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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-881-4700
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. X
---
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 9, 1998 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System)
was $390,012,298.
As of May 9, 1998, there were 16,025,204 shares outstanding of the
registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Prospectus dated March 26, 1998
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Unless the context otherwise requires, references to Daisytek International
Corporation include its direct and indirect subsidiaries, including Daisytek,
Incorporated, the Company's primary operating subsidiary. References in this
Report to the Company's fiscal year means the 12 month period ending on March 31
of such year.
INDEX
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PART 1 Page
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Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 9
Item 3. Legal Proceedings.............................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................ 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................................... 10
Item 6. Selected Financial Data ....................................................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 12
Item 8. Financial Statements and Supplementary Data ................................... 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 39
Item 11. Executive Compensation ........................................................ 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................................ 43
Item 13. Certain Relationships and Related Transactions ................................ 45
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................................... 45
SIGNATURES ................................................................................. 51
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PART I
ITEM 1. BUSINESS
GENERAL
Daisytek International Corporation (the "Company") is a leading wholesale
distributor of non-paper computer and office automation supplies and accessories
("computer supplies products"). The Company distributes over 10,000 computer
supplies products to over 25,000 customer locations, including value-added
resellers ("VARs"), 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 Company believes it is the
largest wholesale distributor of computer supplies products in the world.
The Company sells primarily nationally known, name-brand computer supplies
products manufactured by over 150 original equipment manufacturers, including
Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital Equipment Corporation,
Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. The
Company's products include consumable supplies such as laser toner, inkjet
cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage
products, computer tape cartridges and accessories. The Company's 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 utilizes sophisticated telemarketing, direct mail programs,
frequent innovative sales promotions and electronic commerce technology to
market its computer supplies products throughout the United States, Canada,
Mexico, Australia and Latin America, as well as in other international markets,
including Singapore and the Pacific Rim. The Company presently operates one
centralized "superhub" distribution center in Memphis, Tennessee, to service the
U.S. and certain international markets. To service other international markets,
the Company also operates smaller regional sales and distribution centers in
Miami, Florida, Mexico, Australia and Canada and recently opened a sales and
distribution facility in Singapore. Most of the Company's U.S. computer supplies
products shipments are shipped via Federal Express under an agreement (the
"Federal Express Agreement") which, together with the Company's centralized
distribution center, enables the Company to accept orders for computer supplies
products until 9:00 p.m. Eastern Standard Time (EST) and offer its customers
next business day delivery of product in stock.
During fiscal year 1996, the Company formed Priority Fulfillment Services
("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its
business partners and other customers. Through PFS, the Company sells its core
competencies in call center, product fulfillment, logistics and support
services. PFS customizes these services to meet the specific requirements of
these companies. PFS's call-center services include: order entry, order tracking
and customer service (inbound), outbound telemarketing services and customized
reporting of customer and call information. PFS also provides other support
services such as invoicing, credit management and collection services, and
accounting and systems support. PFS utilizes the Company's distribution
facilities and maintains relationships with a number of shipping companies to
provide next business day delivery on domestic package orders, truck shipments
on larger domestic orders and a variety of air and surface delivery options for
international orders. PFS presently provides its services under both fee-based
contracts (where revenue is based on either the sales value of the products or
service activity volume) and transaction based contracts (where PFS takes title
and resells the products).
In January 1998, the Company expanded its product line and customer base by
acquiring Steadi-Systems, Ltd., ("Steadi-Systems") an independent wholesale
distributor of media products to the filmed entertainment and multimedia
industries. Steadi-Systems distributes a wide array of professional-grade media
products (film stock, video, audio and data storage media) and video hardware
(analog and digital equipment) and is an authorized dealer for leading
manufacturers such as Sony, Fuji, JVC, Avid and others. Steadi-Systems'
customers include production companies, post-production operations, educational
institutions, governmental agencies, television stations and other professional
and individual customers. The Company believes that the integration of
Steadi-Systems into the
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Company's call center technology, management information systems and
distribution expertise should provide Steadi-Systems with the opportunity to
expand its customer base and offer higher and more efficient levels of service,
although no assurance can be given in this regard.
In May 1998, the Company announced that it had signed a letter of intent to
acquire The Tape Company, Inc. ("The Tape Company"), a Chicago-based independent
distributor of professional-grade audio and video media products. The Company
plans to integrate The Tape Company and Steadi-Systems into a leading nationwide
wholesale distributor of professional tape products, although no assurance can
be given in this regard.
PRODUCTS
The Company distributes over 10,000 different computer supplies products and
regularly updates its product line to reflect advances in technology and provide
a wide product range of the most popular products. Computer supplies products
sales represented over 90% of the Company's total net sales in fiscal year
1998. The Company's major computer supplies product 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, are rapidly growing in popularity and have a wide range of
applications. Sales of non-impact printer supplies accounted for approximately
55.4% of the Company's total net sales of computer supplies products in the
year ended March 31, 1998. The Company also sells specialized all-in-one toner
cartridges for laser printers produced by manufacturers such as Canon,
Hewlett-Packard, Digital, Brother and Apple. Sales of these supplies accounted
for approximately 23.4% of the Company's total net sales of computer supplies
products in fiscal year 1998.
Magnetic Media Products. Magnetic media products include computer tapes,
data cartridges, diskettes, optical disks 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. Sales of
magnetic media products accounted for approximately 8.4% of the Company's total
net sales of computer supplies products in fiscal year 1998.
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, the Company believes that a
substantial installed base of impact printers, such as dot matrix printers, are
still in use and require a continuing amount of computer supplies products.
Sales of impact printer supplies accounted for approximately 7.9% of the
Company's total net sales of computer supplies products in fiscal year 1998.
Accessories and Other Products. Accessories sold by the Company include
cleaning supplies, disk storage boxes, data cartridge storage, racks, surge
protection devices, workstation accessories and anti-glare screens. The Company
also sells a number of other products such as transparencies, banking supplies
and selected business machines. Sales of accessories and other products
accounted for approximately 4.9% of the Company's total net sales of computer
supplies products in fiscal year 1998.
SUPPLIERS
The Company's computer supplies products are manufactured by over 150
original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark,
IBM, Okidata, Digital Equipment Corporation, Apple, Panasonic, Kodak, Imation,
Epson, Sony, Xerox, Brother and Maxell. During fiscal year 1998, approximately
70% of the Company's total net sales were derived from computer supplies
products supplied by the Company's ten largest suppliers, with the sale of
Hewlett-Packard and Canon products accounting for approximately 35% and 9% of
total net sales, respectively, and the sale of Lexmark, IBM, Xerox, Epson,
Brother and Okidata products each accounting for between approximately 3% to 6%
of total net sales.
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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 against future
purchases 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. In addition, in order to
introduce new products, many suppliers will permit the Company to return all
unsold inventory after an introductory trial period. Material changes by one or
more of the Company's key suppliers of their pricing arrangements or other
marketing programs may materially and adversely affect the Company's business.
The Company's purchases of computer supplies products inventory are closely
tied to sales and are generally based upon the sales volume of the most recent
six to ten week periods. Many of the Company's suppliers require minimum annual
purchases, which, for fiscal year 1999, will aggregate approximately $66
million.
The Company has 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 it distributes. 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. The Company considers its
relationships with its major suppliers, including Hewlett-Packard, Canon,
Lexmark, IBM, Xerox, Epson, Brother and Okidata to be good; nevertheless, there
can be no assurance that a material change in the Company's relationship with
one or more of its major suppliers will not have a material adverse effect on
the Company's business.
Although the Company purchases most of its products directly from authorized
U.S. manufacturers, the Company also imports 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, the Company also purchases products from secondary sources, such
as other wholesalers and selected dealers, rather than directly from the
manufacturer. The Company utilizes its ability to purchase imported and
secondary source products in order to provide its 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,
the Company has established various procedures which it believes enable it to
identify unauthorized products and, to the extent possible, return such
unauthorized products to the foreign or secondary source. Nevertheless, there
can be no assurance that the Company 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 will not have a material adverse
effect on the Company's business.
SALES AND MARKETING
The Company utilizes sophisticated telemarketing, direct mail programs and
frequent innovative sales promotions and other marketing efforts to market its
computer supplies products to a wide array of dealers, VARs, retailers and
other resellers.
The Company's customer and prospect list includes U.S., Canadian,
Australian, Mexican, Latin American, Singaporean and other foreign computer
supplies dealers, office product dealers, VARs, buying groups, computer stores,
contract stationers, computer and office product superstores, catalog
merchandisers, college bookstores and other resellers. The Company currently
ships its computer supplies products to over 25,000 customer locations. The
Company's typical 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 the
Company. The Company also sells its products to computer and office product
superstores, which the Company believes will become an increasingly important
group of customers as the Company demonstrates its ability to serve the
superstores' need for timely delivery of fast-moving products and efficient
distribution of a variety of product lines to multiple store locations in a more
cost-effective manner than presently provided by many product manufacturers. No
single customer accounts for more than 10% of the Company's sales for each of
the fiscal years ended March 31, 1998, 1997 and 1996. At March 31, 1998, five
computer and office product superstores and
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warehouse clubs represent approximately 29% of the Company's trade accounts
receivable, with the largest two customers being approximately 13% and 11% of
trade accounts receivable, and reflects the significance of this market segment.
As a result of customer consolidation, the Company's U.S. sales growth of
computer supplies products has been slowing. The Company presently expects to
partially offset this reduced sales growth through international expansion,
growth in its PFS business and acquisitions of businesses with complementary
product lines. There can be no assurance, however, that these activities will be
successful.
The Company's international sales accounted for approximately 22% of the
Company's total net sales in fiscal year 1998, and the Company believes that
international markets represent further opportunities for growth. To take
advantage of the growing Far East and Australia marketplace, in October 1996,
the Company acquired Lasercharge Pty Ltd., a large computer and office
automation supplies wholesaler in Australia, and in January 1998, the Company
opened a sales and distribution facility in Singapore. To service the growing
Latin American market, the Company 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. The Company also has sales and distribution operations
in Canada. There can be no assurance, however, that the Company 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 the Pacific Rim, will not have a material adverse effect on the Company's
results of operations. See Note 8 of the Notes to Consolidated Financial
Statements for certain financial information regarding the Company's domestic
and international sales during the last three fiscal years.
The Company's computer supplies products sales force, as of March 31, 1998,
consisted of approximately 185 telemarketing sales representatives located in
the Company's headquarters in Plano, Texas, 27 telemarketing sales
representatives located in Memphis, Tennessee, 47 telemarketing sales
representatives located in the Company's office in Canada, 36 telemarketing
sales representatives located in the Company's office in Mexico, 14
telemarketing sales representatives located in the Company's office in
Australia, 2 telemarketing sales representatives located in the Company's
office in Miami, Florida, and 2 telemarketing sales representative located in
Singapore.
The Company's 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 and highlights the Company's
ability to more efficiently distribute a wide variety of small shipments to a
larger number of store locations than presently provided by product
manufacturers. Similarly, a separate group of sales representatives are
responsible for a select group of national accounts, such as contract
stationers, office products dealers and buying groups, while others focus on new
accounts, existing business or international and export sales. 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 the Company's customers.
The Company provides extensive training for new computer supplies products
sales personnel with special emphasis on the need for regular customer contact,
response to customers' demands for product information and the need to inform
customers of technological advancements by the Company's suppliers. The Company,
together with its major suppliers, provides the Company's sales personnel with
ongoing product-specific training and education emphasizing computer supplies as
well as new technologies, new products and new product applications.
In order to maintain its position as a low cost wholesale distributor, the
Company regularly monitors the efficiency of its sales staff. By utilizing
sophisticated telecommunications equipment, the Company is 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. The
Company's sales force receives a base salary as well as varying sales incentives
based on gross profit margin
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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 the Company's primary marketing tools of computer supplies products
is its quarterly catalog, known as the "Book of Deals." In order to promote its
image as a low cost wholesaler and provider of value-added services, the Book of
Deals will usually highlight a theme related to specific products, customer
services or a combination of the two. The Company presently distributes a total
of approximately 41,000 catalogs and contract price books to its active U.S.
customers each quarter. The Company also distributes a separate Book of Deals
designed specifically for each of its Canadian, Mexican and Australian
subsidiaries as well as for its subsidiary in Singapore. Other catalog-type
marketing tools used by the Company include customized catalogs produced by the
Company for the reseller to distribute to its end-user customers. The Company
also distributes "flyers" which announce new product line additions or special
promotions and are usually inserted in the Book of Deals or mailed directly to
customers.
Although the Book of Deals remains one of the Company's primary marketing
tools, the Company also uses electronic commerce marketing tools as well. The
Company believes it has established itself 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, the Company can offer a suite of electronic commerce
solutions including: traditional X.12 and proprietary EDI; third party software
systems such as DDMS, OPUS, Britannia, and Moore O.P. Services; and Internet,
intranet, and extranet systems.
During fiscal year 1997, the Company introduced a CD-ROM based electronic
catalog of computer supplies products and on-line ordering tool, known as
"SOLO", the System for Online Ordering, and during fiscal year 1998, introduced
a World Wide Web version of the product, known as "SOLOnet". These electronic
tools provide 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.
Certain of the Company's suppliers 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 quarterly Book
of Deals, other published marketing tools and other related costs.
The Company permits its customers to return defective products (most of
which are then returned by the Company to the manufacturer) and incorrect
shipments for credit against other purchases. During the last three fiscal
years, the Company's net expense for returns of the Company's consumable supply
products has not been material.
MANAGEMENT INFORMATION SYSTEMS
The Company 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 is essential for the Company to operate as a low cost, high efficiency
wholesale distributor.
The implementation of these systems has allowed the Company to offer an
advanced suite of electronic commerce tools to its customers so that the Company
can communicate with their computer systems and automatically process, send and
receive purchase orders, invoices and acknowledgments. The Company offers
"customer links" to provide customers with direct access to a proprietary
Company database to examine pricing, credit information, product description and
availability and promotional information. This link also allows customers to
place orders directly into the Company's order processing system. These systems
also allow the Company to offer similar features to its customers through
SOLOnet.
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The Company has 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. The Company has developed and utilizes
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.
The Company plans to continue to invest in various management information
systems enhancements and upgrades to improve efficiency, monitor its operations,
manage inventory risks and offer faster and higher levels of service to its
customers and vendors.
DISTRIBUTION
During fiscal year 1993, the Company consolidated its five U.S. regional
distribution centers into a new "superhub" distribution center located in
Memphis, Tennessee. During fiscal year 1997, the Company more than doubled the
size of this facility to its current size of approximately 370,000 square feet.
The facility is located approximately four miles from the Federal Express hub
facility and contains automated conveyors, in-line scales and shipment
photographs for automatic accuracy checking, computerized sorting equipment,
powered material handling equipment and scanning and bar-coding systems.
Since the consolidation of its regional U.S. distribution centers and the
opening of the Memphis distribution center, the Company has (i) reduced the
amount of "safety stock" inventory previously carried in different distribution
centers, which, in turn, has reduced the Company's working capital borrowings,
(ii) increased its inventory turnover rate, (iii) improved its order fill rate
to a level of approximately 95%, (iv) improved personnel productivity and
reduced shipping errors and their associated costs, (v) improved delivery time
to most geographic areas through later order acceptance times (currently 9:00
p.m. EST) and next business day delivery with the implementation of the Federal
Express Agreement and (vi) reduced real estate expenses.
The Company believes that consumable computer supplies and other products
sold by the Company are particularly suited to cost effective overnight
delivery because of their unique value to weight characteristics. Accordingly,
almost all of the Company's U.S. computer supplies package orders are shipped
via Federal Express, except for certain "heavyweight" packages or as otherwise
requested by the customer. The Company's centralized distribution center,
together with the implementation of the Federal Express Agreement, enables the
Company to offer to its customers next business day delivery to most U.S.
geographic areas. The Company ships virtually 100% of U.S. computer supplies
orders for product in stock on the same day.
The material handling system at its Memphis distribution center includes
several high technology enhancements, including an automated package routing
system and a paperless order picking system. These systems have allowed the
Company to substantially increase the package movement capacity within the
existing facility, further improve package shipment accuracy and enhance the
Company's ability to perform value-added services for its customers, including
custom labeling and price stickering.
Substantially all of the Company's U.S. computer supplies products sales
are distributed from the Memphis distribution center. In order to effectively
service foreign markets, the Company also operates smaller, regional warehouse
and distribution facilities in Toronto and Vancouver, Canada; Mexico City,
Mexico; Sydney, Australia; Singapore; and Miami, Florida.
EMPLOYEES
As of March 31, 1998, the Company had 865 full-time employees and 106
part-time employees (including PFS and Steadi-Systems), of which 305 were in
executive and administrative positions, including accounting, purchasing,
credit and management information systems, 372 were in sales and marketing and
294 were in warehousing and related functions. None of the Company's employees
are represented by a labor union, and the Company has never suffered an
interruption of business as a result of a labor dispute. The Company considers
its relations with its employees to be favorable, and the Company believes it
will be able to continue this relationship by various employee incentive and
participation programs, including employee stock options.
The Company also actively recruits college graduates through on-campus
recruiting programs. Each newly hired employee for this program is placed into
the Company's training program for approximately three months,
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which introduces them to most aspects of the Company's business. Management
believes that this program is an important tool in recruiting and developing
high quality individuals with management potential to support the Company's
future growth.
COMPETITION
The Company believes that most, if not all, of its customers maintain
several sources of supply for their computer supplies product requirements.
Accordingly, the Company 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. Many of these competitors such
as product manufacturers, computer hardware distributors and general office
supply wholesalers are larger and have substantially greater financial and other
resources than the Company. Competition in the Company's industry is generally
based on price, breadth of product lines, product and credit availability,
delivery time and the level and quality of customer services. The Company
competes primarily on the basis of its ability to offer low prices and quality
service while maintaining a high level of operating efficiency. The Company
believes its competitive advantages over product manufacturers and other
wholesale distributors include its 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, to efficiently distribute its products, to
provide innovative and high quality value-added customer service programs and to
respond to changing customer demands and product development.
BACKLOG
The Company does not have a significant backlog of orders and does not
consider backlog to be material to an understanding of its business.
ITEM 2. PROPERTIES
The Company's U.S. sales and executive and administrative offices are
located in a 65,419 square foot central office facility located in Plano, Texas,
a Dallas suburb. The Company also operates regional sales and distribution
centers in Singapore; Toronto, Ontario; Mexico City, Mexico; Vancouver, British
Columbia; Sydney, Australia; and Miami, Florida. Steadi-Systems operates from
offices in New York, New York; Hollywood, San Francisco and Irvine, California;
Phoenix, Arizona; and Miami, Florida. The Company's central U.S. distribution
center is located in Memphis, Tennessee.
All of the Company's facilities are leased under leases, which contain one
or more multiple year renewal options.
ITEM 3. LEGAL PROCEEDINGS
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 condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company'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, as adjusted to reflect the two for one stock split effective
March 2, 1998:
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PRICE
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HIGH LOW
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Fiscal Year 1997
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First Quarter....................... $ 23 1/2 $ 16 1/4
Second Quarter...................... $ 22 1/16 $ 17 1/4
Third Quarter....................... $ 21 3/4 $ 17 1/4
Fourth Quarter...................... $ 21 $ 15 1/2
Fiscal Year 1998
First Quarter....................... $ 19 7/8 $ 12 3/8
Second Quarter...................... $ 24 $ 19 3/8
Third Quarter....................... $ 22 1/2 $ 16 5/16
Fourth Quarter ..................... $ 28 1/4 $ 17 3/8
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As of May 9, 1998, there were approximately 3,200 shareholders of which 84
were record holders of the Common Stock.
The Company 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. The Company currently intends to retain all earnings to finance the
further development of its business. The payment of any future dividends will be
at the discretion of the Company's 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of income data for each of the
fiscal years ended March 31, 1998, 1997 and 1996, and the selected consolidated
balance sheet data as of March 31, 1998 and 1997 have been derived from the
Company's audited consolidated financial statements, and should be read in
conjunction with those statements, which are included in this Form 10-K. The
selected consolidated statements of income data for the fiscal years ended March
31, 1995 and 1994 and the selected consolidated balance sheet data as of March
31, 1996, 1995 and 1994 have been derived from the Company's audited
consolidated financial statements, and should be read in conjunction with those
statements, which are not included in this Form 10-K . 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 Form
10-K.
-10-
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales ................... $757,027 $603,814 $464,169 $352,953 $276,699
Cost of sales ............... 679,726 543,848 416,199 316,982 247,480
Provision for losses from
disposal of software and
hardware inventory ....... -- -- -- -- 402
-------- -------- -------- -------- --------
Gross profit ......... 77,301 59,966 47,970 35,971 28,817
Selling, general and
administrative expenses .. 47,684 36,630 29,024 23,260 20,338
Acquisition integration costs 735 -- -- -- --
-------- -------- -------- -------- --------
Income from
operations ......... 28,882 23,336 18,946 12,711 8,479
Interest expense ............ 2,698 1,677 1,482 2,050 1,726
-------- -------- -------- -------- --------
Income before income
taxes .................... 26,184 21,659 17,464 10,661 6,753
Provision for income
taxes .................... 10,024 8,292 6,697 4,165 2,496
-------- -------- -------- -------- --------
Net income .................. $ 16,160 $ 13,367 $ 10,767 $ 6,496 $ 4,257
======== ======== ======== ======== ========
PER SHARE DATA (1):
Net income per common
share:
Basic ................ $ 1.19 $ 1.03 $ 0.85 $ 0.68 $ 0.49
Diluted .............. $ 1.13 $ 0.97 $ 0.80 $ 0.59 $ 0.40
Weighted average common
shares outstanding:
Basic ................ 13,566 12,934 12,602 9,550 8,676
Weighted average common and
common share equivalents
outstanding:
Diluted ............... 14,343 13,826 13,514 11,084 10,576
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital .............. $122,318 $ 80,248 $ 56,663 $43,427 $28,167
Total assets ................. 246,651 175,288 128,601 94,421 67,385
Long-term debt, net of
current maturities ....... 12,655 30,454 16,419 11,334 19,640
Shareholders' equity ......... 139,370 67,193 51,661 40,817 15,937
</TABLE>
(1) In February 1998, the Company's Board of Directors approved a two for one
stock split effected in the form of a stock dividend paid on March 2, 1998
to stockholders of record on February 16, 1998. Share data is based upon
the weighted average common shares and share equivalents outstanding for
each period, adjusted to reflect the split.
-11-
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited consolidated statements of income expressed as a percentage of
net sales.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 89.8 90.1 89.7
------ ------ ------
Gross profit ............................. 10.2 9.9 10.3
Selling, general and administrative expenses 6.3 6.0 6.2
Acquisition integration costs .............. 0.1 -- --
------ ------ ------
Income from operations ................... 3.8 3.9 4.1
Interest expense ........................... 0.3 0.3 0.3
------ ------ ------
Income before income taxes ............... 3.5 3.6 3.8
Provision for income taxes ................. 1.4 1.4 1.5
------ ------ ------
Net income ............................... 2.1% 2.2% 2.3%
====== ====== ======
</TABLE>
The following table sets forth certain unaudited quarterly financial data
and certain data expressed as a percentage of net sales for fiscal years 1998
and 1997. The unaudited quarterly information includes all adjustments,
consisting of only normal recurring adjustments, which management considers
necessary for a fair presentation of the information shown. The financial data
and ratios for any quarter are not necessarily indicative of results of any
future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1997
----------------------------------------------- -----------------------------------------------
4TH QTR 3RD QTR 2ND QTR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ...... $218,061 $186,586 $179,568 $172,812 $174,343 $154,429 $138,148 $136,894
Gross profit ... $ 23,361 $ 18,763 $ 17,871 $ 17,306 $ 17,503 $ 15,204 $ 13,589 $ 13,670
Gross profit
margin ..... 10.7% 10.1% 10.0% 10.0% 10.0% 9.8% 9.8% 10.0%
SG&A
expenses ... $ 14,541 $ 11,508 $ 11,052 $ 10,583 $ 10,552 $ 9,375 $ 8,397 $ 8,306
Percent of net
sales ...... 6.7% 6.2% 6.2% 6.1% 6.1% 6.1% 6.1% 6.1%
Acquisition
integration
costs ....... $ 735 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Percent of net
sales ...... 0.3% -- -- -- -- -- -- --
Income from
operations ... $ 8,085 $ 7,255 $ 6,819 $ 6,723 $ 6,951 $ 5,829 $ 5,192 $ 5,364
Operating
margin ..... 3.7% 3.9% 3.8% 3.9% 4.0% 3.8% 3.8% 3.9%
Net income ..... $ 4,324 $ 4,138 $ 3,869 $ 3,829 $ 4,007 $ 3,364 $ 2,955 $ 3,041
Net margin ... 2.0% 2.2% 2.2% 2.2% 2.3% 2.2% 2.1% 2.2%
</TABLE>
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Net Sales. Net sales for the year ended March 31, 1998 were $757.0 million
as compared to $603.8 million for the year ended March 31, 1997, an increase of
$153.2 million, or 25.4%, as the result of an increase in U.S. net
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<PAGE> 13
sales of $99.3 million, or 20.2%, and an increase in international net sales of
$53.9 million, or 47.9%. The growth in U.S. and international net sales was
primarily due to increased sales volume to large national accounts, computer and
office product superstores, new customers and the Company's continued
introduction of new products. Also, sales grew during fiscal year 1998 as a
result of higher sales volume of products under revenue-based outsourcing
contracts, and the addition of net sales from its Australian subsidiary and from
Steadi-Systems, acquired by the Company during the third quarter of fiscal year
1997 and the fourth quarter of fiscal year 1998, respectively. Net sales to new
customers for the year ended March 31, 1998 were approximately $36 million,
including the net sales from Steadi-Systems, while net sales to existing
customers increased by approximately $117 million during the year.
During November 1997, the Company announced it would not match lower pricing
offered by a competitor to one of the Company's largest customers. Net sales to
this customer ranged from approximately 5% to 7% of the Company's total net
sales during fiscal year 1997 and the first six months of fiscal year 1998. The
Company believes that the loss of net sales to this customer in the future will
reduce the Company's growth rate in net sales, gross profit and net income for
fiscal year 1999. In addition, continuing consolidation among the Company's
domestic customers may reduce the rate of U.S. sales growth below that achieved
in the past.
Gross Profit. Gross profit for the year ended March 31, 1998 was $77.3
million as compared to $60.0 million in fiscal year 1997, an increase of $17.3
million, or 28.9%, primarily as the result of increased sales volume in fiscal
year 1998. The Company's gross profit margin as a percent of net sales was 10.2%
for the year ended March 31, 1998 as compared to 9.9% for the prior year. The
increase in the Company's gross profit margin percentage for fiscal year 1998
was a result of enhanced product sourcing in fiscal year 1998, and the addition
of sales from Steadi-Systems, whose gross profit percentages are higher than the
Company's core computer supplies business. Gross profit margins for fiscal year
1998 were maintained at approximately 10.0% to 10.1% of net sales during the
first, second and third quarters and increased to 10.7% of net sales during the
fourth quarter. This increase was also due to enhanced product sourcing and due
to the addition of Steadi-Systems. The Company believes that the competitive
environment and consolidation of its wholesale computer supplies products
customers will continue to place downward pressure on the Company's gross profit
margin percentage during fiscal year 1999.
SG&A Expenses. SG&A expenses for the year ended March 31, 1998 were $47.7
million (excluding one-time acquisition integration costs), or 6.3% of net
sales, as compared to $36.6 million, or 6.0% of net sales, for the year ended
March 31, 1997. The increase in SG&A expenses was primarily a result of the
increase in variable costs associated with the Company's increased sales volume.
The increase in SG&A expenses as a percentage of net sales for fiscal year 1998
were primarily due to increased SG&A costs from the addition of Steadi-Systems,
whose SG&A expenses are higher than the Company's core computer supplies
business, and due to incremental SG&A expenses associated with its PFS
subsidiary. For the fourth quarter of fiscal year 1998, SG&A expenses, excluding
the one-time charges, increased to 6.7% of net sales as compared to
approximately 6.1% to 6.2% of net sales for the first, second and third quarters
of fiscal year 1998. This increase was primarily due to the higher SG&A expenses
as a percent of net sales associated with Steadi-Systems. These increased costs
during fiscal year 1998 were partially offset by lower costs due to improved
operating efficiencies and staff productivity as a result of increased sales
volume and continued technological enhancements implemented by the Company.
Acquisition Integration Costs. During January 1998, the Company purchased
all of the common stock of Steadi-Systems. The Company recorded a one-time
acquisition integration charge related to the completion of transition,
integration and merger activities of about $0.7 million, or approximately $0.03
per share, in the Company's fourth financial quarter ending March 31, 1998. See
further discussion of the acquisition of Steadi-Systems in "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources".
Income from Operations. Income from operations for the year ended March 31,
1998 was $28.9 million. Income from operations excluding one-time acquisition
integration costs, was $29.6 million as compared to $23.3 million for fiscal
year 1997, an increase of $6.3 million, or 26.9%. This increase was primarily
due to increased sales volume and increased gross profit, which were partially
offset by higher SG&A costs. Income from operations as a percentage of net sales
was 3.8% for the year ended March 31, 1998. Income from operations as a
percentage of net sales, excluding the one-time acquisition integration costs,
was 3.9% for the years ended March 31, 1998 and 1997.
Interest Expense. Interest expense was $2.7 million during the year ended
March 31, 1998 and was $1.7 million during the year ended March 31, 1997.
Interest expense increased as a result of an increase in the average
-13-
<PAGE> 14
line of credit to support a larger revenue base, the acquisition of
Steadi-Systems, and higher inventory levels due to purchasing opportunities. The
weighted average interest rate was 6.7% during the years ended March 31, 1998
and 1997.
Income Taxes. The Company's provision for income taxes was $10.0 million
for the year ended March 31, 1998 as compared to $8.3 million for the year ended
March 31, 1997. The increase was due to increased pretax profits. The effective
tax rate for both years was approximately 38.3%.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Net Sales. Net sales for the year ended March 31, 1997 were $603.8 million
as compared to $464.2 million for the year ended March 31, 1996, an increase of
$139.6 million, or 30.1%, as the result of an increase in U.S. net sales of
$103.0 million, or 26.5%, and an increase in international net sales of $36.6
million, or 48.2%. The growth in U.S. and international net sales was primarily
due to increased sales volume to large national accounts, computer and office
product superstores, new customers and the Company's continued introduction of
new products, and the addition of net sales from its Australian subsidiary which
was acquired by the Company during the third quarter of fiscal year 1997. The
growth rate in net sales to computer and office product superstore customers for
the year ended March 31, 1997 was less than the growth rate experienced for such
customers during the prior year. Net sales to new customers for the year ended
March 31, 1997 were approximately $49 million, including the net sales from its
new Australian subsidiary, while net sales to existing customers increased by
approximately $91 million during the year.
Gross Profit. Gross profit for the year ended March 31, 1997 was $60.0
million as compared to $48.0 million in fiscal year 1996, an increase of $12.0
million, or 25.0%, primarily as the result of increased sales volume in fiscal
year 1997. The Company's gross profit margin as a percent of net sales was 9.9%
for the year ended March 31, 1997 as compared to 10.3% for the prior year. Gross
profit margin percentage declined during the year ended March 31, 1997 primarily
because the prior year's results include the benefit of incremental margins
earned on the sale of certain one-time inventory purchases by the Company prior
to manufacturer price increases. If the benefits of the one-time inventory
purchase actions are excluded from the prior year's results, gross profit as a
percentage of net sales for fiscal year 1997 is slightly lower as compared to
the prior year. Increased sales at lower gross profit margins to large national
accounts and computer and office product superstores also contributed to the
decline in gross profit margin percentages during the year ended March 31, 1997.
SG&A Expenses. SG&A expenses for the year ended March 31, 1997 were $36.6
million, or 6.0% of net sales, as compared to $29.0 million, or 6.2% of net
sales, for the year ended March 31, 1996. The increase in SG&A expenses was
primarily a result of the increase in variable costs associated with the
Company's increased sales volume. The decrease in SG&A expenses as a percentage
of net sales was primarily due to improved operating efficiencies and staff
productivity as a result of increased sales volume and continued technological
enhancements implemented by the Company. During fiscal 1997, the Company
incurred incremental SG&A expenses associated with its PFS subsidiary and also
associated with an expansion of its leased facilities in Memphis and Plano.
Income from Operations. Income from operations for the year ended March 31,
1997 was $23.3 million as compared to $18.9 million for fiscal year 1996, an
increase of $4.4 million, or 23.2%. This increase was primarily due to increased
sales volume, increased gross profit and improved operating efficiencies. Income
from operations as a percentage of net sales was 3.9% for the year ended March
31, 1997 as compared to 4.1% for the year ended March 31, 1996, primarily as the
result of a decrease in gross profit margin as a percentage of net sales which
was somewhat offset by a decline in SG&A expenses as a percentage of net sales.
Income from operations as a percentage of net sales for the year ended March 31,
1997 declined primarily because the prior year's results include the effects of
the one-time inventory purchase actions. When the benefits of the one-time
inventory purchase actions are excluded from the prior year's results, income
from operations as a percentage of net sales for fiscal year 1997 was slightly
higher than fiscal year 1996.
Interest Expense. Interest expense was $1.7 million during the year ended
March 31, 1997 and was $1.5 million during the year ended March 31, 1996.
Interest expense increased as a result of an increase in the average
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<PAGE> 15
line of credit to support a larger revenue base, which was partially offset by a
reduction in interest rates during fiscal year 1997. The weighted average
interest rate was 6.7% during the year ended March 31, 1997 as compared to 7.5%
for the previous year.
Income Taxes. The Company's provision for income taxes was $8.3 million for
the year ended March 31, 1997 as compared to $6.7 million for the year ended
March 31, 1996. The increase was primarily due to increased pretax profits. The
effective tax rate for both years was approximately 38.3%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. Net cash provided by financing activities was $33.4 million, $15.6
million and $5.2 million for fiscal years 1998, 1997 and 1996, respectively.
Cash provided by financing activities, primarily through the proceeds received
from the issuance of common stock and from the Company's lines of credit, have
been used to finance the Company's operations and expansion. In March 1998, the
Company sold 2,300,000 shares of common stock in a secondary common stock
offering, using the net proceeds of approximately $52.6 million to reduce
outstanding indebtedness under the Company's lines of credit.
Net cash used in operating activities was $20.5 million, $7.0 million and
$0.4 million for fiscal years 1998, 1997 and 1996, respectively. The Company's
net cash used in operations mainly related to increases in working capital
requirements, primarily due to increases in accounts receivable and inventory
partially offset by an increase in accounts payable, to support growth in the
Company's business during the periods. These increased working capital
requirements were partially funded by cash generated by the Company's
operations.
The Company's principal use of funds for investing activities was capital
expenditures of $6.1 million, $5.9 million and $5.0 million for fiscal years
1998, 1997 and 1996, respectively, and for acquisitions of businesses of $6.3
million and $2.1 million in fiscal years 1998 and 1997, respectively. Capital
expenditures have consisted primarily of additions to upgrade the Company's
management information systems, including the Company's Internet based catalog
and ordering tool (SOLOnet) and other methods of electronic commerce, and
general expansion of its facilities. The Company anticipates that its total
investment in upgrades and additions to facilities for fiscal 1999 will be
approximately $6 to $7 million.
Working capital increased to $122.3 million at March 31, 1998 from $80.2
million at March 31, 1997, an increase of $42.1 million which was primarily
attributable to increases in accounts receivable and inventory which were
partially offset by increases in accounts payable. During fiscal years 1998 and
1997, the Company generally maintained an accounts receivable balance of
approximately 47 and 46 days of sales, respectively. This increase is primarily
related to an increased concentration of receivables from large retail computer
and office product superstores, which generally take longer to pay. During
fiscal years 1998 and 1997 the Company generally maintained an inventory
turnover rate of approximately 11 turns, excluding inventory owned by the
Company related to PFS, its subsidiary which provides product fulfillment and
distribution services to third parties. The levels of such inventory is
generally managed by the third party and thus is not indicative of the inventory
turnover maintained by the Company's core wholesale business. From time-to-time,
the Company may take advantage of attractive product sourcing opportunities that
may temporarily lower the Company's overall inventory turnover rate.
In May 1995, the Company entered into an agreement with certain banks for an
unsecured revolving line of credit facility (the "Facility") that, as amended on
February 13, 1998, has a maximum borrowing availability of $65.0 million and
expires on December 31, 2000. Availability under the Facility is based upon
amounts of eligible accounts receivable, as defined. As of March 31, 1998, the
Company completed a secondary offering of its common stock and applied the net
proceeds of approximately $52.6 million to repay in full all outstanding amounts
under the Facility, leaving $65.0 million available for additional borrowings.
The Facility accrues interest, at the Company's option, at the prime rate of a
bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125%
depending on the Company's financial performance. A commitment fee of 0.20% to
0.25% is charged on the unused portion of the Facility. The Facility contains
various covenants including, among other things, the maintenance of certain
financial ratios including the achievement of a minimum fixed charge ratio and
minimum
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<PAGE> 16
level of tangible net worth, and restrictions on certain activities of the
Company, including loans and payments to related parties, incurring additional
debt, acquisitions, investments and asset sales.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, which expires on
July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of
$7.5 million (Australian), or approximately $5.0 million (U.S.) at March 31,
1998. The Australian Facility accrues interest at the Australian Bank Bill Rate
plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the
Australian Facility. As of March 31, 1998, the Company had borrowed
approximately $4.4 million (U.S.), leaving approximately $0.6 million (U.S.)
available under the Australian Facility for additional borrowings.
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 July
1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum
of $15.0 million (Canadian), or approximately $10.6 million (U.S.) at March 31,
1998. The Company had borrowed approximately $8.1 million (U.S.), leaving
approximately $2.5 million (U.S.) available under the Canadian Facility at March
31, 1998. 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 January 1998, the Company entered into a promissory note agreement
with a bank which allows the Company to borrow up to a maximum of $10.0 million.
Amounts borrowed under this note agreement bear interest at the bank's
discretion, primarily based on a money market borrowing rate plus an adjustment.
The maturity date of any amounts borrowed will occur prior to January 1999, the
expiration date of the note. The Company had no borrowings outstanding under
this promissory note agreement at March 31, 1998.
During fiscal year 1998, approximately $166.4 million, or 22%, of the
Company's net sales were sold through the Company's Canadian, Mexican,
Australian, Singaporean and U.S. export operations, including Latin America. The
Company believes that international markets represent further opportunities for
growth. The Company attempts to protect itself from foreign currency translation
risks by denominating substantially all its non-Canadian and non-Australian
international sales in U.S. dollars. In addition, on an annual basis, the
Company has entered into various forward Canadian and Australian currency
exchange contracts in order to hedge the Company's net investment in, and its
intercompany payable applicable to, its Canadian and Australian subsidiaries.
The Company had the following forward currency exchange contracts outstanding as
of March 31, 1998:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------------ ------------------- ------------------------ ------------
<S> <C> <C> <C>
Canadian Dollars $15.2 million Sell Canadian Dollars May 1998
Canadian Dollars $6.3 million Buy Canadian Dollars May 1998
Australian Dollars $1.8 million Sell Australian Dollars October 1998
Australian Dollars $0.5 million Sell Australian Dollars October 1998
</TABLE>
As of March 31, 1998, the Company had incurred unrealized gains of
approximately $0.4 million, net of income taxes, 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, Australian, Mexican, and Singaporean subsidiaries, although no
assurance can be given that the Company will be able to do so on acceptable
terms.
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 has been allocated to the assets and
liabilities assumed based on the fair values at the date of acquisition. The
Company believes that future integration of Steadi-Systems in the Company's
business operations will not require significant working capital nor create
other significant financing needs.
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<PAGE> 17
The Company may attempt to acquire other businesses to expand its product
line and/or in the call-center or public warehousing industries in connection
with its efforts to grow its PFS subsidiary. In May 1998, the Company announced
it had signed a letter of intent to acquire The Tape Company, Inc., ("The Tape
Company") a Chicago-based distributor of professional-grade audio and video
media products. It is anticipated that the Company will account for this
transaction as a pooling of interests and will issue shares of its common
stock. The Tape Company had revenues of approximately $40 million during the
twelve-month period ending March 31, 1998. The Company is also currently
involved in the due diligence process for another potential acquisition target.
The Company can give no assurance at this time as to whether it will ultimately
acquire these targets. Should the Company acquire these or other businesses,
the Company may require additional financing to consummate such a transaction.
Acquisitions involve certain risks and uncertainties, therefore, the Company
can give no assurance with respect to whether it will be successful in
identifying such a business to acquire, whether it will be able to obtain
financing to complete such an acquisition, or whether the Company will be
successful in operating the acquired business.
The Company believes it will be able to satisfy its working capital needs
for fiscal year 1999, as well as business growth and planned capital
expenditures, through funds available under the Company's various lines of
credit facilities, trade credit, lease financing, internally generated funds and
by increasing the amount available under the Company's credit facilities. In
addition, depending on market conditions and the terms thereof, the Company may
also consider obtaining additional funds through an additional line of credit,
other debt financing or the sale of capital stock; however, no assurance can be
given in such regard.
YEAR 2000 ISSUE
The Company has developed plans to ensure its information systems are
capable of properly utilizing dates beyond December 31, 1999. The Company
believes that with upgrades or modifications to existing software and conversion
to new software, the impact of the Year 2000 issue can be mitigated. However, if
such upgrades, modifications and conversions are not made, or are not made in a
timely manner, the Year 2000 issue could have a material impact on the Company's
operations. The total cost of implementing these system upgrades and
modifications is not expected to be material to the Company's results of
operations or cash flows, and the Company estimates completion by December 31,
1998. The costs of the Year 2000 project and the date on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from these estimates.
To the extent it can, the Company is also working with its customers,
suppliers and other service providers to ensure their systems are Year 2000
compliant. There can be no assurance that customers or suppliers will
successfully implement Year 2000 compliant systems. In the event that numerous
or significant customers or suppliers do not successfully implement Year 2000
compliant systems, the Company's operations could be materially affected. In the
event any service providers are unable to convert their systems appropriately,
the Company plans to switch to providers capable of performing such processing,
if such providers are available.
INVENTORY MANAGEMENT
The Company manages its computer consumable supplies inventories held for
sale in its wholesale distribution business by maintaining sufficient quantities
of product to achieve high order fill rates while at the same time maximizing
inventory turnover rates. Inventory balances will fluctuate as the Company adds
new product lines and makes large purchases from suppliers to take advantage of
attractive terms. To reduce the risk of loss to the Company due to supplier
price reductions and slow moving inventory, the Company's purchasing agreements
with many of its suppliers, including most of its major suppliers, contain price
protection and stock return privileges under which the Company receives credits
against future purchases if the supplier lowers prices on previously purchased
inventory or the Company can return slow moving inventory in exchange for other
products.
Beginning in fiscal year 1997, the Company, through its PFS subsidiary,
began providing product fulfillment and distribution services for third parties.
Certain of these distribution agreements provide that the Company own
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<PAGE> 18
the related inventory, some of which also allow for the third party to manage
the levels of inventory held by the Company. As a result, the levels of
inventory held by the Company under these contracts are higher than the Company
would normally carry in its core wholesale business.
SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine any specific seasonal factors that may cause quarterly
variability in operating results. Management believes, however, that factors
that may influence quarterly variability include the overall growth in the
non-paper computer supplies industry and shifts in demand for the Company's
products due to a variety of factors, including sales increases resulting from
the introduction of new computer supplies products. The Company generally
experiences a relative slowness in sales during the summer months, which may
adversely affect the Company's first and second fiscal quarter results in
relation to sequential quarter performance. The Company believes that results of
operations for a quarterly period may not be indicative of the results for any
other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
FORWARD-LOOKING INFORMATION
The matters discussed in this report on Form 10-K, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's prospectus
dated March 26, 1998, which are incorporated by reference herein, as well as
general economic conditions, industry trends, the loss of key suppliers or
customers, the loss of strategic product shipping relationships, customer
demand, product availability, competition (including pricing and availability),
risks inherent in acquiring, integrating and operating new businesses,
concentrations of credit risk, distribution efficiencies, capacity constraints,
technological difficulties, exchange rate fluctuations, and the regulatory and
trade environment (both domestic and foreign).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share ("EPS"). The Company adopted SFAS No. 128 during the quarter
ended December 31, 1997. The Company restated its EPS data for all periods
presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires
the presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 131 requires the disclosure of financial and
descriptive information about reportable operating segments. Both SFAS No. 130
and 131 are modifications of existing disclosure requirements, which will have
no effect on the results of operations or financial condition of the Company.
The Company is currently evaluating the standards and their potential impact on
disclosures and will adopt these pronouncements in its fiscal year 1999
financial statements.
-18-
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public
Accountants.............................................................................. 20
Consolidated Balance Sheets as of March 31, 1998 and 1997................................ 21
Consolidated Statements of Income for the Fiscal Years Ended March 31, 1998, 1997 and
1996................................................................................... 23
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31,
1998, 1997 and 1996.................................................................... 24
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1998, 1997
and 1996............................................................................... 25
Notes to Consolidated Financial Statements............................................... 26
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-19-
<PAGE> 20
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, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 5, 1998
-20-
<PAGE> 21
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 1,068 $ 552
Accounts receivable, net of allowance for doubtful accounts of
$2,655 and $2,360 at March 31, 1998 and 1997, respectively . 122,621 90,778
Inventories, net:
Inventories, excluding Priority Fulfillment Services ....... 78,060 54,426
Inventories, Priority Fulfillment Services ................. 11,634 10,354
Prepaid expenses and other current assets .................... 3,561 1,214
Deferred income tax asset .................................... -- 565
--------- ---------
Total current assets .................................. 216,944 157,889
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ............................ 26,968 20,949
Leasehold improvements ....................................... 1,852 673
--------- ---------
28,820 21,622
Less-- Accumulated depreciation and amortization ............. (14,024) (9,648)
--------- ---------
Net property and equipment ............................ 14,796 11,974
EMPLOYEE RECEIVABLE ............................................ 459 423
EXCESS OF COST OVER NET ASSETS ACQUIRED, net ................... 14,452 5,002
--------- ---------
Total assets .......................................... $ 246,651 $ 175,288
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-21-
<PAGE> 22
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
-------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt............................................. $ 239 $ 662
Trade accounts payable ....................................................... 83,787 69,321
Accrued expenses ............................................................. 7,550 6,260
Income taxes payable ......................................................... 1,504 1,398
Deferred income tax liability ................................................ 1,546 --
-------- ---------
Total current liabilities ............................................. 94,626 77,641
-------- ---------
LONG-TERM DEBT, less current portion ........................................... 12,655 30,454
-------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized at
March 31, 1998 and 1997, none issued and outstanding ....................... -- --
Common stock, $0.01 par value; 20,000,000 shares authorized
at March 31, 1998 and 1997; 15,961,032 and 13,041,418 and shares
issued and outstanding at March 31, 1998 and 1997, respectively ............ 160 130
Additional paid-in capital ................................................... 89,878 33,266
Retained earnings ............................................................ 51,263 35,103
Cumulative foreign currency translation adjustment ........................... (1,931) (1,306)
-------- ---------
Total shareholders' equity ............................................ 139,370 67,193
-------- ---------
Total liabilities and shareholders' equity............................. $246,651 $ 175,288
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-22-
<PAGE> 23
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES .................................. $757,027 $603,814 $464,169
COST OF SALES .............................. 679,726 543,848 416,199
-------- -------- --------
Gross profit ............. 77,301 59,966 47,970
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............ 47,684 36,630 29,024
ACQUISITION INTEGRATION COSTS .............. 735 -- --
-------- -------- --------
Income from operations ... 28,882 23,336 18,946
INTEREST EXPENSE ........................... 2,698 1,677 1,482
-------- -------- --------
Income before income taxes 26,184 21,659 17,464
PROVISION FOR INCOME TAXES:
Current .................. 7,913 8,095 6,460
Deferred ................. 2,111 197 237
-------- -------- --------
10,024 8,292 6,697
-------- -------- --------
NET INCOME ................................. $ 16,160 $ 13,367 $ 10,767
======== ======== ========
NET INCOME PER COMMON SHARE:
Basic .................... $ 1.19 $ 1.03 $ 0.85
Diluted .................. $ 1.13 $ 0.97 $ 0.80
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING:
Basic .................... 13,566 12,934 12,602
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING:
Diluted .................. 14,343 13,826 13,514
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
-23-
<PAGE> 24
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
March 31, 1995 .................. 12,489,364 $125 $ 30,733 $10,969 $(1,010) $ 40,817
Net income .................... -- -- -- 10,767 -- 10,767
Net proceeds from exercise of
common stock options ....... 196,142 2 561 -- -- 563
Costs associated with secondary
offering of stock .......... -- -- (484) -- -- (484)
Foreign currency translation
adjustment ................. -- -- -- -- (2) (2)
---------- ---- -------- ------- ------- ---------
BALANCE,
March 31, 1996 .................. 12,685,506 127 30,810 21,736 (1,012) 51,661
Net income .................... -- -- -- 13,367 -- 13,367
Net proceeds from exercise of
common stock options ....... 315,796 3 1,635 -- -- 1,638
Issuance of common stock for
acquisition of subsidiary .. 38,562 -- 791 -- -- 791
Issuance of common stock ...... 1,554 -- 30 -- -- 30
Foreign currency translation
adjustment ................. -- -- -- -- (294) (294)
---------- ---- -------- ------- ------- ---------
BALANCE,
March 31, 1997 .................. 13,041,418 130 33,266 35,103 (1,306) 67,193
Net income .................... -- -- -- 16,160 -- 16,160
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
Foreign currency translation
adjustment ................. -- -- -- -- (625) (625)
---------- ---- -------- ------- ------- ---------
BALANCE,
March 31, 1998 .................. 15,961,032 $160 $ 89,878 $51,263 $(1,931) $ 139,370
========== ==== ======== ======= ======= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
-24-
<PAGE> 25
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 16,160 $ 13,367 $ 10,767
Adjustments to reconcile net income to net cash
provided by (used in) operating activities, net
of effect from acquisitions of businesses:
Depreciation and amortization ............. 4,740 3,786 2,296
Provision for doubtful accounts ........... 1,936 1,594 999
Deferred income tax provision ............. 2,111 197 237
Changes in operating assets and liabilities
Accounts receivable ................... (31,278) (22,801) (18,888)
Inventories, net ...................... (22,063) (19,580) (12,017)
Trade accounts payable and accrued
expenses ............................ 10,145 14,559 18,495
Income taxes payable .................. 127 969 (478)
Prepaid expenses and other current
assets .............................. (2,378) 873 (1,776)
-------- -------- --------
Net cash used in operating
activities ................................ (20,500) (7,036) (365)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............. (6,128) (5,931) (4,959)
Acquisitions of businesses, net of cash acquired . (6,322) (2,105) --
Advances of employee receivables, net ............ (45) (30) (80)
-------- -------- --------
Net cash used in investing activities .... (12,495) (8,066) (5,039)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) revolving lines of
credit, net ................................... (20,361) 14,660 5,735
Payments on capital leases and notes payable ..... (2,784) (656) (571)
Net proceeds from sale of stock and exercise of
stock options and warrants .................... 56,582 1,638 79
-------- -------- --------
Net cash provided by financing
activities ............................. 33,437 15,642 5,243
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH ................... 74 (192) (83)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH .................... 516 348 (244)
CASH, beginning of period .......................... 552 204 448
-------- -------- --------
CASH, end of period ................................ $ 1,068 $ 552 $ 204
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
-25-
<PAGE> 26
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Business
Daisytek International Corporation (a Delaware corporation) and subsidiaries
(the "Company") is primarily a wholesale distributor of non-paper computer and
office automation supplies and accessories, whose primary products are 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. The Company's 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, through its wholly owned subsidiaries in the U.S., Canada, Australia,
Mexico and Singapore, sells products primarily in North America, as well as in
Latin America, Australia, Singapore, the Pacific Rim, Europe and Africa.
The Company's 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. No single customer accounted for more than 10% of the Company's
annual net sales for the fiscal years ended March 31, 1998, 1997 and 1996. At
March 31, 1998, five computer and office product superstores and warehouse clubs
represent approximately 29% of trade accounts receivable, with the largest two
customers being approximately 13% and 11% of trade accounts receivable,
reflecting the significance of this market segment.
The Company recognizes 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
industry.
During fiscal year 1996, the Company formed Priority Fulfillment Services,
Inc. ("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its
business partners and other customers. Through PFS, the Company sells its core
competencies in call-center, product fulfillment, logistics and support services
to client companies worldwide. PFS customizes these services to meet specific
requirements of these companies. PFS's call-center services include: order
entry, order tracking and customer service (inbound), outbound telemarketing
services and customized reporting of customer and call information. PFS also
provides other support services such as invoicing, credit management and
collection services, and accounting and systems support. PFS utilizes primarily
the Company's centralized distribution facility in Memphis, Tennessee and also
the Company's foreign distribution facilities, and maintains relationships with
a number of shipping companies to provide next business day delivery on domestic
package orders, truck shipments on larger domestic orders and a variety of air
and surface delivery options for international orders. PFS presently provides
its services under both fee-based contracts (where revenue is based on either
the sales value of the products or service activity volume) and transaction
based contracts (where PFS takes title and resells the product).
In January 1998, the Company expanded its product line by acquiring
Steadi-Systems, Ltd., ("Steadi-Systems") an independent wholesale distributor of
media products to the filmed entertainment and multimedia industries.
Steadi-Systems distributes a wide array of professional-grade audio and video
media products and video hardware and is an authorized dealer for leading
manufacturers such as Sony, Fuji, JVC, Avid and others. Steadi-Systems'
customers include production companies, post-production operations, educational
institutions, governmental agencies, television stations, and other professional
and individual customers.
Basis of Presentation
The consolidated financial statements include the accounts of Daisytek
International Corporation and its subsidiaries. All significant intercompany
transactions are eliminated. The preparation of consolidated 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, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
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.
-26-
<PAGE> 27
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Inventories
Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market.
Inventories held and owned by the Company's PFS subsidiary relate to product
fulfillment and logistics services provided for third parties, and are presented
separately in the consolidated balance sheet as certain of these distribution
agreements generally allow for the third party to manage the levels of inventory
held by the Company. As a result, the levels of inventory held by the Company
under these contracts are higher than the Company would normally carry in its
core wholesale business.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets
which range from one to seven years.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line
basis over 20 to 40 years. The related amortization expense for each of the
fiscal years 1998, 1997 and 1996 was approximately $263,000, $140,000, and
$50,000, respectively. Accumulated amortization as of March 31, 1998 and 1997
was approximately $884,000 and $608,000 respectively.
Foreign Currency Translation and Transactions
For the Company's Canadian and Australian subsidiaries, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of shareholders' equity. In
addition, the Company periodically enters into foreign exchange contracts in
order to hedge the Company's net investment in, and its intercompany payable
balance (of a long-term investment nature) applicable to its Canadian and
Australian subsidiaries. The Company had the following forward currency exchange
contracts outstanding as of March 31, 1998:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------------ ------------------- ------------------------ ------------
<S> <C> <C> <C>
Canadian Dollars $15.2 million Sell Canadian Dollars May 1998
Canadian Dollars $ 6.3 million Buy Canadian Dollars May 1998
Australian Dollars $ 1.8 million Sell Australian Dollars October 1998
Australian Dollars $ 0.5 million Sell Australian Dollars October 1998
</TABLE>
As of March 31, 1998, the Company had incurred unrealized gains of
approximately $0.4 million, net of income taxes, 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, Australian, Mexican, and Singaporean subsidiaries, although no
assurance can be given that the Company will be able to do so on acceptable
terms.
For the Company's Mexican subsidiary, 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 the Mexican subsidiary are included in net income and
have not been material.
-27-
<PAGE> 28
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 is calculated by dividing net income by the weighted average common
shares and 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. The stock splits discussed in
Note 3 have been reflected in the net income per common share calculations for
all periods presented.
Adoption of New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," in fiscal year 1997. SFAS No. 121 requires companies
to periodically evaluate long-lived assets and to record an impairment loss if
the expected undiscounted future cash flows is less than the carrying value of
those assets. The effect of the application of SFAS No. 121 was not material.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in fiscal year 1997. The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its plans, and has
opted to comply with the disclosure requirements of SFAS No. 123.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This statement establishes new standards for
computing and presenting earnings per share ("EPS"). The Company adopted SFAS
No. 128 during the quarter ended December 31, 1997. The Company restated its EPS
data for all periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires
the presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 131 requires the disclosure of financial and
descriptive information about reportable operating segments. Both SFAS No. 130
and 131 are modifications of existing disclosure requirements, which will have
no effect on the results of operations or financial condition of the Company.
The Company is currently evaluating the standards and their potential impact on
disclosures and will adopt these pronouncements in its fiscal year 1999
financial statements.
Acquisitions of Businesses
Effective October 1, 1996, the Company acquired, with cash and common stock,
substantially all of the assets and liabilities of Lasercharge Pty Ltd
("Lasercharge"). Lasercharge is an Australian wholesale distributor of computer
and office automation supplies and accessories. The acquisition of Lasercharge
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 cost in excess of fair
value of approximately $3.6 million which is being amortized on a straight-line
basis over 20 years. Pro forma results of operations have not been presented
because the effects of the acquisition were not significant.
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 of approximately $10.4 million which is being
amortized on a straight-line basis over 25 years. Pro-forma results of
operations have not been presented because the effects of the acquisition were
not significant. The Company recorded a one-time acquisition integration charge
related to the
-28-
<PAGE> 29
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
completion of transition, integration and merger activities, of about $0.7
million, or approximately $0.03 per share, net of income taxes, in the Company's
fourth financial quarter ending March 31, 1998. Steadi-Systems was acquired
using cash of approximately $6.3 million during fiscal year 1998. Not included
in this amount are contingent cash payment arrangements payable if certain
events occur. These contingent payments will be recorded upon the occurrence of
the specified events. During May 1998, those events occurred and the Company
incurred approximately $2.4 million in additional costs for the acquisition of
Steadi-Systems.
2. DEBT:
Debt at March 31, 1998 and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Revolving line of credit with commercial banks, interest
at the Company's option at the prime rate of a bank (8.5% at
March 31, 1998), or the Eurodollar rate plus 0.625% to
1.125% (6.6% at March 31, 1998), due December 31,
2000 .......................................................... $ -- $ 30,100
Revolving line of credit with commercial bank, interest
at the Australian Bank Bill Rate plus 0.75% (5.7% at
March 31, 1998), due July 1, 1999.............................. 4,410 --
Revolving line of credit with commercial bank, interest at the
Canadian bank's cost of funds plus 0.65% (5.7% at March
31, 1998), due July 1, 1999................................... 8,101 --
Notes payable and obligations under capital leases for
warehouse equipment, computer equipment, office furniture
and fixtures, interest at varying rates ranging from 8% to
21%, with initial lease terms varying from three to seven
years......................................................... 383 1,016
-------- --------
Long-term debt..................................... 12,894 31,116
Less: current portion of long--term debt......................... (239) (662)
-------- --------
Long-term debt, less current portion............... $ 12,655 $ 30,454
======== ========
</TABLE>
In May 1995, the Company entered into an agreement with certain banks for an
unsecured revolving line of credit facility (the "Facility") that, as amended on
February 13, 1998, has a maximum borrowing availability of $65.0 million and
expires on December 31, 2000. Availability under the Facility is based upon
amounts of eligible accounts receivable, as defined. As of March 31, 1998, the
Company completed a secondary offering of its common stock and applied the net
proceeds of approximately $52.6 million to repay in full all outstanding amounts
under the Facility, leaving $65.0 million available for additional borrowings.
The Facility accrues interest, at the Company's option, at the prime rate of a
bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125%
depending on the Company's financial performance. A commitment fee of 0.20% to
0.25% is charged on the unused portion of the Facility. The Facility contains
various covenants including, among other things, the maintenance of certain
financial ratios including the achievement of a minimum fixed charge ratio and
minimum level of tangible net worth, and restrictions on certain activities of
the Company, including loans and payments to related parties, incurring
additional debt, acquisitions, investments and asset sales. 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, which expires on
July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of
$7.5 million (Australian), or approximately $5.0 million (U.S.) at March 31,
1998. The Australian Facility accrues interest at the Australian Bank Bill Rate
plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the
Australian Facility. As of March 31, 1998, the Company had borrowed
approximately $4.4 million (U.S.), leaving approximately $0.6 million (U.S.)
available under the Australian Facility for additional borrowings.
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 July
1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum
of $15.0 million
-29-
<PAGE> 30
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Canadian), or approximately $10.6 million (U.S.) at March 31, 1998. The Company
had borrowed approximately $8.1 million (U.S.), leaving approximately $2.5
million (U.S.) available under the Canadian Facility at March 31, 1998. 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.
The Company is a party to a number of non-cancelable capital lease
agreements involving warehouse equipment, computer equipment, and office
furniture and fixtures. The Company's property held under capital leases,
included in furniture, fixtures and equipment in the balance sheet, amounted to
approximately $284,000, net of accumulated amortization of approximately
$2,538,000 at March 31, 1998, and approximately $684,000 net of accumulated
amortization of approximately $2,054,000 at March 31, 1997.
Annual maturities of long-term debt and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ended March 31,
<S> <C>
1999.......................................................... $ 239
2000.......................................................... 12,655
Thereafter.................................................... --
--------
Total................................................. $ 12,894
========
</TABLE>
3. STOCK OPTIONS AND SHAREHOLDERS' EQUITY:
Public Offerings
In January 1995, the Company completed an initial public offering (the
"IPO") of 2,760,000 shares of common stock. In January 1996, the Company
completed a secondary offering of 2,415,500 shares of common stock, sold by
certain principal and selling shareholders. The Company did not receive any of
the proceeds from the sale of shares by these principal and selling
shareholders. The Company incurred approximately $484,000 in costs related to
the secondary offering, which is reflected as a reduction in Shareholders'
Equity. 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.
Preferred Stock
In connection with the IPO, the Company authorized the issuance of up to
1,000,000 shares of preferred stock, par value $1.00 per share, none of which is
issued or outstanding at March 31, 1998 and 1997.
Stock Splits
In conjunction with the IPO, the Company's Board of Directors approved the
conversion of each share of common stock into 1.45 shares upon consummation of
the IPO. 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 these stock splits on a
retroactive basis for all periods presented.
Stock Options
At March 31, 1998 and 1997, the Company had stock option compensation plans
and a non-employee Director stock option plan, which are described below. The
Company may also, from time to time, issue non-qualified options outside these
plans. The Company applies APB Opinion No. 25 and related Interpretations in
accounting for these stock options. Accordingly, no compensation cost has been
recognized for stock-based compensation awards. Pro forma net income and
earnings per share assuming compensation cost for the Company had been
-30-
<PAGE> 31
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
determined under SFAS No. 123, "Accounting for Stock-Based Compensation," are as
follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Net income:
As reported........................................... $16,160 $ 13,367 $ 10,767
Pro forma............................................. $12,884 $ 11,202 $ 10,039
Earnings per share:
Basic:
As reported........................................ $ 1.19 $ 1.03 $ 0.85
Pro forma.......................................... $ 0.95 $ 0.87 $ 0.80
Diluted
As reported........................................ $ 1.13 $ 0.97 $ 0.80
Pro forma.......................................... $ 0.90 $ 0.81 $ 0.74
</TABLE>
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 used for
grants in fiscal year 1996: no dividends; expected volatility of 38.51%;
risk-free interest rate of 6.9%; and expected life of 6 years. The following
assumptions were used for grants during fiscal year 1997: no dividends, expected
volatility ranging between 39.25% and 39.50%; risk-free interest rate ranging
between 5.9% and 6.6%; and expected life of 6 years. The following assumptions
were used for grants during the fiscal year 1998: no dividends, expected
volatility ranging between 40.97% and 41.40%; risk-free interest rate ranging
between 5.6% and 6.8%; and expected life of 6 years.
In January 1989, the Company established an employee stock option plan (the
"Plan") in which shares of common stock are reserved for the granting of options
at an amount not less than market price, as determined by the Board of
Directors, at the date of grant. There were no options available at March 31,
1998 to be granted under the plan. As of March 31, 1997, 17,108 remained
available to be granted under the Plan.
In 1994, the Company adopted the 1994 Stock Option Plan for Key Employees of
Daisytek International Corporation (the "1994 Plan"). The 1994 Plan authorizes
the Company to grant options to select officers and other key employees of the
Company and to non-employee directors. The 1994 Plan provides for the granting
to employees of both incentive stock options and nonqualified stock options. The
maximum number of shares of common stock for which options may be granted is
1,450,000, subject to adjustments for certain changes in the shares issued and
outstanding as described in the 1994 Plan.
The exercise price of incentive stock options granted under the 1994 Plan
may not be less than the fair market value at the date of the grant. The
exercise price of nonqualified stock options granted under the 1994 Plan is
determined by the option committee of the Board of Directors. As of March 31,
1998 and 1997, 100,974 and 510,904 options, respectively, remain to be granted
in the future under the 1994 Plan.
During fiscal year 1997, the Company adopted the Non-Employee Director Stock
Option and Retainer Plan (the "Non-Employee Director Plan"). The Non-Employee
Director Plan authorizes the Company to grant nonqualified common stock options
to non-employee directors at the fair market value of the Company's common stock
on the date of grant. The options vest over a three-year period starting on the
date of grant. The maximum number of shares which may be granted under the
Non-Employee Director Plan is 100,000 shares, subject to adjustments for certain
changes in the shares issued and outstanding as described in the plan. As of
March 31, 1998 and 1997 there were 7,440 and 6,000 options, respectively,
granted under the Non-Employee Director Plan.
During fiscal year 1998, the Company adopted the 1997 Stock Option Plan (the
"1997 Plan"). The 1997 Plan authorizes the Company to grant options to select
officers, directors and other key employees of the Company. The 1997 Plan
provides for the granting to employees of both incentive stock options and
nonqualified stock options. The maximum number of shares of common stock for
which options may be granted is 2,000,000, subject to adjustments for certain
changes in the shares issued and outstanding as described in the 1997 Plan.
-31-
<PAGE> 32
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The exercise price of incentive stock options granted under the 1997 Plan
may not be less than the fair market value of the Company's stock at the date of
the grant. In the case of an individual then owning more than 10% of the total
combined voting power of the Company, the exercise price may not be less than
110% of the fair market value of the Company's stock at the date of the grant.
As of March 31, 1998, 1,864,942 options remain to be granted in the future under
the 1997 Plan.
During fiscal years 1998, 1997 and 1996, the Company granted options to
certain employees pursuant to its employee stock option plans. In addition to
the options under such plans, the Company granted options to certain key
employees, executives and directors to purchase 181,826 shares of common stock
in fiscal year 1998, 110,000 shares of common stock in fiscal year 1997 and
45,000 shares of common stock in fiscal year 1996. 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.
During April 1997, the Company, at the option of individual employees and
directors, canceled options issued during fiscal year 1997 and issued
replacement options, granted at the fair market value of the Company's common
stock on the date of the replacement grant. Such options also become exercisable
over a three-year period starting with the date of the replacement grant, based
on vesting percentages.
The following table summarizes stock option activity for the three years in
the period ended March 31, 1998.
<TABLE>
<CAPTION>
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
------ -------------- --------------
<S> <C> <C> <C>
Outstanding, March 31, 1995............ 1,123,130 $ 0.64--$ 3.80 $ 1.75
Granted.............................. 520,000 $ 9.75 $ 9.75
Exercised............................ (196,142) $ 0.64--$ 3.80 $ 1.84
Canceled............................. (9,000) $ 9.75 $ 9.75
---------
Outstanding, March 31, 1996............ 1,437,988 $.0.64--$ 9.75 $ 4.58
Granted.............................. 678,228 $16.25--$20.00 $16.54
Exercised............................ (315,796) $ 0.64--$ 9.75 $ 2.45
Canceled............................. (93,482) $ 3.80--$16.25 $13.27
---------
Outstanding, 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
---------
Outstanding, March 31, 1998............ 1,725,974 $ 0.64--$22.44 $11.66
=========
</TABLE>
The weighted average fair values of options granted during each of the years
ended March 31, 1998, 1997 and 1996, were $7.02, $8.08 and $4.85 respectively.
As of March 31, 1998, 1997 and 1996, 234,531, 682,543 and 806,788, respectively,
of options outstanding were exercisable. The remaining options will become
exercisable over the next three years based on vesting percentages.
The following table summarizes information about the Company's stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------- ----------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1998 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.64-- $ 5.00 99,440 3.5 $ 1.82 99,440 $ 1.82
$ 5.01-- $10.00 355,120 7.1 $ 9.75 133,786 $ 9.75
$10.01-- $15.00 1,168,320 9.0 $ 12.50 -- --
$15.01-- $22.44 103,094 9.4 $ 18.28 1,305 $ 16.25
</TABLE>
-32-
<PAGE> 33
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about the Company's stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------------------------------
WEIGHTED
RANGE OF AVERAGE WEIGHTED WEIGHTED
EXERCISE OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
PRICES MARCH 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1997 EXERCISE PRICE
-------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.64--$ 5.00 626,018 4.6 $ 1.59 626,018 $ 1.59
$ 5.01--$10.00 457,260 8.1 $ 9.75 56,525 $ 9.75
$10.01--$20.00 623,660 9.1 $ 16.57 -- --
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest ........................ $2,762 $ 1,830 $1,445
Income taxes .................... $5,416 $ 6,411 $6,953
Fixed assets acquired under capital
leases ........................ $ 84 $ -- $ --
Acquisitions of businesses:
Fair value of net assets acquired $6,322 $ 2,896 $ --
Stock issued .................... -- (791) --
------ ------- ------
Net cash paid for acquisition . $6,322 $ 2,105 $ --
====== ======= ======
</TABLE>
5. RELATED PARTY TRANSACTIONS:
The Company has made various loans to its President, a Senior Vice
President, and a Vice President. These loans accrue interest at the Company's
effective borrowing rate (6.8% at March 31, 1998 and March 31, 1997). The
Company had notes receivable (including accrued interest) from its President of
approximately $459,000 and $423,000 as of March 31, 1998 and 1997, respectively,
which are classified as non-current assets in the consolidated balance sheet.
The Company's note receivable from a Senior Vice President as of March 31, 1998
and March 31, 1997 were approximately $186,000 and $122,000, respectively. The
Company's receivables from a Vice President as of March 31, 1997 was $61,000.
These notes are classified as accounts receivable in the accompanying
consolidated balance sheet.
The Company also had trade accounts receivable due from companies in which
either the Company or its largest shareholder owns a minority interest. Such
sales were made in accordance with the Company's usual terms, except that such
companies were provided with extended payment terms. In fiscal year 1993, the
principal shareholder transferred his minority interest in all but one of these
companies to a subsidiary of the Company for a nominal amount, which
approximated the fair market value of these minority interests. In fiscal year
1997, the Company sold its interest in its only remaining related party company.
In fiscal year 1998, the Company's largest shareholder sold the minority
interest in the remaining company. Trade accounts receivable and advances from
these related party companies totaled approximately $517,000 at March 31, 1997,
and are classified as accounts receivable in the accompanying consolidated
balance sheet. Sales to these related parties totaled approximately $537,000,
$1,844,000 and $2,707,000 for the fiscal years ended March 31, 1998, 1997 and
1996, respectively.
In April 1997, the Company entered into a one-year aircraft lease with a
company owned by the Company's largest shareholder under which the Company, on a
non-exclusive basis, leases an aircraft from such company. The lease was
terminable by either party at any time. During fiscal year 1998, the Company
incurred approximately $342,000 in lease payments and reimbursement of certain
operating costs relating to this aircraft lease. The aircraft lease was
terminated on March 31, 1998.
6. 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 at the U.S. Federal statutory
-33-
<PAGE> 34
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
corporate tax rate (35.0%, 35.0% and 34.9% in fiscal years 1998, 1997 and 1996,
respectively, and the Company's effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Provision computed at statutory rate ......... $ 9,164 $ 7,581 $6,086
Impact of foreign taxation at different rate.. 356 270 141
State income taxes, net of federal benefit ... 415 335 297
Expenses not deductible for tax purposes ..... 149 104 56
Change in valuation reserve .................. 48 (123) 8
Other ........................................ (108) 125 109
-------- ------- ------
Provision for income taxes .............. $ 10,024 $ 8,292 $6,697
======== ======= ======
</TABLE>
The consolidated income before taxes, by domestic and foreign entities, is as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic ...... $20,910 $18,703 $16,355
Foreign ....... 5,274 2,956 1,109
------- ------- -------
Total..... $26,184 $21,659 $17,464
======= ======= =======
</TABLE>
The provision (benefit) for income taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Current
Domestic............................... $ 5,141 $ 6,317 $ 5,349
State.................................. 639 515 456
Foreign................................ 2,133 1,263 655
-------- -------- ---------
Total current...................... 7,913 8,095 6,460
-------- -------- ---------
Deferred
Domestic............................... 2,018 197 265
Foreign................................ 93 -- (28)
-------- -------- ---------
Total deferred..................... 2,111 197 237
-------- -------- ---------
Total......................... $ 10,024 $ 8,292 $ 6,697
======== ======== =========
</TABLE>
-34-
<PAGE> 35
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of the deferred tax asset (liability) as of March 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts ........ $ 692 $ 872
Capitalized inventory costs ............ 182 170
Inventory obsolescence reserve ......... 252 273
Accrued straight-line rent ............. 63 70
Accrued vacation ....................... 82 58
Foreign net operating loss carryforwards 1,659 631
Other .................................. 106 204
------- -------
3,036 2,278
Less-- Valuation reserve ............... (311) (263)
------- -------
Total deferred tax asset ....... 2,725 2,015
------- -------
Deferred tax liability:
Property and equipment ................. (413) (426)
Accounts receivable discount ........... (2,077) (411)
Foreign inventory purchases ............ (1,257) (463)
Other .................................. (524) (150)
------- -------
Total deferred liability ....... (4,271) (1,450)
------- -------
Deferred tax asset (liability), net ...... $(1,546) $ 565
======= =======
</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". Foreign
net operating loss carryforwards relate primarily to taxable losses of the
Company's Mexico subsidiary. These loss carryforwards begin to expire in fiscal
year 2005. As of March 31, 1998 and 1997 a valuation allowance was recorded due
to uncertainties regarding the Company's utilization of its Mexico subsidiary's
net tax asset.
7. 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.
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>
1999..................................................... $ 4,325
2000..................................................... 4,473
2001..................................................... 3,291
2002..................................................... 2,041
2003..................................................... 912
Thereafter............................................... 5,921
---------
Total............................................ $ 20,963
=========
</TABLE>
Total rental expense under operating leases approximated $3,822,000,
$3,107,000 and $2,255,000 for the fiscal years ended March 31, 1998, 1997 and
1996, respectively.
Although the Company carries products and accessories supplied by numerous
vendors, the Company's net sales from products manufactured by its ten largest
suppliers were approximately 70%, 74% and 72% of total net sales during fiscal
years 1998, 1997 and 1996, 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 1999 approximate
$66 million. Additionally, many of the Company's
-35-
<PAGE> 36
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 against future purchases 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.
8. FOREIGN OPERATIONS AND EXPORTS
The Company, through its wholly owned subsidiaries, sells products in
Canada, Australia, Mexico and in Singapore. All intercompany activity is
eliminated in computing net sales and net income. Information related to the
Company's Australia, Mexico and Singapore subsidiaries are included in Other in
the following table. Financial information, summarized by geographical area, is
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
----------- ---------- -----------
Net sales:
<S> <C> <C> <C>
Domestic..................... $ 653,525 $ 541,710 $ 424,667
Canada....................... 77,589 57,295 44,459
Other........................ 53,707 26,425 8,932
Intercompany elimination..... (27,794) (21,616) (13,889)
----------- ----------- -----------
Consolidated.............. $ 757,027 $ 603,814 $ 464,169
=========== =========== ===========
Net income:
Domestic..................... $ 13,112 $ 11,675 $ 10,284
Canada....................... 2,326 1,346 759
Other........................ 722 346 (276)
----------- ----------- -----------
Consolidated.............. $ 16,160 $ 13,367 $ 10,767
=========== =========== ===========
Identifiable assets:
Domestic..................... $ 200,774 $ 144,836 $ 115,219
Canada....................... 23,331 16,924 10,360
Other........................ 22,546 13,528 3,022
----------- ----------- -----------
Consolidated.............. $ 246,651 $ 175,288 $ 128,601
=========== =========== ===========
</TABLE>
The Company also exports its products for sale throughout Latin America,
Europe, the Far East, Africa and Australia. Total export sales to these
geographic regions for fiscal years 1998, 1997 and 1996, included in Domestic
sales in the preceding table, were approximately $38.0 million, $33.5 million
and $31.8 million, respectively.
9. 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 1998, the Company matched 10% of employee
contributions resulting in a charge against income of approximately $53,000. For
fiscal year 1997, the Company matched 20% of employee contributions resulting in
a charge against income of approximately
-36-
<PAGE> 37
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$78,000. For the fiscal year 1996, the Company matched 25% of employee
contributions, resulting in a charge against income of approximately $95,000.
10. FAIR VALUES 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, 1998 and 1997, consisted of
forward foreign currency exchange contracts used to hedge the Company's net
investment in, and its intercompany payable balance applicable to its Canadian
and Australian subsidiaries (See Note 1). The fair values of these contracts
based on fiscal year-end exchange rates, excluding related income taxes, were
net gains of approximately $420,000 and $67,000 at March 31, 1998 and 1997,
respectively.
11. SUBSEQUENT EVENT
On May 4, 1998, the Company signed a letter of intent to acquire The Tape
Company, Inc. ("The Tape Company"), a Chicago-based independent distributor of
professional-grade audio and video media products. It is anticipated that the
Company will account for this transaction as a pooling of interests and will
issue shares of its common stock. The Tape Company had revenues of approximately
$40 million during the twelve month period ending March 31, 1998.
-37-
<PAGE> 38
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for fiscal years 1998 and 1997 are
as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL YEAR 1998
-----------------------------------------------------------
4TH QTR 3RD QTR. 2ND QTR. 1ST QTR.
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................................. $ 218,061 $ 186,586 $ 179,568 $ 172,812
Gross profit .............................................. $ 23,361 $ 18,763 $ 17,871 $ 17,306
Gross profit margin .................................. 10.7% 10.1% 10.0% 10.0%
SG&A expenses ............................................. $ 14,541 $ 11,508 $ 11,052 $ 10,583
Percent of net sales ................................. 6.7% 6.2% 6.2% 6.1%
Acquisition integration costs.............................. $ 735 $ -- $ -- $ --
Percent of net sales.................................. 0.3% -- -- --
Income from operations .................................... $ 8,085 $ 7,255 $ 6,819 $ 6,723
Operating margin ..................................... 3.7% 3.9% 3.8% 3.9%
Net income ................................................ $ 4,324 $ 4,138 $ 3,869 $ 3,829
Net margin ........................................... 2.0% 2.2% 2.2% 2.2%
Net income per common and
common equivalent share
Basic ............................................ $ 0.32 $ 0.30 $ 0.28 $ 0.29
Diluted .......................................... $ 0.30 $ 0.29 $ 0.27 $ 0.27
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997
-----------------------------------------------------------
4TH QTR 3RD QTR. 2ND QTR. 1ST QTR.
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................................. $ 174,343 $ 154,429 $ 138,148 $ 136,894
Gross profit .............................................. $ 17,503 $ 15,204 $ 13,589 $ 13,670
Gross profit margin .................................. 10.0% 9.8% 9.8% 10.0%
SG&A expenses ............................................. $ 10,552 $ 9,375 $ 8,397 $ 8,306
Percent of net sales ................................. 6.1% 6.1% 6.1% 6.1%
Income from operations .................................... $ 6,951 $ 5,829 $ 5,192 $ 5,364
Operating margin ..................................... 4.0% 3.8% 3.8% 3.9%
Net income ................................................ $ 4,007 $ 3,364 $ 2,955 $ 3,041
Net margin ........................................... 2.3% 2.2% 2.1% 2.2%
Net income per common and
common equivalent share
Basic ............................................ $ 0.31 $ 0.26 $ 0.23 $ 0.24
Diluted .......................................... $ 0.29 $ 0.24 $ 0.21 $ 0.22
</TABLE>
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<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------- ------- ---------------------------
<S> <C> <C>
David A. Heap.............. 54 Chairman of the Board
Mark C. Layton............. 38 President, Chief Executive Officer, Chief Operating
Officer and Director
Christopher Yates.......... 43 Senior Vice President-- Business Development and
Director
James R. Powell............ 37 Senior Vice President-- Sales and Marketing and
Director
Steven Graham.............. 46 Senior Vice President-- Information Technologies,
Chief Information Officer
Harvey H. Achatz........... 57 Vice President-- Administration and Secretary
Thomas J. Madden........... 36 Vice President-- Finance, Chief Financial Officer,
Chief Accounting Officer and Treasurer
Peter D. Wharf............. 39 Vice President-- International Operations
Suzanne Garrett............ 33 Vice President-- Product Management and Marketing
Edgar D. Jannotta, Jr...... 37 Director
Timothy M. Murray.......... 45 Director
Peter P. J. Vikanis........ 47 Director
</TABLE>
DAVID A. HEAP has served as Chairman of the Board since 1982, as Chief
Executive Officer from 1982 until his retirement in April 1997 and as President
from 1982 to 1990. From 1970 to 1985, Mr. Heap served as Chairman of ISA
International plc (and its predecessors) ("ISA"), a now publicly traded company
he founded in England in 1970. ISA is a distributor of computer supplies in
Western Europe.
MARK C. LAYTON has served as President, Chief Executive Officer and Chief
Operating Officer since April 1997 and as a Director since 1988. Mr. Layton
served as President, Chief Operating Officer and Chief Financial Officer from
1993 to April 1997, as Executive Vice President from 1990 to 1993 and as Vice
President -- Operations from 1988 to 1990. Prior to joining the Company, Mr.
Layton served as a management consultant with Arthur Andersen & Co., S.C. for
six years through 1988 specializing in wholesale and retail distribution and
technology.
CHRISTOPHER YATES was appointed Senior Vice President -- Business
Development in February 1996 and served as Vice President -- Business
Development from November 1995 to February 1996, as a Director of the Company
since February 1995, as Vice President -- Marketing from January 1994 to
November 1995, as Vice President -- Sales from 1988 to 1994 and in various other
sales capacities for the Company since 1982. Prior to joining the Company, Mr.
Yates served in various sales capacities for ISA.
JAMES R. POWELL has served as a Director and Senior Vice President -- Sales
and Marketing since 1996. Mr. Powell served as Vice President -- Sales from 1992
to 1996 and in various other sales capacities from 1988 to 1992. Prior to
joining the Company, Mr. Powell was engaged in various sales and marketing
activities.
STEVEN GRAHAM has served as Senior Vice President of Information
Technologies and Chief Information Officer since 1996. Prior to joining the
Company, Mr. Graham was employed by Ingram Micro, a major microcomputer
distributor. Mr. Graham has over 23 years of experience in the
information-technology field.
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<PAGE> 40
HARVEY H. ACHATZ serves as Vice President -- Administration and Secretary,
positions he has held since 1993 and 1984, respectively. Mr. Achatz served as
Vice President -- Finance from 1985 to 1993, as Controller from 1981 to 1985 and
as a Director from 1984 to 1990.
THOMAS J. MADDEN was appointed Chief Financial Officer in July 1997 and
serves as Vice President -- Finance, Treasurer and as Chief Accounting Officer,
positions he has held since November 1994, March 1994 and 1992, respectively.
From 1992 to 1994 he also served as Controller. From 1983 to 1992, Mr. Madden
served in various capacities with Arthur Andersen & Co., S.C., including
financial consulting and audit manager. Mr. Madden is a certified public
accountant.
PETER D. WHARF serves as Vice President -- International Operations, a
position he has held since February 1996. Mr. Wharf joined the Company in 1992
and has served in various export and international sales capacities since such
time. Prior to joining the Company, Mr. Wharf served in various sales capacities
for ISA.
SUZANNE GARRETT was recently promoted to Vice President of Product
Management and Marketing and has served as new-products manager, marketing
manager, and director of product management and marketing. Prior to joining the
Company in 1991, Ms. Garrett served as an account executive for United Media.
EDGAR D. JANNOTTA, JR. has served as a Director of the Company since 1991.
Mr. Jannotta is a Principal of GTCR Golder Rauner L.L.C.; an investment banking
firm he joined in 1998. Mr. Jannotta is also a director of Gibraltar Packaging
Group, Inc., a diversified packaging company, and several privately held
corporations.
TIMOTHY M. MURRAY has served as a Director of the Company since 1991. Mr.
Murray is a Principal of William Blair & Company, L.L.C.; an investment banking
firm he joined in 1979. Mr. Murray is also a director of several privately held
corporations.
PETER P. J. VIKANIS was appointed a Director of the Company during fiscal
year 1996. Mr. Vikanis served as Chief Operating Officer of ISA from 1991 to
1995, as a director of ISA from 1979 to 1995, and also served in various
management capacities at ISA from 1971 to 1991.
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes. Each class serves three years, with the
terms of office of the respective classes expiring in successive years. Class I
consists of Messrs. Powell and Yates whose term will expire at the annual
meeting of stockholders in 1998. Messrs. Powell and Yates have been nominated by
the Board for election at the 1998 annual meeting. Class II consists of Messrs.
Murray and Layton whose terms will expire at the annual meeting of stockholders
in 1999; and Class III consists of Messrs. Heap, Janotta and Vikanis whose terms
will expire at the annual meeting of stockholders in 2000.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and controlling stockholders to file initial
reports of ownership and reports of changes of ownership of the Company's Common
Stock with the Securities and Exchange Commission and the Company. To the
Company's knowledge, all reports required to be so filed were filed in
accordance with the provisions of said Section 16(a).
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<PAGE> 41
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company to its Chief Executive Officer and to each of the four most highly
compensated executive officers for services rendered during fiscal years ended
March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS OPTIONS COMPENSATION (1)
- ----------------------------- ---- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
David A. Heap............... 1998 $ 250,000 $ 201,897 151,554 $ 4,951
Chairman 1997 385,000 222,900 85,728 5,970
1996 385,000 280,676 75,666 8,636
Mark C. Layton.............. 1998 319,599 269,196 122,836 9,731
President, Chief 1997 299,013 222,900 69,832 8,458
Executive and Operating 1996 276,386 280,676 56,040 6,008
Officer
Christopher Yates........... 1998 248,454 88,835 84,742 6,088
Senior Vice President - 1997 232,200 73,557 41,120 5,004
Business Development 1996 215,000 92,623 40,276 2,430
Steven Graham............... 1998 189,491 88,835 60,000 37,829
Senior Vice President - 1997 78,268 32,439 50,000 5,610
Information 1996 -- -- -- --
Technologies and Chief
Information Officer
James R. Powell............. 1998 175,037 88,835 76,116 3,015
Senior Vice President - 1997 163,652 73,557 42,660 3,715
Sales and Marketing 1996 150,359 70,169 28,008 3,707
</TABLE>
- --------------------
(1) Represents compensation in respect of one or more
of the following: personal use of Company automobiles; life insurance
premiums paid by the Company for the benefit of the name executive
officer; tax return preparation services paid by the Company; personal
travel expenses; and relocation costs.
The following table sets forth information with respect to grants of
stock options during the year ended March 31, 1998 to the name executive
officers reflected in the Summary Compensation Table:
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2) (3)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------------
NAME GRANTED YEAR SHARE (3) DATE (1) (3) 5% 10%
- ----------------------- ---------- ---------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
David A. Heap.......... 151,554 11.3% $ 12.50 4-17-07 $ 1,191,394 $ 3,019,226
Mark C. Layton......... 122,836 9.2% 12.50 4-17-07 965,636 2,447,112
Christopher Yates...... 84,742 6.3% 12.50 4-17-07 666,172 1,688,212
Steven Graham.......... 60,000 4.5% 12.50 4-17-07 471,671 1,195,307
James R. Powell........ 76,116 5.7% 12.50 4-17-07 598,362 1,516,366
</TABLE>
- ------------------
(1) All of such options are subject to a three-year cumulative vesting schedule.
(2) These are hypothetical values using assumed annual rates of stock price
appreciation as prescribed by the rules of the Securities and Exchange
Commission.
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<PAGE> 42
(3) The fiscal year 1997 option grants were cancelled in April 1997 and
reissued at an exercise price per share of $12.50 (the fair market
value on the date of reissue) and have a ten year term. All such
options are subject to a three year cumulative vesting schedule and are
included in the option grants in the table above.
The following table sets forth information concerning the aggregate stock
option exercises during the fiscal year ended March 31, 1998 and stock option
values as of the end of fiscal year 1998 for unexercised stock options held by
each of the named executive officers:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END (1) (3)
ON VALUE --------------------------- -----------------------------
NAME EXERCISE RECEIVED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------- --------- ----------- ------------- ----------- -------------
(2)
<S> <C> <C> <C> <C> <C> <C>
David A. Heap.......... -- $ -- 37,833 189,387 $ 553,308 $ 2,353,011
Mark C. Layton......... 91,532 987,401 19,614 150,856 286,855 1,868,470
Christopher Yates...... 121,600 1,814,154 20,138 104,880 294,518 1,300,830
Steven Graham.......... -- -- -- 60,000 -- 712,500
James R. Powell........ 21,856 275,947 -- 90,120 -- 1,108,686
</TABLE>
- ------------------
(1) Calculated by determining the difference between $24 3/8 (the last sale
price of the Common Stock on March 31, 1998 as reported by the Nasdaq
National Market) and the exercise price of the shares of Common Stock
underlying the options.
(2) Calculated by determining the difference between the last sale price of
the Common Stock on the date of exercise as reported by the Nasdaq
National Market and the exercise price.
(3) See footnote 3 above.
COMPENSATION OF DIRECTORS
Each non-employee director receives an annual director's fee of $20,000 for
each year in which he or she serves as a director. Non-employee directors do not
receive additional Board or Committee meeting fees. The Company has also adopted
a Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee
Director Plan") pursuant to which each non-employee director (i) may elect to
receive payment of the director's fees in shares of Common Stock in lieu of
cash, and (ii) is entitled to receive certain grants of options in accordance
with the formula, and subject to the conditions precedent, set forth therein.
The Non-Employee Director Plan is a formula grant plan pursuant to which
each non-employee director receives options to purchase shares of Common Stock
as of the date of each annual meeting of stockholders. Under the terms of the
Non-Employee Director Plan, during fiscal year 1998, each of the Company's
non-employee directors received options to purchase 2,480 share of Common Stock
at an exercise price of $22 7/16 (the fair market value on the date of grant) as
of the date of the 1998 Annual Meeting. The number of options to be issued under
the Non-Employee Director Plan will increase each year based on the percentage
increase, if any, in the Company's earnings before taxes ("EBT") for such fiscal
year over the Company's EBT for the immediately preceding fiscal year. No
options will be issued, however, under the Non-Employee Director Plan with
respect to any fiscal year in which the company's EBT does not equal or exceed
the Company's projected EBT for such year, nor will any options be issued to any
non-employee director who does not attend at lease 75% of all Board (and
committee) meetings held during such fiscal year.
All options issued under the Non-Employee Director Plan are non-qualified
options for federal income tax purposes and have an exercise price equal to the
fair market value of a share of common stock as of the date of the annual
meeting upon which such option is granted. All options are subject to a three
year cumulative vesting schedule.
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<PAGE> 43
Directors who are employees of the Company or any of its subsidiaries do
not receive additional compensation for service on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Company's Board of
Directors are Timothy M. Murray and Edgar D. Jannotta, Jr. who are non-employee
directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of May 9, 1998, certain information
regarding the beneficial ownership of the Common Stock by (i) each person who is
known to the Company to beneficially own more than 5% of the Common Stock, (ii)
each of the Directors and executive officers of the Company individually, (iii)
the Directors and executive officers of the Company as a group and (iv) the
Selling Stockholder. The information contained in this table reflects
"beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Unless otherwise indicated, the
stockholders identified in this table have sole voting and investment power with
respect to the shares owned of record by them.
<TABLE>
<CAPTION>
NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT(1)
------------------------------------- --------- -------
<S> <C> <C> <C>
David A. Heap(2).......................... 1,224,997 7.6%
500 North Central Expressway
Plano, Texas 75074
Royal Bank of Canada Trust Company
(Jersey) Limited and Kenneth Edward
Rayner, Trustees, of the David Heap
Life Interest Settlement (No.
10)(3).................................. 1,169,346 7.3%
19-21 Broad Street
St. Helier, Jersey, Channel Islands
Robert Fleming Inc.(4).................... 1,053,910 6.6%
1285 Avenue of the Americas
New York, New York 10019
Amvescap Plc(5)........................... 915,600 5.7%
11 Devonshire Square
London, England
Mark C. Layton(6)......................... 253,234 *
Christopher Yates(7)...................... 52,987 *
Harvey H. Achatz(8)....................... 59,484 *
James R. Powell(9)........................ 14,004 *
Steven Graham(10)......................... 9,000 *
Thomas J. Madden(11)...................... 60,634 *
Edgar D. Jannotta, Jr.(12)................ 39,179 *
Timothy M. Murray(13)..................... 69,679 *
Peter P.J. Vikanis(14).................... 2,125 *
Suzanne Garrett(15)....................... 12,186 *
Peter D. Wharf(16)........................ 20,421 *
All directors and executive officers
as a group (11 persons)(17)............. 1,817,930 11.3%
</TABLE>
- ----------
* Represents less than 1%
(1) This table is based on 16,025,204 shares of Common Stock outstanding
on May 9, 1998.
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<PAGE> 44
(2) Includes outstanding options to purchase 98,399 shares of Common
Stock, which are fully vested and exercisable. Does not include (i)
1,800 shares held by Mr. Heap's spouse as custodian for minor children
as to which beneficial ownership is disclaimed, (ii) options to
purchase 128,821 shares of Common Stock which are not vested or
exercisable and (iii) 1,169,346 shares of Common Stock held of record
by the trust set forth above (the "Heap Trust"). Although Mr. Heap and
members of his family are the primary beneficiaries of the Heap Trust,
neither Mr. Heap nor such beneficiaries have voting or investment
power with respect to such shares. Of the shares owned of record by
Mr. Heap, 222,099 are pledged to a financial institution to secure
indebtedness owing by Mr. Heap to such institution.
(3) Shares are held of record by a Trust established by Mr. Heap for which
he and members of his family are the primary beneficiaries, although
neither Mr. Heap nor such beneficiaries may exercise voting or
investment power with respect to such shares.
(4) Based upon a Schedule 13G dated February 19, 1998 filed by Robert
Fleming Inc. reporting beneficial ownership and shared voting and
dispositive power as of December 31, 1997.
(5) Based upon a Schedule 13G dated February 9, 1998 filed by Amvescap
Plc, as parent holding company of Avz, Inc., AIM Management Group,
Inc., Amvescap Group Services Inc., Invesco, Inc., and Invesco North
American Holdings Inc., reporting beneficial ownership and shared
voting and dispositive power as of December 31, 1997.
(6) Includes outstanding options to purchase 66,060 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 104,410 shares of Common Stock, which
are not vested or exercisable.
(7) Includes outstanding options to purchase 52,987 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 72,031 shares of Common Stock, which
are not vested or exercisable.
(8) Includes outstanding options to purchase 59,484 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 6,374 shares of Common Stock, which
are not vested or exercisable.
(9) Includes outstanding options to purchase 14,004 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 64,699 shares of Common Stock, which
are not vested or exercisable.
(10) Includes outstanding options to purchase 9,000 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 51,000 shares of Common Stock, which are not
vested or exercisable.
(11) Includes outstanding options to purchase 39,184 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 51,298 shares of Common Stock, which
are not vested or exercisable.
(12) Includes outstanding options to purchase 300 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 4,180 shares of Common Stock, which are not vested
or exercisable.
(13) Includes outstanding options to purchase 300 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 4,180 shares of Common Stock, which are not vested
or exercisable.
-44-
<PAGE> 45
(14) Includes outstanding options to purchase 300 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 4,180 shares of Common Stock, which are not vested
or exercisable.
(15) Includes outstanding options to purchase 12,186 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 29,432 shares of Common Stock, which
are not vested or exercisable.
(16) Includes outstanding options to purchase 20,421 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 41,091 shares of Common Stock, which
are not vested or exercisable.
(17) Includes outstanding options to purchase 372,625 shares of Common
Stock, which are fully vested and exercisable. Does not include (i)
outstanding options to purchase 561,696 shares of Common Stock which
are not vested or exercisable or (ii) shares of Common Stock held by
the Heap Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
During fiscal year 1998, the Company made loans in varying amounts to
Messrs. Layton, Powell and Wharf in order to provide such persons with the funds
necessary to satisfy various personal obligations and for other purposes. The
largest amount owing by such persons during fiscal year 1998 was $458,684,
$186,440 and $61,956, respectively. Mr. Wharf repaid in full his indebtedness to
the Company prior to March 31, 1998. As of March 31, 1998, Messrs. Layton and
Powell were indebted to the Company in the amount $458,684 and $186,440,
respectively. The indebtedness owing by such persons accrues interest at the
rate charged to the Company for working capital borrowings. Messrs. Layton's and
Powell's indebtedness is due and payable in one installment on March 31, 1999.
David Heap, the Company's Chairman of the Board, owned approximately a
one-third equity interest in a small computer supplies dealer, Business Software
Centers, Inc. ("BSC"). In December 1991, Mr. Heap agreed to remit to the Company
any dividends, distributions or other amounts which he may receive in respect of
such interest. Mr. Heap has not received any dividends, distributions or other
amounts in respect of his equity interest. During fiscal year 1998, Mr. Heap
sold all of his remaining equity interest and no longer retains an equity
interest in BSC.
During fiscal year 1998, the Company's sales to BSC during the period of
the year that Mr. Heap owned an equity interest in BSC aggregated approximately
$537,000 and contributed less than 1% of the Company's total sales in such
fiscal year. Such sales were made in accordance with the Company's usual terms,
except that BSC received extended payment terms in return for which BSC agreed,
among other things, to provide the Company with quarterly financial information.
In April 1997, the Company entered into a one-year aircraft lease with a
company owned by Mr. Heap under which the Company, on a non-exclusive basis,
leases an aircraft from such company. The lease was terminable by either party
at any time. During fiscal year 1998, the Company incurred approximately
$342,000 in lease payments and reimbursement of certain operating costs relating
to this aircraft lease. The aircraft lease was terminated on March 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Income for the Fiscal Years Ended March 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statements Schedules
Report of Independent Public 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.
3. Exhibits
Exhibit
No. Description of Exhibit
3.1(7) - Amended and Restated Certificate of Incorporation of Daisytek
International Corporation.
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<PAGE> 46
3.1.1(7) - Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Daisytek International Corporation.
3.2(1) - Amended and Restated By-laws of Daisytek International Corporation.
10.1(2) - Employee Stock Option Plan of Daisytek International Corporation.
10.2(2) - 1994 Stock Option Plan of Daisytek International Corporation.
10.3(7) - Non-Employee Director Stock Option and Retainer Plan.
10.4(10) - 1997 Employee Stock Option Plan of Daisytek International
Corporation.
10.5(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as
Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, Texas Commerce Bank National
Association, as Agent, and Texas Commerce Bank National Association
and State Street bank and Trust Company, as Lenders.
10.5.1(8)- First Amendment to Credit Agreement dated April 15, 1996 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and Texas
Commerce Bank National Association and State Street Bank and Trust
Company, as Lenders.
10.5.2(9)- Second Amendment to Credit Agreement dated November 14, 1996 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and Texas
Commerce Bank National Association, NBD Bank, and State Street bank
and Trust Company, as Lenders.
10.6(2) - Industrial Lease Agreement between Industrial Developments
International, Inc. and Daisytek, Incorporated, as amended.
10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings
Association and Daisytek, Incorporated, as amended.
10.8(2) - Lease dated October 28, 1994 between Robco Enterprises, Ltd., Yen
Hoy Enterprises Ltd., George Yen and Daisytek (Canada) Inc.
10.9(4) - Lease dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow
(6) Inc. and Daisytek (Canada) Inc.
10.10(2) - Lease Agreement dated December 30, 1998 between Daisytek,
Incorporated and State Street Bank and Trust Company.
10.11(2) - Term Lease master Agreement dated November 29, 1990 between IBM
Credit Corporation and Daisytek, Incorporated.
10.12(10)- U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard
Company and Daisytek, Incorporated, with Addendum.
10.13(2) - Lease dated July 4, 1994 between Fraccionadora Industrial Del Norte,
S.A. De C.V. and Daisytek De Mexico, S.A. De C.V.
10.14(2) - Marketing Advantage Program Enrollment Agreement dated November 11,
1994 between Federal Express Corporation and Daisytek, Incorporated.
10.15(5) - Lease Agreement dated May 22, 1995 between New World Partners Joint
Number Three and Daisytek and Daisytek Latin America, Inc.
10.16(10)- Forward Exchange Contact dated May 22, 1997 between Daisytek and
Texas Commerce Bank National Association.
10.17(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between
Daisytek International Corporation and David A. Heap.
10.18(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between
Daisytek International Corporation and Mark C. Layton.
10.19(6) - Second Amendment to Industrial Lease Agreement between New York Life
Insurance Company and Daisytek, Incorporated.
10.20(6) - Agreement dated December 19, 1995 between Diesel Recon Company and
Daisytek, Incorporated.
10.21(6) - Sixth Modification to Lease Agreement dated November 30, 1995 between
Atrium Association, L.P. and Daisytek, Incorporated.
10.22(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and David A.Heap.
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<PAGE> 47
10.23(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Steve Graham.
10.24(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Peter Vikanis.
10.25(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Timothy Murray.
10.26(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Edgar D. Jannotta, Jr.
10.27(11)- Third Amendment to Credit Agreement dated June 30, 1997 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Texas Commerce Bank National Association, as Lenders.
10.28(12)- Lease Amending Agreement dated September 5, 1997 to Lease Agreement
dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6)
Inc. and Daisytek (Canada) Inc.
10.29(12)- Lease Agreement dated October 21, 1997 between G.T.W. International
PTE LTD and Daisytek Asia PTE LTD.
10.30(12)- Committed Credit Facility Agreement dated October 22, 1997 between
Daisytek Australia PTY LTD, as Borrower, Daisytek International
Corporation and Daisytek, Inc., as Guarantors, and The First
National Bank of Chicago, as Lender.
10.31(12)- Fourth Amendment to Credit Agreement dated December 11, 1997 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Texas Commerce Bank National Association, as Lenders.
10.32(12)- Revolving Credit and Foreign Exchange Facility Agreement dated
December 31, 1997 between Daisytek (Canada) Inc., as Borrower,
Daisytek, Inc., as Guarantor, and First Chicago NBD Bank, Canada,
as Lender.
10.33(*) - Stock Purchase Agreement by and among the Stockholders of
Steadi-Systems, Ltd., Daisytek, Incorporated, and Daisytek
International Corporation dated January 5, 1998.
10.34(*) - Fifth Amendment to Credit Agreement dated February 13, 1998 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Chase Bank of Texas, N.A., as Lenders.
11(*) - Statement re: computation of per share earnings.
21(*) - Subsidiaries of the Registrant.
23(*) - Consents.
27(*) - Financial Data Schedule.
- -----------
(*) Filed herewith.
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(2) Incorporated by reference from Registration Statement on Form S-1 No.
33-86926.
(3) Incorporated by reference from Current Report on Form 8-K dated May 22,
1995.
(4) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1995 dated June 23, 1995.
(5) Incorporated by reference from Current Report on Form 8-K dated
August 22, 1995.
(6) Incorporated by reference from Registration Statement on Form S-1 No.
33-99796.
(7) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1996 dated June 26, 1996.
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1996 dated August 13, 1996.
-47-
<PAGE> 48
(9) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1996 dated February 13, 1997.
(10) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1997 dated June 27, 1997.
(11) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1997 dated August 14, 1997.
(12) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1997 dated February 17, 1998.
(b) Reports on Form 8-K
1. On January 28, 1998, the Company filed a Current Report on
Form 8-K to report under Item 5 the Company's press
release dated January 28, 1998 announcing third quarter
results.
2. On February 9, 1998, the Company filed a Current Report on
Form 8-K to report under Item 5 the Company's press
release dated February 9, 1998 announcing a two for one
stock split.
3. On March 26, 1996, the Company filed a Current Report on
Form 8-K to report under Item 5 the Company's Underwriting
Agreement dated March 26, 1998 for the sale of 3,300,000
shares of Common Stock.
-48-
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Daisytek International
Corporation (a Delaware corporation) and subsidiaries included in this Form 10-K
and have issued our report thereon dated May 5, 1998. 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 Form 10-K is the responsibility of the
Company's management and is presented for the 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 5, 1998
-49-
<PAGE> 50
SCHEDULE II
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 1998
(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>
Fiscal Year Ended March 31, 1996:
Allowance for doubtful accounts........... $ 1,535 999 -- (776) $ 1,758
Income tax valuation allowance............ $ 378 8 -- -- $ 386
Fiscal Year Ended March 31, 1997:
Allowance for doubtful accounts........... $ 1,758 1,594 -- (992) $ 2,360
Income tax valuation allowance............ $ 386 -- -- (123) $ 263
Fiscal Year Ended March 31, 1998:
Allowance for doubtful accounts........... $ 2,360 1,936 -- (1,641) $ 2,655
Income tax valuation allowance............ $ 263 48 -- -- $ 311
</TABLE>
-50-
<PAGE> 51
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/ Thomas J. Madden
--------------------------------------
Thomas J. Madden, Chief Financial Officer
and Vice President - Finance
May 29, 1998
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
--------- ----- ----
<S> <C> <C>
/s/ David A. Heap Chairman of the Board May 29, 1998
-------------------------
David A. Heap
/s/ Mark C. Layton Chief Executive and Operating May 29, 1998
------------------------- Officer, President and Director
Mark C. Layton (principal executive officer)
/s/ Thomas J. Madden Chief Financial Officer, Vice May 29, 1998
-------------------------
Thomas J. Madden President - Finance
(principal financial and
accounting officer)
/s/ Christopher Yates Director May 29, 1998
-------------------------
Christopher Yates
/s/ James R. Powell Director May 29, 1998
-------------------------
James R. Powell
/s/ Timothy M. Murray Director May 29, 1998
-------------------------
Timothy M. Murray
/s/ Edgar D. Jannotta, Jr. Director May 29, 1998
-------------------------
Edgar D. Jannotta, Jr.
/s/ Peter P. J. Vikanis Director May 29, 1998
-------------------------
Peter P. J. Vikanis
</TABLE>
-51-
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<S> <C>
3.1(7) - Amended and Restated Certificate of Incorporation of Daisytek
International Corporation.
3.1.1(7) - Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Daisytek International Corporation.
3.2(1) - Amended and Restated By-laws of Daisytek International Corporation.
10.1(2) - Employee Stock Option Plan of Daisytek International Corporation.
10.2(2) - 1994 Stock Option Plan of Daisytek International Corporation.
10.3(7) - Non-Employee Director Stock Option and Retainer Plan.
10.4(10) - 1997 Employee Stock Option Plan of Daisytek International
Corporation.
10.5(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as
Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, Texas Commerce Bank National
Association, as Agent, and Texas Commerce Bank National Association
and State Street bank and Trust Company, as Lenders.
10.5.1(8)- First Amendment to Credit Agreement dated April 15, 1996 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and Texas
Commerce Bank National Association and State Street Bank and Trust
Company, as Lenders.
10.5.2(9)- Second Amendment to Credit Agreement dated November 14, 1996 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and Texas
Commerce Bank National Association, NBD Bank, and State Street bank
and Trust Company, as Lenders.
10.6(2) - Industrial Lease Agreement between Industrial Developments
International, Inc. and Daisytek, Incorporated, as amended.
10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings
Association and Daisytek, Incorporated, as amended.
10.8(2) - Lease dated October 28, 1994 between Robco Enterprises, Ltd., Yen
Hoy Enterprises Ltd., George Yen and Daisytek (Canada) Inc.
10.9(4) - Lease dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow
(6) Inc. and Daisytek (Canada) Inc.
10.10(2) - Lease Agreement dated December 30, 1998 between Daisytek,
Incorporated and State Street Bank and Trust Company.
10.11(2) - Term Lease master Agreement dated November 29, 1990 between IBM
Credit Corporation and Daisytek, Incorporated.
10.12(10)- U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard
Company and Daisytek, Incorporated, with Addendum.
10.13(2) - Lease dated July 4, 1994 between Fraccionadora Industrial Del Norte,
S.A. De C.V. and Daisytek De Mexico, S.A. De C.V.
10.14(2) - Marketing Advantage Program Enrollment Agreement dated November 11,
1994 between Federal Express Corporation and Daisytek, Incorporated.
10.15(5) - Lease Agreement dated May 22, 1995 between New World Partners Joint
Number Three and Daisytek and Daisytek Latin America, Inc.
10.16(10)- Forward Exchange Contact dated May 22, 1997 between Daisytek and
Texas Commerce Bank National Association.
10.17(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between
Daisytek International Corporation and David A. Heap.
10.18(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between
Daisytek International Corporation and Mark C. Layton.
10.19(6) - Second Amendment to Industrial Lease Agreement between New York Life
Insurance Company and Daisytek, Incorporated.
10.20(6) - Agreement dated December 19, 1995 between Diesel Recon Company and
Daisytek, Incorporated.
10.21(6) - Sixth Modification to Lease Agreement dated November 30, 1995 between
Atrium Association, L.P. and Daisytek, Incorporated.
10.22(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and David A.Heap.
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
<S> <C>
10.23(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Steve Graham.
10.24(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Peter Vikanis.
10.25(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Timothy Murray.
10.26(10)- Option to Purchase Shares of Common Stock dated April 17, 1997
between Daisytek International Corporation and Edgar D. Jannotta, Jr.
10.27(11)- Third Amendment to Credit Agreement dated June 30, 1997 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Texas Commerce Bank National Association, as Lenders.
10.28(12)- Lease Amending Agreement dated September 5, 1997 to Lease Agreement
dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6)
Inc. and Daisytek (Canada) Inc.
10.29(12)- Lease Agreement dated October 21, 1997 between G.T.W. International
PTE LTD and Daisytek Asia PTE LTD.
10.30(12)- Committed Credit Facility Agreement dated October 22, 1997 between
Daisytek Australia PTY LTD, as Borrower, Daisytek International
Corporation and Daisytek, Inc., as Guarantors, and The First
National Bank of Chicago, as Lender.
10.31(12)- Fourth Amendment to Credit Agreement dated December 11, 1997 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Texas Commerce Bank National Association, as Lenders.
10.32(12)- Revolving Credit and Foreign Exchange Facility Agreement dated
December 31, 1997 between Daisytek (Canada) Inc., as Borrower,
Daisytek, Inc., as Guarantor, and First Chicago NBD Bank, Canada,
as Lender.
10.33(*) - Stock Purchase Agreement by and among the Stockholders of
Steadi-Systems, Ltd., Daisytek, Incorporated and Daisytek
International Corporation dated January 5, 1998.
10.34(*) - Fifth Amendment to Credit Agreement dated February 13, 1998 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of Chicago,
and Chase Bank of Texas, N.A., as Lenders.
11(*) - Statement re computation of per share earnings.
21(*) - Subsidiaries of the Registrant.
23(*) - Consents.
27(*) - Financial Data Schedule.
</TABLE>
- -----------
(*) Filed herewith
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(2) Incorporated by reference from Registration Statement on Form S-1 No.
33-86926.
(3) Incorporated by reference from Current Report on Form 8-K dated May 22,
1995.
(4) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1995 dated June 23, 1995.
(5) Incorporated by reference from Current Report on Form 8-K dated
August 22, 1995.
(6) Incorporated by reference from Registration Statement on Form S-1 No.
33-99796.
(7) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1996 dated June 26, 1996.
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1996 dated August 13, 1996.
(9) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1996 dated February 13, 1997.
(10) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1997 dated June 27, 1997.
(11) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1997 dated August 14, 1997.
(12) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1997 dated February 17, 1998.
<PAGE> 1
EXHIBIT 10.33
STOCK PURCHASE AGREEMENT
by and among
THE STOCKHOLDERS OF
STEADI-SYSTEMS, LTD.,
DAISYTEK, INCORPORATED
and
DAISYTEK INTERNATIONAL CORPORATION
January 5, 1998
<PAGE> 2
STOCK PURCHASE AGREEMENT dated as of January 5, 1998 among RICHARD D.
SCHOENBERG, ROBERT SCHOENBERG and STEVEN KLEIN (each, a "Seller" and
collectively, the "Sellers"), DAISYTEK, INCORPORATED, a Delaware corporation
(the "Purchaser") and DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation
("Parent").
WHEREAS, the Sellers are the record and beneficial owner of all of the
issued and outstanding shares of Common Stock, no par value (the "Shares"), of
Steadi-Systems, Ltd., a California corporation (the "Company"); and
WHEREAS, the Company is a distributor of media products and video
hardware to the filmed entertainment and multimedia industries (the "Business");
and
WHEREAS, the Sellers desire to sell to the Purchaser, and the Purchaser
desires to purchase from the Sellers, all of the Shares, subject to and in
accordance with the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, Parent, the Purchaser and the
Sellers hereby agree as follows:
ARTICLE I
DEFINITIONS
1. CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings:
"Abrams Agreement" means the agreement between the Company and Larry
Abrams dated the date hereof pursuant to which the Company has agreed, subject
to the conditions set forth therein, to pay to Larry Abrams the principal amount
of $223,000, of which $163,000 is payable on the Closing Date and $60,000 is
payable on May 15, 1998.
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation, in each case, by or before any Governmental
Authority.
"Additional Agreements" means the Employment Agreements and the
Options.
"Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
"Audited Financial Statements" has the meaning set forth in Section
4.7.
<PAGE> 3
"Bank Debt" means the Indebtedness owing by the Company to Congress
Financial Corporation.
"Business Day" means any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by law to be closed in The City of
New York.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, and the rules and regulations promulgated
thereunder.
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System.
"Closing" and "Closing Date" have the meanings specified in Section
2.3.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Stock" means the shares of Common Stock, no par value, of the
Company.
"Control" (including the terms "controlled by" and "under common
control with"), with respect to the relationship between or among two or more
Persons, means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, as trustee or
executor or by contract, including, without limitation, the ownership, directly
or indirectly, of securities having the power to elect a majority of the board
of directors or similar body governing the affairs of such Person.
"Cost of Sales" means, for any fiscal year, the sum of (a) the
aggregate of the Steadi Group's equipment purchases, film stock purchases, video
tape purchases, audio tape purchases, data media purchases, repair purchases,
digital tech purchases and miscellaneous purchases and freight cost less
purchase returns and allowances, rebates and discounts plus or minus net
Inventory adjustments and giving effect to the establishment of appropriate
reserves in respect of Inventory obsolescence, in each case, determined in a
manner consistent with the Audited Financial Statements and (b) the aggregate
cost of sales incurred by Parent or any Affiliate thereof in respect of New
Business for such fiscal year, determined in a manner consistent with Parent's
financial statements.
"D&T" means Deloitte & Touche, L.L.P.
"Employment Agreements" means the Employment Agreements to be executed
by the Company and each of Richard D. Schoenberg and Robert Schoenberg, as of
the Closing Date, substantially in the form of Exhibit A hereto.
"Encumbrance" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential
-2-
<PAGE> 4
arrangement, or restriction of any kind, including, without limitation, any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.
"Environment" means surface waters, groundwaters, soil, subsurface
strata and ambient air.
"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demand letters, claims, liens, notices of noncompliance
or violation, investigations, proceedings, consent orders or consent agreements
relating in any way to any Environmental Law or any Environmental Permit
(hereinafter "Claims"), including without limitation (a) any and all Claims by
Governmental Authorities for enforcement, cleanup, removal, response, remedial
or other actions or damages pursuant to any applicable Environmental Law and (b)
any and all Claims by any Person seeking damages, contribution, indemnification,
cost recovery, compensation or injunctive relief resulting from Hazardous
Materials or arising from alleged injury or threat of injury to health, safety
or the environment.
"Environmental Laws" means any federal, state or local law or any
foreign law, including any statute, rule, regulation, ordinance, code or rule of
common law, now or hereafter in effect and in each case as amended, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials, including, without
limitation, the CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C.
ss.ss. 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
ss.ss. 6901 et seq.; the Clean Water Act, 33 U.S.C. ss.ss. 1251 et seq.; the
Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq.; the Clean Air Act,
42 U.S.C. ss.ss. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. ss.ss.
300f et seq.; the Atomic Energy Act, 42 U.S.C. ss.ss. 2011 et seq.; and the
Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq.
"Environmental Permits" means all permits, written approvals, U.S.
Environmental Protection Agency or state generator numbers, licenses and other
authorizations from applicable Governmental Authorities required under any
applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"GAAP" means generally accepted accounting principles and practices in
effect from time to time applied consistently throughout the periods involved.
"Governmental Authority" means any United States federal, state, local,
possession or foreign governmental, regulatory or administrative authority,
agency or commission, or any political subdivision thereof, or any court,
tribunal or arbitral body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
-3-
<PAGE> 5
"Gross Profit" means, for any fiscal year, Net Sales minus Cost of
Sales for such fiscal year, as determined in a manner consistent with the
Audited Financial Statements and, with respect to New Business, Parent's
financial statements.
"Hazardous Materials" means (a) petroleum and petroleum fuels,
lubricants and cleaning agents, radioactive materials, friable asbestos material
as defined under 40 C.F.R. 61.141, urea formaldehyde foam insulation,
transformers or other equipment that contain polychlorinated biphenyls in
concentrations of 50 ppm, and radon gas; (b) any other chemicals, materials or
substances defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials" or "extremely hazardous wastes"; and
(c) any other chemical, material or substance exposure to which is regulated
pursuant to any applicable Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Immediate Family" means any spouse, brother, sister, parent or child
of any specified individual.
"Indebtedness" means, with respect to any Person, (a) all indebtedness
of such Person, whether or not contingent, for borrowed money, (b) all
obligations of such Person for the deferred purchase price of property or
services, (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (e) all obligations of such Person as
lessee under leases that have been or should be, in accordance with GAAP,
recorded as capital leases, (f) all obligations, contingent or otherwise, of
such Person under acceptance, letter of credit or similar facilities, (g) all
Indebtedness of others referred to in clauses (a) through (f) above guaranteed
directly or indirectly in any manner by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (i) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Indebtedness or to assure the holder
of such Indebtedness against loss, (iii) to supply funds to or in any other
manner invest in the debtor (including any agreement to pay for property or
services irrespective of whether such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss, and (h) all
Indebtedness referred to in clauses (a) through (f) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Encumbrance on property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
"Intellectual Property" means all trademarks, patents, copyrights,
tradenames, service marks, logos and all registrations and applications for
registration thereof and all renewals or reissues thereof.
-4-
<PAGE> 6
"Inventories" and "Inventory" mean all inventory, merchandise, goods,
raw materials, finished goods, packaging and supplies, maintained, held
(including, without limitation, on consignment) or stored by or for any member
of the Steadi Group, and held or offered for sale in the ordinary course of the
Business, and any prepaid deposits for any of the same, but excluding any fixed
assets (as such term is used in the Audited Financial Statements) held or
offered for lease or rent.
"Knowledge" (including the terms "to the knowledge of" or "to the best
knowledge of") means, with respect to the Sellers, the actual personal knowledge
of one or more of the Sellers at the time when the applicable statement is made
as evidenced by one or more written statements or other documentary evidence.
"Leased Real Property" means the real property leased by any member of
the Steadi Group, as tenant, together with, to the extent leased by such member,
all buildings and other structures, facilities or improvements currently or
hereafter located thereon, all fixtures attached or appurtenant thereto, and all
easements, licenses, rights and appurtenances relating to the foregoing.
"Liabilities" means any and all debts, liabilities and obligations,
whether accrued or fixed, absolute or contingent, matured or unmatured or
determined or determinable, including, without limitation, those arising under
any law (including, without limitation, any Environmental Law), rule,
regulation, Action or Governmental Order and those arising under any contract,
agreement, arrangement, commitment or undertaking, including all indemnification
obligations under any charter document, any indemnity agreement or as permitted
under applicable law.
"Material Adverse Effect" means any circumstance, change in, or effect
on, the Business that, individually or in the aggregate with any other
circumstances, changes in, or effects on, the Business, taken as a whole: (a)
is, or would be, materially adverse to the operations, assets or liabilities
(including, without limitation, contingent liabilities), employee relationships,
customer or supplier relationships, prospects, results of operations or the
condition (financial or otherwise) of the Business or (b) would materially
adversely affect the ability of the Purchaser to operate or conduct the Business
in the manner in which it is currently operated or conducted by the Steadi
Group.
"Material Contracts" has the meaning specified in Section 4.8.
"Multiplier" means, for the 12 month period ending December 31, 1998
(the "1998 Multiplier") or the 12 month period ending December 31, 1999 (the
"1999 Multiplier"), the percentage (not to exceed 100%) set forth in the
intersecting cell of the applicable Net Revenue column and Gross Profit column
for such fiscal year as set forth on Exhibit B attached hereto.
"New Business" means the sale of goods or services by Parent or any
Affiliate thereof to any third party and which meets the following tests: (i)
such third party was introduced to Parent or any Affiliate thereof by a Seller,
(ii) such sale of goods or services would not have occurred but
-5-
<PAGE> 7
for the actions or steps taken by a Seller, (iii) the Seller shall have
designated such sale as "New Business" hereunder prior to such introduction and
prior to any such sale and (iv) "New Business" shall not include the wholesale
sale or distribution of consumable computer and office supplies and shall not
include sales of goods or services which are sold as part of the Business,
regardless of whether such sales are by the Steadi Group or by Parent or an
Affiliate of Parent (which shall be deemed sales of the Steadi Group).
"Net Sales" means, for any fiscal year, the sum of (a) the aggregate of
equipment sales, film stock sales, video tape sales, audio sales, data media
sales, repair income, equipment rental fees, digital tech sales, equipment
service fees, management and administration fees, processing fees, services
charges, freight revenue and miscellaneous income received by the Steadi Group
for such fiscal year, in each case, determined in a manner consistent with the
Audited Financial Statements, plus (b) the aggregate net revenue received by
Parent or any Affiliate thereof in respect of New Business for such fiscal year,
determined in a manner consistent with Parent's financial statements.
"Options" means options (which are designated as "incentive stock
options" under the Code) to purchase 15,000 and 12,500 shares of Parent Common
Stock, respectively, to be issued by Parent under and in accordance with the
terms of the Daisytek International Corporation 1997 Stock Option Plan, to each
of Richard Schoenberg and Robert Schoenberg, respectively, on the Closing Date.
"Parent Common Stock" means the shares of Common Stock, $.01 par value,
of Parent.
"Permits" has the meaning specified in Section 4.17.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
"Plan" has the meaning specified in Section 4.24.
"Purchase Price" has the meaning specified in Section 2.2.
"Regulations" means the Treasury Regulations (including Temporary
Regulations) promulgated by the United States Department of Treasury with
respect to the Code or other federal tax statutes.
"Remedial Action" means all action reasonably necessary and required
under any applicable Environmental Law or Environmental Permit and all action
required by a Governmental Authority to (i) clean up, remove, treat or handle in
any other way Hazardous Materials in the Environment; (ii) prevent the Release
of Hazardous Materials so that they do not migrate, endanger or threaten to
endanger public health or the Environment; or (iii) perform remedial
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investigations, feasibility studies, corrective actions, closures, and
postremedial or postclosure studies, investigations, operations, maintenance and
monitoring on, about or in any Real Property.
"Sands Note" means the Buyout Note dated November 2, 1995 executed and
delivered by the Company to William Sands in the original principal amount of
$3,000,000.
"Sellers' Representative" means Richard D. Schoenberg, or, in the event
of his death or incapacity, such other person as may have been designated by
him.
"Shareholder Note" means the promissory note dated December 31, 1996
payable by Richard Schoenberg to the Company in the original principal amount of
$442,121.
"Shares" means the shares of Company Stock owned of record and
beneficially by the Sellers.
"Steadi Group" and the "members of the Steadi Group" mean the Company
and the Subsidiaries, jointly and severally.
"Subsidiaries" means the subsidiaries of the Company set forth on
Schedule 4.2, each of which is referred to as a "Subsidiary".
"Tax" or "Taxes" means any and all taxes, fees, levies, duties,
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any government or taxing authority, including,
without limitation: taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes;
license, registration and documentation fees; and customs' duties, tariffs, and
similar charges.
ARTICLE II
SALE AND PURCHASE OF SHARES
2.1 SALE AND PURCHASE OF SHARES. Upon the terms and subject to the
conditions contained in this Agreement, at the Closing, each Seller shall sell,
transfer and convey to the Purchaser all the Shares owned by such Seller, and
Parent shall cause the Purchaser to purchase and acquire, and the Purchaser
shall purchase and acquire from each Seller all the Shares owned by such Seller.
2.2. PURCHASE PRICE. The aggregate purchase price ("Purchase Price")
for the Shares shall be $7,638,000. The Purchase Price shall be allocated among
the Sellers in accordance with Schedule 2.2.
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2.4. CLOSING. Subject to the terms and conditions of this Agreement,
the purchase and sale of the Shares shall take place at a closing (the
"Closing") to be held at the offices of Spitzer & Feldman P.C., 405 Park Avenue,
New York, New York 10022 at 10:00 a.m., local time, on the date hereof (the
"Closing Date").
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 PAYMENT OF PURCHASE PRICE. Subject to the terms set forth herein,
the Purchase Price shall be payable in two installments. The first portion (the
"Closing Payment") shall be equal to $5,698,000 and the second portion (the
"Contingent Payment") shall be equal to $1,940,000.
3.2 CLOSING PAYMENT. The Closing Payment shall be payable at the
Closing by wire transfer to an account designated by the Sellers' Representative
and set forth on Exhibit C hereto.
3.3 ADDITIONAL PAYMENT. In the event that, pursuant to the terms of the
Abrams Agreement, the conditions precedent to the payment by the Company
thereunder of $60,000 on May 15, 1998 are not satisfied, the Purchaser shall pay
such amount to the Sellers in accordance with the allocation and payment and
delivery instructions set forth in Schedule 2.2 and Exhibit C.
3.4 CONTINGENT PAYMENT. The Contingent Payment shall be determined and
payable in accordance with the following:
(a) Not later than March 1, 1999, the Purchaser shall deliver to
the Sellers' Representative a detailed statement (the "Contingent Payment
Statement") of the Purchaser's chief financial officer setting forth (i) Net
Sales, Cost of Sales and Gross Profit in respect of the 12 month period ending
December 31, 1998 (including a detailed statement setting forth the items
included therein) and (ii) the amount (the "Purchaser's Contingent Payment
Amount") determined by multiplying the Contingent Payment by the 1998 Multiplier
determined by the Purchaser. The Sellers' Representative and his representatives
and agents shall have the right to review and inspect, and shall be afforded the
opportunity to examine and make copies of, all work papers and supporting
documentation reasonably requested in order to verify the accuracy of the
Contingent Payment Statement. The Purchaser and the Sellers' Representative
shall meet on a quarterly basis to review preliminary non-binding determinations
of Net Sales, Cost of Sales and Gross Profit (and each of the items included
therein) during the 1998 calendar year.
(b) The Sellers' Representative shall have the right to dispute
any amount set forth in the Contingent Payment Statement and the Purchaser's
Contingent Payment Amount, provided, however, the Sellers' Representative shall
notify (the "Sellers' Representative's Notice") the Purchaser in writing of the
nature and basis of such dispute within 60 days of the Purchaser's delivery of
the Contingent Payment Statement; provided, further, however, that such 60-day
period shall be reasonably extended in the event there is any delay by the
Purchaser in providing to the Sellers' Representative any of the information
(including all necessary details) reasonably requested by the Sellers'
Representative in connection with his review of the Contingent Payment Statement
and supporting documentation. The Purchaser and the Sellers' Representative
shall
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<PAGE> 10
attempt to resolve all disputes set forth in the Sellers' Representative's
Notice. In the event the difference between the Purchaser's Contingent Payment
Amount and the amount determined by the Sellers' Representative as the
Contingent Payment Amount does not exceed $100,000, then the Purchaser's
Contingent Payment Amount shall be increased by one-half of such difference (but
not to exceed $50,000) and such dispute shall be deemed conclusively determined
and binding upon the parties. If the difference between the Purchaser's
Contingent Payment Amount and the Sellers' Representative's Contingent Payment
Amount exceeds $100,000 and the Purchaser and the Sellers' Representative are
unable to resolve such dispute within 20 Business Days of the Purchaser's
receipt of the Sellers' Representative's Notice, such dispute shall be submitted
to D&T (or if such firm is unwilling or unable to serve, such other independent
nationally recognized accounting firm mutually acceptable to the Purchaser and
the Sellers' Representative) who shall, within 30 Business Days after such
submission, resolve such disputed items in accordance with the terms of this
Agreement, which resolution shall (absent manifest error) be final, binding and
conclusive on the parties hereto. All fees and expenses of D&T (or other
accounting firm as aforesaid) arising in connection with the resolution of
disputes hereunder shall be divided equally between the Sellers and the
Purchaser.
(c) Concurrently with the delivery of the Contingent Payment
Statement, the Purchaser shall deliver to the Sellers (in accordance with the
allocation and payment and delivery instructions set forth in Schedule 2.2 and
Exhibit C) the Purchaser's Contingent Payment Amount reflected therein.
(d) Upon the final resolution of all disputes as provided in the
preceding paragraph, the Purchaser shall deliver to the Sellers (in accordance
with the allocation and payment and delivery instructions set forth in Schedule
2.2 and Exhibit C) the excess, if any, of (i) the amount determined by
multiplying the Contingent Payment by the 1998 Multiplier, over (ii) the
Purchaser's Contingent Payment Amount previously paid.
(e) Notwithstanding the foregoing, the Contingent Payment shall
be immediately payable in full to all Sellers (in accordance with the allocation
and payment and delivery instructions set forth in Schedule 2.2 and Exhibit C)
in the event that either or both of the Employment Agreements shall be
terminated prior to the expiration of the Initial Term (as defined therein),
except that the foregoing shall not apply to any voluntary termination by
Richard or Robert Schoenberg thereunder.
3.5 CARRYOVER AMOUNT. If the First Contingent Payment Amount is less
than the Contingent Payment, such shortfall (the "Carryover Amount") shall be
determined and payable in accordance with the following:
(a) Not later than March 1, 2000, the Purchaser shall deliver to
the Sellers' Representative a detailed statement (the "Carryover Statement") of
the Purchaser's chief financial officer setting forth (i) Net Sales, Cost of
Sales and Gross Profit in respect of the 12 month period ending December 31,
1999 (including a detailed statement setting forth the items included therein)
and (ii) the amount determined by multiplying the Carryover Amount by the 1999
Multiplier. The Sellers' Representative and its representatives and agents shall
have the right to review and inspect, and shall be afforded the opportunity to
examine and make copies of all work papers and
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<PAGE> 11
supporting documentation reasonably requested in order to verify the accuracy of
the Carryover Statement. The Purchaser and the Sellers' Representative shall
meet on a quarterly basis to review preliminary non-binding determinations of
Net Sales, Cost of Sales and Gross Profit (and each of the items included
therein) during the 1999 calendar year.
(b) All of the terms and provisions of Sections 3.4(b), (c), (d)
and (e) above regarding payments, disputes, notices thereof, the resolution
process thereof and the costs and expenses associated therewith shall apply to
the Carryover Statement and the matters set forth therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Sellers hereby, jointly and severally, make the following
representations and warranties to the Purchaser and Parent (except that no
Seller shall be deemed to make any representation or warranty regarding any
other Seller):
4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
California with full corporate power and authority to own its properties and to
carry on the Business as now conducted. Schedule 4.1 sets forth the state of
incorporation of each Subsidiary, and each Subsidiary is a corporation, duly
organized, validly existing and in good standing under the laws of its state of
incorporation with full corporate power and authority to own its properties and
to carry on the Business as now conducted. The Company and each Subsidiary is
duly qualified or licensed and has all permits necessary to transact business,
and is in good standing as a foreign corporation, in each of the jurisdictions
set forth in Schedule 4.1, which are the only jurisdictions wherein the nature
of the business conducted by it or its ownership or lease of real property
requires it to be so qualified or licensed or to hold such permits.
4.2 CAPITALIZATION. The Sellers own all of the Shares which are the
only shares of Company Stock which are issued and outstanding. The Company is
not authorized to issue, and has not issued, any shares of capital stock or
equity interests (whether common or preferred) other than the Shares. The total
authorized and issued capital stock of each of the Subsidiaries is set forth on
Schedule 4.2 (the "Subsidiaries Stock"). The Company is the lawful record and
beneficial owner of all of the issued and outstanding shares of the Subsidiaries
Stock and has good and marketable title thereto, free and clear of all
Encumbrances. All of the issued and outstanding shares of Company Stock and
Subsidiaries Stock have been duly authorized and validly issued in full
compliance with all applicable federal, state and other securities and other
laws, and without any violation of any pre-emptive rights and are fully paid and
non-assessable. There are no other shares or other securities of the Company or
any Subsidiary which are authorized, issued and/or outstanding other than the
Shares and the Subsidiaries Stock owned by the Company. Except as set forth on
Schedule 4.2, there are no outstanding subscriptions, options, warrants, rights,
calls, contracts, commitments, understandings or agreements to purchase, redeem,
retire, defease or otherwise acquire or relating to the issuance of any shares
of Company Stock or other securities of the Company or any Subsidiary,
including, without limitation, any options, rights, warrants or
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<PAGE> 12
other rights of conversion or exchange under any outstanding securities or other
instruments, other than this Agreement. Except as set forth in Schedule 4.2, the
Company does not own any capital shares or other proprietary interests, directly
or indirectly, in any Person, other than the Subsidiaries, and the Subsidiaries
do not, jointly or severally, own any capital shares or other proprietary
interests, directly or indirectly, in any Person.
4.3 CHARTER DOCUMENTS. The copies of the certificates of incorporation
and by-laws of each of the Company and the Subsidiaries, certified by the
respective secretaries or assistant secretaries thereof, which have been
delivered to Purchaser are complete and correct in all respects. Except as set
forth in Schedule 4.3, there are no voting trusts, stockholder agreements,
proxies or other agreements or understandings currently in effect with respect
to the voting or transfer of any of the shares of Company Stock or Subsidiaries
Stock.
4.4 TITLE TO STOCK. Except as set forth in Schedule 4.4, each Seller
represents he is the lawful record and beneficial owner of the number of Shares
set forth opposite his name on Schedule 4.4 and each Seller represents he has
good and marketable title thereto, free and clear of all Encumbrances,
including, without limitation, any agreements, subscriptions, options, warrants,
calls, commitments or rights of any character granting to any Person any
interest or right to acquire from such Seller at any time, or upon the happening
of any stated event, any of the Shares. Upon the delivery by each Seller to the
Purchaser of the Shares owned by such Seller and set forth opposite his name on
Schedule 4.4, the Purchaser shall acquire the legal, valid and indefeasible
title to such Shares, free and clear of all Encumbrances and shall become the
lawful record and beneficial owner thereof. Except for the Shares set forth
opposite his name on Schedule 4.4, each Seller represents that he does not own
any shares or any other Shares of capital stock, securities or equity interests
of the Company.
4.5 AUTHORITY; BINDING OBLIGATION. Each Seller represents that he has
all requisite power and authority to execute, deliver and perform his respective
obligations under this Agreement and the Additional Agreements to which each may
be a party and consummate the transactions contemplated herein and therein. Each
Seller represents that this Agreement and the Additional Agreements have been
duly executed and delivered by such Seller (to the extent a party thereto) and
constitute the legal, valid and binding obligation of such Seller enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditor's rights'
generally and to general equitable principles.
4.6 NO VIOLATIONS. Except as set forth in Schedule 4.6, the execution,
delivery and performance of this Agreement and the Additional Agreements and the
consummation of the transactions contemplated herein and therein by the Sellers
parties thereto do not and will not, with or without the giving of notice or
passage of time or both (a) violate, conflict with or result in the breach of
any term or provision of, or require any notice, filing or consent under (i) the
certificate of incorporation, by-laws or other charter documents of any member
of the Steadi Group, (ii) any statutes, laws, rules, regulations, ordinances or
Permits of any Governmental Authority applicable to Sellers or any member of the
Steadi Group or (iii) any Governmental Order binding upon any Seller or any
member of the Steadi Group or any of their respective properties or assets; (b)
conflict with or result in the breach of any term or provision of, require any
notice or consent under, give rise to a right
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<PAGE> 13
of termination of, constitute a default under, result in the acceleration of, or
give rise to a right to accelerate any obligation under, (i) any of the Material
Contracts or (ii) any loan agreement, mortgage, indenture, financing agreement,
lease or any other agreement or instrument to which (A) any Seller is a party or
by which any of their respective properties or assets are bound or (B) the
Company or any member of the Steadi Group is a party or by which any of their
respective properties or assets are bound and which will cause a Material
Adverse Effect; or (c) result in any Encumbrance on any of the properties or
assets of any of the Sellers or any member of the Steadi Group.
4.7 FINANCIAL STATEMENTS. The Sellers have furnished to the Purchaser
the audited consolidated balance sheet of the Company as at September 30, 1997
and the related audited consolidated statements of operations and retained
earnings and cash flows for the twelve months then ended, including the notes
thereto, certified by D&T (the "Audited Financial Statements"), copies of which
are attached hereto as Schedule 4.7. The Audited Financial Statements (i) were
prepared in all material respects in accordance with the books of account and
other financial records of the Company and its Subsidiaries, (ii) fairly present
the consolidated financial condition, results of operations, changes in retained
earnings and, cash flows for Company and the Subsidiaries as of the dates and
for the periods covered thereby and (iii) have been prepared in accordance with
GAAP applied on a basis consistent with past practice.
4.8 BOOKS OF ACCOUNTS. To the best of the Sellers' knowledge, the books
of account and other financial records of each member of the Steadi Group (i)
reflect all material items of income and expense and all material assets and
material liabilities required to be reflected therein in accordance with GAAP
consistently applied and (ii) are in all material respects complete and correct
and do not contain or reflect any material inaccuracies or discrepancies.
4.9 ABSENCE OF UNDISCLOSED LIABILITIES. No member of the Steadi Group
has any Liabilities, except: (a) Liabilities that were reflected, disclosed or
reserved against in the Audited Financial Statements and not heretofore paid or
discharged; (b) Liabilities specifically disclosed in Schedule 4.9; (c)
Liabilities incurred in, or as a result of, the ordinary course of the Business
consistent with past practice since September 30, 1997 which do not exceed
$25,000 for any one transaction or $50,000 in the aggregate; and (d) Liabilities
in respect of open purchase orders of Inventory which are cancelable without
penalty.
4.10 ACCOUNTS RECEIVABLE. To the Sellers' knowledge, Schedule 4.10 sets
forth an aged list of trade accounts receivable arising in the ordinary course
of the Business as of September 30, 1997 showing separately those accounts
receivable that, as of such date, had been outstanding (i) for 30 days or less,
(ii) 31 to 60 days, (iii) 61 to 90 days and (iv) more than 90 days, and a list
of all other accounts receivable outstanding as of such date. Except for any
allowance for doubtful accounts (considered in the aggregate) set forth therein,
all accounts receivable reflected on the Audited Financial Statements (a) have
arisen in the ordinary course of the Business consistent with past practice, (b)
to the Sellers' knowledge, are not subject to any valid defenses, set-offs or
counterclaims and (c) to the Sellers' knowledge, are good and collectible in
full in the ordinary course of business and no member of the Steadi Group has
received any written notice that any account debtor thereof intends to contest
payment. Except as set forth in Schedule 4.10, each member of the Steadi Group
has good and marketable title to all of its accounts receivable, free and clear
of any Encumbrances.
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4.11 INVENTORY.
Except as set forth in Schedule 4.11, all Inventories are in the
physical possession of the Company or its Subsidiaries at the facilities located
on the Leased Real Property. The value at which all Inventories are carried in
the Audited Financial Statements reflect the historical inventory valuation
policy of the Company. Except as set forth in Schedule 4.11, each member of the
Steadi Group has good and marketable title to all of its Inventories, free and
clear of all Encumbrances. Except as set forth in Schedule 4.11, the Inventory
does not include any items held on consignment for others, and no member of the
Steadi Group is under any obligation or liability with respect to accepting
returns of Inventory or merchandise in the possession of its customers other
than in the ordinary course of the Business consistent with past practice. As of
the date hereof, the Sellers have no present knowledge that the Inventory
reflected in the Audited Financial Statements is over-valued in any material
respect or that any Inventory reserve is insufficient or inadequate in any
material respect.
4.12 [Deleted]
4.13 [Deleted]
4.14 CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES.
(a) Since September 30, 1997, except as disclosed in Schedule
4.14, there has not been any change in the condition (financial or otherwise) of
the Business or the Liabilities, assets, customer or supplier relations,
operations, results of operations, prospects or condition (financial or
otherwise) of the Steadi Group, taken as a whole, including, without limitation,
any damage or destruction of property by fire or other casualty, which change
would have a Material Adverse Effect.
(b) Since September 30, 1997, except as disclosed in Schedule
4.14, the Business has been conducted in all material respects in the ordinary
course and consistent with past practice. For the avoidance of doubt and as
amplification and not limitation of the foregoing, except as disclosed in
Schedule 4.14, since September 30, 1997, no member of the Steadi Group has:
(i) permitted or allowed any of its assets or properties
(whether tangible or intangible) to be subjected to any Encumbrance, other than
Encumbrances reflected in the Audited Financial Statements;
(ii) amended, terminated, canceled or compromised any material
claims or waived any other rights of value in excess of $25,000;
(iii) sold, transferred, leased, subleased, licensed or
otherwise disposed of any properties or assets, real, personal or mixed
(including, without limitation, leasehold interests and intangible property), of
or relating to the Business in excess of $25,000, other than in the ordinary
course of the Business consistent with past practice;
(iv) [deleted];
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(v) (A) granted or proposed any increase, or announced any
increase, in the wages, salaries, compensation, bonuses, incentives, pension or
other benefits payable by it to any of its employees, other than aggregate
annual increases which do not exceed $250,000, or (B) established or increased
or promised or proposed to increase any benefits under any Plan, in either case
except as required by law and except for ordinary increases consistent with the
past practice of the Business;
(vi) made any material change in any method of accounting or
accounting practice or policy, other than such changes required by GAAP;
(vii) made or changed any express or deemed election or
settled or compromised any liability with respect to Taxes or prepaid any Taxes,
except in the ordinary course of the Business consistent with past practice, or
as may be required by any applicable law, rule or regulation;
(viii) [deleted];
(ix) incurred any Indebtedness for borrowed money described
in clauses (a), (c) and (f) of the definition of Indebtedness in excess of
$10,000, in the aggregate and currently outstanding, except as reflected in the
Audited Financial Statements or arising in the ordinary course of the Business
consistent with past practice;
(x) [deleted];
(xi) redeemed any of its capital stock or, declared, made or
paid any dividends or distributions (whether in cash, securities or other
property), other than dividends, distributions and redemptions declared, made or
paid by any Subsidiary solely to the Company;
(xii) issued or sold any capital stock, notes, bonds or
other securities, or any option or warrant to purchase the same (other than the
issuance by any Subsidiary solely to the Company);
(xiii) amended or restated its charter or by-laws;
(xiv) made any capital expenditure or commitment for any
capital expenditure in excess of $100,000 individually or $250,000 in the
aggregate;
(xv) merged with, entered into a consolidation with or
acquired (by purchase, merger, consolidation, stock acquisition or otherwise) a
substantial portion of the assets or business of any other Person or any
division or line of business thereof, or, except as permitted by clause (xiv),
acquired any material assets other than in the ordinary course of the Business
consistent with past practice;
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(xvi) entered into any agreement with any of its directors,
officers or shareholders (or any Immediate Family member thereof);
(xvii) made any loan to, guaranteed any Indebtedness of or
otherwise incurred any Indebtedness on behalf of, any Person in excess of
$10,000 which remains outstanding, other than Indebtedness solely among or
between the members of the Steadi Group;
(xviii) materially amended, modified or consented to the
termination of any Material Contract or any of its rights therein, except in the
ordinary course of Business and as would not reasonably be expected to have a
Material Adverse Effect;
(xix) allowed any Permit or Environmental Permit that was
issued to it and is required to operate the Business in the ordinary course and
consistent with past practice to lapse or terminate (unless the same has been
reinstated);
(xx) failed in the aggregate to maintain its plant,
property and equipment in its general operating condition, ordinary wear and
tear excepted;
(xxi) to the best of Sellers' knowledge, violated any law,
rule or regulation of any Governmental Authority or any Governmental Order which
can reasonably be expected to have a Material Adverse Effect;
(xxii) made any charitable contribution which would cause the
aggregate amount of charitable contributions of all the members of the Steadi
Group made since September 30, 1996 to exceed the aggregate amount of charitable
contributions made by the Steadi Group during the fiscal year ended September
30, 1996;
(xxiii) suffered any casualty loss or damage with respect to
any of its assets, plant, property or equipment which, when aggregated with the
casualty losses or damages of the other members of the Steadi Group suffered
since September 30, 1997, would have a replacement cost of more than $250,000,
whether or not such losses or damage shall have been covered by insurance; or
(xxiv) agreed, whether in writing or otherwise, to take any
of the actions specified in this Section or granted any options to purchase,
rights of first refusal, rights of first offer or any other similar rights with
respect to any of the actions specified in this Section, except as expressly
contemplated by this Agreement.
4.15 LITIGATION. Except as set forth in Schedule 4.15 (which sets forth
a summary of each Action disclosed therein containing the following information:
parties, nature of the proceeding, date commenced, description of claim and
amount of damages or other relief sought and, if applicable, paid or granted),
to the knowledge of the Sellers, there are no Actions, pending or threatened,
against any member of the Steadi Group. Except as set forth in Schedule 4.15, to
the knowledge of the Sellers, no member of the Steadi Group nor any of their
respective assets or properties, is subject to any Governmental Order (nor, to
the knowledge of the Sellers, are there
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<PAGE> 17
any such Governmental Orders threatened to be imposed by any Governmental
Authority) which has had or would have a Material Adverse Effect.
4.16 COMPLIANCE WITH LAWS. Except as set forth in Schedule 4.16, to
the knowledge of the Sellers, each member of the Steadi Group has each conducted
and continues to conduct the Business substantially in accordance with all
applicable laws, ordinances, statutes, rules, regulations and Governmental
Orders applicable to it or any of its properties or assets or the Business
(except where any such failure would not have a Material Adverse Effect), and,
to the knowledge of the Sellers, no member of the Steadi Group is in material
violation of any such law, ordinance, statute, rule, regulation or Governmental
Order (except where any such violation would not have a Material Adverse
Effect). No member of the Steadi Group nor any officer, director, employee,
agent or representative of any member of the Steadi Group has violated or is
currently in violation of the Foreign Corrupt Practices Act of 1977, as amended.
4.17 ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS.
(a) Except as disclosed in Schedule 4.17, to the knowledge of
the Sellers, each member of the Steadi Group currently holds all health and
safety and other permits, licenses, authorizations, certificates, exemptions and
approvals of Governmental Authorities (collectively, "Permits"), including,
without limitation, Environmental Permits, necessary or proper for the current
use, occupancy or operation of any of its assets or properties or the conduct of
the Business (except where the failure to hold any such Permit or Environmental
Permit will not have a Material Adverse Effect), and all such Permits and
Environmental Permits are in full force and effect. To the knowledge of Sellers,
Schedule 4.17 contains a true, correct and complete list of all Permits held by
each member of the Steadi Group (setting forth the issuer thereof and any
expiration or terminate date). Except as disclosed in Schedule 4.17, to the
knowledge of the Sellers, there is no existing practice, action or activity of
any member of the Steadi Group and no existing condition of the properties or
assets of any member of the Steadi Group, or the Business, which will give rise
to any civil or criminal Liability under, or violate or prevent compliance with,
any health or occupational safety Environmental Law or other applicable statute,
regulation, ordinance or decree (except where the same will not have a Material
Adverse Effect). No member of the Steadi Group has received any notice from any
Governmental Authority revoking, canceling, rescinding, materially modifying or
refusing to renew any Permit or Environmental Permit or providing written notice
of violations under any Environmental Law. Except as disclosed in Schedule 4.17,
to the knowledge of the Sellers each member of the Steadi Group is in all
material respects substantially in compliance with all applicable Permits, all
applicable Environmental Laws and the requirements of all applicable
Environmental Permits (except where the failure to be in compliance will not
have a Material Adverse Effect).
(b) Except as disclosed in Schedule 4.17, to the knowledge of
the Sellers (i) Hazardous Materials have not been generated, used, treated,
handled or stored on, or transported to or from, or released (as "release" is
defined under any applicable Environmental Law) by any member of the Steadi
Group on any Leased Real Property or any property adjoining any Leased Real
Property; (ii) the members of the Steadi Group have disposed of all wastes,
including those containing Hazardous Materials, in compliance with all
applicable Environmental Laws and Environmental Permits; (iii) there are no
past, pending or threatened Environmental Claims, nor
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<PAGE> 18
any basis for asserting the same, against any member of the Steadi Group, or any
Leased Real Property; and (iv) no Leased Real Property or any property adjoining
any Leased Real Property, is listed or proposed for listing on the National
Priorities List under CERCLA or on the CERCLIS or any analogous state list of
sites requiring investigation or cleanup.
4.18 MATERIAL CONTRACTS.
(a) Schedule 4.18 lists each of the following contracts and
agreements to which any member of the Steadi Group is a party (such contracts
and agreements being collectively referred to herein as the "Material
Contracts"):
(i) any contract, agreement, invoice, purchase order or
other arrangement, whether oral or written which imposes upon any member of the
Steadi Group the current or future obligation (whether primary or secondary,
direct or contingent) to make any payment (or series of payments) of $100,000 or
more and which is not terminable by any member of the Steadi Group without
penalty or further payment at any time upon not more than 30 calendar days'
notice;
(ii) [deleted];
(iii) [deleted];
(iv) any indebtedness for borrowed money (including
without limitation, all promissory notes, bonds, debentures, credit agreements,
letters of credit, acceptances and other similar items) as to which any member
of the Steadi Group has any Liability, whether as borrower or guarantor;
(v) any contract or agreement with any Governmental
Authority other than purchase orders in the ordinary course of the Business;
(vi) [deleted];
(vii) any contract or agreements that limits the ability
of any member of the Steadi Group to compete in any line of business or with any
Person or entity or in any geographic area or during any period of time;
(viii) any contract or agreement (including without
limitation those relating to employment) between or among any member of the
Steadi Group and any Seller (or any member of any Seller's Immediate Family);
(ix) any collective bargaining agreement, employment
contract, severance agreement and any contract, agreement for providing benefits
under any Plan, except, in each case, any agreement or contract which is
terminable by any member of the Steadi Group without penalty or further payment
at any time upon not more than 30 calendar days' notice; and
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<PAGE> 19
(x) any other contract or agreement, except those made in
the ordinary course of the Business, which if terminated by the other party
thereto (with or without notice and with or without cause) would cause a
Material Adverse Effect.
(b) Except as expressly set forth in Schedule 4.18 (which shall
identify each such Material Contract), each Material Contract: (i) is valid and
binding on the member of the Steadi Group that is a party to such Material
Contract and, to the knowledge of the Sellers, on the other parties thereto and
is in full force and effect, (ii) upon consummation of the transactions
contemplated by this Agreement shall continue in full force and effect without
penalty or other adverse consequence and unaffected by such transactions. No
member of the Steadi Group is in material breach or default under the terms of
any Material Contract.
(c) Except as expressly set forth in Schedule 4.18 (which shall
identify each such Material Contract), to the knowledge of the Sellers, no other
party to any Material Contract is in material breach or default thereunder.
(d) Except as expressly set forth in Schedule 4.18, there is no
contract, agreement or other arrangement granting any Person any right of first
refusal or similar preferential right to purchase any of the properties or
assets of any member of the Steadi Group.
(e) To their knowledge, the Sellers have delivered to the
Purchaser true, correct and complete copies of each written Material Contract.
(f) The Sellers have delivered to the Purchaser a true, correct
and complete copy of the Abrams Agreement.
4.19 INTELLECTUAL PROPERTY. Except for the application filed for
"Steadi-Systems Firm Video Multimedia Sales Service Rentals" in Class 042, no
member of the Steadi Group owns (or has any rights as licensee in) any
Intellectual Property. To the best of the Sellers' knowledge, no member of the
Steadi Group has infringed upon, or used without authorization, any Intellectual
Property of any other Person.
4.20 REAL PROPERTY.
(a) Except as set forth in Schedule 4.20, no member of the
Steadi Group currently owns or has ever owned any real property and no member of
the Steadi Group is currently the lessor or sublessor of any real property.
(b) Schedule 4.20 contains true and complete copies of all
leases for each Leased Real Property and all amendments, modifications and
supplements thereto and all material ancillary documents pertaining thereto.
(c) Except as described in Schedule 4.20, no Seller has received
any written notice of any material violation of any law, regulation or ordinance
relating to any of the Leased Real Property.
(d) With respect to each of the leases contained in Schedule
4.20:
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<PAGE> 20
(i) such lease is legal, valid, binding, enforceable
and in full force and effect with respect to the member of the Steadi Group that
is a party thereto, and, to the knowledge of the Sellers, with respect to all
other parties thereto and is the entire agreement between the parties thereto
with respect to such property;
(ii) [deleted];
(iii) except as otherwise disclosed in Schedule 4.20,
with respect to each such lease: (A) no Seller nor any member of the Steadi
Group has received any notice of cancellation or termination under such lease
and, to the knowledge of the Sellers, no lessor has any right of termination or
cancellation under such lease except in connection with the default of a member
of the Steadi Group thereunder, and (B) no Seller nor any member of the Steadi
Group has received any notice of a breach or default by any member of the Steadi
Group under such lease, which breach or default has not been cured; and
(iv) no member of the Steadi Group is presently in
arrears with respect to any rental payments or other sums due under any such
lease (other than payments due in respect of the current month) and, to the
knowledge of the Sellers, no member of the Steadi Group nor any other party to
such lease is in breach or default in any material respect, and, to the
knowledge of the Sellers, no event has occurred that, with notice or lapse of
time, would constitute such a material breach or default or permit termination,
modification or acceleration under such lease.
(e) To the knowledge of the Sellers, no member of the Steadi
Group has, within the past 12 months, wrongfully terminated any lease or
sublease for any real property or abandoned any real property held by it under
lease or sublease.
4.21 TANGIBLE PERSONAL PROPERTY.
(a) Schedule 4.21 contains true and complete copies of all
leases (whether capital leases or operating leases) for tangible personal
property to which any member of the Steadi Group is a party, as lessee, and
which has remaining annual rental payments in excess of $35,000 and any and all
material ancillary documents pertaining thereto (including, but not limited to,
any amendments, consents and evidence of commencement dates and expiration
dates). With respect to each of these leases:
(i) such lease is legal, valid, binding, enforceable
and in full force and effect in all material respects with respect to the member
of the Steadi Group that is a party thereto and, to the knowledge of the
Sellers, with respect to all other parties thereto and is the entire agreement
between the parties thereto with respect to such property;
(ii) [deleted]:
(iii) except as otherwise disclosed in Schedule 4.21,
with respect to each such lease: (A) no Seller nor any member of the Steadi
Group has received any notice of cancellation or termination under such lease
and, to the knowledge of the Sellers, no lessor has any right of termination or
cancellation under such lease except in connection with the default of a member
of the Steadi Group thereunder, and (B) no Seller nor any member of the Steadi
Group has received
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<PAGE> 21
any notice of a breach or default under such lease, which breach or default has
not been cured; and
(iv) member of the Steadi Group is presently in arrears
with respect to any rental payments or other sums due under any such lease
(other than payments due in respect of the current month) and, to the knowledge
of the Sellers, no member of the Steadi Group, nor any other party to such
lease, is in breach or default thereunder in any material respect, and, to the
knowledge of the Sellers, no event has occurred that, with notice or lapse of
time would, constitute such a material breach or default or permit termination,
modification or acceleration under such lease.
4.22 CUSTOMERS. Listed in Schedule 4.22 are the names and addresses
of the top ten customers of the Company and the members of the Steadi Group (on
a consolidated basis), ranked by revenue, for the fiscal year ending September
30, 1997 and the respective revenue amounts for each such customer. Except as
disclosed in Schedule 4.22, no Seller nor any member of the Steadi Group has
received any written notice that any customer listed in Schedule 4.22 has
ceased, or will cease, to use the products, equipment, goods or services of the
Steadi Group, or has substantially reduced, or will substantially reduce, the
use of such products, equipment, goods or services following the Closing Date.
Also listed in Schedule 4.22 are the names and addresses of each Person holding
goods or merchandise on consignment from any member of the Steadi Group and the
cost to such member of the Steadi Group of the goods or merchandise shipped to
such Person.
4.23 SUPPLIERS. Listed in Schedule 4.23 are the names and addresses
of the top ten suppliers of the Company and the members of the Steadi Group (on
a consolidated basis), ranked by purchases, for the fiscal year ending September
30, 1997 and the approximate respective purchase amounts for each such supplier.
Except as disclosed in Schedule 4.23, no Seller nor any member of the Steadi
Group has received any written notice that any supplier listed in Schedule 4.23
will not sell materials, supplies, merchandise and other goods to the Steadi
Group at any time after the Closing Date on terms and conditions similar to
those imposed on current sales, except for general and customary price
increases. Schedule 4.23 also contains a true, correct and complete copy of the
written distributor agreement or similar agreement between any supplier listed
therein and any member of the Steadi Group (other than ordinary purchase orders
and correspondence arising in the ordinary course of the Business), and, to the
knowledge of the Sellers, no member of the Steadi Group is in breach or default
thereunder in any material respect.
4.24 EMPLOYEE BENEFIT MATTERS.
(a) Plans and Material Documents. Schedule 4.24 lists (i) all
employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements to which any member
of the Steadi Group is a party, with respect to which any member of the Steadi
Group has any obligation or which are maintained, contributed to or sponsored by
any member of the Steadi Group for the benefit of any current or former
employee, officer or director of such member and (ii) each employee benefit plan
for which any member of the Steadi Group could incur liability
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<PAGE> 22
under Section 4069 of ERISA in the event such plan has been or were to be
terminated (collectively, the "Plans"). Except as set forth in Schedule 4.24,
each Plan is in writing and the Sellers have furnished the Purchaser with a
complete and accurate copy of each written Plan and a complete and accurate copy
of each material document prepared in connection with each such Plan, including,
where applicable, without limitation, (i) each current trust or other funding
arrangement, (ii) each current summary plan description and summary of material
modifications, (iii) the most recently filed Internal Revenue Service ("IRS")
Form 5500, (iv) the most recently received IRS determination letter for each
such Plan, and (v) the most recently prepared actuarial report and financial
statement in connection with each such Plan. Except as disclosed on Schedule
4.24, there are no other employee benefit plans, programs, arrangements or
agreements, whether formal or informal, whether in writing or not, to which any
member of the Steadi Group is a party, with respect to which any member of the
Steadi Group has any obligation or which are maintained, contributed to or
sponsored by any member of the Steadi Group for the benefit of any current or
former employee, officer or director of such member.
(b) [deleted].
(c) Compliance with Applicable Law. To the Sellers' knowledge,
each Plan offered by any member of the Steadi Group is operated in all material
respects in accordance with the requirements of all applicable law, including,
without limitation, ERISA and the Code, and, to the knowledge of the Sellers,
all persons who participate in the operation of such Plans and all Plan
"fiduciaries" (within the meaning of Section 3(21) of ERISA) have acted in all
material respects in accordance with the provisions of all applicable law,
including, without limitation, ERISA and the Code. To the Sellers' knowledge,
each member of the Steadi Group has performed all material obligations required
to be performed by it under, is not in any material respect in default under or
in violation of, and has no knowledge of any default or violation by any party
to any Plan.
(d) Qualification of Certain Plans. To the knowledge of the
Sellers, no fact or event has occurred since the date of any Plan's
determination letter from the IRS to adversely affect the qualified status of
any such Plan or the exempt status of any such trust established in connection
therewith.
(e) Absence of Certain Liabilities and Events. To the knowledge
of the Sellers, there has been no prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan. To
the knowledge of the Sellers, no member of the Steadi Group has incurred any
liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B of
the Code and, to the knowledge of the Sellers, no fact or event exists which
could give rise to any such liability. To the knowledge of the Sellers, no
member of the Steadi Group has incurred any material liability under, arising
out of or by operation of Title IV of ERISA (other than liability for premiums
to the Pension Benefit Guaranty Corporation arising in the ordinary course);
and, to the knowledge of the Sellers, no fact or event exists which could give
rise to any such liability. To the knowledge of the Sellers, no complete or
partial termination has occurred within the five years preceding the date hereof
with respect to any Plan subject to
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<PAGE> 23
Title IV of ERISA. To the knowledge of the Sellers, no reportable event (within
the meaning of Section 4043 of ERISA) has occurred or is expected to occur with
respect to any Plan subject to Title IV of ERISA. To the knowledge of the
Sellers, no Plan had an accumulated funding deficiency (within the meaning of
Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of
the most recently ended plan year of such Plan. None of the assets of any member
of the Steadi Group is the subject of any lien arising under Section 302(f) of
ERISA or Section 412(n) of the Code; no member of the Steadi Group has been
required to post any security under Section 307 of ERISA or Section 401(a)(29)
of the Code; and, to the knowledge of the Sellers, no fact or event exists which
could give rise to any such lien or requirement to post any such security.
(f) Plan Contributions and Funding. To the Sellers' knowledge,
all employer and employee contributions, premiums or payments required to be
made with respect to any Plan have been made on or before their due dates. To
the Sellers' knowledge, as of the date hereof, no Plan which is subject to Title
IV of ERISA has an "unfunded benefit liability" (within the meaning of Section
4001(a)(18) of ERISA).
4.25 LABOR MATTERS. Except as set forth in Schedule 4.25, (a) no member
of the Steadi Group is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by any member of the Steadi
Group and currently there are no organizational campaigns, petitions or other
unionization activities seeking recognition of a collective bargaining unit
which could affect any member of the Steadi Group; (b) there are no strikes,
slowdowns or work stoppages pending or, to the best knowledge of the Sellers,
threatened between any member of the Steadi Group and any of their respective
employees, and no member of the Steadi Group has experienced any such strike,
slowdown or work stoppage within the past three years; (c) to the Sellers'
knowledge, each member of the Steadi Group is currently in material compliance
with all applicable laws, rules and regulations relating to the employment of
labor, including those related to wages, hours, collective bargaining and the
payment and withholding of taxes and other sums as required by the appropriate
Governmental Authority and has withheld and paid to the appropriate Governmental
Authority or is holding for payment not yet due to such Governmental Authority
all amounts required to be withheld from such employees of such member of the
Steadi Group and is not liable for any arrears of wages, taxes, penalties or
other sums for failure to comply with any of the foregoing (except as otherwise
reflected in the Audited Financial Statements); (d) there is no material claim
with respect to payment of wages, salary or overtime pay that has been asserted
or is now pending or, to the knowledge of the Sellers, threatened before any
Governmental Authority with respect to any persons currently or formerly
employed by any member of the Steadi Group; (e) no member of the Steadi Group is
a party to, or otherwise bound by, any consent decree with, or citation by, any
Governmental Authority relating to employees or employment practices; (f) to the
Sellers' knowledge, there is no material charge or proceeding with respect to a
violation of any occupational safety or health standards that has been asserted
in the past 12 months or is now pending or threatened with respect to any member
of the Steadi Group; (g) to the Sellers knowledge, there is no charge of
discrimination in employment or employment practices, for any reason, including,
without limitation, age, gender, race, religion or other legally protected
category, which has been asserted in the past 12 months or is now pending or,
threatened in writing before the United States Equal Employment Opportunity
Commission, or any other Governmental Authority in any jurisdiction in which any
member of the Steadi Group has employed employees; (h) no member of the Steadi
Group has violated or otherwise failed to comply with the requirements of the
Workers Adjustment and
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<PAGE> 24
Retraining Notification Act; and (i) no member of the Steadi Group is party to
any written employment agreement.
4.26 KEY EMPLOYEES. Schedule 4.26 lists the name, place of
employment, the current annual salary rates, bonuses, deferred or contingent
compensation (other than compensation under a 401(k) plan), "golden parachute"
and other like benefits paid or payable (in cash or otherwise), the date of
employment and job title of each current salaried employee, officer, director,
consultant or agent of any member of the Steadi Group whose annual compensation
exceeds $100,000 for the fiscal year ending September 30, 1997.
4.27 CERTAIN INTERESTS.
(a) Except as disclosed in Schedule 4.27, no Seller or Immediate
Family member thereof:
(i) has any direct or indirect financial interest in any
competitor, supplier or customer of any member of the Steadi Group, provided,
however, that the ownership of securities representing no more than two percent
of the outstanding voting power of any competitor, supplier or customer, and
which are also listed on any national securities exchange or traded actively in
the national over-the-counter market, shall not be deemed to be a "financial
interest" so long as the Person owning such securities has no other connection
or relationship with such competitor, supplier or customer;
(ii) owns, directly or indirectly, in whole or in part, or
has any other interest in any material tangible or intangible property which any
member of the Steadi Group uses or proposes to use in the conduct of the
Business; or
(iii) has outstanding any Indebtedness in excess of $5,000
to any member of the Steadi
Group.
4.28 TAXES. Except as set forth in Schedule 4.28, (i) all returns and
reports in respect of Taxes required to be filed with respect to each member of
the Steadi Group or the Business have been timely filed; (ii) all Taxes required
to be shown on such returns and reports or otherwise due have been timely paid;
(iii) all such returns and reports are true, correct and complete in all
material respects; (iv) no adjustment relating to such returns has been proposed
formally or informally by any Governmental Authority and, to the knowledge of
the Sellers, no basis exists for any such adjustment; (v) there are no pending
or, to the knowledge of the Sellers, threatened actions or proceedings for the
assessment or collection of Taxes against any member of the Steadi Group or any
corporation that was included in the filing of a return with any member of the
Steadi Group on a consolidated or combined basis; (vi) no consent under Section
341(f) of the Code has been filed with respect to any member of the Steadi
Group; (vii) there are no Tax liens on any assets of any member of the Steadi
Group or of the Business; (viii) there are no outstanding waivers or agreements
extending the statute of limitations for any period with respect to any Tax to
which any member of the Steadi Group may be subject; (ix) there are no requests
for information currently outstanding that could affect the Taxes of any member
of the Steadi Group; (x) there are no proposed reassessments of any property
owned by any member of the Steadi
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<PAGE> 25
Group; and (xi) no power of attorney that is currently in force has been granted
with respect to any matter relating to Taxes.
4.29 INSURANCE.
(a) Schedule 4.29 sets forth true, correct and complete
copies of all insurance policies (including policies providing property,
casualty, liability, workers' compensation, and bond and surety arrangements)
under which any member of the Steadi Group is presently an insured, a named
insured or otherwise the principal beneficiary of coverage thereunder.
(b) With respect to each such insurance policy: (i) the policy
is legal, valid, binding and enforceable in accordance with its terms with
respect to the member of the Steadi Group that is a party thereto and, to the
knowledge of the Sellers, with respect to the other parties thereto and, to the
Sellers' knowledge, is in full force and effect; (ii) to the Sellers' knowledge,
no member of the Steadi Group is in breach or default (including any breach or
default with respect to the payment of premiums or the giving of notice), and no
event has occurred which, with notice or the lapse of time, would constitute
such a material breach or default or which would permit termination or
modification, under the policy; and (iii) no party to the policy has repudiated,
or given notice of an intent to repudiate, any provision thereof.
(c) No member of the Steadi Group is self-insured or covered
under any risk retention program. The terms "self-insured" and "risk retention
program" as used in this Section shall not refer to the mere absence of
insurance, but, in the case of self-insurance, to a formal program of
self-insurance that includes the actuarial projections of losses, the
maintenance of reserves and the adherence to formal claim procedures and, in the
case of a risk retention program, to means other than insurance by which the
availability of funds to pay losses arising out of defined risks is assured
before the losses occur (including, without limitation, retention group).
(d) All material properties and risks of the Business and of
each member of the Steadi Group are, and for the past five years have been,
covered by valid and, except for policies that have expired under their terms in
the ordinary course, currently effective insurance policies or binders of
insurance (including, without limitation, general liability insurance, property
insurance and workers' compensation insurance) issued in favor of such member of
the Steadi Group or the member of the Steadi Group bearing such risk of the
Business.
(e) At no time during the past three years has any member of the
Steadi Group (i) been denied any insurance or indemnity bond coverage which it
has requested, (ii) made any material reduction in the scope or amount of its
insurance coverage, or received notice from any of its insurance carriers that
any insurance premiums will be subject to increase in an amount materially
disproportionate to the amount of the increases with respect thereto (or with
respect to similar insurance) in prior years or that any insurance coverage will
not be available in the future substantially on the same terms as are now in
effect, except for increases in premiums occurring in the ordinary course of the
Business or (iii) suffered any extraordinary increase in premium for renewed
coverage, except increases applicable to all insureds under similar policies.
During the past three years, no insurance carrier has canceled, failed to renew
or materially reduced any
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<PAGE> 26
insurance coverage for any member of the Steadi Group or given any notice or
other indication of its intention to cancel, not renew or reduce any such
coverage.
4.30 ACCOUNTS; LOCKBOXES; SAFE DEPOSIT BOXES; POWERS OF ATTORNEY.
Schedule 4.30 is a true and complete list of (i) the names of each bank, savings
and loan association, or other financial institution in which any member of the
Steadi Group has an account, and the names of all persons authorized to draw
thereon or have access thereto, (ii) the location of all lockboxes and safe
deposit boxes of each member of the Steadi Group and the names of all Persons
authorized to draw thereon or have access thereto and (iii) the names of all
Persons, if any, holding powers of attorney from any member of the Steadi Group
relating to the Business. On the Closing Date, no member of the Steadi Group
shall have any such account, lockbox or safe deposit box other than those listed
in Schedule 4.31, nor shall any additional Person have been authorized, from the
date of this Agreement, to draw thereon or have access thereto or to hold any
such power of attorney, without prior written notice to the Purchaser. Except as
disclosed in Schedule 4.31, no member of the Steadi Group has commingled monies
or accounts of any member of the Steadi Group with other monies or accounts of
the Sellers.
4.31 BROKERS. Except for Barrington Associates, whose fees and other
compensation shall be paid by the Sellers, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Sellers or any member of the Steadi
Group.
4.32 FULL DISCLOSURE. No Seller has knowledge of any facts pertaining
to the Sellers, any member of the Steadi Group or the Business which, in such
Seller's reasonable opinion, could have a Material Adverse Effect and which have
not been disclosed in this Agreement or any of the Schedules hereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
Parent and the Purchaser, jointly and severally, represent and warrant
to the Sellers as follows:
5.1 ORGANIZATION AND QUALIFICATION. Each of Parent and the Purchaser is
a corporation duly organized validly existing and in good standing under the
laws of its state of incorporation with full corporate power and authority to
own its properties and to carry on its business as now conducted. Each of Parent
and the Purchaser is duly qualified or licensed and has all permits necessary to
transact business, and is in good standing as a foreign corporation, in each of
the jurisdictions wherein the nature of the business conducted by it or its
ownership or lease of real property requires it to be so qualified or licensed
or to hold such permits. The Purchaser is a wholly-owned subsidiary of Parent.
5.2 AUTHORITY; BINDING OBLIGATION. Parent and the Purchaser have all
requisite power and authority to execute, deliver and perform their respective
obligations under this Agreement and the Additional Agreements to which each may
be a party and consummate the transactions
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<PAGE> 27
contemplated herein and therein. The Purchaser's and Parent's execution,
delivery and performance of this Agreement and the Additional Agreements to
which each may be a party and the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action and this Agreement
and the Additional Agreements have been duly executed and delivered by the
Purchaser and Parent (to the extent parties thereto) and constitute the legal,
valid and binding obligation of the Purchaser and Parent (to the extent parties
thereto) enforceable in accordance with their terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditor's rights' generally and to general equitable principles.
5.3 NO VIOLATIONS. The execution and delivery of this Agreement and the
Additional Agreements and the consummation of the transactions contemplated
herein and therein by the Purchaser and Parent (to the extent parties thereto)
do not and will not, with or without the giving of notice or passage of time or
both (a) violate, conflict with or result in the breach of any term or provision
of, or require any notice, filing or consent under (i) the certificate of
incorporation, by-laws or other charter documents of the Purchaser or Parent,
(ii) any statutes, laws, rules, regulations, ordinances or Permits of any
Governmental Authority applicable to Purchaser or Parent or (iii) any
Governmental Order binding upon the Purchaser or Parent or any of their
respective properties or assets; (b) conflict with or result in the breach of
any term or provision of, require any notice or consent under, give rise to a
right of termination of, constitute a default under, result in the acceleration
of, or give rise to a right to accelerate any obligation under, any material
contract or any loan agreement, mortgage, indenture, financing agreement, lease
or any other agreement or instrument to which the Purchaser or Parent is a party
or by which any of their respective properties or assets are bound; or (c)
result in any Encumbrance on any of the properties or assets of the Purchaser or
Parent.
5.4 SEC DOCUMENTS. Parent has filed all required reports, schedules,
forms, statements and other documents with the Securities and Exchange
Commission the ("SEC Documents"). Parent has made available to the Sellers true,
correct and complete copies of all Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and final Proxy Statements
included within the SEC Documents. All of the SEC Documents (other than
preliminary material or material which was subsequently amended), as of their
respective filing dates, complied in all material respects with all applicable
requirements of the Act, and the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). None of the SEC Documents, as of their respective dates,
contained any untrue statements of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been amended, modified
or superseded by later SEC Documents. Parent's consolidated financial statements
included in the SEC Documents were prepared in accordance with GAAP (except, in
the case of unaudited statements, as permitted by Form 10-Q) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP, the consolidated financial position thereof and the
consolidated results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end adjustments).
5.5 FINANCIAL ABILITY. The Purchaser and Parent have the financial
resources to pay the Purchase Price and consummate the transactions described
herein.
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5.6 BROKERS AND FINDERS. Neither the Purchaser nor Parent has employed
any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the transactions contemplated
hereby.
5.7 FULL DISCLOSURE. No representation or warranty of Parent or the
Purchaser in this Agreement, or any Schedule hereto, or any certificate
furnished or to be furnished to the Sellers pursuant to this Agreement, contains
or will contain any untrue statements of a material fact, or omits or will omit
to state a material fact necessary to make the statements contained herein or
therein not misleading.
ARTICLE VI
POST-CLOSING COVENANTS
6.1 PERSONAL GUARANTIES. Schedule 6.1 sets forth a true, correct and
complete copy of personal guarantees (the "Personal Guarantees") executed and
delivered by certain Sellers with respect to obligations (the "Guaranteed
Obligations") of the Company or members of the Steadi Group, together with true,
correct and complete copies of all instruments, agreements and documents
evidencing the Guaranteed Obligations. Following the Closing, Parent agrees to
indemnify and hold the Sellers harmless from and against and in respect of any
claim or demand made or asserted under the Personal Guarantees with respect to
the Guaranteed Obligations.
6.2 CREDIT SUPPORT. Following the Closing, Parent agrees to provide the
Company with the necessary credit support (whether by means of inter-company
loans, advances, guarantees or other method, and upon such terms and conditions,
reasonably deemed appropriate by Parent), but not to exceed the principal amount
of $4,500,000 (excluding the repayment of the Sands Note), to continue to
operate the Business in the ordinary course and the reasonably projected growth
thereof.
6.3 NO THIRD PARTY BENEFIT. Except for the parties hereto and their
permitted successors and assigns, nothing contained in this Article VI shall
confer upon any Person any rights, remedies or benefits, nor shall any such
Person be deemed a third party beneficiary thereof.
ARTICLE VII
CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS
The obligation of the Sellers to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction, or waiver
by the Sellers' Representative, prior to or at the Closing, of each of the
following conditions precedent:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Parent and the Purchaser contained in this Agreement shall be true,
correct and complete in all material respects on and as of the Closing Date with
the same effect as though such representations and warranties were made or given
on and as of such date (other than such representations and warranties as are
made as of another specified date, which shall be true and correct as of such
other specified date).
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7.2 PERFORMANCE OF OBLIGATIONS. Parent and the Purchaser shall have
performed and complied with all of the covenants, agreements and conditions
required by this Agreement to be performed and complied with by them prior to or
on the Closing Date.
7.3 COMPLIANCE CERTIFICATE. Parent and the Purchaser shall each have
delivered to Sellers' Representative on the Closing Date a certificate signed by
an authorized officer thereof and dated as of the Closing Date to the effect
that each of the representations and warranties of Parent and the Purchaser,
respectively, contained in this Agreement is true, correct and complete in all
material respects as of the Closing Date (other than such representations and
warranties as are made as of another specified date, which shall be true and
correct as of such other specified date), and each of Parent and the Purchaser,
respectively, has complied with, fulfilled and performed each of the covenants,
terms and conditions to be complied with, fulfilled or performed by it under
this Agreement on or prior to the Closing Date
7.4 ABSENCE OF LITIGATION. No Action shall be threatened or pending on
the Closing Date in which it is sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby, and no investigation that might result in
any such Action shall be pending or threatened.
7.5 REQUIRED CONSENTS AND APPROVALS; HSR. Each Governmental Authority
and all other Persons whose approval, consent or waiver may be necessary or
required with respect to the transactions contemplated herein shall have given
or granted such approval, consent or waiver. Specifically, but without limiting
the foregoing, any waiting period (and any extension thereof) under the HSR Act
shall have expired or shall have been terminated.
7.6 RESOLUTIONS. The Sellers' Representative shall have received a true
and complete copy, certified by the Secretary or Assistant Secretary of each of
Parent and the Purchaser, of the resolutions duly adopted by the Board of
Directors of each of Parent and the Purchaser evidencing its authorization of
the execution and delivery of this Agreement and the Additional Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby.
7.7 INCUMBENCY CERTIFICATE. The Sellers' Representative shall have
received a certificate of the Secretary or Assistant Secretary of each of Parent
and the Purchaser certifying the names and signatures of the officers of Parent
and the Purchaser authorized to sign this Agreement and the Additional
Agreements to which is a party.
7.8 LEGAL OPINION. The Sellers' Representative shall have received a
legal opinion, dated as of the Closing Date, of Wolff & Samson, P.A., as to the
matters set forth in Sections 5.1, 5.2 and 5.3, substantially in the form of
Exhibit D.
7.9 ADDITIONAL AGREEMENTS. The Company shall have executed and
delivered the Employment Agreements and Parent shall have executed and delivered
the Options.
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7.10 PAYMENT OF BANK DEBT. Parent shall provide the Company with the
necessary funds to repay the Bank Debt in full and the Company shall cause the
Bank Debt to be paid in full and all collateral securing the same shall be
released.
7.11 SANDS NOTE. Parent shall provide the Company with the necessary
funds to pay the Sands Note in full and the Company shall cause the Sands Note
to be paid in full and all collateral securing the same shall be released.
7.12 ABRAMS AGREEMENT. Parent shall provide the Company with the
necessary funds to pay the Closing payment due under the Abrams Agreement and
the Company shall pay such amount to Larry Abrams.
7.13 CLOSING PAYMENT. The Purchaser shall have made the payment set
forth in Section 3.2 in accordance with the allocation and payment instructions
set forth in Schedule 2.2 and Exhibit C.
ARTICLE VIII
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
The obligation of the Purchaser and Parent to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, or waiver by the Purchaser, prior to or at the Closing, of each of
the following conditions precedent:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Sellers contained in this Agreement shall be true, correct and complete
in all material respects on and as of the Closing Date with the same effect as
though such representations and warranties were made or given on and as of such
date (other than such representations and warranties as are made of another
specified date, which shall be true and correct as of such other specified
date).
8.2 PERFORMANCE OF OBLIGATIONS. Sellers shall have performed and
complied with all of the covenants, agreements and conditions required by this
Agreement to be performed and complied with by them prior to or on the Closing
Date.
8.3 COMPLIANCE CERTIFICATE. Sellers shall have delivered to Purchaser
on the Closing Date a certificate signed by or on behalf of Sellers and dated as
of the Closing Date to the effect that each of the representations and
warranties of Sellers contained in this Agreement is true, correct and complete
in all material respects as of the Closing Date (other than such representations
and warranties as are made of another specified date, which shall be true and
correct as of such other specified date), and Sellers have complied with,
fulfilled and performed each of the covenants, terms and conditions to be
complied with, fulfilled or performed by Sellers under this Agreement on or
prior to the Closing Date.
8.4 ABSENCE OF LITIGATION. No Action shall be threatened or pending on
the Closing Date in which it is sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby, and no investigation that might result in
any such Action shall be pending or threatened.
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8.5 REQUIRED CONSENTS AND APPROVALS; HSR. Each Governmental Authority
and all other Persons whose approval, consent or waiver may be necessary or
required with respect to the transactions contemplated herein shall have given
or granted such approval, consent or waiver. Specifically, but without limiting
the foregoing, any waiting period (and any extension thereof) under the HSR Act
shall have expired or shall have been terminated.
8.6 ORGANIZATIONAL DOCUMENTS; MINUTE BOOKS. The Purchaser shall have
received for each member of the Steadi Group (i) its certificate of
incorporation, as amended, certified by the Secretary of State (or other similar
official) of its state of incorporation, (ii) a long form good standing
certificate from the Secretary of State (or other similar official) of its state
of incorporation and each other jurisdiction set forth in Schedule 4.1 hereof,
(iii) a copy of its By-laws, certified by the Secretary of such member, (iv) the
original minute book and stock ledger or register, certified by the Secretary of
such member and (v) the resignation of each member of its Board of Directors.
8.7 LEGAL OPINION. The Purchaser shall have received a legal opinion,
dated as of the Closing Date, of Spitzer & Feldman, as to the matters set forth
in Sections 4.1, 4.2, 4.4, 4.5, 4.6 and 4.15, substantially in the form of
Exhibit E. In rendering such opinion, such counsel may rely as to factual
matters upon certificates or other documents furnished by the Sellers and
officers of the Company and government officials and upon such other documents
as such counsel deems appropriate as the basis for such opinion.
8.8 ADDITIONAL AGREEMENTS. Richard Schoenberg and Robert Schoenberg
shall have executed and delivered the Employment Agreements.
8.9 ABRAMS AGREEMENT. Provided Parent shall have delivered the
necessary funds therefor, the Company shall pay the Closing Payment due under
the Abrams Agreement to Larry Abrams.
8.10 SHAREHOLDER NOTE. The Shareholder Note shall have been discharged
or paid in full as of the Closing Date and the Purchaser shall have received a
copy thereof marked canceled.
8.11 BANK DEBT. Provided Parent shall have delivered the necessary
funds therefor, the Company shall have caused the Bank Debt to be paid in full
and all collateral securing the same shall be released.
8.12 SANDS NOTE. Provided Parent shall have delivered the necessary
funds therefor, the Company shall have caused the Sands Note to be paid in full
and all collateral securing the same shall be released.
8.13 STOCK CERTIFICATES. The Purchaser shall have received original
stock certificates evidencing the Shares, duly endorsed in blank, or accompanied
by stock powers duly executed in blank, in form reasonably satisfactory to the
Purchaser, with all required stock transfer tax stamps affixed
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8.14 BARRINGTON RELEASE. Barrington Associates shall have delivered to
the Company a full and unconditional release of any obligation or liability to
pay any fee, commission or other amount (including any reimbursement of
expenses) in connection with the transactions described herein or any other
matter.
8.15 MAXIMUM DEBT. As of the Closing Date, the outstanding principal
balance of (i) the Sands Note shall not exceed $2,045,000 and (ii) the Bank Debt
shall not exceed $2,900,000.
ARTICLE IX
OTHER MATTERS
9.2 FEES AND EXPENSES. Except for the fees and expenses of D&T in
connection with the Audited Financial Statements (which shall be apportioned
between the Company and the Purchaser in accordance with a separate engagement
letter of D&T), all legal, accounting, investment banking and other costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses. Without
limiting the foregoing, the Sellers shall be responsible for and pay and
discharge all fees and expenses payable to Barrington Associates and Spitzer &
Feldman in connection with the negotiation, preparation and consummation of this
Agreement and the transactions contemplated hereby.
9.3 TAXES. Each party and their respective Affiliates shall be liable
for all federal, state and local taxes on capital gains, transfer, documentary,
stamp and other similar taxes which may be due or payable by it in connection
with the consummation of the transactions contemplated hereunder.
ARTICLE X
INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLERS. From and after the Closing, the
Sellers shall, jointly and severally, but subject to the limitations of Section
10.3 hereof, reimburse, indemnify and hold harmless the Purchaser, Parent and
their respective officers, directors, employees, agents, representatives and
successors and assigns (collectively, "Purchaser Indemnitees") from and against
and in respect of each of the following (collectively, the "Purchaser's
Indemnification Events"):
(a) any and all actual damages, losses, deficiencies,
liabilities, claims, demands, charges, costs and expenses of every nature and
character whatsoever, including, without limitation, reasonable attorneys' fees
and costs, excluding punitive or consequential damages of any kind
(collectively, the "Losses") that result from or arise out of any
misrepresentation or breach of warranty of the Sellers in this Agreement or any
of the Schedules provided hereunder or any agreement, document, statement, list,
certificate or instrument furnished by or on behalf of the Sellers or any of
them in connection with the performance of this Agreement and the transactions
contemplated herein; and
(b) any and all actions, suits, claims, proceedings,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses incident to any of the foregoing or to the successful enforcement of
this Section.
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10.2 INDEMNIFICATION OF SELLERS. From and after the Closing, the
Purchaser and Parent shall, jointly and severally, but subject to the
limitations of Section 10.3 hereof, reimburse, indemnify and hold harmless
Sellers and each of their respective heirs, estate, successors and assigns
(collectively, "Seller Indemnitees") from and against and in respect of each of
the following (collectively, the "Sellers' Indemnification Events"):
(a) any and all Losses that result from or arise out of any
misrepresentation or breach of warranty of the Purchaser or Parent in this
Agreement or any of the Schedules provided hereunder or any agreement, document,
statement, list, certificate or instrument furnished by or on behalf of the
Purchaser or Parent in connection with the performance of this Agreement and the
transactions contemplated herein; and
(b) any and all actions, suits, claims, proceedings,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses incident to any of the foregoing or to the successful enforcement of
this Section.
10.3 LIMITATIONS ON LOSSES
(a) In case any event shall occur that would otherwise entitle any
party to assert a claim for indemnification hereunder, no Losses shall be deemed
to have been sustained by such party to the extent of (i) any actual tax savings
realized by such party with respect thereto or (ii) any proceeds (net of
deductibles, taxes and collection costs) received by such party from any
insurance policies maintained by or on behalf of such party with respect to
losses to such party's property. The parties agree to submit a claim under such
insurance policies prior to or promptly following making a request for
indemnification hereunder.
(b) No Seller shall be liable under Section 10.1 for any
misrepresentation or breach of warranty solely made by any other Seller.
(c) Robert Schoenberg and Steven Klein shall only be liable for
20% and 10%, respectively, of all Losses, except for a misrepresentation or
breach of warranty made by them individually as set forth in Sections 4.2, 4.4
or 4.5 hereof.
(d) The maximum liability of each Seller under Section 10.1 shall
not exceed an amount equal to such Seller's proportionate share (as set forth in
Schedule 2.2) of the Purchase Price (each Seller's "Maximum Liability"),
provided, however, that to the extent any Seller has not received his full
allocable share of the Purchase Price, then (i) such Seller shall not be
required to pay any amount in excess of the portion of the Purchase Price
received by him and (ii) the Purchaser may offset any shortfall against any
portion of the Purchase Price thereafter payable to such Seller up to the amount
of his Maximum Liability.
(e) The sum of all Losses incurred by the Purchaser and Parent in
the aggregate, or the sum of all Losses incurred by all Sellers in the
aggregate, must exceed $250,000 before such parties shall be entitled to
indemnification hereunder; provided, however, once such Losses exceed $250,000,
such parties shall be entitled to indemnification for all Losses to the extent
such Losses exceed $100,000 (it being agreed that such parties shall only be
liable for such excess amounts).
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(f) No party shall have any liability hereunder in respect of
claims asserted against any Indemnified Party on or after March 1, 2000;
provided, however, (i) the representations and warranties of the Sellers
relating to (A) title to the Shares shall survive indefinitely and (B) Taxes and
Environmental matters shall survive until the applicable statute of limitations
has expired and (ii) except as to claims asserted on or prior to May 15, 1998,
the maximum aggregate liability of the Sellers shall not exceed the unpaid
Contingent Payment. The limitation set forth in this paragraph shall not apply
to any claim asserted on or before May 15, 1998 or March 1, 2000, as the case
may be.
(g) Purchasers' Indemnification Events shall not include any
misrepresentation or breach of warranty set forth in Section 4.7, to the extent
the same relates to accounts receivable or Inventory and does not constitute a
misrepresentation or breach of warranty set forth in Sections 4.10 or 4.11,
respectively.
(h) Purchaser's Indemnification Events shall not include any
misrepresentation or breach of warranty of which Parent or Purchaser has actual
knowledge (as evidenced by the Schedules hereto or a written statement or other
documentary evidence addressed and delivered to Parent or Purchaser) prior to or
as of the Closing.
(i) None of the limitations set forth in this Section 10.3, or the
provisions of Section 10.5, shall apply to any party who is found to have
fraudulently made any misrepresentation hereunder.
10.4 NOTICE.
(a) Promptly after receipt by an Indemnified Party of notice of
the assertion of any claim by a Person not a party to this Agreement (a "Third
Party Claim") with respect to which such Indemnified Party expects to make a
request for indemnification hereunder, such Indemnified Party shall give the
Indemnifying Party written notice describing such claim in reasonable detail.
The Indemnifying Party shall, upon receipt of such notice, be entitled to
participate in or, at the Indemnifying Party's option, assume the defense,
appeal or settlement of, such claim with respect to which such indemnity has
been invoked with counsel selected by it and approved by the Indemnified Party
(such approval not to be unreasonably withheld), and the Indemnified Party will
fully cooperate with the Indemnifying Party in connection therewith; provided,
that the Indemnified Party shall be entitled to employ separate counsel (at the
expense of the Indemnifying Party) to represent such Indemnified Party if
counsel selected by the Indemnifying Party cannot, by reason of any actual or
deemed conflict of interest, adequately represent the interests of the
Indemnified Party. In the event that the Indemnifying Party fails to assume the
defense, appeal or settlement of such claim within 20 days after receipt of
notice thereof from the Indemnified Party, and the Indemnified Party is, or
reasonably may be, prejudiced thereby, the Indemnified Party shall have the
right to undertake the defense or appeal of, or settle or compromise, such claim
on behalf of and for the account and risk of the Indemnifying Party; provided,
however, no settlement shall be for an amount in excess of such claim. The
Indemnifying Party shall not settle or compromise any such claim without the
Indemnified Party's prior written consent, unless the terms of such settlement
or compromise release the Indemnified Party from any and all liabilities with
respect to such Third Party Claim.
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(b) Any indemnifiable claim that is not a Third Party Claim shall
be asserted by written notice to the Indemnifying Party. If the Indemnifying
Party does not respond to such notice within 30 days, it shall have no further
right to contest the validity of such claim.
10.5 EXCLUSIVE REMEDY. Except as set forth in Section 10.7 below, the
indemnification rights of the parties hereto under this Agreement shall be
subject to, and deemed effective as of, the Closing of the transactions
contemplated hereunder and, except as set forth in Section 10.3(i), are the
exclusive rights and remedies of the parties hereto, including, without
limitation, for any misrepresentation or breach of warranty.
10.6 REPRESENTATIONS OF THE PARTIES. Except for the representations and
warranties expressly set forth herein and the Schedules hereto, no party hereto
makes any representation or warranty of any kind or nature regarding the
Business or any other matter, fact or circumstance, and Parent and the Purchaser
acknowledge that they (and their authorized agents and representatives,
including Arthur Anderson, LLP) have conducted their own investigation and due
diligence review of the Company and have reviewed the operations, facilities,
books and records of the Company and the Steadi Group and have met with and
interviewed such employees, suppliers and customers as they deemed appropriate.
10.7 CERTAIN ADDITIONAL MATTERS.
(a) Notwithstanding anything contained herein, the Sellers shall
pay, satisfy and discharge, and indemnify and hold the Purchaser Indemnitees
harmless from and against (i) any and all Taxes of the Steadi Group for all
taxable periods, or portions thereof, prior to the Closing Date, (ii) all claims
and causes of action now or hereafter asserted by any third party against any
member of the Steadi Group in connection with the matters set forth in Numbers 3
and 4 of Schedule 4.15 hereto and (iii) all claims and causes of action now or
hereafter inserted by William Sands against any member of the Steadi Group in
connection with any event, occurrence or cause of action arising prior to the
Closing Date.
(b) The liability of the Sellers under the preceding paragraph (a)
shall be joint and several, except that Robert Schoenberg and Steven Klein shall
only be liable for 20% and 10%, respectively, of such amounts.
(c) The obligation of the Sellers to pay the Taxes of the Steadi
Group as set forth in paragraph (a)(i) above shall (i) not apply to federal,
state and city income taxes for the fiscal year ending September 30, 1997 and
all taxable periods thereafter, (ii) not apply to any state sales or use tax
arising in connection with sales or rentals occurring after November 30, 1997,
provided, and only to the extent that, the Company has collected the proper
amount of tax in respect of each such transaction or event and (iii) only apply
to the extent the aggregate amount of such Taxes for which the Sellers have the
obligation to pay exceeds $145,000, in which event the aforesaid obligation of
the Sellers shall be to pay such excess.
(d) The matters described in this Section 10.7 shall not be
deemed "Purchaser's Indemnification Events" under Section 10.1 above, and the
indemnification
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contained in Section 10.1 shall not include all Losses arising from the matters
described in this Section 10.7.
ARTICLE XI
MISCELLANEOUS
11.1 COVENANT OF FURTHER ASSURANCES. The parties hereto covenant and
agree to execute and deliver any and all additional writings, instruments and
other documents and take such further actions as shall be reasonably required or
requested to effectuate the terms and conditions of this Agreement.
11.2 ENTIRE AGREEMENT. This Agreement and the Additional Agreements
represent the entire agreements between the parties hereto and thereto with
respect to the subject matter hereof and thereof, and supersede all prior
agreements and communications with respect thereto and all prior agreements and
understandings, whether oral or written, are merged into this Agreement.
11.3 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor any
rights or obligations hereunder may be assigned by any party hereto without the
express written consent of the others and any attempted assignment in violation
thereof shall be null and void; provided, however, that the rights of the
Purchaser may be assigned to any Affiliate of Parent. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended to confer on any Person other than the parties hereto or their
respective successors or permitted assigns or the Indemnified Parties (who shall
be deemed third party beneficiaries hereof) any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
11.4 AMENDMENT OR MODIFICATION. This Agreement may not be waived,
amended, modified or supplemented by the parties hereto in any manner, except by
an instrument in writing signed by the Purchaser and the Sellers'
Representative.
11.5 SEVERABILITY. If any provision of this Agreement shall be
determined by a court of competent jurisdiction to be invalid or unenforceable,
such determination shall not affect the remaining provisions of this Agreement,
all of which shall remain in full force and effect, nor shall it affect their
validity or enforceability in any other jurisdiction. To the extent permitted by
law, each party hereto waives any provision of law which renders any provision
hereof unenforceable in any respect.
11.6 NOTICES. All notices, requests, demands or other communications
under or with respect to this Agreement shall be in writing and shall be given
by hand, by telecopy with request for acknowledgment or confirmation of receipt,
by Federal Express or other nationally recognized overnight delivery service
providing for receipt against delivery (delivery charges prepaid) or by
certified or registered U.S. Mail, postage prepaid, return receipt requested,
and shall be deemed to have been duly given and effective upon the earlier of
(i) its actual receipt (or acknowledgment or confirmation of receipt), (ii) the
next business day after having been sent by Federal Express or similar
nationally recognized overnight delivery service providing for receipt against
delivery, delivery charges prepaid, or (iii) three days after having been sent
by certified or registered U.S. mail, return receipt requested, postage prepaid,
addressed as follows:
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If to Sellers: Richard D. Schoenberg
Steadi-Systems, Ltd.
931 N. Cole Avenue
Hollywood, CA 90038
Telecopier: 213-465-9961
- with a copy to -
Spitzer & Feldman, P.C.
405 Park Avenue
New York, NY 10022
Attention: M. James Spitzer, Jr., Esq.
Telecopier: 212-838-7472
If to Purchaser: Daisytek, Incorporated
500 North Central Expressway
Plano, TX 75074
Attention: Tom Madden
Telecopier: 972-423-1108
- with a copy to -
Wolff & Samson, P.A.
5 Becker Farm Road
Roseland, New Jersey 07068
Attention: Morris Bienenfeld, Esq.
Telecopier: 973-740-1407
Any such Person by written notice to each of the others listed in this Section
in accordance herewith may change the address to which notices may be directed,
but such notice shall be deemed duly given and effective only upon actual
receipt thereof.
12.7 WAIVERS AND EXTENSIONS. Any waiver by any party hereto of any
provision or condition of this Agreement or breach thereof or any extension of
time granted by any party under this Agreement shall not be construed or deemed
to be a waiver of any other provision or condition of this Agreement or breach
thereof or extension of time with respect thereto or a waiver of a subsequent
breach of or subsequent extension of time with respect to same provision or
condition.
12.8 GOVERNING LAW; PERSONAL JURISDICTION. This Agreement shall be
governed by, and be construed in accordance with, the laws of the State of New
York without regard to the conflicts of laws principles thereof. Each party
hereto hereby agrees that any legal action or proceeding (other than any action
seeking injunctive relief, specific performance or other equitable relief) shall
be brought in the courts of the State of New York, New York County, or of the
United States for the Southern District of New York, and each party hereto
hereby accepts for itself and in respect of its property the jurisdiction of
said courts in any such suit or proceeding, and each party consents that process
therein
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may be served by registered or certified mail addressed to such party at the
address designated for notice pursuant hereto.
12.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Agreement but
all of which taken together shall constitute one and the same instrument.
12.10 CAPTIONS AND HEADINGS. The captions, section and other headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
12.11 EXHIBITS AND SCHEDULES. All Exhibits annexed hereto, and all
Schedules referred to herein, are hereby incorporated in and made a part of this
Agreement as if set forth herein.
12.12 CONSTRUCTION. The parties hereto hereby acknowledge and agree
that they and their respective counsel have independently reviewed and made
amendments to this Agreement and that the normal rule of construction, whereby
ambiguities are to be resolved against the drafting party, shall be inapplicable
to this Agreement.
12.13 PUBLICITY. Except as otherwise required by applicable laws or
regulations, neither Sellers, the Purchaser, Parent, nor any Affiliate of the
foregoing, shall issue any press release or make any other public statement
prior to the Closing relating to or connected with or arising out of this
Agreement or the matters contained herein, without obtaining the prior approval
of the other parties hereto to the contents and the manner of presentation and
publication thereof, such consent not to be unreasonably delayed or withheld.
12.14 SELLERS' REPRESENTATIVE. Each Seller hereby appoints the Sellers'
Representative as his agent and representative to give and receive all notices
and services of process and to take any action, give any consents and waivers or
take any other action in connection with the transactions contemplated by this
Agreement; provided, however, each Seller shall have the right at any time, upon
prior written notice to Parent, to revoke such appointment.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SELLERS:
---------------------------------------
Richard D. Schoenberg
---------------------------------------
Robert Schoenberg
---------------------------------------
Steven Klein
PURCHASER:
DAISYTEK, INCORPORATED
By:
------------------------------------
Name: Mark C. Layton
Title: President & CEO
PARENT:
DAISYTEK INTERNATIONAL
CORPORATION
By:
------------------------------------
Name: Mark C. Layton
Title: President & CEO
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SCHEDULES AND EXHIBITS
TO
STOCK PURCHASE AGREEMENT
Exhibit A - Form of Employment Agreements
Exhibit B - Multiplier Table
Exhibit C - Wire transfer instructions
Exhibit D - Form of Legal Opinion
Exhibit E - Form of Legal Opinion
Schedule 2.2 - Seller Allocation of Purchase Price and Shares
Schedule 4.1 - Organization and Qualification
Schedule 4.2 - Capitalization
Schedule 4.3 - Voting Trusts, etc.
Schedule 4.4 - Title to Stock
Schedule 4.6 - No Violations
Schedule 4.7 - Audited Financial Statements
Schedule 4.9 - Undisclosed Liabilities
Schedule 4.10 - Accounts Receivable
Schedule 4.11 - Inventory
Schedule 4.14 - Absence of Changes
Schedule 4.15 - Litigation
Schedule 4.16 - Compliance with Laws
Schedule 4.17 - Environmental and Other Permits
Schedule 4.18 - Material Contracts
Schedule 4.20 - Real Property
Schedule 4.21 - Tangible Personal Property
Schedule 4.22 - Customers
Schedule 4.23 - Suppliers
Schedule 4.24 - Employee Benefit Matters
Schedule 4.25 - Labor Matters
Schedule 4.26 - Key Employees
Schedule 4.27 - Certain Interests
Schedule 4.28 - Taxes
Schedule 4.29 - Insurance
Schedule 4.30 - Accounts, Lockboxes
Schedule 6.1 - Personal Guaranties
-39-
<PAGE> 1
EXHIBIT 10.34
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated and
effective as of February 13, 1998, is among DAISYTEK, INCORPORATED, a Delaware
corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware
corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the
caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or
that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter
defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary
Guarantor," and, collectively, the "Subsidiary Guarantors"), STATE STREET BANK
AND TRUST COMPANY, a Massachusetts trust ("State Street"), THE FIRST NATIONAL
BANK OF CHICAGO, a national banking association ("First Chicago"), and CHASE
BANK OF TEXAS, N.A., a national banking association formerly named Texas
Commerce Bank National Association ("Chase"), as a lender and as administrative
agent for itself, State Street and First Chicago (State Street, First Chicago,
Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement
being referred to, collectively, as "Lenders"). All capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to such terms
in the Credit Agreement.
RECITALS
WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State
Street, First Chicago (as assignee, effective June 30, 1997, of NBD Bank, a
Michigan banking corporation) and Chase are parties to that certain Credit
Agreement dated as of May 22, 1995, as amended by that certain First Amendment
to Credit Agreement dated as of April 15, 1996, that certain Second Amendment
to Credit Agreement dated as of November 14, 1996 and effective as of November
18, 1996, that certain Third Amendment to Credit Agreement dated and effective
as of June 30, 1997, and that certain Fourth Amendment to Credit Agreement
dated and effective as of December 11, 1997 (as so amended, the "Credit
Agreement"), establishing a revolving credit facility in the aggregate maximum
principal amount of $50,000,000; and
WHEREAS, the parties desire to increase the maximum principal amount
of the revolving credit facility from $50,000,000 to $65,000,000, to extend the
stated maturity date thereof to December 31, 2000, and to modify certain
provisions regarding the rates at which interest accrues.
NOW, THEREFORE, in consideration of the recitals set forth above, the
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor,
Subsidiary Guarantors and Lenders hereby agree as follows:
1. Amended Definitions. The following definitions in Section 1.1
of the Credit Agreement are amended to read in their entireties as follows:
""Adjusted Eurodollar Rate" means, at any time, a rate of
interest per annum determined by reference to the Adjustment Ratio in
effect on the date such interest rate is determined according to the
following table:
<TABLE>
<CAPTION>
Adjustment Ratio (%) Rate
---------------- ----
<S> <C>
<65 Eurodollar Rate plus 0.625%
> or = to 65 to <85 Eurodollar Rate plus 0.700%
> or = to 85 to <120 Eurodollar Rate plus 0.775%
> or = to 120 to <150 Eurodollar Rate plus 0.875%
> or = to 150 Eurodollar Rate plus 1.125%"
</TABLE>
<PAGE> 2
""Committed Sum" means, with respect to the Loan Commitment,
Twenty-Five Million Dollars ($25,000,000) with respect to Chase,
Twenty-Five Million Dollars ($25,000,000) with respect to State
Street, and Fifteen Million Dollars ($15,000,000) with respect to
First Chicago."
""Loan Commitment" means Sixty-Five Million Dollars
($65,000,000)."
""Loan Maturity Date" means December 31, 2000, or such earlier
date as results pursuant to Article X."
2. New Definitions. The following definitions are added to
Section 1.1 of the Credit Agreement, to read in their entireties as follows:
""Fifth Amendment Closing Date" means February 13, 1998, being
the effective date of the Fifth Amendment to Credit Agreement among
Borrower, Guarantor, Subsidiary Guarantors, Lenders and Agent."
""First Chicago" means The First National Bank of Chicago, a
national banking association."
3. Amendment of Section 2.2. The first sentence of Section 2.2
of the Credit Agreement is amended to read in its entirety as follows:
"The Loan made by Lenders pursuant to this Article II shall be
evidenced by the Notes dated as of the Fifth Amendment Closing Date
and substantially in the form of Exhibit A."
4. Amendment of Section 11.3. Lenders' names and addresses as
set forth in Section 11.3 of the Credit Agreement are amended to read in their
entirety as follows:
"Chase Bank of Texas, N.A.
2200 Ross Avenue, Third Floor
Dallas, Texas 75201
Attention: James Perry
Telecopy: 214-965-2990
State Street Bank and Trust Company
225 Franklin Street - M8
Boston, Massachusetts 02101
Attention: Michael St. Jean
Telecopy: 617-338-4041
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 2
<PAGE> 3
The First National Bank of Chicago
One First National Plaza, Suite 0088
Chicago, Illinois 60670
Attention: Cory M. Olson
Telecopy: 312-732-2991
As to any Lender who becomes such pursuant to Section 11.4A,
to such Lender at its address given to Agent."
In addition, all references to "Texas Commerce Bank National
Association" are hereby amended to be references to "Chase Bank of Texas,
N.A.," and all references to "TCB" are hereby amended to be references to
"Chase."
5. Amendment of Exhibit A. Exhibit A to the Credit Agreement is
amended in its entirety to be in the form of Exhibit A attached to this
Amendment.
6. Conditions to Effectiveness. The effectiveness of this
Amendment is conditioned upon the prior receipt by Agent of the documentation
and fees set forth below:
(a) Certificates. A certificate of the Secretary of each
Daisytek Corporation, dated as of the Fifth Amendment Closing Date, to
the effect that, except for an increase in the number of authorized
shares of common stock of Guarantor, no changes have occurred to the
certificates of incorporation (and other equivalent charter documents)
and by-laws of the Daisytek Corporations, and no changes have occurred
in the incumbency of officers of the Daisytek Corporations authorized
to execute or attest any of the Loan Documents, in each case since May
22, 1995, except as expressly described in such certificate;
(b) Resolutions. Copies of resolutions of the Board of
Directors of each Daisytek Corporation, satisfactory to Lenders,
approving the execution and delivery of this Amendment and such of the
other Loan Documents to which such corporation is a party and
authorizing the performance of the obligations of such corporation
contemplated in this Amendment and in such other Loan Documents,
accompanied by a certificate of the Secretary of such corporation,
dated as of the Fifth Amendment Closing Date, that such copies are
complete and correct copies of resolutions duly adopted at a meeting
of such Board of Directors, and that such resolutions have not been
amended, modified or revoked in any respect, and are in full force and
effect as of the Fifth Amendment Closing Date;
(c) Other Certificates. Certificates of each Daisytek
Corporation's existence, good standing and qualification to do
business, issued by appropriate officials in any state in which such
corporation is incorporated, owns property or otherwise qualified, or
required to qualify, to do business;
(d) Notes. The Notes, duly executed;
(e) Opinion of Counsel. An executed opinion of Wolff &
Samson, P.C., Roseland, New Jersey, counsel to the Daisytek
Corporations, dated as of the Fifth Amendment Closing Date and in form
and substance satisfactory to Lenders and their counsel;
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 3
<PAGE> 4
(f) Other Documents. Any and all other documents or
certificates reasonably requested by a Lender in connection with the
execution of this Amendment; and
(g) Fee. The fee referred to in Borrower's letter to
Agent of February 6, 1998.
7. Guaranties. Each of Guarantor and each Subsidiary Guarantor
hereby acknowledges, consents and agrees to this Amendment and (a) acknowledges
that its obligations under that certain Guaranty executed by it, in favor of a
Lender, includes a guaranty of all of the obligations, indebtedness and
liabilities of Borrower under the Credit Agreement as amended by this Amendment
(specifically including, without limitation, the obligations, indebtedness and
liabilities resulting from the increase in the maximum principal amount of the
revolving credit facility established by the Credit Agreement from $50,000,000
to $65,000,000), (b) represents to each Lender that such Guaranty remains in
full force and effect and shall continue to be its legal, valid and binding
obligation, enforceable against it in accordance with its terms, and (c) agrees
that this Amendment and all documents executed in connection herewith do not
operate to reduce or discharge its obligations under such Guaranty.
8. Other Documents. Borrower shall provide such other documents
incidental and appropriate to this Amendment as Agent or Agent's counsel may
reasonably request, all such documents being in form and substance reasonably
satisfactory to Agent.
9. Terms of Agreement. Except as expressly amended by this
Amendment, the Credit Agreement is and shall be unchanged.
10. Effect of Amendment. The Credit Agreement and any and all
other documents heretofore, now or hereafter executed and delivered pursuant to
the terms of the Credit Agreement are hereby amended so that any reference to
the Credit Agreement in the Credit Agreement or the other documents shall mean
a reference to the Credit Agreement as amended hereby.
Lenders agree to undertake reasonable efforts among themselves such
that, as of the Fifth Amendment Closing Date, amounts outstanding under the
Loan shall, as to each Lender, be held Pro Rata (as Pro Rata is modified by the
amendment, in this Amendment, of the term "Committed Sum.").
11. Reaffirmation; No Default. Each Daisytek Corporation hereby
represents and warrants to Lenders that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed and
delivered in connection herewith have been authorized by all requisite
corporate action on the part of such Daisytek Corporation and will not violate
the certificate of incorporation (or other charter documents) or bylaws of any
Daisytek Corporation, (b) the representations and warranties contained in the
Credit Agreement, as amended by this Amendment, and any other Loan Document are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (c) no Event of Default has occurred and is continuing and no
event or condition has occurred that with the giving of notice or lapse of time
or both would be an Event of Default, and (d) each Daisytek Corporation is in
full compliance with all covenants and agreements contained in the Credit
Agreement, as amended hereby.
12. Enforceability. Each Daisytek Corporation hereby represents
and warrants that, as of the date of this Amendment, the Credit Agreement and
all documents and instruments executed in connection therewith are in full
force and effect and that there are no claims, counterclaims, offsets or
defenses to any of such documents or instruments.
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 4
<PAGE> 5
13. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS
SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA.
CHAPTER 15 OF TEXAS REVISED CIVIL STATUTES ARTICLE 5069 (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL
NOT APPLY TO THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, OR THE NOTES.
14. Maximum Interest Rate. Regardless of any provisions contained
in this Amendment or in any other Loan Documents, Lenders shall never be deemed
to have contracted for or be entitled to receive, collect or apply as interest
on the Notes or otherwise any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and if Lenders ever receive, collect
or apply as interest any such excess, or if acceleration of the maturity of the
Notes or if any prepayment by Borrower results in Borrower having paid any
interest in excess of the maximum rate, such amount which would be excessive
interest shall be applied to the reduction of the unpaid principal balance of
the Notes for which such excess was received, collected or applied, and, if the
principal balances of Notes are paid in full, any remaining excess shall
forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders
for the use, forbearance or detention of the indebtedness evidenced by the
Notes and/or the Credit Agreement, as amended by this Amendment, shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full term of such indebtedness until payment in full so
that the rate or amount of interest on account of such indebtedness does not
exceed the maximum lawful rate permitted under applicable law. In determining
whether or not the interest paid or payable under any specific contingency
exceeds the maximum rate of interest permitted by law, Borrower and Lenders
shall, to the maximum extent permitted under applicable law, (i) characterize
any non-principal payment as an expense, fee or premium, rather than as
interest; and (ii) exclude voluntary prepayments and the effect thereof; and
(iii) compare the total amount of interest contracted for, charged or received
with the total amount of interest which could be contracted for, charged or
received throughout the entire contemplated term of the Notes at the maximum
lawful rate under applicable law.
15. Counterparts. This Amendment may be separately executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Amendment.
16. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY
AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM
OR OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS
AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK
CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL
INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN
DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS
WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH
LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH
ITS
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 5
<PAGE> 6
LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION,
THE FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY
THE COURT.
17. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION
HEREBY WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE
PRACTICES-CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE Section 17.41 ET
SEQ.), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND
REPRESENTS AND WARRANTS TO EACH LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE
AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION
TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS
AMENDMENT, (B) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C)
IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS.
18. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS
AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE
PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING
TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS
AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES.
[The balance of this page is intentionally left blank.]
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 6
<PAGE> 7
THIS AMENDMENT is executed and effective as of the date first written
above.
BORROWER:
DAISYTEK, INCORPORATED
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
GUARANTOR:
DAISYTEK INTERNATIONAL
CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
SUBSIDIARY GUARANTORS:
WORKING CAPITAL OF AMERICA, DAISYTEK DE MEXICO SERVICES,
INC., a Delaware corporation S.A. DE C.V., a Mexican corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
HOME TECH DEPOT, INC., a Delaware PRIORITY FULFILLMENT SERVICES,
corporation INC., a Delaware corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
DAISYTEK (CANADA) INC., a Canadian DAISYTEK AUSTRALIA PTY. LIMITED, an
corporation Australian corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
SUBSIDIARY GUARANTORS (cont'd):
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 7
<PAGE> 8
WORKING CAPITAL OF AMERICA, PRIORITY FULFILLMENT SERVICES OF
INC., a corporation CANADA, INC., a Canadian corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
PRIORITY FULLFILLMENT SERVICES OF
DAISYTEK DE MEXICO, S.A. DE C.V., AUSTRALIA PTY. LIMITED, an
a Mexican corporation Australian corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
SUPPLIES EXPRESS, INC., a Delaware DAISYTEK ASIA PTY. LIMITED, a
corporation Singapore corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
DAISYTEK LATIN AMERICA, INC., a STEADI SYSTEMS LTD.,
Florida corporation a California corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
PRIORITY FULFILLMENT SERVICES STEADI SYSTEMS NEW YORK, INC.,
DE MEXICO, S.A. DE C.V., a Mexican a New York corporation
corporation
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- ------------------------------
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 8
<PAGE> 9
STEADI SYSTEMS MIAMI, INC.,
a Florida corporation
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AGENT:
CHASE BANK OF TEXAS, N.A.,
a national banking association
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
LENDERS:
CHASE BANK OF TEXAS, N.A.
a national banking association
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust
By:
---------------------------------
Michael St. Jean,
Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
a national banking association
By:
---------------------------------
James F. Gable,
Authorized Agent
FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 9
<PAGE> 1
EXHIBIT 11
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Income $16,160 $13,367 $10,767
======= ======= =======
Weighted average common shares
outstanding 14,343 13,826 13,514
======= ======= =======
Net income per common
share-diluted $ 1.13 $ 0.97 $ 0.80
======= ======= =======
Calculation of weighted average
common shares:
Weighted average common
shares outstanding 13,566 12,934 12,602
Weighted average common
stock options, utilizing the
treasury stock method 777 892 912
------- ------- -------
14,343 13,826 13,514
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
<S> <C>
Daisytek, Incorporated Delaware
Subsidiaries of Daisytek, Incorporated:
Daisytek (Canada) Inc. Canada
Working Capital of America, Inc. Delaware
Home Tech Depot, Inc. Delaware
Daisytek De Mexico S.A. De C.V. Mexico
Daisytek Latin America, Inc. Florida
Supplies Express, Inc. Delaware
Priority Fulfillment Services, Inc. Delaware
Priority Fulfillment Services of Canada, Inc. Canada
Daisytek De Mexico Services, S.A. de C.V. Mexico
Priority Fulfillment Services de Mexico, S.A. de C.V. Mexico
Daisytek Australia Pty. Ltd. Australia
Daisytek Asia PTY LTD Singapore
Steadi-Systems, Ltd. (including 6 wholly-owned U.S.
subsidiaries operating as distributors of
professional-grade audio and video media products) California
Steadi-Systems De Mexico, S.A. De C.V. Mexico
Steadi-Systems Canada Inc. Canada
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statement File Nos. 33-96728 and 333-53505.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,068
<SECURITIES> 0
<RECEIVABLES> 125,276
<ALLOWANCES> 2,655
<INVENTORY> 89,694
<CURRENT-ASSETS> 216,944
<PP&E> 28,820
<DEPRECIATION> 14,024
<TOTAL-ASSETS> 246,651
<CURRENT-LIABILITIES> 94,626
<BONDS> 12,894
0
0
<COMMON> 160
<OTHER-SE> 139,210
<TOTAL-LIABILITY-AND-EQUITY> 246,651
<SALES> 757,027
<TOTAL-REVENUES> 757,027
<CGS> 679,726
<TOTAL-COSTS> 679,726
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,936
<INTEREST-EXPENSE> 2,698
<INCOME-PRETAX> 26,184
<INCOME-TAX> 10,024
<INCOME-CONTINUING> 16,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,160
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.13
</TABLE>
