partially
offset by an increase in IBM product sales with lower SG&A expense ratios. SG&A
expenses for the year ended March 31, 2000 included incremental charges
primarily related to certain repositioning and separation activities associated
with the PFSweb spin-off, increases in allowances for bad debts related
primarily to issues
25
<PAGE> 28
in our Latin American accounts receivable, legal and professional fees related
to an unsolicited acquisition offer, costs incurred in connection with closing
our Singapore operation, and certain other charges.
Acquisition Related Costs. In June, 1998, we completed the acquisition of
The Tape Company through a stock-for-stock merger, which was accounted for as a
pooling of interests in the accompanying Consolidated Financial Statements and
notes thereto. During fiscal 1999, we incurred acquisition and integration costs
of $1.1 million related to accounting, legal and other costs applicable to the
acquisition of The Tape Company. During fiscal 2000, we recorded costs of about
$0.6 million applicable to transition, integration and merger activities within
our Professional Tape Products segment.
Loss on Disposition of Business. In fiscal 1999, we recorded a charge of
$2.8 million related to the disposition of our professional tape hardware
business. In fiscal 2000, we reversed $1.0 million of this charge as management
was able to avoid some of the costs associated with this disposition.
Interest Expense. Interest expense for the year ended March 31, 2000 was
$4.0 million as compared to $2.8 million for the year ended March 31, 1999.
Interest expense was higher for the year ended March 31, 2000, primarily due to
higher debt balances caused by business acquisitions and higher working capital
levels throughout the year. Our weighted average interest rate was 6.5% for both
fiscal year 2000 and 1999; however, interest rate increases during the latter
part of fiscal year 2000 may result in higher interest expense in fiscal 2001.
These negative impacts were partially offset by interest on proceeds from the
PFSweb initial public offering, which was completed in December 1999. Our
interest cost is impacted by short term movements in interest rates and,
therefore, may be adversely impacted by continuing rate increases.
Income Taxes. Our effective tax rate was approximately 54.0% for the year
ended March 31, 2000 compared to 38.1% for the year ended March 31, 1999. The
income tax provision was negatively impacted during the year primarily due to
losses generated by our PFSweb Europe subsidiary for which no income tax benefit
has been recorded. Due to our limited operating history in Europe, it is
uncertain whether it is "more likely than not" that we will be able to utilize
our cumulative tax losses and therefore no tax benefit has been recorded related
to these losses. Additionally, upon completion of the spin-off, PFSweb will
cease to be included in Daisytek's consolidated tax return. Accordingly, because
a sufficient history of earnings has not been established by PFSweb on a
stand-alone basis, a valuation allowance has been provided for the net deferred
income tax asset related to PFSweb as of March 31, 2000. To the extent PFSweb's
U.S. entity or European subsidiary have tax losses in future quarters, prior to
the spin-off, it may continue to negatively impact the Company's consolidated
income tax provision.
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Net Revenues. Net revenues for the year ended March 31, 1999 increased
$108.5 million or 13.6%, to $908.6 million as compared to $800.1 million for the
year ended March 31, 1998. Computer and Office Supplies net revenues increased
by 8.0% compared to the prior year. Net revenues in the international computer
supplies operations increased by 32.4% in fiscal 1999 over fiscal 1998 primarily
due to market share growth and higher industry growth rates in the international
markets, such as Canada, Latin America and Australia. Also, net revenues grew
during fiscal year 1999 as a result of growth in the Company's IBM product
sales. These increases were offset by a decrease in revenues in the U.S.
computer supplies operation due to a reduction in business with large office
superstores and a warehouse club and a slower growth rate in the U.S. market.
Professional Tape Products sales increased 80.2% in fiscal 1999 over fiscal 1998
due to organic growth of approximately 10% and the acquisition of Steadi-Systems
in January 1998. PFSweb also experienced an increase in its service fee-based
activity as a result of new contracts and expansion of existing contracts.
Gross Profit. The Company's gross profit margin as a percent of net
revenues was 11.9% for the year ended March 31, 1999 as compared to 10.9% for
the prior year. The increase in the Company's gross profit margin as a
percentage of net revenues was primarily a result of (i) enhanced product
sourcing in the Computer and Office Supplies segments, (ii) a reduction in net
revenues of computer supplies with lower gross margins to large office
superstores and a warehouse club, and (iii) an increase in Professional Tape
26
<PAGE> 29
Product sales, which have higher gross margins than the Company's computer
supplies products, as a percent of total net revenues.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended March 31, 1999 were $70.6 million (excluding acquisition related costs and
a charge related to the disposition of the Professional Tape Products hardware
division), or 7.8% of net revenues, as compared to $56.0 million, or 7.0% of net
revenues, for the year ended March 31, 1998. The increase in SG&A expenses as a
percentage of net revenues for fiscal year 1999 was due primarily to (i) a
reduction in net revenues with lower SG&A expense ratios to large office
superstores and a warehouse club, and (ii) the impact of the higher SG&A expense
ratio in the Company's Professional Tape Products segment.
Acquisition Related Costs. During June 1998, the Company completed the
acquisition of The Tape Company through a stock-for-stock merger, which is
accounted for as a pooling of interests in the accompanying Consolidated
Financial Statements and notes thereto. Daisytek incurred various acquisition
costs related to accounting, legal and other costs applicable to the acquisition
of The Tape Company of $0.4 million in June 1998. During the fiscal year ended
March 31, 1999, the Company incurred costs of approximately $0.7 million related
to transition, integration and merger activities.
Loss on Disposition of Business. The Company recorded a charge of $2.8
million related to the disposition of its professional tape hardware division in
March 1999. See Note 3 of Notes to Consolidated Financial Statements.
Interest Expense. Interest expense was $2.8 million during the year ended
March 31, 1999 and was $3.1 million during the year ended March 31, 1998.
Interest expense was lower in fiscal 1999 primarily due to a slight decrease in
interest rates, which was partially offset by an increase in the average line of
credit to support working capital requirements and business acquisitions. The
weighted average interest rate was 6.5% and 6.7% during the years ended March
31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate increased to 38.1% for the
year ended March 31, 1999 as compared to 36.8% for the year ended March 31,
1998. The increase was primarily due to non-deductible goodwill amortization
from the Steadi-Systems acquisition combined with additional state income taxes
resulting from the acquisitions of both Steadi-Systems and the Tape Company. 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 would have been approximately 39% in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
We expect to fund our anticipated cash requirements, including the
anticipated cash requirement of our capital expenditures and acquisition
activity, if any, with internally generated funds and other various external
sources of funds that may be available to us. The external sources of funds
include our credit agreements and amendments thereto and may include the future
issuance of debt, equity or other securities. However, we cannot assure you that
we will be able to access capital markets in the future on terms that will be
satisfactory to us. We believe that such internally and externally generated
funds will provide us with adequate liquidity and capital necessary for fiscal
2001.
Our cash at March 31, 2000 is primarily related to the remaining proceeds
from the PFSweb Offering, which are intended to be used for PFSweb's anticipated
capital expenditures, future PFSweb working capital needs, and possible
acquisitions by PFSweb. The remaining proceeds from the Offering cannot be
utilized by us to pay down our outstanding balance under our credit facility.
Subsequent to the Offering, PFSweb is prohibited from borrowing from Daisytek
and no longer participates in Daisytek's centralized cash management system.
Historically, our primary source of cash has been from financing
activities. Net cash provided by financing activities was $49.9 million, $24.8
million, and $30.8 million for fiscal years 2000, 1999 and 1998, respectively.
In December 1999, PFSweb successfully completed its Offering and sold 3,565,000
shares of common stock at $17 per share. Net proceeds from the Offering
aggregated approximately $53.0 million and were used to repay PFSweb's
intercompany payable to Daisytek and to acquire from Daisytek all fixed assets
27
<PAGE> 30
in its Memphis distribution facility as well as certain information technology
assets. In connection with this sale of assets, Daisytek and PFSweb have entered
into a five-year agreement whereby PFSweb will provide transaction management
services for Daisytek.
In conjunction with the acquisition of Arlington, certain acquired debt was
paid in full during the year ended March 31, 2000. This impact was primarily
offset by proceeds received from the exercise of stock options during fiscal
2000. During the year ended March 31, 1999, cash provided by financing
activities was generated primarily from proceeds from revolving lines of credit.
In conjunction with the Professional Tape Products segment's business
combination, certain acquired debt of the Tape Company was paid in full during
fiscal year 1999. Included in cash flows from financing activities for the year
ended March 31, 1999 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. During the fiscal year ended March 31, 1998, cash provided by
financing activities was generated primarily through the issuance of 2.3 million
shares of common stock, which was used to reduce our indebtedness under the
revolving lines of credit.
Net cash provided by operating activities was $4.6 million and $13.0
million for fiscal years 2000 and 1999, respectively. Net cash used in operating
activities was $16.7 million for fiscal 1998. Working capital increased to
$153.9 million at March 31, 2000 from $138.8 million at March 31, 1999. This
increase was primarily attributable to 1) acquisition of the Arlington business,
2) remaining cash related to the Offering, and 3) increases in accounts
receivable related to growth in the existing business units. These factors were
partially offset by a decline in inventory levels during the year. This
reduction in inventory resulted from our focus on critical balance sheet
components. During the last two quarters of fiscal 2000, we experienced
improvements in inventory turns in all business units.
Our principal use of funds for investing activities was capital
expenditures of $15.2 million, $10.5 million, and $6.3 million for fiscal years
2000, 1999, and 1998, respectively, and for acquisitions of businesses and
incremental costs of acquired businesses of $21.1 million, $20.6 million, and
$6.3 million in fiscal years 2000, 1999, and 1998, respectively. See Note 3 of
Notes to Consolidated Financial Statements. The capital expenditures consisted
primarily of additions to upgrade our management information systems and
expansion of our PFSweb distribution facilities, both domestic and foreign. We
anticipate that our total investment in upgrades and additions to facilities for
fiscal 2001 will be approximately $10 million to $15 million, of which $7
million to $10 million will be incurred by PFSweb. Historically, our PFSweb
subsidiary has had a long-term contractual agreement with one of its clients
pursuant to which, as part of the services that PFSweb provided, PFSweb would
finance certain of the client's inventory. During fiscal 2000, this client
indicated to PFSweb that they would not have PFSweb finance this inventory in
the future. As a result, the remaining balance due from this client of $3.4
million has been classified as a current asset in the accompanying financial
statements. This financing agreement provided net cash flows of $8.7 million for
the year ended March 31, 2000 and used net cash flows of $12.1 million for the
year ended March 31, 1999.
Daisytek has an agreement with certain banks for an unsecured revolving
line of credit facility (the "Facility") that, as amended in October 1999, has a
maximum borrowing availability of $105.0 million and expires on January 1, 2001.
Availability under the Facility is based upon amounts of eligible accounts
receivable and inventory, as defined. As of March 31, 2000, we had borrowed
$32.8 million, leaving $72.2 million available under the Facility for additional
borrowings. The Facility accrues interest, at our option, at the prime rate of a
bank or a Eurodollar rate plus an adjustment ranging from 1.00% to 1.75%
depending on our financial performance. A commitment fee of 0.20% to 0.25% is
charged on the unused portion of the Facility. The Facility contains various
covenants including, among other things, the maintenance of certain financial
ratios including the achievement of a minimum fixed charge ratio and minimum
level of tangible net worth, and restrictions on certain of our activities,
including loans and payments to related parties, incurring additional debt,
acquisitions, investments and asset sales. This Facility is part of our
integrated cash management system in which accounts receivable collections are
used to pay down the Facility and disbursements are paid from the Facility. This
system allows us to optimize our cash flow.
28
<PAGE> 31
During October 1997, our Australian subsidiary entered into an agreement
with an Australian bank for an unsecured revolving line of credit facility (the
"Australian Facility"). The Australian Facility, as amended in July 1998,
expires on December 31, 2000, and allows them to borrow Australian dollars up to
a maximum of $10.0 million (Australian), or approximately $6.1 million (U.S.) at
March 31, 2000. We had borrowed about $1.4 million (U.S.), leaving about $4.7
million (U.S.) available under the Australian Facility at March 31, 2000. The
Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75%
or the Australian bank's overnight rate plus 0.75%. A commitment fee of 0.25% is
charged on the total amount of the Australian Facility.
During December 1997, our Canadian subsidiary entered into an agreement
with a Canadian bank for an unsecured revolving line of credit facility (the
"Canadian Facility"). The Canadian Facility, which expires on December 31, 2000,
allows them to borrow Canadian or U.S. dollars up to a maximum of $15.0 million
(Canadian), or approximately $10.3 million (U.S.) at March 31, 2000. We had
borrowed approximately $7.9 million (U.S.), leaving approximately $2.4 million
(U.S.) available under the Canadian Facility at March 31, 2000. The Canadian
Facility accrues interest at our option at the bank's prime rate, the bank's
cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR
plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the
Canadian Facility.
During August 1999, our Canadian subsidiary also entered into an agreement
with a Canadian bank for a revolving term loan (the "Term Loan"). The Term Loan,
which expires on August 31, 2001, allows them to borrow Canadian or U.S. dollars
up to a maximum of $10.0 million (Canadian), or approximately $6.9 million
(U.S.) at March 31, 2000. The Term Loan accrues interest at our option at either
the bank's prime rate plus 0.10% or the bank's U.S. dollar commercial loan rate
plus 0.10%. A commitment fee of 0.25% is charged on the unused portion of the
Term Loan. We had no borrowings outstanding under this Term Loan at March 31,
2000.
Daisytek is currently in negotiations regarding new credit facilities and
we expect to finalize these negotiations and to contract for new facilities
before the end of calendar year 2000. Management believes that any new
facilities will be on substantially comparable terms to the current facilities.
We believe that international markets represent further opportunities for
growth. We attempt to protect ourselves from foreign currency fluctuations by
denominating substantially all our non-Canadian and non-Australian international
sales in U.S. dollars. In addition, we have entered into various forward
Canadian and Australian currency exchange contracts in order to hedge our net
investments in, and our intercompany payables applicable to, our Canadian and
Australian subsidiaries. We have the following forward currency exchange
contracts outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
<S> <C> <C> <C>
Canadian Dollars $8.2 million Sell Canadian Dollars May 2000
Australian Dollars $7.7 million Sell Australian Dollars April 2000
Australian Dollars $1.3 million Sell Australian Dollars April 2000
Australian Dollars $2.5 million Sell Australian Dollars August 2000
</TABLE>
As of March 31, 2000, we had incurred net unrealized gains of approximately
$0.6 million on these outstanding Canadian and Australian forward exchange
contracts, which are included as a component of shareholders' equity. We may
consider entering into other forward exchange contracts in order to hedge our
net investment in our Canadian, Australian and Mexican subsidiaries, although no
assurance can be given that we will be able to do so on acceptable terms.
OTHER MATTERS
Inventory Management
Daisytek 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 we add new product lines and make
large purchases from
29
<PAGE> 32
suppliers to take advantage of attractive terms. To reduce the risk of loss due
to supplier price reductions and slow moving inventory, we have entered into
purchasing agreements with many of our suppliers, including most of our major
suppliers, which contain price protection and stock return privileges under
which we receive credits if the supplier lowers prices on previously purchased
inventory or if we return slow moving inventory in exchange for other products.
Seasonality
Although historically we have experienced our greatest sequential quarter
revenue growth in our fourth fiscal quarter, our management has not been able to
determine the specific or, if any, seasonal factors that may cause quarterly
variability in operating results. Our 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 our computer
supplies products due to a variety of factors, including sales increases
resulting from the introduction of new products. We generally experience a
relative slowness in sales during the summer months, which may adversely affect
our first and second fiscal quarter results in relation to sequential quarter
performance.
The seasonality of PFSweb's business is dependent upon the seasonality of
their clients' business and of their sale of their products. Accordingly, our
management must rely upon the projections of PFSweb's customers in assessing
quarterly variability. We believe that as the PFSweb business grows with
consumer product clients, its business activity will be more significant in the
quarter ended December 31.
We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
Memphis Facility
The majority of our U.S. Computer Supplies inventory and distribution
activity is located in a centralized warehouse and distribution facility
operated by PFSweb in Memphis, Tennessee. Although we have established certain
disaster recovery procedures, which include other warehouse and distribution
locations operated by Daisytek in the U.S., there can be no assurance that the
loss of this Memphis facility for any extended period of time would not have a
material effect on our business.
Inflation
Our management believes that inflation has not had a material effect on our
operations.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS 133") effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires companies to recognize all
derivative financial instruments as either assets or liabilities in the balance
sheet 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. SFAS No.
133 requires gains or losses on these financial instruments to be recognized in
other comprehensive income as a part of the cumulative translation adjustment.
In June 1999, the FASB approved the issuance of SFAS 137 deferring the effective
date of SFAS 133 for one year. Consequently, Daisytek is required to adopt SFAS
133 by April 1, 2001. The impact of SFAS 133 on our financial statements will
depend on a variety of factors, including future interpretative guidance from
the FASB, the future level of forecasted and actual foreign currency
transactions, the extent of our hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. We presently utilize
derivative financial instruments only to hedge our net investments in some of
our foreign operations. The Company is currently evaluating the provisions of
SFAS 133 and its effect on the accounting treatment of these financial
instruments. Due to our limited use of derivative instruments, we do not
anticipate that adoption of SFAS 133 will have a material effect on our
financial statements.
30
<PAGE> 33
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for fiscal years beginning after December 15,
1999. The Company is currently evaluating the provisions of SAB No. 101 and its
effect, if any, on the Company's financial statements.
YEAR 2000 ISSUE
Daisytek and its subsidiaries (including PFSweb) completed its
identification, assessment and remediation of the year 2000 compliance issue
("Y2K") in December 1999. The total expenses incurred by Daisytek and its
subsidiaries (including PFSweb) related to Y2K was approximately $0.8 million,
which included both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not reported separately. To date, the Company has not experienced any
material Y2K failures and to the best of its knowledge neither have any of its
significant clients or service providers. However, there can be no assurance
that in the future issues related to Y2K will not have a material adverse effect
on our financial condition or that of our significant customers and service
providers.
31
<PAGE> 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Daisytek is exposed to various market risks including interest rates on its
debt and foreign exchange rates. In the normal course of business the Company
employs established policies and procedures to manage these risks.
INTEREST RATE RISK
Our interest rate risk is limited to our outstanding balances on our
revolving lines of credit which amounted to $42.1 million at March 31, 2000. A
50 basis point movement in interest rates would result in approximately $211,000
annualized increase or decrease in interest expense based on the outstanding
balance of the revolving line of credit at March 31, 2000.
We anticipate managing our future interest rate exposure by using a mix of
fixed and floating interest rate debt and, if appropriate, financial derivative
instruments.
FOREIGN EXCHANGE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect
year-over-year comparability and could cause us to adjust our financing and
operating strategies. Accordingly, we utilize foreign currency forward contracts
to hedge our net investments and long-term intercompany payable balances. We
also monitor our foreign exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. Foreign currency instruments generally
have maturities that do not exceed three months. We do not enter into foreign
currency instruments for speculative purposes.
Our current foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars and the Euro. Other
international sales and purchases are generally U.S. Dollar based. At March 31,
2000 we had four outstanding foreign currency forward contracts. If the foreign
exchanges rates of the Canadian and Australian currencies fluctuate 10% from the
March 31, 2000 rates, gains or losses in fair value on the four outstanding
contracts would be $1.5 million.
32
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 34
Consolidated Balance Sheets as of March 31, 2000 and 1999... 35
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 2000, 1999 and 1998............................. 36
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended March 31, 2000, 1999 and 1998.......... 37
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2000, 1999 and
1998...................................................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
33
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited the accompanying consolidated balance sheets of Daisytek
International Corporation (a Delaware corporation) and subsidiaries as of March
31, 2000 and 1999, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Daisytek International
Corporation and subsidiaries as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 4, 2000 (except with respect
to the matters discussed in Note 14,
as to which the date is June 8, 2000)
34
<PAGE> 37
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,186 $ 1,551
Accounts receivable, net of allowance for doubtful
accounts of $6,031 and $2,857 at March 31, 2000 and
1999, respectively..................................... 167,705 139,864
Inventories, net.......................................... 96,371 107,918
Prepaid expenses and other current assets................. 7,812 4,982
Income taxes receivable................................... 3,714 --
Deferred tax asset, net................................... 249 137
-------- --------
Total current assets.............................. 304,037 254,452
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment......................... 52,491 37,807
Leasehold improvements.................................... 5,692 2,399
-------- --------
58,183 40,206
Less -- Accumulated depreciation and amortization......... (27,523) (20,296)
-------- --------
Net property and equipment............................. 30,660 19,910
OTHER ASSETS................................................ 528 12,070
EMPLOYEE RECEIVABLE......................................... 518 485
EXCESS OF COST OVER NET ASSETS ACQUIRED, net................ 37,003 28,962
-------- --------
Total assets...................................... $372,746 $315,879
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 42,392 $ 146
Trade accounts payable.................................... 92,978 103,179
Accrued expenses.......................................... 14,746 11,802
Income taxes payable...................................... -- 561
-------- --------
Total current liabilities......................... 150,116 115,688
-------- --------
LONG-TERM DEBT, less current portion........................ 2,431 43,021
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 9,513 --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized at March 31, 2000 and 1999, none issued and
outstanding............................................ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at March 31, 2000 and 1999, respectively;
17,600,164 and 17,162,382 shares issued and outstanding
at March 31, 2000 and 1999, respectively............... 176 172
Additional paid-in capital................................ 136,736 87,394
Retained earnings......................................... 76,340 71,801
Accumulated other comprehensive income.................... (2,566) (2,197)
-------- --------
Total shareholders' equity........................ 210,686 157,170
-------- --------
Total liabilities and shareholders' equity........ $372,746 $315,879
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
35
<PAGE> 38
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
NET REVENUES................................................ $1,060,147 $908,630 $800,112
COST OF SALES............................................... 957,006 800,263 712,568
---------- -------- --------
Gross profit.............................................. 103,141 108,367 87,544
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 90,844 70,648 55,974
ACQUISITION RELATED COSTS................................... 619 1,111 735
LOSS ON DISPOSITION OF BUSINESS............................. (1,000) 2,800 --
---------- -------- --------
Income from operations.................................... 12,678 33,808 30,835
INTEREST EXPENSE............................................ 4,035 2,797 3,134
---------- -------- --------
Income before income taxes................................ 8,643 31,011 27,701
PROVISION FOR INCOME TAXES:
Current................................................... 4,782 13,506 8,074
Deferred.................................................. (112) (1,683) 2,111
---------- -------- --------
4,670 11,823 10,185
---------- -------- --------
Income before minority interest and cumulative effect of
accounting change......................................... 3,973 19,188 17,516
MINORITY INTEREST........................................... 566 -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX.......... -- (405) --
---------- -------- --------
NET INCOME.................................................. $ 4,539 $ 18,783 $ 17,516
========== ======== ========
NET INCOME PER COMMON SHARE:
Basic
Income before cumulative effect of accounting change... $ 0.26 $ 1.12 $ 1.20
Cumulative effect of accounting change, net of tax..... -- (0.02) --
---------- -------- --------
Net income............................................. $ 0.26 $ 1.10 $ 1.20
========== ======== ========
Diluted
Income before cumulative effect of accounting change... $ 0.25 $ 1.08 $ 1.14
Cumulative effect of accounting change, net of tax..... -- (0.02) --
---------- -------- --------
Net income............................................. $ 0.25 $ 1.06 $ 1.14
========== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON SHARE EQUIVALENTS
OUTSTANDING:
Basic.................................................. 17,248 17,101 14,541
Diluted................................................ 18,186 17,789 15,318
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
36
<PAGE> 39
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN RETAINED COMPREHENSIVE TOTAL COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY INCOME
---------- ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997.... 14,016,282 $140 $ 33,283 $38,266 $(1,306) $ 70,383
Net income(a)................ -- -- -- 17,516 -- 17,516 $17,516
Other comprehensive income --
foreign currency
translation adjustment..... -- -- -- -- (625) (625) (625)
-------
Comprehensive income......... $16,891
=======
Distribution of earnings to
The Tape Company
shareholders............... -- -- -- (1,791) -- (1,791)
Repurchase of The Tape
Company shares............. -- -- (4,394) -- -- (4,394)
Net proceeds from exercise of
common stock options....... 616,326 7 3,932 -- -- 3,939
Net proceeds from issuance of
common stock............... 2,303,288 23 52,680 -- -- 52,703
---------- ---- -------- ------- ------- --------
BALANCE AT MARCH 31, 1998.... 16,935,896 170 85,501 53,991 (1,931) 137,731
Net income(a)................ -- -- -- 18,783 -- 18,783 $18,783
Other comprehensive income --
foreign currency
translation adjustment..... -- -- -- -- (266) (266) (266)
-------
Comprehensive income......... $18,517
=======
Distribution of earnings to
The Tape Company
shareholders............... -- -- -- (973) -- (973)
Net proceeds from exercise of
common stock options....... 223,953 2 1,838 -- -- 1,840
Issuance of common stock..... 2,533 -- 55 -- -- 55
---------- ---- -------- ------- ------- --------
BALANCE AT MARCH 31, 1999.... 17,162,382 172 87,394 71,801 (2,197) 157,170
Net income................... -- -- -- 4,539 -- 4,539 $ 4,539
Other comprehensive income --
foreign currency
translation adjustment..... -- -- -- -- (369) (369) (369)
-------
Comprehensive income......... $ 4,170
=======
PFSweb offering.............. -- -- 42,955 -- -- 42,955
Deferred compensation expense
on PFSweb stock options.... -- -- 48 -- -- 48
Employee stock purchase
plan....................... 31,823 -- 368 -- -- 368
Net proceeds from exercise of
common stock options....... 402,548 4 5,926 -- -- 5,930
Issuance of common stock..... 3,411 -- 45 -- -- 45
---------- ---- -------- ------- ------- --------
BALANCE AT MARCH 31, 2000.... 17,600,164 $176 $136,736 $76,340 $(2,566) $210,686
========== ==== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE> 40
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,539 $ 18,783 $ 17,516
Adjustments to reconcile net income to net cash flow
provided by (used in) operating activities, net of
effects from acquisition of businesses:
Depreciation and amortization.......................... 9,242 6,048 5,011
Provision for doubtful accounts........................ 7,783 2,863 2,016
Minority interest...................................... (566) -- --
Non-cash compensation expense.......................... 48 -- --
Deferred income tax (benefit) provision................ (112) (1,683) 2,111
Changes in operating assets and liabilities
Accounts receivable.................................... (22,465) (12,564) (31,773)
Inventories, net....................................... 24,699 (16,279) (21,880)
Prepaid expenses and other current assets.............. 1,100 (1,222) (2,484)
Trade accounts payable and accrued expenses............ (15,385) 17,923 12,670
Income taxes payable................................... (4,238) (884) 115
-------- -------- --------
Net cash provided by (used in) operating activities......... 4,645 12,985 (16,698)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (15,175) (10,523) (6,304)
Acquisitions of businesses, net of cash acquired.......... (21,132) (20,585) (6,322)
Disposition of business................................... -- 4,736 --
Advances of employee receivables, net..................... (75) (117) (45)
Decrease (increase) in other asset........................ 8,693 (12,070) --
-------- -------- --------
Net cash used in investing activities....................... (27,689) (38,559) (12,671)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from revolving lines of credit,
net.................................................... (910) 28,686 (20,361)
Payments on capital leases and notes payable.............. (8,533) (4,787) (2,796)
Net proceeds of PFSweb initial public offering............ 53,014 -- --
Net proceeds from sale of stock, exercise of stock options
and issuance of common stock........................... 6,343 1,906 56,582
Distributions to former shareholders of The Tape
Company................................................ -- (973) (1,791)
Payment to former shareholder of The Tape Company......... -- -- (809)
-------- -------- --------
Net cash provided by financing activities................... 49,914 24,832 30,825
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH............................ (235) 206 74
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................................... 26,635 (536) 1,530
CASH AND CASH EQUIVALENTS at beginning of year.............. 1,551 2,087 557
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year.................... $ 28,186 $ 1,551 $ 2,087
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE> 41
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OVERVIEW AND BASIS OF PRESENTATION
Daisytek International Corporation and its subsidiaries ("the Company" or
"Daisytek") is a leading wholesale distributor of non-paper computer and office
automation supplies and accessories ("computer and office supplies") and
professional-grade video and audio media products ("professional tape products")
and also a leading provider of transaction management services to both
traditional and electronic commerce, or e-commerce, companies. The Company's
three reportable segments are strategic business units that offer different
products and services and are managed separately based on fundamental
differences in their operations.
Computer and Office Supplies
The computer and office supplies products include laser toner, inkjet
cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage
products, computer tape cartridges and accessories such as cleaning kits and
media storage files. These products are used in a broad range of computers and
office automation products including laser and inkjet printers, photocopiers,
fax machines and data storage products. The Company's computer and office
supplies customers include value-added resellers, computer supplies dealers,
office product dealers, contract stationers, buying groups, computer and office
product superstores and other retailers who resell the products to end-users.
The computer and office supplies segment distributes products primarily in
the United States, Canada, Australia and Mexico. During March 2000, the Company
closed its Singapore operations and consolidated the remaining activity into its
Asia Pacific headquarters in Australia. In connection with this closure and
consolidation, the Company recognized a loss of approximately $1.0 million,
before income taxes.
Professional Tape Products
In January 1998, the Company expanded its product line by acquiring
Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of
professional tape products and related hardware to the filmed entertainment and
multimedia industries. The Company further expanded its operations in the
distribution of pro-tape products through the acquisition of The Tape Company in
June 1998 and the purchase of the professional tape division of Videotape
Products, Inc. ("VTP") in March 1999. In connection with the purchase of VTP,
the Company also sold certain assets of its professional hardware division to
VTP. Through Steadi-Systems, The Tape Company, and VTP, the Company distributes
a wide array of professional-grade audio and video media products to customers
including production companies, post-production operations, broadcast stations,
corporate in-house production facilities, advertising agencies, and cable
television providers.
PFSweb
PFSweb, Inc.'s ("PFSweb") business unit was formed in 1991 and expanded in
1996 under the name "Priority Fulfillment Services." PFSweb is an international
provider of transaction management services to both traditional and e-commerce
companies and sells products and services primarily in the United States, Canada
and Europe. The Company offers such services as order management, customer care,
billing, credit management and collection, information management, and
distribution. The Company provides its services under fee-based contracts where
service fee revenue is based on either the sales value of the products or
service activity volume.
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. At March 31, 2000, the Company owned
approximately 80.1% of the outstanding shares of common stock of PFSweb.
Minority interest represents minority shareholders proportionate share of the
equity in PFSweb.
39
<PAGE> 42
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and investments of more than 50% in subsidiaries and other entities, including
the accounts of companies acquired in business combinations accounted for under
1) the purchase method from their respective acquisition dates, and 2) the
pooling of interests method, giving retroactive effect for all periods
presented. All significant intercompany transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes product revenue upon shipment of product to
customers and provides for estimated returns and allowances. The Company permits
its customers to return defective products (many of which are then returned by
the Company to the manufacturer) and incorrect shipments for credit against
other purchases. The Company offers terms to its customers that it believes are
standard for its industries. PFSweb service fee revenues are recognized at the
time the service is provided to its client.
Reclassifications
Certain prior year data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
Inventories
Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation expense is computed
by a straight-line method over estimated useful lives of the respective assets
which range from three to ten years.
Excess of Cost over Net Assets Acquired
Excess of cost over net assets acquired is generally amortized by the
straight-line method over estimated useful lives of 20 to 40 years. The Company
evaluates the amortization period of intangibles on an ongoing basis in light of
changes in any business conditions, events or circumstances that may indicate
the potential impairment of intangible assets. Amortization expense for each of
the fiscal years 2000, 1999 and 1998 was approximately $1.5 million, $0.7
million, and $0.3 million, respectively. Accumulated amortization of intangible
assets was $3.2 million at March 31, 2000 and $1.7 million at March 31, 1999.
40
<PAGE> 43
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Company periodically evaluates whether events or circumstances have
occurred that indicate that long-lived assets may not be recoverable or that the
remaining useful life may warrant revision. When such events or circumstances
are present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value will be recovered through the expected
undiscounted future cash flows. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying value of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. To date, no such
impairment has been recognized.
Other Assets
During fiscal 1999, PFSweb entered into a long-term contractual agreement
whereby PFSweb finances certain inventory owned by the client. PFSweb warehouses
this client inventory and distributes it upon the sale to third parties by the
client, who controls the disposition of this inventory. In addition to service
fees, PFSweb charges the client an asset management fee, a portion of which
results in interest income. PFSweb has the contractual right to collect the
receivable in full at the conclusion of the contract. During fiscal 2000, this
client provided notification to PFSweb of its intention to repay in full the
outstanding balance within the upcoming fiscal year. Due to the revision in this
financing arrangement, the receivable balance of $3.4 million of March 31, 2000
is included in other current assets; whereas, the receivable balance of $12.1
million at March 31, 1999 is included in other assets.
Foreign Currency Translation and Transactions
For the Company's Canadian and Australian subsidiaries, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of shareholders' equity. In
addition, the Company periodically enters into foreign exchange contracts in
order to hedge the Company's net investment in, and its intercompany payable
balance (of a long-term investment nature) applicable to its Canadian and
Australian subsidiaries. The Company had the following forward currency exchange
contracts outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- -----------
<S> <C> <C> <C>
Canadian Dollars $8.2 million Sell Canadian Dollars May 2000
Australian Dollars $7.7 million Sell Australian Dollars April 2000
Australian Dollars $1.3 million Sell Australian Dollars April 2000
Australian Dollars $2.5 million Sell Australian Dollars August 2000
</TABLE>
As of March 31, 2000, the Company had incurred net unrealized gains of
approximately $0.6 million on these outstanding Canadian and Australian forward
exchange contracts, which are included as a component of shareholders' equity.
The Company may consider entering into other forward exchange contracts in order
to hedge the Company's net investment in its Canadian, and Australian
subsidiaries, although no assurance can be given that the Company will be able
to do so on acceptable terms.
For the Company's Mexican and European subsidiaries, the U.S. dollar is the
functional currency. Monetary assets and liabilities are translated at the rates
of exchange on the balance sheet date and certain assets (notably inventory, and
property and equipment) are translated at historical rates. Income and expense
items are translated at average rates of exchange for the period except for
those items of expense, which relate to assets, which are translated at
historical rates. The gains and losses from foreign currency transactions and
translation related to these subsidiaries are included in net income and have
not been material.
41
<PAGE> 44
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cumulative Effect of Accounting Change
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP
98-5") requiring these costs to be accounted for as period expenses. During
fiscal 1999, the Company adopted this pronouncement and recorded a cumulative
effect charge to income, net of income taxes, as of April 1, 1998, of $405,000.
Excluding the cumulative effect, the change in accounting for start-up costs did
not materially affect net income for fiscal year 1999.
Income Taxes
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. These differences relate
primarily to provisions for doubtful accounts, reserves for inventory, book
versus tax depreciation differences , and certain accrued expenses deducted for
book purposes but not yet deductible for tax purposes. A valuation allowance
must be provided when it is more likely than not that the deferred income tax
asset will not be realized.
Fair Value of Financial Instruments
The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The fair values of all
non-derivative financial instruments approximate their carrying amounts in the
accompanying consolidated balance sheets.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company's derivative
financial instruments outstanding as of March 31, 2000 and 1999, consisted of
forward foreign currency exchange contracts used to hedge the Company's net
investment in, and its intercompany payable balances applicable to its Canadian
and Australian subsidiaries.
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It consists of net income and other gains
and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Currency translation and other
derivative foreign currency exchange contracts are the only items of other
comprehensive income impacting the Company.
42
<PAGE> 45
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average common shares outstanding for each period. Diluted net
income per share is calculated by dividing net income by the weighted average
common shares and common share equivalents outstanding for each period. The
difference between the Company's basic and diluted weighted average common
shares outstanding is due to dilutive common stock options outstanding.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
NUMERATOR:
Income before cumulative effect of an accounting change..... $4,539 $19,188 $17,516
Cumulative effect of accounting change...................... -- (405) --
------ ------- -------
Net income.................................................. $4,539 $18,783 $17,516
====== ======= =======
DENOMINATOR:
Denominator for basic earnings per share --
Weighted average shares................................... 17,248 17,101 14,541
Effect of dilutive securities:
Employee stock options.................................... 938 688 777
------ ------- -------
Denominator for diluted earnings per share
Adjusted weighted average shares and assumed
conversions............................................ 18,186 17,789 15,318
Net income per common share:
Basic:
Income before cumulative effect of an accounting
change............................................... $ 0.26 $ 1.12 $ 1.20
Cumulative effect of accounting change................. -- (0.02) --
------ ------- -------
Net income............................................. $ 0.26 $ 1.10 $ 1.20
====== ======= =======
Diluted:
Income before cumulative effect of an accounting
change............................................... $ 0.25 $ 1.08 $ 1.14
Cumulative effect of accounting change................. -- (0.02) --
------ ------- -------
Net income............................................. $ 0.25 $ 1.06 $ 1.14
====== ======= =======
</TABLE>
Adoption of 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. 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. The Company is currently evaluating the provisions of SFAS No.
133 and its effect on the accounting treatment of these financial instruments.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for fiscal years beginning
43
<PAGE> 46
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after December 15, 1999. The Company is currently evaluating the provisions of
SAB No. 101 and its effect, if any, on the Company's financial statements.
NOTE 3 -- BUSINESS COMBINATIONS
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc. ("Arlington"), a privately held, specialty wholesaler
of copier and fax consumables for approximately $19.5 million. This transaction
resulted in costs in excess of fair value of approximately $8.0 million which is
being amortized over 20 years on a straight-line basis. The acquisition was
accounted for by the purchase method of accounting for business combinations
and, accordingly, the accompanying consolidated statements of operations do not
include any revenues or expenses related to the acquisition prior to October 1,
1999. The entire cost of the acquisition was funded through the Company's
availability under its credit facility.
The following unaudited pro forma information presents a summary of the
consolidated results of operations including Arlington as if the acquisition was
effective on April 1, 1999:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
2000 1999
---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $1,111,815 $1,013,484
Net income.................................................. 5,342 19,919
Diluted net income per share................................ $ 0.29 $ 1.12
</TABLE>
In March 1999, the Company purchased the professional tape division of VTP,
a Glendale, California-based distributor of professional-grade audio and video
media and professional hardware products for approximately $13.5 million. In
addition, the Company sold certain assets of its professional hardware division
to VTP for approximately $4.7 million. The acquisition of VTP was accounted for
using the purchase method of accounting, and, accordingly, the purchase price
has been allocated to the assets and liabilities assumed based on fair values at
the date of acquisition. This resulted in costs in excess of fair value of
approximately $11.9 million, which is being amortized over 25 years. In
connection with this transaction, the Company recorded a $2.8 million one-time
charge relating to the disposition of its hardware division. In fiscal year
2000, the Company reversed $1.0 million of this charge as the Company was able
to avoid some of the costs associated with this disposition. Proforma results of
operations have not been presented because the effects of the acquisition and
disposition were not significant.
During June 1998, the Company completed the acquisition of The Tape Company
through a stock-for-stock merger. Under the terms of the acquisition, accounted
for as a pooling of interests, the Company exchanged 974,864 shares of Company
common stock for all of The Tape Company's common stock. The Tape Company is a
Chicago, Illinois-based independent distributor of professional grade audio and
video media products.
During January 1998, the Company purchased all of the common stock of
Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media
products to the filmed entertainment and multimedia industries. The acquisition
of Steadi-Systems was accounted for using the purchase method of accounting,
and, accordingly, the purchase price was allocated to the assets and liabilities
assumed based on the fair values at the date of acquisition. This resulted in
cost in excess of fair value at date of acquisition of approximately $10.4
million which is being amortized on a straight-line basis over 25 years.
Steadi-Systems was acquired using cash of approximately $6.3 million during
fiscal year 1998. Not included in this amount were contingent cash payment
arrangements payable if certain events occurred. During May 1998, these events
occurred and the Company incurred approximately $2.9 million in additional costs
for the acquisition of
44
<PAGE> 47
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Steadi-Systems and has reflected the amount as an additional cost in excess of
net assets acquired. Pro forma results of operations have not been presented
because the effects of the acquisition were not significant.
NOTE 4 -- DEBT
Debt as of March 31, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
Revolving line of credit with commercial banks, interest
(weighted average rate of 8.0% at March 31, 2000) at the
Company's option at the prime rate of a bank (9.0% at
March 31, 2000) and the Eurodollar rate plus 1.00 to 1.75%
(7.8% at March 31, 2000), due January 1, 2001............. $ 32,800 $29,800
Revolving line of credit with commercial bank, interest at
the Australian bank's overnight rate plus 0.75% (6.4% at
March 31, 2000), due December 31, 2000.................... 1,365 4,778
Revolving line of credit with commercial bank, interest
(weighted average rate of 6.6% at March 31, 2000) at the
Canadian bank's cost of funds plus 0.65% (6.1% at March
31, 2000) and the Canadian bank's prime rate (7.0% at
March 31, 2000), due December 31, 2000.................... 7,948 8,126
Notes payable and obligations under capital leases for
warehouse equipment, computer equipment, and
transportation equipment, interest at varying rates
ranging from 6.5% to 9.2%, with lease terms varying from
three to eight years...................................... 2,710 463
-------- -------
Long-term debt............................................ 44,823 43,167
Less: Current portion of long-term debt..................... (42,392) (146)
-------- -------
Long-term debt, less current portion...................... $ 2,431 $43,021
======== =======
</TABLE>
The Company has an agreement with certain banks for an unsecured revolving
line of credit facility (the "Facility") that, as amended in October 1999, has a
maximum borrowing availability of $105.0 million and expires on January 1, 2001.
Availability under the Facility is based upon amounts of eligible accounts
receivable and inventory, as defined. As of March 31, 2000, the Company had
borrowed $32.8 million, leaving $72.2 million available under the Facility for
additional borrowings. The Facility accrues interest, at the Company's option,
at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from
1.00% to 1.75% depending on the Company's financial performance. A commitment
fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The
Facility contains various covenants including, among other things, the
maintenance of certain financial ratios including the achievement of a minimum
fixed charge ratio and minimum level of tangible net worth, and restrictions on
certain activities of the Company, including loans and payments to related
parties, incurring additional debt, acquisitions, investments and asset sales.
This Facility is part of the Company's integrated cash management system in
which accounts receivable collections are used to pay down the Facility and
disbursements are paid from the Facility. This system allows the Company to
optimize its cash flow.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, as amended in
July 1998, expires on December 31, 2000 and allows the Company to borrow
Australian dollars up to a maximum of $10.0 million (Australian), or
approximately $6.1 million (U.S.) at March 31, 2000. The Company had borrowed
approximately $1.4 million (U.S.), leaving approximately $4.7 million (U.S.)
45
<PAGE> 48
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available under the Australian Facility at March 31, 2000. The Australian
Facility accrues interest at the Australian Bank Bill Rate plus 0.75% or the
Australian bank's overnight rate plus 0.75%. A commitment fee of 0.25% is
charged on the total amount of the Australian Facility.
During December 1997, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). The Canadian Facility, which expires on
December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a
maximum of $15.0 million (Canadian), or approximately $10.3 million (U.S.) at
March 31, 2000. The Company had borrowed approximately $7.9 million (U.S.),
leaving approximately $2.4 million (U.S.) available under the Canadian Facility
at March 31, 2000. The Canadian Facility accrues interest at the Company's
option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's
U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25%
is charged on the unused portion of the Canadian Facility.
During August 1999, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for a revolving term loan (the "Term Loan"). The
Term Loan, which expires on August 31, 2001, allows the Company to borrow
Canadian or U.S. dollars up to a maximum of $10.0 million (Canadian), or
approximately $6.9 million (U.S.) at March 31, 2000. The Term Loan accrues
interest at the Company's option at either the bank's prime rate plus 0.10% or
the bank's U.S. dollar commercial loan rate plus 0.10%. A commitment fee of
0.25% is charged on the unused portion of the Term Loan. The Company had no
borrowings outstanding under this Term Loan at March 31, 2000.
The Company is currently in negotiations regarding new credit facilities
and expects to finalize these negotiations and to contract for new facilities
before January 1, 2001, which is when the current facilities expire. Management
believes that any new facilities will be on substantially comparable terms to
the current facilities.
The Company is a party to non-cancelable capital lease agreements involving
warehouse equipment and computer equipment. The Company's property held under
capital leases, included in furniture, fixtures and equipment in the balance
sheet, amounted to approximately $2.7 million, net of accumulated amortization
of approximately $140,000 at March 31, 2000, and approximately $436,000 net of
accumulated amortization of approximately $2.1 million at March 31, 1999.
Annual maturities of long-term debt and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------
<S> <C>
2001.................................................... $42,392
2002.................................................... 330
2003.................................................... 326
2004.................................................... 342
2005.................................................... 303
Thereafter.............................................. 1,130
-------
Total........................................... $44,823
=======
</TABLE>
NOTE 5 -- SHAREHOLDERS' EQUITY
Public Offerings
In December 1999, PFSweb successfully completed the IPO of 19.9% of its
outstanding stock and sold 3,565,000 shares of common stock at $17 per share.
Net proceeds from the IPO aggregated $53.0 million and were used to repay
PFSweb's intercompany payable to Daisytek of approximately $27 million, to
acquire from Daisytek all fixed assets in its Memphis distribution facility, as
well as certain information technology assets
46
<PAGE> 49
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for $5.0 million. Daisytek used these proceeds to repay bank debt. The remaining
net proceeds are intended to be used by PFSweb for working capital, capital
expenditures, a portion of which may be financed through capital or operating
leases, and possible acquisitions. As a result of the IPO, the Company's
additional paid-in capital increased by approximately $43.0 million.
During March 1998, the Company completed a secondary offering of 3,300,000
shares, consisting of 2,300,000 shares offered by the Company, and 1,000,000
shares offered by a principal and selling shareholder.
Shareholder Rights Plan
On October 15, 1999, the Daisytek Board of Directors declared a dividend
distribution of one Daisytek 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.
Stock Split
In February 1998, the Company's Board of Directors approved a two for one
stock split which provided each holder of common stock to receive one additional
share for each share held. The stock split was effected in the form of a stock
dividend on March 2, 1998. The consolidated financial statements and the notes
thereto have been adjusted to reflect this stock split on a retroactive basis
for all periods presented.
NOTE 6 -- STOCK PLANS
Employee Stock Purchase Plan
On August 14, 1998, Daisytek shareholders adopted the 1998 Employee Stock
Purchase Plan (the "Stock Purchase Plan") qualified under Section 423 of the
Internal Revenue Code of 1986, to provide employees of Daisytek and designated
subsidiaries an opportunity to acquire a proprietary interest in the company.
The Stock Purchase Plan provides for acquisition of Daisytek common stock at a
15% discount of market value. The Stock Purchase Plan permits each employee of
Daisytek's domestic subsidiaries who have completed ninety days of service to
elect to participate in the plan. Eligible employees may elect to contribute up
to 10 percent of their compensation with after-tax dollars up to a maximum
annual contribution of $25,000. The Company has reserved 250,000 shares of its
common stock under the Stock Purchase Plan. The Stock Purchase Plan became
effective for eligible employees in October 1999.
Stock Option Plans
The Company has various stock option plans (the "Plans") including: the
Daisytek stock option plans (the "Daisytek Plans") and the PFSweb stock option
plans (the "PFSweb Plans"). The purpose of the Plans is to benefit and advance
the interests of the Company by rewarding officers and key employees for their
contributions to the financial success of the Company and thereby motivating
them to continue to make such contributions in the future. The Plans provide for
fixed grants of both incentive stock options and nonqualified stock options. The
stock options generally vest over a three to five year period from the date of
grant and expire 10 years after the date of grant.
The Company has adopted the disclosure-only provisions of SFAS
123,"Accounting for Stock-based Compensation." In accordance with the provisions
of SFAS 123, the Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting
47
<PAGE> 50
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the Plans and accordingly, does not recognize compensation expense for any
of its Plans because the Company typically does not issue options at exercise
prices below the market value at date of grant.
Pro forma net income and earnings per share assuming compensation cost for
the Company had been determined under SFAS No. 123 are as follows (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $ 4,539 $18,783 $17,516
Pro forma........................................... $(3,801) $14,169 $15,992
Earnings (loss) per share:
Basic:
As reported...................................... $ 0.26 $ 1.10 $ 1.20
Pro forma........................................ $ (0.22) $ 0.83 $ 1.10
Diluted:
As reported...................................... $ 0.25 $ 1.06 $ 1.14
Pro forma........................................ $ (0.21) $ 0.80 $ 1.04
</TABLE>
Daisytek Stock Option Plans
Daisytek has authorized 5,550,000 shares of common stock for issuance under
various stock option plans. The Daisytek Plans, which are administered by the
Compensation Committee of the Board of Directors of Daisytek, provide for the
granting of incentive awards in the form of stock options to directors,
executive management, key employees and outside consultants of Daisytek. The
right to purchase shares under the stock option agreements typically vest over a
three to five year period. Stock options are generally issued at fair market
value and must be exercised within ten years from the date of grant. As of March
31, 2000, there were 1,187,668 shares available for future options.
In addition to options granted under the Daisytek Plans, Daisytek granted
options to certain key employees, executives and directors to purchase 181,826
shares of common stock in fiscal year 1998, and 110,000 shares of common stock
in fiscal year 1997. These options were granted at the fair market value at the
date of the grant and become exercisable over a three-year period starting on
the date of the grant.
The weighted average fair values of options granted during each of the
years ended March 31, 2000, 1999 and 1998, was $5.41, $7.93 and $7.02,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Expected dividend yield(a).... -- -- --
Expected stock price
volatility.................. 49.37% - 51.04% 41.42% - 47.92% 40.97% - 41.40%
Risk-free interest rate....... 5.7% - 6.0% 4.6% - 5.5% 5.6% - 6.8%
Expected life of options
(years)..................... 6 6 6
</TABLE>
---------------
(a) The Company has not declared any cash dividends on its common stock for any
of the periods presented and has no present intention of doing so.
48
<PAGE> 51
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's stock option activity under
the Daisytek Plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE EXERCISE PRICE
----------- --------------- ----------------
<S> <C> <C> <C>
Balance at March 31, 1997....................... 1,706,938 $ 0.64 - $20.00 $ 9.25
Granted....................................... 1,341,650 $12.50 - $22.44 $12.91
Exercised..................................... (616,326) $ 0.64 - $16.25 $ 2.76
Canceled...................................... (706,288) $ 9.75 - $20.00 $15.97
---------
Balance at March 31, 1998....................... 1,725,974 $ 0.64 - $22.44 $11.66
Granted....................................... 2,773,892 $12.88 - $22.88 $15.68
Exercised..................................... (223,953) $ 0.64 - $17.38 $ 7.18
Canceled...................................... (291,844) $ 9.75 - $22.88 $16.41
---------
Balance at March 31, 1999....................... 3,984,069 $ 2.65 - $22.88 $14.37
Granted....................................... 473,500 $ 9.13 - $14.44 $ 9.83
Exercised..................................... (402,548) $ 2.65 - $22.88 $11.73
Canceled...................................... (97,226) $10.94 - $22.88 $16.46
---------
Balance at March 31, 2000....................... 3,957,795 $ 2.65 - $22.88 $13.07
=========
</TABLE>
As of March 31, 2000, 1999 and 1998, 1,038,568, 413,766 and 234,531,
respectively, of options outstanding were exercisable. The remaining options
will become exercisable over the next three to four years based on vesting
percentages.
The following table summarizes information about the Company's outstanding
and exercisable stock options at March 31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------------- ------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- --------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.29 - $ 4.58 180 3.0 $ 2.65 180 $ 2.65
$ 6.86 - $ 9.15 375,000 9.4 $ 9.13 -- $ --
$ 9.16 - $11.44 203,240 5.5 $ 9.90 182,740 $ 9.75
$11.45 - $13.73 2,596,161 8.2 $12.77 737,161 $12.50
$13.74 - $16.01 109,000 9.0 $15.19 12,598 $15.41
$16.02 - $18.30 10,204 7.5 $17.22 4,594 $16.57
$18.31 - $20.58 10,000 8.4 $19.00 1,500 $19.00
$20.59 - $22.88 654,010 8.2 $22.86 99,795 $22.84
</TABLE>
PFSweb Stock Option Plans
PFSweb has authorized 6,000,000 shares of common stock for issuance under
two 1999 stock option plans and 35,000 shares under a stock option agreement.
The PFSweb Plans, which are currently administered by the Compensation Committee
of the Board of Directors of PFSweb provide for the granting of incentive awards
in the form of stock options to directors, executive management, key employees,
and outside consultants of PFSweb. The right to purchase shares under the stock
option agreements typically vest over a three year period. Stock options are
generally issued at fair market value and must be exercised within ten years
from the date of grant. In July 1999, PFSweb issued options to purchase 35,000
common shares at $10.45 which were issued to a non-employee of PFSweb.
The weighted average fair value of options granted during the fiscal year
ended March 31, 2000, was $5.50. The weighted average remaining contractual life
of outstanding options is 9.3 years. The fair value of
49
<PAGE> 52
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 2000
-----------------
<S> <C>
Expected dividend yield........................... --
Expected stock price volatility................... 45.00% - 84.23%
Risk-free interest rate........................... 5.5% - 6.2%
Expected life of options (years).................. 6
</TABLE>
The following table summarizes stock option activity under the PFSweb
Plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE EXERCISE PRICE
----------- --------------- ----------------
<S> <C> <C> <C>
Balance at March 31, 1999................. -- $ -- $ --
Granted................................. 1,425,000 $10.45 - $17.00 $10.69
Exercised............................... -- $ -- $ --
Canceled................................ (63,500) $10.45 - $13.00 $10.77
---------
Balance at March 31, 2000................. 1,361,500 $10.45 - $17.00 $10.69
=========
</TABLE>
All of these options are subject to a three year vesting schedule under
which no options vest for three years, subject to acceleration, in part, upon
completion of the spin-off of PFSweb from Daisytek. After the spin-off, options
vest one-third on the anniversary of the date of grant and one-twelfth each
quarter thereafter. Additionally, certain PFSweb employees were granted Daisytek
stock options under the Daisytek Plans prior to the PFSweb offering. These
options are convertible to PFSweb stock options at the completion of the spin-
off transaction.
Effect of the Spin-off Transaction on Stock Option Plans
In connection with the completion of the spin-off discussed in Note 14, all
outstanding Daisytek stock options will be adjusted and replaced with substitute
stock options as follows:
1. Options held by Daisytek employees who were transferred to PFSweb
will be replaced (at the option holder's election to be made prior to the
spin-off) with either options to acquire shares of PFSweb common stock or
options to purchase shares of both Daisytek common stock and PFSweb common
stock, which may be exercised separately, (the "Unstapled Options"), in
proportion to the dividend ratio of 0.81 (see Conversion Ratio discussion
below);
2. Options held by Daisytek employees who remain with Daisytek will be
replaced (at the option holder's election to be made prior to the spin-off)
with either options to acquire Daisytek common stock or Unstapled Options.
The number of shares of Daisytek common stock and PFSweb common stock that
will be subject to the Unstapled Options will be based upon the ratio (the
"Conversion Ratio") of the number of shares of PFSweb common stock distributed
to the Daisytek shareholders in the spin-off divided by the total number of
shares of Daisytek common stock outstanding on the June 19, 2000, the record
date. In addition, outstanding Daisytek options held by PFSweb officers may be
replaced by Unstapled Options based upon a ratio other than the Conversion
Ratio, as such officer may elect.
The exercise price and number of shares subject to the above described
substitute options (including the Unstapled Options) will be established
pursuant to a formula designed to ensure that: (1) the aggregate "intrinsic
value" (i.e. the difference between the exercise price of the option and the
market price of the common stock underlying the option) of the substitute
options immediately after spin-off will not exceed the
50
<PAGE> 53
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intrinsic value of the outstanding Daisytek stock option, immediately prior to
the spin-off, and (2) the ratio of the exercise price of the substitute options
to the market value of the underlying stock immediately after the spin-off does
not decrease as compared to such ratio of the outstanding Daisytek stock option
immediately prior to the spin-off.
Substantially all of the other terms and conditions of each substitute
stock option, will be the same as those of the replaced Daisytek stock option,
except that option holders who are employed by one company will be permitted to
exercise, and will be subject to all of the terms and provisions of, options to
acquire shares in the other company as if such holder was an employee of such
other company.
Although it is not possible to specify how many shares of Daisytek common
stock will be subject to substitute stock options until after the spin-off, it
is possible Daisytek shareholders may experience some dilutive impact from the
previously described conversion.
NOTE 7 -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
2000 1999 1998
------- -------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest................................................ $3,853 $ 2,718 $2,762
Income taxes............................................ $7,669 $14,607 $5,416
Fixed assets acquired under capital leases................ $2,400 $ 347 $ 84
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The Company has made various loans to its Chairman and President. These
loans accrue interest at the Company's effective borrowing rate (8.0% at March
31, 2000 and 6.0% at March 31, 1999). The Company's note receivable (including
accrued interest) from its Chairman of approximately $518,000 and $485,000 as of
March 31, 2000 and 1999, respectively, is due in one installment on April 1,
2001 and is classified as a non-current asset in the consolidated balance sheet.
The Company's note receivable (including accrued interest) from its President as
of March 31, 2000 and 1999 of approximately $212,000 and $199,000, respectively,
is due in one installment on March 31, 2001, is classified as accounts
receivable in the accompanying consolidated balance sheets.
A non-employee director of both Daisytek and PFSweb, is a Managing Director
of Hambrecht and Quist LLP, one of the lead managing underwriters on the PFSweb
IPO.
NOTE 9 -- INCOME TAXES
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. These differences relate
primarily to provisions for doubtful accounts, capitalization of inventory
costs, reserves for inventory, book versus tax depreciation differences, and
certain accrued expenses deducted for book purposes but not yet deductible for
tax purposes. A reconciliation of the difference between the expected income tax
provision, before cumulative effect of accounting change, at the U.S. Federal
statutory corporate tax rate of 34% for
51
<PAGE> 54
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal year 2000 and 35% for fiscal years 1999 and 1998, and the Company's
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Provision computed at statutory rate..................... $2,939 $10,854 $ 9,695
Impact of foreign taxation at different rate............. 264 538 356
State income taxes, net of federal benefit............... 415 694 520
Expenses not deductible for tax purposes................. 420 346 149
Impact of acquired subchapter S corporation accounted for
as a pooling of interests.............................. -- (291) (431)
Change in valuation reserve.............................. 807 (203) 48
Other.................................................... (175) (115) (152)
------ ------- -------
Provision for income taxes............................. $4,670 $11,823 $10,185
====== ======= =======
</TABLE>
The consolidated income before taxes and cumulative effect of accounting
change, by domestic and foreign entities, is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Domestic................................................. $2,550 $24,879 $22,427
Foreign.................................................. 6,093 6,132 5,274
------ ------- -------
Total.......................................... $8,643 $31,011 $27,701
====== ======= =======
</TABLE>
The provision (benefit) for income taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Current
Domestic............................................... $1,458 $ 9,857 $ 5,141
State.................................................. 628 1,068 800
Foreign................................................ 2,696 2,581 2,133
------ ------- -------
Total current.................................. 4,782 13,506 8,074
------ ------- -------
Deferred
Domestic............................................... (151) (1,683) 2,018
Foreign................................................ 39 -- 93
------ ------- -------
Total deferred................................. (112) (1,683) 2,111
------ ------- -------
Total.......................................... $4,670 $11,823 $10,185
====== ======= =======
</TABLE>
52
<PAGE> 55
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred tax asset (liability) as of March 31, 2000
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts........................... $ 1,568 $ 762
Inventory................................................. 880 595
Reserves for disposition of business...................... 52 875
Foreign net operating loss carryforwards.................. 1,974 2,847
Other..................................................... 1,061 428
------- -------
5,535 5,507
Less -- Valuation reserve................................. (915) (108)
------- -------
Total deferred tax asset.......................... 4,620 5,399
------- -------
Deferred tax liability:
Property and equipment.................................... (331) (393)
Accounts receivable discount.............................. (1,038) (1,557)
Foreign inventory purchases............................... (2,437) (2,568)
Other..................................................... (565) (744)
------- -------
Total deferred liability.......................... (4,371) (5,262)
------- -------
Deferred tax asset, net..................................... $ 249 $ 137
======= =======
</TABLE>
For financial reporting purposes, the tax benefit of cumulative temporary
differences is recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not". At March
31, 2000, foreign net operating loss carryforwards relate primarily to taxable
losses of the Company's Europe subsidiary. These loss carryforwards begin to
expire in fiscal year 2015. As of March 31, 2000, a valuation allowance was
recorded due to uncertainties regarding the Company's utilization of its Europe
subsidiary's net operating loss carryforward.
In addition, as of March 31, 2000, a valuation allowance was recorded by
PFSweb due to uncertainties regarding the PFSweb utilization of its net tax
asset following its anticipated spin-off from the Company. As of March 31, 1999,
a valuation allowance was recorded by the Company due to uncertainties regarding
utilization of the Company's Mexico net operating loss carry forward. This loss
carry forward was utilized in fiscal 2000.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease facilities, and warehouse, office,
transportation and other equipment under operating leases expiring in various
years through fiscal year 2010. In most cases, management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
53
<PAGE> 56
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future annual rental payments under non-cancelable operating leases
having original terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
2001....................................................... $ 8,915
2002....................................................... 8,285
2003....................................................... 6,906
2004....................................................... 6,708
2005....................................................... 2,594
Thereafter................................................. 6,052
-------
Total............................................ $39,460
=======
</TABLE>
Total rental expense under operating leases approximated $8.8 million, $5.8
million and $4.2 million for the fiscal years ended March 31, 2000, 1999 and
1998, respectively.
Although the Company carries products and accessories supplied by numerous
vendors, the Company's net revenues from products manufactured by its ten
largest suppliers were approximately 78%, 69% and 70% of total net revenues
during fiscal years 2000, 1999 and 1998, respectively. The Company has entered
into written distribution agreements with nearly all of its major suppliers. As
is customary in the industry, these agreements generally provide non-exclusive
distribution rights, have one-year renewable terms and are terminable by either
party at any time, with or without cause. Certain of these agreements require
minimum annual purchases. Total minimum purchase requirements for fiscal year
2001 approximate $76 million. Additionally, many of the Company's suppliers
offer rebate programs under which, subject to the Company purchasing certain
predetermined amounts of inventory, the Company receives rebates based on a
percentage of the dollar volume of total rebate program purchases. The Company
also takes advantage of several other programs offered by substantially all of
its suppliers. These include price protection plans under which the Company
receives credits if the supplier lowers prices on previously purchased inventory
and stock rotation or stock balancing privileges under which the Company can
return slow-moving inventory in exchange for other products. Certain of the
Company's suppliers also provide the Company with cooperative advertising
programs, marketing development funds and other types of incentives and
discounts which offset the production costs of the Company's published marketing
tools and other related costs.
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three reportable business segments: (1) Computer
and Office Supplies, (2) Professional Tape Products, and (3) PFSweb. The
Company's reportable segments are strategic business units that offer different
products and services and are managed separately based on the fundamental
differences in their operations. PFSweb segment revenue includes revenue earned
for certain services provided to the Computer and Office Supplies segment, which
is eliminated as part of the intersegment elimination. In addition, PFSweb and
Computer Supplies net revenues are presented consistently with how management
evaluates the businesses under its modified IBM distributor agreements. No
single customer accounted for more than 10% of the Company's annual net revenues
for any of the fiscal years ended March 31, 2000, 1999
54
<PAGE> 57
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1998. The following table set forth information as to the Company's
reportable segments for fiscal years ended March 31:
<TABLE>
<CAPTION>
COMPUTER PROFESSIONAL
AND OFFICE TAPE INTERSEGMENT
SUPPLIES PRODUCTS PFSWEB ELIMINATIONS TOTAL
---------- ------------ ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
2000
Net revenues................. $948,367 $ 93,075 $33,299 $(14,594) $1,060,147
Operating contribution....... 26,363 5,085 (7,940) (79) 23,429
Assets....................... 268,807 43,638 64,840 (4,539) 372,746
1999
Net revenues................. $799,078 $102,784 $11,796 $ (5,028) $ 908,630
Operating contribution....... 32,956 4,383 (238) 618 37,719
Assets....................... 198,527 48,295 69,057 -- 315,879
1998
Net revenues................. $739,969 $ 57,040 $ 5,468 $ (2,365) $ 800,112
Operating contribution....... 29,678 1,778 (445) 559 31,570
Assets....................... 200,070 36,864 20,911 -- 257,845
</TABLE>
The Company's Computer and Office Supplies segment includes certain
expenses and assets that relate to the Professional Tape Products segment which
are not allocated by management to this segment. 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.
Reconciliation of segment operating contribution to consolidated income
before taxes is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Segment operating contribution......................... $ 23,429 $37,719 $31,570
Loss on disposition of business(a)..................... 1,000 (2,800) --
Acquisition related costs(a)........................... (619) (1,111) (735)
Other unallocated costs(b)............................. (11,132) -- --
Interest expense....................................... (4,035) (2,797) (3,134)
-------- ------- -------
Consolidated income before income taxes................ $ 8,643 $31,011 $27,701
======== ======= =======
</TABLE>
---------------
(a) These charges relate to the Professional Tape Products segment.
(b) These other unallocated costs relate to certain repositioning and
separation activities associated with the planned spin-off of PFSweb,
certain other charges as a result of these activities, to increase
allowances for bad debts, legal and professional fees related to an
unsolicited acquisition offer, costs related to the closing of Singapore
and other operating charges during such periods.
Geographic information
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Net revenues:
United States..................................... $ 784,677 $713,806 $671,670
Canada............................................ 111,487 100,192 76,623
Other............................................. 163,983 94,632 51,819
---------- -------- --------
$1,060,147 $908,630 $800,112
========== ======== ========
</TABLE>
55
<PAGE> 58
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Long-lived assets:
United States..................................... $ 56,509 $ 55,937 $ 26,218
Canada............................................ 1,284 1,340 802
Other............................................. 10,916 4,150 3,641
---------- -------- --------
$ 68,709 $ 61,427 $ 30,661
========== ======== ========
</TABLE>
The Company also exports its products for sale throughout Latin America,
Europe, and the Far East. Total export sales to these geographic regions for
fiscal years 2000, 1999 and 1998, included in United States sales in the
preceding table, were approximately $66.4 million, $60.2 million, and $54.3
million, respectively.
NOTE 12 -- EMPLOYEE SAVINGS PLAN
The Company has a defined contribution employee savings plan under Section
401(k) of the Internal Revenue Code. Substantially all full-time and part-time
U.S. employees are eligible to participate in the plan. The Company, at its
discretion, may match employee contributions to the plan and also make an
additional matching contribution in the form of profit sharing in recognition of
Company performance. For fiscal year 2000 and 1999, the Company matched 10% of
employee contributions resulting in a charge against income of approximately
$91,000 and $88,000, respectively. For fiscal year 1998, the Company matched 15%
of employee contributions resulting in a charge against income of approximately
$79,000.
NOTE 13 -- QUARTERLY DATA (UNAUDITED)
Summarized unaudited quarterly financial data for fiscal years 2000 and
1999 are as follows (dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FISCAL YEAR 2000
-----------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................................... $297,134 $283,087 $246,689 $233,237
Income (loss) from operations...................... $ 4,395 $ (1,905) $ 2,580 $ 7,608
Operating margin................................. 1.5% (0.7)% 1.0% 3.3%
Income (loss) before minority interest and
cumulative effect of accounting change........... $ 2,225 $ (3,387) $ 952 $ 4,183
Percent of net revenues.......................... 0.7% (1.2)% 0.4% 1.8%
Net income (loss).................................. $ 2,303 $ (2,899) $ 952 $ 4,183
Net margin....................................... 0.8% (1.0)% 0.4% 1.8%
Net income (loss) per common share before
cumulative effect of accounting change:
Basic............................................ $ 0.13 $ (0.17) $ 0.06 $ 0.24
Diluted.......................................... $ 0.12 $ (0.17) $ 0.05 $ 0.24
Net income (loss) per common share:
Basic............................................ $ 0.13 $ (0.17) $ 0.06 $ 0.24
Diluted.......................................... $ 0.12 $ (0.17) $ 0.05 $ 0.24
</TABLE>
56
<PAGE> 59
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR 1999
-----------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................................... $240,383 $225,507 $220,151 $222,589
Income from operations............................. $ 6,254 $ 8,786 $ 9,448 $ 9,320
Operating margin................................. 2.6% 3.9% 4.3% 4.2%
Income before cumulative effect of accounting
change........................................... $ 3,488 $ 4,981 $ 5,281 $ 5,438
Percent of net revenues.......................... 1.5% 2.2% 2.4% 2.4%
Net income......................................... $ 3,488 $ 4,981 $ 5,281 $ 5,033
Net margin....................................... 1.5% 2.2% 2.4% 2.3%
Net income per common share before cumulative
effect of accounting change:
Basic............................................ $ 0.20 $ 0.29 $ 0.31 $ 0.32
Diluted.......................................... $ 0.19 $ 0.28 $ 0.30 $ 0.31
Net income per common share:
Basic............................................ $ 0.20 $ 0.29 $ 0.31 $ 0.30
Diluted.......................................... $ 0.19 $ 0.28 $ 0.30 $ 0.28
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS
In June, 2000 the Company received a favorable private letter ruling from
the Internal Revenue Service regarding the tax-free treatment of the
distribution of Daisytek's remaining ownership in PFSweb to Daisytek common
shareholders on a pro-rata basis. The spin-off is subject to certain conditions
and is intended to establish PFSweb as a stand-alone entity with objectives
separate from Daisytek's objectives. As a result, on June 8, 2000, the Daisytek
Board of Directors approved the separation of PFSweb and declared a distribution
to its shareholders of all of its remaining 14,305,000 PFSweb shares. The
distribution is payable at the close of business on July 6, 2000 to shareholders
of record as of June 19, 2000 (the "Record Date".) The shareholders as of the
Record Date will receive a pro rata distribution of PFSweb shares owned by
Daisytek. Based on the shares outstanding at each company on the Record Date,
Daisytek shareholders will receive about 0.81 shares of PFSweb stock for each
share of Daisytek stock they owned on the Record Date.
On May 3, 2000, the Company acquired certain assets and liabilities of B.A.
Pargh, a wholesaler of office products and customer of PFSweb, for approximately
$3 million. The acquisition was accounted for by the purchase method of
accounting for business combinations. The entire cost of the acquisition was
funded through the Company's availability under its credit facility.
Daisytek signed a seven year lease on a 46,000 square foot office space
location in Allen, Texas, a Dallas suburb, which will become the new corporate
headquarters for Daisytek following the PFSweb spin-off. Terms and conditions of
this lease are comparable to those experienced under the Company's current
facility lease.
On June 8, 2000, the PFSweb Board of Directors declared a dividend
distribution of one PFSweb preferred stock purchase right (a "PFSweb right") for
each share of the Company's common stock outstanding on July 6, 2000. Each
PFSweb right entitles the registered shareholders to purchase from the Company
one one-thousandth of a share of preferred stock at an exercise price of $67,
subject to adjustment. The PFSweb 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 Company's
outstanding shares of common stock. The PFSweb rights expire on July 6, 2010,
unless redeemed or exchanged by the Company earlier.
57
<PAGE> 60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding our directors and executive
officers is set forth in our Proxy Statement for our 2000 Annual Meeting of
Shareholders under the heading "Election of Directors," which information is
incorporated herein by reference. The Proxy Statement will be filed with the
Securities and Exchange Commission no later than 120 days after the last day of
the our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in our Proxy Statement
for our 2000 Annual Meeting of Shareholders under the heading "Executive
Compensation," which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in our Proxy Statement
for our 2000 Annual Meeting of Shareholders under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in our Proxy Statement
for our 2000 Annual Meeting of Shareholders under the heading "Certain
Relationships and Related Transactions," which information is incorporated
herein by reference.
58
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
See Index to Consolidated Financial Statements on page 33 of this Form
10-K.
(b) Financial Statement Schedules
Report of Independent Accountants
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.
(c) Exhibits.
<TABLE>
<C> <S>
2.1(8) -- Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2(8) -- Initial Public Offering and Distribution Agreement by and
among Daisytek International Corporation, Daisytek,
Incorporated and PFSweb, Inc.
2.3(8) -- Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated and
PFSweb, Inc.
2.4(8) -- Tax Indemnification and Allocation Agreement between
Daisytek International Corporation and PFSweb, Inc.
2.5(8) -- Transition Services Agreement between Daisytek,
Incorporated and PFSweb, Inc.
2.6(8) -- Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment Services,
Inc.
3.1(3) -- Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(3) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.2(2) -- Amended and Restated By-laws of Daisytek International
Corporation.
3.3(4) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.4(5) -- Amendments to the Bylaws of the Company, adopted on
October 15, 1999.
4.1(5) -- 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).
10.1(1) -- 1994 Stock Option Plan of Daisytek International
Corporation.
10.2(3) -- Non-Employee Director Stock Option and Retainer Plan.
10.3(4) -- 1998 Amended and Restated Stock Option Plan of Daisytek
International Corporation.
10.4(4) -- Daisytek International Corporation 1998 Employee Stock
Purchase Plan.
10.5(6) -- 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.
</TABLE>
59
<PAGE> 62
<TABLE>
<C> <S>
10.6(7) -- Seventh Amendment 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.
10.7(7) -- Eighth Amendment 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.
10.8(7) -- Ninth Amendment to Credit Agreement dated October 29,
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.
10.9(7) -- Asset Purchase Agreement dated September 30, 1999, by and
among Arlington Industries, Inc., Craig Funk, Arlington
Acquisition Corp., and Daisytek, Incorporated.
10.10(7) -- Form of Change in Control Severance Agreement between
Daisytek International Corporation and each of its
executive officers.
10.11(7) -- Industrial Lease Agreement between Shelby Drive
Corporation and each of its executive officers.
10.12(7) -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
10.13(7) -- Commitment Letter dated September 9, 1999 between The
Bank of Nova Scotia and Daisytek (Canada) Inc.
10.14(8) -- PFSweb, Inc. Underwriting Agreement by and among PFSweb,
Inc., Daisytek International Corporation and the
Underwriters named therein.
21(*) -- Subsidiaries of the Registrant.
23(*) -- Consents.
27(*) -- Financial Data Schedule for fiscal year ended March 31,
2000.
</TABLE>
---------------
(*) Filed herewith.
(1) Incorporated by reference from Registration Statement on Form S-1 No.
33-86926.
(2) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(3) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996.
(4) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998.
(5) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999.
(6) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1999 dated August 16, 1999.
(7) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1999 dated November 15, 1999.
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1999 dated February 14, 2000.
(d) Reports on Form 8-K
None
60
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Daisytek
International Corporation (a Delaware corporation) and subsidiaries included in
this report on Form 10-K and have issued our report thereon dated May 4, 2000
(except with respect to the matters discussed in Note 14, as to which the date
is June 8, 2000). Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. Schedule II of
this report on Form 10-K is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 4, 2000
61
<PAGE> 64
SCHEDULE II
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 2000
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1998:
Allowance for doubtful accounts........ $2,425 2,016 -- (1,676) $2,765
Income tax valuation allowance......... $ 263 48 -- -- $ 311
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts........ $2,765 2,863 -- (2,771) $2,857
Income tax valuation allowance......... $ 311 -- -- (203) $ 108
Reserves for disposition of business... $ -- 2,800 -- -- $2,800
Fiscal Year Ended March 31, 2000:
Allowance for doubtful accounts........ $2,857 7,783 -- (4,609) $6,031
Income tax valuation allowance......... $ 108 915 -- (108) $ 915
Reserves for disposition of business... $2,800 (1,000) -- (1,652) $ 148
</TABLE>
62
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ RALPH MITCHELL
------------------------------------
Ralph Mitchell
Chief Financial Officer and
Executive Vice President -- Finance
June 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK C. LAYTON Chairman of the Board June 29, 2000
-----------------------------------------------------
Mark C. Layton
/s/ JAMES R. POWELL Chief Executive and Operating June 29, 2000
----------------------------------------------------- Officer, President and Director
James R. Powell (principal executive officer)
/s/ RALPH MITCHELL Chief Financial Officer, June 29, 2000
----------------------------------------------------- Executive Vice
Ralph Mitchell President -- Finance (principal
financial and accounting
officer)
/s/ CHRISTOPHER YATES Director June 29, 2000
-----------------------------------------------------
Christopher Yates
/s/ TIMOTHY M. MURRAY Director June 29, 2000
-----------------------------------------------------
Timothy M. Murray
/s/ JAMES F. REILLY Director June 29, 2000
-----------------------------------------------------
James F. Reilly
/s/ PETER P. J. VIKANIS Director June 29, 2000
-----------------------------------------------------
Peter P. J. Vikanis
</TABLE>
63
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1(8) -- Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2(8) -- Initial Public Offering and Distribution Agreement by and
among Daisytek International Corporation, Daisytek,
Incorporated and PFSweb, Inc.
2.3(8) -- Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated and
PFSweb, Inc.
2.4(8) -- Tax Indemnification and Allocation Agreement between
Daisytek International Corporation and PFSweb, Inc.
2.5(8) -- Transition Services Agreement between Daisytek,
Incorporated and PFSweb, Inc.
2.6(8) -- Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment Services,
Inc.
3.1(3) -- Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(3) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.2(2) -- Amended and Restated By-laws of Daisytek International
Corporation.
3.3(4) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.4(5) -- Amendments to the Bylaws of the Company, adopted on
October 15, 1999.
4.1(5) -- 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, Richt Certificates will
not be mailed until after the Separation Date (as defined
therein).
10.1(1) -- 1994 Stock Option Plan of Daisytek International
Corporation.
10.2(3) -- Non-Employee Director Stock Option and Retainer Plan.
10.3(4) -- 1998 Amended and Restated Stock Option Plan of Daisytek
International Corporation.
10.4(4) -- Daisytek International Corporation 1998 Employee Stock
Purchase Plan.
10.5(6) -- 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.
10.6(7) -- Seventh Amendment 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.
10.7(7) -- Eighth Amendment 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.
10.8(7) -- Ninth Amendment to Credit Agreement dated October 29,
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.
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.9(7) -- Asset Purchase Agreement dated September 30, 1999, by and
among Arlington Industries, Inc., Craig Funk, Arlington
Acquisition Corp., and Daisytek, Incorporated.
10.10(7) -- Form of Change in Control Severance Agreement between
Daisytek International Corporation and each of its
executive officers.
10.11(7) -- Industrial Lease Agreement between Shelby Drive
Corporation and each of its executive officers.
10.12(7) -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
10.13(7) -- Commitment Letter dated September 9, 1999 between The
Bank of Nova Scotia and Daisytek (Canada) Inc.
10.14(8) -- PFSweb, Inc. Underwriting Agreement by and among PFSweb,
Inc., Daisytek International Corporation and the
Underwriters named therein.
21(*) -- Subsidiaries of the Registrant.
23(*) -- Consents.
27(*) -- Financial Data Schedule for fiscal year ended March 31,
2000.
</TABLE>
---------------
(*) Filed herewith.
(1) Incorporated by reference from Registration Statement on Form S-1 No.
33-86926.
(2) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(3) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996.
(4) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998.
(5) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999.
(6) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1999 dated August 16, 1999.
(7) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1999 dated November 15, 1999.
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1999 dated February 14, 2000.
