<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
------- -------
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At July 31, 1998 there were 17,096,528 shares of registrant's common stock
outstanding.
<PAGE> 2
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets as of June 30, 1998 and
March 31, 1998...................................................... 3
Unaudited Interim Consolidated Statements of Income for the
Three Months Ended June 30, 1998 and 1997 .......................... 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1998 and 1997........................... 6
Notes to Unaudited Interim Condensed Consolidated Financial
Statements.......................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................................... 21
SIGNATURES............................................................................. 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998 (a)
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 725 $ 2,087
Accounts receivable, net of allowance for doubtful accounts of
$2,075 and $2,765 at June 30, 1998 and March 31, 1998, respectively 114,651 127,563
Inventories, net:
Inventories, excluding Priority Fulfillment Services Division 105,347 81,956
Inventories, Priority Fulfillment Services Division 14,375 11,634
Prepaid expenses and other current assets 5,946 3,944
---------- ----------
Total current assets 241,044 227,184
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment 29,885 28,391
Leasehold improvements 2,060 1,907
---------- ----------
31,945 30,298
Less - Accumulated depreciation and amortization (16,307) (15,025)
---------- ----------
Net property and equipment 15,638 15,273
EMPLOYEE RECEIVABLE 463 459
OTHER ASSETS 3,980 --
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of $1,091 and $931 at June 30, 1998 and
March 31, 1998, respectively 17,466 14,929
---------- ----------
Total assets $ 278,591 $ 257,845
========== ==========
</TABLE>
- ----------------------
(a) Retroactively restated to combine the financial positions of Daisytek
International Corporation ("Daisytek") with The Tape Company, Inc. ("The
Tape Company"), which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests. (see Footnotes 1 and 3 of these
Interim Unaudited Consolidated Financial Statements).
The accompanying notes are an integral part
of these consolidated balance sheets.
3
<PAGE> 4
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998 (a)
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 176 $ 3,010
Trade accounts payable 84,226 87,390
Accrued expenses 10,288 9,768
Income taxes payable 2,316 1,484
Deferred income tax liability 1,032 1,546
---------- ----------
Total current liabilities 98,038 103,198
---------- ----------
LONG-TERM DEBT, less current portion 37,085 16,916
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at June 30, 1998 and March 31, 1998; none issued
and outstanding -- --
Common stock, $0.01 par value; 20,000,000 shares
authorized at June 30, 1998 and March 31, 1998;
17,041,308 and 16,935,896 shares issued and
outstanding at June 30, 1998 and March 31, 1998,
respectively 170 169
Additional paid-in capital 91,322 89,879
Retained earnings 54,034 49,614
Cumulative foreign currency translation adjustment (2,058) (1,931)
---------- ----------
Total shareholders' equity 143,468 137,731
---------- ----------
Total liabilities and shareholders' equity $ 278,591 $ 257,845
========== ==========
</TABLE>
- ----------------------
(a) Retroactively restated to combine the financial positions of Daisytek with
The Tape Company, which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests. (see Footnotes 1 and 3 of these
Interim Unaudited Consolidated Financial Statements).
The accompanying notes are an integral part
of these consolidated balance sheets.
4
<PAGE> 5
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net sales $ 222,589 $ 182,777
Cost of sales 196,062 163,154
------------ ------------
Gross profit 26,527 19,623
Selling, general and administrative expenses 16,875 12,522
Acquisition related costs 405 --
------------ ------------
Income from operations 9,247 7,101
Interest expense 852 586
------------ ------------
Income before income taxes 8,395 6,515
Provision for income taxes 3,002 2,415
------------ ------------
Net income $ 5,393 $ 4,100
============ ============
Net income per common share:
Basic $ 0.32 $ 0.29
Diluted $ 0.30 $ 0.27
Pro forma data (b):
Net income $ 5,393 $ 4,100
Pro forma adjustments:
Provision for income taxes (291) (82)
Acquisition related costs, net of tax 246 --
------------ ------------
Pro forma net income $ 5,348 $ 4,018
============ ============
Pro forma net income per common share:
Basic $ 0.31 $ 0.28
Diluted $ 0.30 $ 0.27
Weighted average common and common share equivalents outstanding:
Basic 17,005 14,339
Diluted 17,814 14,983
</TABLE>
- ----------------------
(a) Retroactively restated to combine the results of operations of Daisytek
with The Tape Company, which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests. (see Footnotes 1 and 3 of these
Interim Unaudited Consolidated Financial Statements).
(b) Pro forma data includes the following adjustments: (1) The Tape Company
included a business unit organized as a subchapter S corporation, whereby
income taxes were paid individually by the owners. The pro forma provision
for income tax adjustment is provided to reflect income tax under a
corporate tax structure. (2) Daisytek incurred various acquisition related
accounting, legal and other costs applicable to the acquisition of The Tape
Company. The pro forma adjustment for acquisition related costs, net of
tax, excludes such costs from pro forma net income for the three months
ended June 30, 1998.
The accompanying notes are an integral part
of these interim consolidated statements.
5
<PAGE> 6
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1998 1997(a)
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,393 $ 4,100
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization 1,782 1,223
Provision for doubtful accounts 525 418
Deferred income tax provision (benefit) (399) 2
Changes in operating assets and liabilities --
Accounts receivable 11,949 (390)
Inventories, net (26,690) (7,492)
Trade accounts payable and accrued expenses (2,217) 4,197
Income taxes payable 828 (332)
Prepaid expenses and other current assets (2,526) (632)
---------- ---------
Net cash provided by (used in) operating activities (11,355) 1,094
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,807) (837)
Additional cost of acquired business (2,886) --
Advances to employees, net (29) (138)
Increase in other assets (3,980) --
---------- ---------
Net cash used in investing activities (8,702) (975)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net 25,024 (50)
Payments on capital leases and notes payable (7,132) (746)
Net proceeds from exercise of stock options 1,443 2,331
Distributions to shareholders of pooled company (973) (985)
---------- ----------
Net cash provided by financing activities 18,362 550
---------- ---------
EFFECT OF EXCHANGE RATES ON CASH 333 (141)
---------- ----------
NET INCREASE (DECREASE) IN CASH (1,362) 528
CASH, beginning of period 2,087 557
---------- ---------
CASH, end of period $ 725 $ 1,085
========== =========
</TABLE>
- ------------------------
(a) Retroactively restated to combine the cash flows of Daisytek with The Tape
Company, which was acquired by Daisytek during June 1998 and accounted for
as a pooling of interests. (see Footnotes 1 and 3 of these Interim
Unaudited Consolidated Financial Statements).
The accompanying notes are an integral part
of these interim consolidated statements.
6
<PAGE> 7
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
1. BASIS OF PRESENTATION:
The Interim Unaudited Consolidated Financial Statements include the
accounts of Daisytek International Corporation and the accounts of companies
acquired in business combinations accounted for under 1) the purchase method
from their respective acquisition dates, and 2) the pooling of interests method,
giving retroactive effect for all periods presented. See Footnote 3 of these
Interim Unaudited Consolidated Financial Statements for a reconciliation of the
Company's retroactively restated and previously reported revenue, net income,
pro forma net income and weighted average common share and common share
equivalents outstanding, resulting from the business combination with The Tape
Company, Inc. ("The Tape Company"), which was acquired by the Company during
June 1998 and accounted for as a pooling of interests.
In the opinion of management, the Interim Unaudited Condensed Consolidated
Financial Statements of the Company include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position as of June 30, 1998, its results of operations and its
results of cash flows for the three months ended June 30, 1998 and 1997. Results
of the Company's operations for interim periods may not be indicative of results
for the full fiscal year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission (the "SEC").
The Interim Unaudited Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements and
accompanying notes of the Company included in the Company's Form 10-K (File
Number 0-25400) as filed with the SEC on May 29, 1998 (the "Company's Form
10-K"). Accounting policies used in the preparation of the Interim Unaudited
Condensed Consolidated Financial Statements are consistent in all material
respects with the accounting policies described in the Notes to Consolidated
Financial Statements in the Company's Form 10-K.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
Presented as follows, for informational purposes only, are the Company's
unaudited interim consolidated statements of income for the three month periods
ended June 30, 1998 and 1997:
7
<PAGE> 8
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------
1997 % 1997
1998 Reported (a) Change Restated (b)
------------ ------------ ------ -------------
<S> <C> <C> <C> <C>
Net sales $ 222,589 $ 172,812 28.8% $ 182,777
Cost of sales 196,062 155,506 163,154
------------ ------------ ------------
Gross profit 26,527 17,306 53.3% 19,623
Selling, general and administrative expenses 16,875 10,583 59.5% 12,522
Acquisition related costs 405 -- --
------------ ------------ ------------
Income from operations 9,247 6,723 37.5% 7,101
Interest expense 852 519 586
------------ ------------ ------------
Income before income taxes 8,395 6,204 6,515
Provision for income taxes 3,002 2,375 2,415
------------ ------------ ------------
Net income $ 5,393 $ 3,829 40.8% $ 4,100
============ ============ ============
Net income per common share:
Basic $ 0.32 $ 0.29 10.3% $ 0.29
Diluted $ 0.30 $ 0.27 11.1% $ 0.27
Pro forma data (c):
Net income $ 5,393 $ 3,829 $ 4,100
Pro forma adjustments:
Provision for income taxes (291) -- (82)
Acquisition related costs, net of tax 246 -- --
------------ ------------ ------------
Pro forma net income $ 5,348 $ 3,829 39.7% $ 4,018
============ ============ ============
Pro forma net income per common share:
Basic $ 0.31 $ 0.29 6.9% $ 0.28
Diluted $ 0.30 $ 0.27 11.1% $ 0.27
Weighted average common and common share
equivalents outstanding:
Basic 17,005 13,364 27.2% 14,339
Diluted 17,814 14,008 27.2% 14,983
</TABLE>
- ------------------------
(a) Results previously reported for Daisytek prior to the acquisition of The
Tape Company.
(b) Retroactively restated to combine the results of operations of Daisytek
with The Tape Company, which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests.
(c) Pro forma data includes the following adjustments: (1) The Tape Company
included a business unit organized as a subchapter S corporation, whereby
income taxes were paid individually by the owners. The pro forma provision
for income tax adjustment is provided to reflect income tax under a
corporate tax structure. (2) Daisytek incurred various acquisition related
accounting, legal and other costs applicable to the acquisition of The Tape
Company. The pro forma adjustment for acquisition related costs, net of
tax, excludes such costs from pro forma net income for the three months
ended June 30, 1998.
8
<PAGE> 9
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
2. ORGANIZATION AND NATURE OF BUSINESS:
The Company is 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, warehouse clubs and other retailers who resell the products to
end-users.
During fiscal year 1996, the Company formed Priority Fulfillment Services,
Inc. ("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its
business partners 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
collections 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
professional-grade audio and video media products (pro-tape products) to the
filmed entertainment and multimedia industries. The Company further expanded its
operations in the distribution of pro-tape products through the acquisition of
The Tape Company in June 1998. Through Steadi-Systems and The Tape Company, the
Company distributes a wide array of professional-grade audio and video media
products and video hardware and is an authorized distributor for leading
manufacturers such as Sony, Fuji, JVC, Avid and others to customers including
production companies, post-production operations, and television stations.
9
<PAGE> 10
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
3. BUSINESS COMBINATIONS:
During June 1998, the Company completed the acquisition of The Tape Company
through a stock-for-stock merger. Under the terms of the acquisition, accounted
for as a pooling of interest, the Company exchanged 974,864 shares of Company
common stock for all of The Tape Company's common stock. The Tape Company is a
Chicago, Ill.-based independent distributor of professional grade audio and
video media products. Retroactively restated and previously reported revenue,
net income, pro forma net income and weighted average common share and common
share equivalents outstanding are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
-----------------------------------------------
Daisytek -
Previously The Tape Daisytek -
Reported Company Restated
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 172,812 $ 9,965 $ 182,777
Net income $ 3,829 $ 271 $ 4,100
Net income per common share:
Basic $ 0.29 $ 0.29
Diluted $ 0.27 $ 0.27
Pro forma data (a):
Net income $ 3,829 $ 271 $ 4,100
Pro forma adjustment for income taxes -- (82) (82)
------------ ------------ ------------
Pro forma net income $ 3,829 $ 189 $ 4,018
============ ============ ============
Pro forma net income per common share:
Basic $ 0.29 $ 0.28
Diluted $ 0.27 $ 0.27
Weighted average common and
common share equivalents outstanding:
Basic 13,364 14,339
Diluted 14,008 14,983
</TABLE>
- ------------------------
(a) Pro forma data includes the following adjustments: (1) The Tape Company
included a business unit organized as a subchapter S corporation, whereby
income taxes were paid individually by the owners. The pro forma provision
for income tax adjustment is provided to reflect income tax under a
corporate tax structure. (2) Daisytek incurred various acquisition related
accounting, legal and other costs applicable to the acquisition of The Tape
Company. The pro forma adjustment for acquisition related costs, net of
tax, excludes such costs from pro forma net income for the three months
ended June 30, 1998.
4. INVENTORIES:
Inventories (merchandise held for resale, all of which is finished goods)
are stated at the lower of weighted average cost or market.
10
<PAGE> 11
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
5. DEBT:
Debt as of June 30, 1998 and March 31, 1998, is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Revolving line of credit with commercial banks, interest (weighted average rate
of 6.9% at June 30, 1998) at the Company's option at the prime rate of a
bank (8.5% at June 30, 1998) or the Eurodollar rate plus
0.625% to 1.125% (6.3% at June 30, 1998), due December 31, 2000 $ 24,900 $ --
Revolving line of credit with commercial bank, interest at the Australian Bank
Bill Rate or the Australian bank's overnight rate plus 0.75%
(6.0% at June 30, 1998), due December 31, 2000 3,813 4,410
Revolving line of credit with commercial bank, interest (weighted average rate
of 5.8% at June 30, 1998) at the Canadian bank's cost of funds plus 0.65%
(5.8% at June 30, 1998) or the Canadian bank's prime rate
(6.5% at June 30, 1998), due December 31, 2000 8,271 8,101
Revolving line of credit with commercial bank, interest payable monthly at the
Federal Funds rate plus 2%, due October 31, 1998, and secured by a
blanket lien on all assets of The Tape Company and affiliates -- 2,161
Term loan with commercial bank, payable monthly at a rate of $25 plus interest
at 7.65%, due October 31, 2002 and secured by a blanket lien
on all assets of The Tape Company and affiliates -- 1,400
Note payable to individual, payable monthly at a rate of $41 including
interest at a rate of 6.66%, due July 25, 2007 -- 3,413
Notes payable and obligations under capital leases for warehouse equipment,
computer equipment, office furniture, fixtures and transportation equipment
interest at varying rates ranging from 7.5% to 11%, with
lease terms varying from three to seven years 277 441
---------- ----------
Long-term debt 37,261 19,926
Less: Current portion of long-term debt (176) (3,010)
---------- ----------
Long-term debt, less current portion $ 37,085 $ 16,916
========== ==========
</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. The Facility accrues
interest, at the Company's option, at the prime rate of a bank or the Eurodollar
rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's
financial performance. A commitment fee of 0.20% to 0.25% is charged on the
unused portion of the Facility. The Facility contains various covenants
including, among other things, the maintenance of certain financial ratios
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,
11
<PAGE> 12
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
investments and asset sales. As of June 30, 1998, the Company had borrowed $24.9
million under the Facility, leaving $40.1 million available for additional
borrowings. This Facility is part of the Company's integrated cash management
system in which accounts receivable collections are used to pay down the
Facility and disbursements are paid from the Facility. This system allows the
Company to optimize its cash flow.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, as amended in
July 1998, expires on December 31, 2000 and allows the Company to borrow
Australian dollars up to a maximum of $7.5 million (Australian), or
approximately $4.6 million (U.S.) at June 30, 1998. The Australian Facility
accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian
bank's overnight rate plus 0.75%. A commitment fee of 0.25% is charged on the
total amount of the Australian Facility. As of June 30, 1998, the Company had
borrowed approximately $3.8 million (U.S.), leaving approximately $0.8 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, as amended in July
1998, expires on December 31, 2000 and allows the Company to borrow Canadian or
U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $10.2
million (U.S.) at June 30, 1998. The Company had borrowed approximately $8.3
million (U.S.) under the Canadian Facility at June 30, 1998, leaving
approximately $1.9 million (U.S.) available under the Canadian Facility for
additional borrowings. 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.
In conjunction with the business combination with The Tape Company, certain
debt of The Tape Company, including the revolving line of credit due October 31,
1998, the term loan with commercial bank due October 31, 2002, and the note
payable to individual due July 25, 2007, were paid in full by the Company and
were retired.
6. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash paid during the period for:
Interest $ 728 $ 590
Income taxes $ 2,177 $ 1,103
</TABLE>
12
<PAGE> 13
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
7. STOCK OPTIONS:
During the three months ended June 30, 1998, the Company granted options to
certain employees under its employee stock option plans (the "Plans"). These
options were granted at the fair market value of the Company's common stock at
the date of the grant. Such options become exercisable over a three year period
starting with the date of grant, based on vesting percentages.
<TABLE>
<CAPTION>
Shares Price per Share
---------- ---------------
<S> <C> <C>
Outstanding, March 31, 1998 1,725,974 $0.64 - $22.44
Granted 737,298 $21.50 - $22.88
Exercised (104,779) $2.65 - $16.25
Canceled (74,031) $9.75 - $17.38
----------
Outstanding, June 30, 1998 2,284,462 $0.64 - $22.88
==========
</TABLE>
8. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires companies to report comprehensive
income, which is defined as all changes in equity during a period, except those
resulting from investment by owners and distribution to owners. The Company
adopted SFAS No. 130 during the three months ended June 30, 1998. Comprehensive
income for the Company includes net income and foreign currency translation
adjustments for the Company's foreign subsidiaries where the local currency is
the functional currency. The Company's comprehensive income is as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $ 5,393 $ 4,100
Comprehensive income adjustments:
Cumulative translation adjustment (127) (224)
-------- --------
Comprehensive income $ 5,266 $ 3,876
======== ========
</TABLE>
9. NEW ACCOUNTING STANDARDS:
The Company adopted SFAS No. 128, "Earnings per Share," during the quarter
ended December 31, 1997. The statement establishes new standards for computing
and presenting earnings per share ("EPS"). The Company restated its earnings per
share data for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997; however, earlier adoption is permitted.
SFAS No. 131 requires the disclosure of financial and descriptive information
about reportable operating segments. SFAS No. 131 modifies 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
standard and its potential impact on disclosures and will adopt these
pronouncement in its fiscal year 1999 annual financial statements.
13
<PAGE> 14
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investment in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial instruments
to be included in other comprehensive income as a part of the cumulative
translation adjustment. The Company currently complies with the provisions of
SFAS No. 133 in its accounting treatment of these financial instruments. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999, with
initial application as of the beginning of an entity's fiscal quarter. Early
adoption of the standard is allowed, however, the statement cannot be applied
retroactively to financial statements of prior periods.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Interim Unaudited Consolidated Financial Statements include the accounts
of Daisytek International Corporation and the accounts of companies acquired in
business combinations accounted for under 1) the purchase method from their
respective acquisition dates, and 2) the pooling of interests method, giving
retroactive effect for all periods presented.
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 1998 AND 1997.
Net Sales. Net sales for the three months ended June 30, 1998 were $222.6
million as compared to $182.8 million for the three months ended June 30, 1997,
an increase of $39.8 million, or 21.8%. The increase was the result of an
increase in domestic and international computer supplies sales, revenues from
outsourcing activities of Priority Fulfillment Services ("PFS"), and the
addition of net sales of professional-grade audio and video media products
(pro-tape products) resulting from the acquisitions of Steadi-Systems, Ltd.
("Steadi-Systems") in January 1998. The business combination of Steadi-Systems
was accounted for under the purchase method, thus its results of operations are
included in the Company's consolidated results after the acquisition date. The
growth in U.S. net sales was approximately $24 million, or approximately 17%,
and the growth in international net sales was approximately $16 million, or
approximately 41%. The growth in U.S. and international net sales was primarily
due to new customers, increased sales volume to large national accounts,
computer and office product superstores, and the Company's continued
introduction of new products, including those new products added through
business acquisitions. 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 three months ended June 30, 1998 was
$26.5 million as compared to $19.6 million in the same period in 1997, an
increase of $6.9 million, or 35.2%, primarily as the result of increased sales
volume in the first quarter of fiscal year 1999. The Company's gross profit
margin as a percent of net sales was 11.9% for the three month period ended June
30, 1998 as compared to 10.7% for the same period of 1997. The increase in the
Company's gross profit margin as a percentage of net sales was a result of an
increase in pro-tape net sales, which have higher margins than the Company's
traditional computer supplies products, as a percent of total net sales. Also
increased higher margin fee revenue business for the Company's outsource
providing subsidiary, Priority Fulfillment Services ("PFS"), and enhanced
product sourcing in fiscal year 1999 contributed to increased gross profit
margins during fiscal year 1999. The Company believes that the competitive
environment and consolidation of its computer supplies products customers may
negatively impact the Company's gross profit margin percentage during fiscal
year 1999. The Company continues to look for opportunities to offset such
impact, however, there can be no assurance that the Company will be successful
in doing so.
SG&A Expenses. SG&A expenses for the three months ended June 30, 1998 were
$16.9 million (excluding acquisition related costs), or 7.6% of net sales, as
compared to $12.5 million, or 6.9% of net sales, for the three months ended June
30, 1997. The increase in SG&A expenses was primarily a result of the increase
in costs associated with the Company's increased sales volume. The increase in
SG&A expenses as a percentage of net sales for fiscal year 1999 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. The Company
continues to incur incremental SG&A expenses to invest in growth areas of the
business, PFS and international operations in particular.
15
<PAGE> 16
Acquisition Related Costs. During June 1998, the Company completed the
acquisition of The Tape Company, Inc. ("The Tape Company") through a
stock-for-stock merger, which is accounted for as a pooling of interest in the
accompanying Unaudited Interim Consolidated Financial Statements and notes
thereto. Daisytek incurred various acquisition related accounting, legal and
other costs applicable to the acquisition of The Tape Company of approximately
$0.4 million, or approximately $0.01 per share net of income taxes. These costs
were charged to income during the 3 months ended June 30, 1998. The Company
expects to incur approximately $0.4 million of expenses in each of the next two
fiscal quarters relating to The Tape Company merger activities.
Income from Operations. Income from operations for the three months ended
June 30, 1998 was $9.2 million. Income from operations excluding acquisition
related costs was $9.7 million as compared to $7.1 million for the same period
during 1997, an increase of $2.6 million, or 35.9%. This increase was due to
increased sales volume and increased gross profit partially offset by increased
SG&A expenses. Income from operations as a percentage of net sales was 4.2% for
the three months ended June 30, 1998. Income from operations excluding
acquisition related costs as a percentage of net sales was 4.3% for the three
months ended June 30, 1998 as compared to 3.9% for the corresponding period
ending June 30, 1997.
Interest Expense. Interest expense for the three months ended June 30, 1998
was $0.9 million as compared to $0.6 million for the three months ended June 30,
1997. Interest expense was higher during the three months ended June 30, 1998
primarily due to an increase in the average line of credit, partially offset by
a slight decrease in interest rates during fiscal year 1999. The weighted
average interest rate was 6.7% and 7.0% during the three months ended June 30,
1998 and 1997, respectively.
Income Taxes. The Company's provision for income taxes was $3.0 million for
the three months ended June 30, 1998 as compared to $2.4 million for the three
months ended June 30, 1997. The increase was primarily due to increased pretax
profits. The effective tax rate was 35.8% and 37.1% for the three months ended
June 30, 1998 and 1997, respectively. The effective tax rate for the three
months ended June 30, 1998 was lower than the corresponding period during 1997
as The Tape Company's income before income taxes represented a larger percentage
of the Company's total income before income taxes during the three months ended
June 30, 1998. The Tape Company, prior to its acquisition by the Company
included a business unit organized as a subchapter S corporation, whereby income
taxes were paid individually by the owners. In future periods, The Tape Company,
including all of its operating units, will be taxed under a corporate tax
structure, and accordingly, the Company's effective tax rate should be in the
range of 38% to 39% during the remainder of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the three months ended June 30, 1998, net cash of $18.4
million was provided by financing activities, compared to net cash provided by
financing activities of $0.6 million for the three months ended June 30, 1997.
Cash provided by financing activities was generated primarily from proceeds from
revolving lines of credit and the exercise of common stock options during the
three months ended June 30, 1998. In conjunction with the business combination
with The Tape Company, certain debt of The Tape Company, including the revolving
line of credit due October 31, 1998, the term loan with commercial bank due
October 31, 2002, and the note payable to an individual due July 25, 2007, were
paid in full by the Company during the three months ended June 30, 1998, and
were retired. Included in cash flows from financing activities for the three
months ended June 30, 1998 and 1997 are distributions made to shareholders of
The Tape Company relating to taxes incurred by these shareholders for earnings
of the business unit of The Tape Company which was organized as a subchapter S
corporation. These distributions were made prior to the business combination
with the Company. During the three months ended June 30, 1997, cash provided by
financing activities was generated primarily from proceeds received from the
exercise of common stock options. Financing activities should provide the
Company's primary source of cash during the remainder of fiscal year 1999,
primarily to support the Company's growth.
16
<PAGE> 17
During the three months ended June 30, 1998, $11.4 million was used in
operating activities, while net cash of $1.1 million was provided by operating
activities during the three months ended June 30, 1997. Increased working
capital requirements during the three months ended June 30, 1998, were partially
funded by cash generated by the Company's operations, with the remainder
provided by financing activities. During the three months ended June 30, 1997,
increased working capital required to support the Company's growth was funded by
cash generated from operating activities.
Funds used for investing activities during the three months ended June 30,
1998 included incremental costs of an acquired business and for capital
expenditures. During May 1998, certain events occurred which were defined in the
acquisition agreement for Steadi-Systems, which caused the Company to incur
approximately $2.9 million in contingent cash payments for that acquisition.
Capital expenditures of approximately $1.9 during the three months ended June
30, 1998 consisted primarily of additions to upgrade the Company's management
information systems, including the Company's Internet based customer tools,
including its on-line catalog and ordering tool (SOLOnet) and other methods of
electronic commerce, and general expansion of its facilities, both domestic and
foreign. The principal use of funds for investing activities were for capital
expenditures of $0.8 million for the three months ended June 30, 1997. The
Company anticipates that its total investment in upgrades and additions to
facilities for fiscal year 1999 will be approximately $6 million to $7 million.
Working capital increased to $143.0 million at June 30, 1998 from $124.0
million at March 31, 1998. This increase of $19.0 million was primarily
attributable to an increase in inventory and a decrease in accounts payable,
which were partially offset by a decrease in accounts receivable. During the
three month periods ended June 30, 1998 and 1997, the Company generally
maintained an accounts receivable balance of approximately 47 days of sales.
Inventory turnover, excluding Priority Fulfillment Services Division, was
approximately 7 and 10 turns for the three month periods ended June 30, 1998 and
1997, respectively. The Company generally maintains an inventory turnover of
approximately 10 to 11 turns, however, inventory turnover was lower during the
three months ended June 30, 1998 primarily due to increased inventory levels
held by the Company's pro-tape business and due to inventory buy-in activity to
take advantage of enhanced product sourcing opportunities.
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 June 30, 1998, the
Company had borrowed $24.9 million, leaving $40.1 million available under the
Facility for additional borrowings. The Facility accrues interest, at the
Company's option, at the prime rate of a bank or a eurodollar rate plus an
adjustment ranging from 0.625% to 1.125% depending on the Company's financial
performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion
of the Facility. The Facility contains various covenants including, among other
things, the maintenance of certain financial ratios including the achievement of
a minimum fixed charge ratio and minimum level of tangible net worth, and
restrictions on certain activities of the Company, including loans and payments
to related parties, incurring additional debt, acquisitions, investments and
asset sales.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, as amended in
July 1998, expires on December 31, 2000 and allows the Company to borrow
Australian dollars up to a maximum of $7.5 million (Australian), or
approximately $4.6 million (U.S.) at June 30, 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 June
30, 1998, the Company had borrowed approximately $3.8 million (U.S.), leaving
approximately $0.8 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
December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a
maximum of $15.0 million (Canadian), or approximately $10.2 million (U.S.) at
June 30, 1998. The Company had borrowed approximately $8.3 million (U.S.) under
the Canadian Facility, leaving approximately $1.9 million (U.S.) available under
the Canadian Facility for additional borrowings at June 30, 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.
17
<PAGE> 18
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 $10.0 million.
Amounts borrowed under this note agreement bear interest at the bank's
discretion, primarily based on a money market borrowing rate plus an adjustment.
The maturity date of any amounts borrowed will occur prior to January 1999, the
expiration date of the note. The Company had no borrowings outstanding under
this promissory note agreement at June 30, 1998.
During the three months ended June 30, 1998, approximately 23% of the
Company's net sales were sold through the Company's Canadian, Mexican,
Australian, Singaporean and U.S. export operations, including Latin America. The
Company believes that international markets represent further opportunities for
growth. The Company attempts to protect itself from foreign currency
fluctuations by denominating substantially all of its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company has
entered into various forward Canadian and Australian currency exchange contracts
in order to hedge the Company's net investment in, and its intercompany payable
applicable to, its Canadian and Australian subsidiaries. The Company has the
following forward currency exchange contracts outstanding:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
<S> <C> <C>
Canadian Dollars $11.7 million Sell Canadian Dollars October 1998
Australian Dollars $1.8 million Sell Australian Dollars October 1998
Australian Dollars $0.5 million Sell Australian Dollars October 1998
Australian Dollars $3.7 million Sell Australian Dollars October 1998
</TABLE>
As of June 30, 1998, the Company had incurred unrealized gains of
approximately $0.3 million, net of income taxes, on these outstanding Canadian
and Australian forward exchange contracts. 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.
The Company may attempt to acquire other businesses to expand its product
line in its core wholesale business and/or in the call-center or public
warehousing industries in connection with its efforts to grow its PFS
subsidiary. The Company currently has no agreements to acquire any such
businesses. Should the Company be successful in acquiring other businesses, the
Company may require additional financing to consummate such a transaction.
Acquisitions involve certain risks and uncertainties, therefore, the Company can
give no assurance with respect to whether it will be successful in identifying
such a business to acquire, whether it will be able to obtain financing to
complete such an acquisition, or whether the Company will be successful in
operating the acquired business.
The Company believes it will be able to satisfy its working capital needs
for fiscal year 1999, as well as business growth and planned capital
expenditures, through funds available under the Company's various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under the Company's credit facilities. In
addition, depending on market conditions and the terms thereof, the Company may
also consider obtaining additional funds through an additional line of credit,
other debt financing or the sale of capital stock; however, no assurance can be
given in such regard.
YEAR 2000 ISSUE
The Company has developed plans to ensure its information systems are
capable of properly utilizing dates beyond December 31, 1999 (the "Year 2000"
issue). 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
18
<PAGE> 19
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 will switch to providers capable of performing such processing.
INVENTORY MANAGEMENT
The Company manages its computer consumable supplies inventories held for
sale in its wholesale distribution business by maintaining sufficient quantities
of product to achieve high order fill rates while at the same time maximizing
inventory turnover rates. Inventory balances will fluctuate as the Company adds
new product lines and makes large purchases from suppliers to take advantage of
attractive terms. To reduce the risk of loss to the Company due to supplier
price reductions and slow moving inventory, the Company's purchasing agreements
with many of its suppliers, including most of its major suppliers, contain price
protection and stock return privileges under which the Company receives credits
against future purchases if the supplier lowers prices on previously purchased
inventory or the Company can return slow moving inventory in exchange for other
products.
During fiscal year 1997, the Company, through its PFS subsidiary, began
providing product fulfillment and distribution services for third parties.
Certain of these distribution agreements provide that the Company own the
related inventory, some of which also allow for the third party to manage the
levels of inventory held by the Company. As a result, the levels of inventory
held by the Company under these contracts is higher than the Company would
normally carry in its core wholesale business.
SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine the specific event, if any, of seasonal factors that may cause
quarterly variability in operating results. Management believes, however, that
factors that may influence quarterly variability include the overall growth in
the non-paper computer supplies industry and shifts in demand for the Company's
products due to a variety of factors, including sales increases resulting from
the introduction of new computer supplies products. The Company generally
experiences a relative slowness in sales during the summer months, which may
adversely affect the Company's first and second fiscal quarter results in
relation to sequential quarter performance. The Company believes that results of
operations for a quarterly period may not be indicative of the results for any
other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
FORWARD-LOOKING INFORMATION
The matters discussed in this report on Form 10-Q, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the
19
<PAGE> 20
"Risk Factors" set forth in the Company's prospectus dated March 26, 1998, and
the matters set forth in the Company's Report on Form 10-K filed on May 29,
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
The Company adopted SFAS No. 128, "Earnings per Share," during the quarter
ended December 31, 1997. The statement establishes new standards for computing
and presenting earnings per share ("EPS"). The Company restated its earnings per
share data for all periods presented. The Company also adopted SFAS No. 130,
"Reporting Comprehensive Income," during the quarter ended June 30, 1998. SFAS
No. 130 requires companies to report comprehensive income, which is defined as
all changes in equity during a period, except those resulting from investment by
owners and distribution to owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997; however, earlier adoption is permitted.
SFAS No. 131 requires the disclosure of financial and descriptive information
about reportable operating segments. SFAS No. 131 modifies 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
standard and its potential impact on disclosures and will adopt these
pronouncement in its fiscal year 1999 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investment in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial instruments
in other comprehensive income as a part of the cumulative translation
adjustment. The Company currently complies with the provisions of SFAS No. 133
in its accounting treatment of these financial instruments. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, with initial
application as of the beginning of an entity's fiscal quarter. Early adoption of
the standard is allowed, however, the statement cannot be applied retroactively
to financial statements of prior periods.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
-------- -----------------------------------------------------------
10.1 Agreement and Plan of Merger Among Daisytek International
Corporation, Daisytek, Incorporated, TC Illinois Acquisition
Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition
Corp., TC Ohio Acquisition Corp., TC Pennsylvania
Acquisition Corp., TC Texas Acquisition Corp., And TC
Minnesota Acquisition Corp., The Tape Company, Inc., An
Illinois Corporation, The Tape Company, Inc., A Michigan
Corporation, The Tape Company, Inc., A Georgia Corporation,
The Tape Company, Inc., An Ohio Corporation, Tape
Distributors, Inc., A Pennsylvania Corporation, Tape
Distributors Of Texas, Inc., A Texas Corporation, Tape
Distributors Of Minnesota, Inc., A Minnesota Corporation,
Michael Cullen and Robert Daly.
10.2 Registration Rights Agreement by and among Daisytek
International Corporation, a Delaware corporation, Michael
Cullen and Robert Daly, dated June 1, 1998.
11 Statement re: Computation of Earnings Per Share.
27.1 Financial Data Schedule for the three months ended June 30,
1998.
27.2 Financial Data Schedule for the three months ended June 30,
1997.
b) Reports on Form 8-K:
Form 8-K filed on May 5, 1998 reporting Item 5. the Company's press
release dated May 5, 1998 announcing fourth quarter and fiscal year
ended March 31, 1998 results.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
--------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Vice President - Finance
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
-------- -----------------------------------------------------------
<S> <C>
10.1 Agreement and Plan of Merger Among Daisytek International
Corporation, Daisytek, Incorporated, TC Illinois Acquisition
Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition
Corp., TC Ohio Acquisition Corp., TC Pennsylvania
Acquisition Corp., TC Texas Acquisition Corp., And TC
Minnesota Acquisition Corp., The Tape Company, Inc., An
Illinois Corporation, The Tape Company, Inc., A Michigan
Corporation, The Tape Company, Inc., A Georgia Corporation,
The Tape Company, Inc., An Ohio Corporation, Tape
Distributors, Inc., A Pennsylvania Corporation, Tape
Distributors Of Texas, Inc., A Texas Corporation, Tape
Distributors Of Minnesota, Inc., A Minnesota Corporation,
Michael Cullen and Robert Daly.
10.2 Registration Rights Agreement by and among Daisytek
International Corporation, a Delaware corporation, Michael
Cullen and Robert Daly, dated June 1, 1998.
11 Statement re: Computation of Earnings Per Share.
27.1 Financial Data Schedule for the three months ended June 30,
1998.
27.2 Financial Data Schedule for the three months ended June 30,
1997.
</TABLE>
23
<PAGE> 1
EXHIBIT 10.1
AGREEMENT AND PLAN OF MERGER
AMONG
DAISYTEK INTERNATIONAL CORPORATION,
DAISYTEK, INCORPORATED,
TC ILLINOIS ACQUISITION CORP., TC MICHIGAN ACQUISITION CORP., TC GEORGIA
ACQUISITION CORP., TC OHIO ACQUISITION CORP.,
TC PENNSYLVANIA ACQUISITION CORP., TC TEXAS ACQUISITION CORP., AND TC MINNESOTA
ACQUISITION CORP.
THE TAPE COMPANY, INC., AN ILLINOIS CORPORATION, THE TAPE COMPANY, INC., A
MICHIGAN CORPORATION, THE TAPE COMPANY, INC.,
A GEORGIA CORPORATION, THE TAPE COMPANY, INC., AN OHIO CORPORATION, TAPE
DISTRIBUTORS, INC., A PENNSYLVANIA CORPORATION,
TAPE DISTRIBUTORS OF TEXAS, INC., A TEXAS CORPORATION, AND TAPE DISTRIBUTORS OF
MINNESOTA, INC., A MINNESOTA CORPORATION
AND
MICHAEL CULLEN AND ROBERT DALY
DATED AS OF JUNE 1, 1998
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of June 1, 1998 (this
"AGREEMENT") and is by and among Daisytek International Corporation, a Delaware
corporation ("DAISYTEK"); Daisytek, Incorporated, a Delaware corporation (the
"PURCHASER"); TC Illinois Acquisition Corp. ("TC ILLINOIS ACQUISITION"), TC
Michigan Acquisition Corp. ("TC MICHIGAN ACQUISITION"), TC Georgia Acquisition
Corp. ("TC GEORGIA ACQUISITION"), TC Ohio Acquisition Corp. ("TC OHIO
ACQUISITION"), TC Pennsylvania Acquisition Corp. ("TC PENNSYLVANIA
ACQUISITION"), TC Texas Acquisition Corp. ("TC TEXAS ACQUISITION"), and TC
Minnesota Acquisition Corp. ("TC MINNESOTA ACQUISITION"), each, a Delaware
corporation and wholly-owned subsidiary of the Purchaser (collectively, the
"ACQUISITION SUBS" and individually, an "ACQUISITION SUB"); The Tape Company,
Inc., an Illinois corporation ("TC ILLINOIS"), The Tape Company, Inc., a
Michigan corporation ("TC MICHIGAN"), The Tape Company, Inc., a Georgia
corporation ("TC GEORGIA"), The Tape Company, Inc., an Ohio corporation ("TC
OHIO"), Tape Distributors, Inc., a Pennsylvania corporation ("TC
PENNSYLVANIA"), Tape Distributors of Texas, Inc., a Texas corporation ("TC
TEXAS"), and Tape Distributors of Minnesota, Inc., a Minnesota corporation ("TC
MINNESOTA") (collectively, the "SELLERS" and individually, a "SELLER"); and
Michael Cullen and Robert Daly, the stockholders of the Sellers (collectively,
the "STOCKHOLDERS" and individually, a "STOCKHOLDER"). The parties wish to
effect the acquisition of the Sellers by the Purchaser through a merger of the
Acquisition Subs with and into the Sellers on the terms and conditions hereof.
This Agreement is intended to be a "plan of reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"CODE"), and the Merger described herein is intended to be treated as a
"pooling of interests" for accounting purposes.
Accordingly, in consideration of the mutual representations,
warranties and covenants contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1. CERTAIN DEFINED TERMS. As used in this Agreement, (i) terms
defined in the Preamble or elsewhere in this Agreement shall have the meaning
set forth therein and (ii) the following terms shall have the following
meanings:
"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 Registration Rights Agreement,
Restrictive Covenant Agreement and Affiliate Letter.
<PAGE> 3
"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.
"AFFILIATE LETTER" means the letter being executed and delivered
concurrently herewith by the Stockholders to the Purchaser, as provided in
Section 2.11 hereof.
"BUSINESS" means the sale and distribution of professional video and
audio recording tape and related products as conducted by the Sellers, taken as
a whole.
"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.
"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.
"DAISYTEK BUSINESS" means the business conducted by Daisytek and its
subsidiaries, taken as a whole.
"ENCUMBRANCE" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential 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
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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.
Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.;
the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean
Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42
U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et
seq.; and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
Sections 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.
"FINANCIAL STATEMENTS" has the meaning specified in Section 3.7.
"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.
"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.
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<PAGE> 5
"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 obligations of such Person to purchase, redeem, retire,
defease or otherwise acquire for value any capital stock of such Person or any
warrants, rights or options to acquire such capital stock, valued, in the case
of redeemable preferred stock, at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends, (h) all Indebtedness
of others referred to in clauses (a) through (g) above guaranteed directly or
indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person through an agreement (1) to pay or purchase such
Indebtedness or to advance or supply funds for the payment or purchase of such
Indebtedness, (2) 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, (3) 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 (4) otherwise to assure a creditor against loss, and (i) all
Indebtedness referred to in clauses (a) through (g) 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.
"INDEMNIFIED PARTY" means any Person having a right to indemnification
from an Indemnifying Party under the terms and provisions of Article VII
hereof.
"INDEMNIFYING PARTY" means any Person responsible or obligated to
provide indemnification to an Indemnified Party under the terms and provisions
of Article VII hereof.
"INTELLECTUAL PROPERTY" means (a) inventions, whether or not reduced
to practice and whether or not yet made the subject of a pending patent
application or applications, (b) ideas and conceptions of potentially
patentable subject matter, including, without limitation, any patent
disclosures, whether or not reduced to practice and whether or not yet made the
subject of a pending patent application or applications, (c) statutory
invention registrations, patents, patent registrations and patent applications
(including all reissues, divisions, continuations and continuations-in-part)
and all improvements to the inventions covered in each such registration,
patent or application, (d) trademarks, service marks, trade dress, logos, trade
names and
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<PAGE> 6
corporate names and registrations and applications for registration thereof,
including, but not limited to, all marks registered in the United States Patent
and Trademark Office, the Trademark Offices of the States and Territories of
the United States of America, and the Trademark Offices of other nations
throughout the world, (e) copyrights (registered or otherwise) and
registrations and applications for registration thereof, (f) moral rights
(including, without limitation, rights of integrity), and waivers of such
rights by others, (g) computer software and programs, data and documentation,
(h) trade secrets and confidential business information (including ideas,
formulas, compositions, inventions, and conceptions of inventions, whether
patentable or unpatentable and whether or not reduced to practice), technology
(including know-how), manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data and copyrightable works, (i) copies and tangible
embodiments of all of the foregoing, in whatever form or medium, (j) all rights
to obtain and rights to apply for patents, and to register trademarks and
copyrights, and (k) all rights to sue for present and past infringement of any
of the intellectual property rights hereinabove set out.
"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 Seller
and any prepaid deposits for any of the same.
"LEASED REAL PROPERTY" means the real property leased by any Seller,
as landlord or tenant, together with, to the extent leased by such Seller, 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, (i) for purposes of the representations of the Stockholders
hereunder, the Business or (ii) for purposes of the representations of
Daisytek, the Purchaser and the Acquisition Subs hereunder, the Daisytek
Business, in each case, that, individually or in the aggregate with any other
circumstances, changes in, or effects on, the Business or the Daisytek
Business, as the case may be, 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 the Daisytek Business, as the case may be, or, as to the
Business, 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 Sellers.
"MATERIAL CONTRACTS" has the meaning specified in Section 3.8.
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<PAGE> 7
"PERMITS" has the meaning specified in Section 3.17.
"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 3.24.
"PURCHASE PRICE" has the meaning specified in Section 2.2.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement being executed and delivered concurrently herewith by Daisytek and
the Stockholders, as provided in Section 2.11 hereof.
"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.
"RESTRICTIVE COVENANT AGREEMENT" means the Restrictive Covenant
Agreement being executed and delivered concurrently herewith by the
Stockholders, as provided in Section 2.11 hereof.
"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 investigations, feasibility studies, corrective actions, closures, and
postremedial or postclosure studies, investigations, operations, maintenance
and monitoring on, about or in any real property.
"SEC" means the United States Securities and Exchange Commission.
"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.
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<PAGE> 8
ARTICLE II
THE MERGER
2.1. THE MERGER. Upon the terms and subject to the conditions
hereof, and in accordance with the General Corporation Law of the State of
Delaware (the "DGCL") (i) TC Illinois Acquisition shall be merged with and
into TC Illinois, (ii) TC Michigan Acquisition shall be merged with and into TC
Michigan, (iii) TC Georgia Acquisition shall be merged with and into TC
Georgia, (iv) TC Ohio Acquisition shall be merged with and into TC Ohio, (v) TC
Pennsylvania Acquisition shall be merged with and into TC Pennsylvania, (vi) TC
Texas Acquisition shall be merged with and into TC Texas and (vii) TC Minnesota
Acquisition shall be merged with and into TC Minnesota (all of the foregoing
being collectively referred to herein as the "MERGER"). The Merger shall be
deemed to occur and shall be effective for accounting and all other purposes as
of June 1, 1998 (the "EFFECTIVE TIME"), except to the extent that the
respective state corporation statutes of any Seller require, as a condition to
the effectiveness of any Merger, the filing or issuance of a Certificate of
Merger (as hereinafter defined), in which event, solely for purposes of such
state corporation statutes, the Merger of such Seller shall be deemed effective
as of the filing or issuance of such Certificate of Merger. Following the
Merger, each of the Sellers shall continue as the surviving corporation
(collectively, the "SURVIVING CORPORATIONS" and individually, a "SURVIVING
CORPORATION") and be a wholly-owned subsidiary of the Purchaser, and the
separate corporate existence of each Acquisition Sub shall cease.
2.2. MERGER CERTIFICATES. As of June 1, 1998, the parties
shall cause certificates of merger (the "MERGER CERTIFICATES") to be filed and
recorded in accordance with Section 252 of the DGCL and shall take all such
further actions as may be required by law to make the Merger effective. The
execution and delivery of this Agreement shall occur at a closing (the
"CLOSING") which shall be deemed to have been held as of June 1, 1998 (the
"CLOSING DATE") at the offices of the Purchaser (or such other place as the
parties may agree) for the purpose of confirming satisfaction or waiver of all
conditions to the Merger.
2.3. EFFECTS OF THE MERGER. The Merger shall have the effects
set forth in Section 259 of the DGCL.
2.4. CERTIFICATE OR ARTICLES OF INCORPORATION AND BYLAWS. The
Certificate or Articles of Incorporation and Bylaws of each Seller, in each
case as in effect immediately prior to the Effective Time, shall be the
Certificate or Articles of Incorporation and Bylaws of the applicable Surviving
Corporation, as the case may be, immediately after the Effective Time.
2.5. DIRECTORS AND OFFICERS. The directors and officers of
each Acquisition Sub immediately prior to the Effective Time shall be the
directors and officers of the applicable Surviving Corporation immediately
after the Effective Time, each to hold office in accordance with the
Certificate or Articles of Incorporation and Bylaws of such Surviving
Corporation. Each Surviving Corporation may designate such other officers as it
determines.
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2.6. CONVERSION OF STOCK.
(a) At the Effective Time, by virtue of the
Merger and without any action on the part of the Purchaser, the Acquisition
Subs or the Sellers:
(i) All shares of common stock of each
Seller (collectively, the "SELLER COMMON STOCK") outstanding immediately prior
to the Effective Time, other than shares held by any Seller as treasury stock,
shall be converted into and become the right to receive, in the aggregate,
974,864 shares of common stock, $.01 par value, of Daisytek ("DAISYTEK COMMON
STOCK"), the same being that number of shares (rounded down to the nearest
whole share and subject to the payment of cash for fractional shares as
provided in Section 2.9) determined by dividing the Purchase Price (as defined
below) by the Market Value (as defined below) of Daisytek Common Stock (such
shares of Daisytek Common Stock are referred to hereinafter as the "MERGER
CONSIDERATION").
(ii) All shares of Seller Common Stock
held at the Effective Time by any Seller as treasury stock shall be canceled
and no payment shall be made, nor shall any shares of Daisytek Common Stock be
issued, with respect thereto.
(iii) Each share of common stock of each
Acquisition Sub outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
share of common stock, $.01 par value, of the applicable Surviving
Corporation.
(b) For the purpose of this Agreement:
(i) The term "PURCHASE PRICE" means
$24,127,900.45.
(ii) The term "MARKET VALUE" of Daisytek
Common Stock means $24.75.
(c) The Merger Consideration shall be allocated
equally between the Stockholders.
2.7. CLOSING OF SELLER TRANSFER BOOKS. At the Effective Time,
the stock transfer books of the Sellers shall be closed and no transfer of
Seller Common Stock shall thereafter be made. If, after the Effective Time,
certificates representing shares of Seller Common Stock are presented to a
Surviving Corporation, they shall be canceled.
2.8. EXCHANGE OF CERTIFICATES. At the Closing and effective
as of the Effective Time, the Stockholders shall deliver to the Purchaser their
certificates representing Seller Common Stock, duly endorsed for transfer, in
exchange for a certificate or certificates representing that number of whole
shares of Daisytek Common Stock into which the shares of Seller Common Stock
theretofore represented by such certificate or certificates so surrendered
shall have been converted pursuant to the provisions of this Agreement, and the
certificate or certificates so surrendered shall forthwith be canceled. No
Daisytek Common Stock certificates
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<PAGE> 10
are to be issued in a name other than that in which the Seller Common Stock
certificate surrendered is registered.
2.9. NO FRACTIONAL SHARES. No certificates representing fractional
shares of Daisytek Common Stock shall be issued upon the surrender for exchange
of Seller Common Stock certificates. No fractional interest shall entitle the
owner to vote or to any rights of a security holder. In lieu of fractional
shares, each holder of shares of Seller Common Stock who would otherwise have
been entitled to a fractional share of Daisytek Common Stock, will receive upon
surrender of a Seller Common Stock certificate or certificates, as the case may
be, an amount in cash (without interest) determined by multiplying such fraction
by the Market Value of one share of Daisytek Common Stock.
2.10. [deleted]
2.11. OTHER CLOSING MATTERS. At the Closing (i) Daisytek and the
Stockholders shall execute and deliver the Registration Rights Agreement
pursuant to which the Stockholders shall be granted piggy-back registration
rights with respect to the shares of Daisytek Common Stock issued hereunder and
(ii) the Stockholders shall execute and deliver to the Purchaser the (a)
Restrictive Covenant Agreement pursuant to which the Stockholders shall agree
not to compete with the Business of the Surviving Corporations following the
Effective Time and (b) Affiliate Letter pursuant to which the Stockholders shall
agree to certain restrictions on transfer with respect to the shares of Daisytek
Common Stock issued hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Stockholders hereby, jointly and severally, make the following
representations and warranties to the Purchaser and Daisytek:
3.1. ORGANIZATION AND QUALIFICATION. Each Seller is a corporation, duly
organized, validly existing and in good standing under the laws of its state or
jurisdiction of incorporation with full corporate power and authority to own its
properties and to carry on the Business as now conducted. Schedule 3.1 sets
forth (i) the state or jurisdiction of incorporation of each Seller, and (ii)
the states or jurisdictions in which each Seller is qualified or otherwise
authorized to transact business as a foreign corporation. Each Seller is
qualified or otherwise authorized to transact business as a foreign corporation,
and is in good standing as a foreign corporation, in all jurisdictions in which
such qualification or authorization is required by law, except for jurisdictions
in which the failure to be so qualified or authorized will not have a Material
Adverse Effect.
3.2. CAPITALIZATION. The total authorized and issued capital stock of
each of the Sellers is set forth on Schedule 3.2. The Stockholders are the
lawful record and beneficial owners of all of the issued and outstanding shares
of the Seller Common Stock. Each of the Stockholders owns one-half of the issued
and outstanding shares of Seller Common Stock and has owned such
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<PAGE> 11
shares for not less than the thirty (30) day period prior to the date hereof.
All of the issued and outstanding shares of Seller Common 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. The Sellers have no
other shares or other securities which are authorized, issued and/or
outstanding other than the Seller Common Stock owned by the Stockholders.
Except as set forth on Schedule 3.2, there are no outstanding subscriptions,
options, warrants, rights, calls, contracts, commitments, understandings or
agreements to purchase or otherwise acquire or relating to the issuance of any
shares or other securities of any Seller, including, without limitation, any
rights of conversion or exchange under any outstanding securities or other
instruments, nor are there any shareholder agreements, voting trusts, proxies
or other agreements, instruments or understandings with respect to any shares
of Seller Common Stock. None of the Sellers own any capital shares or other
proprietary interests, including without limitation, any shares of stock,
partnership interests, joint venture interests, limited liability company
interests, membership interests or other equity interests, directly or
indirectly, in any Person. None of the Sellers, nor any of the Stockholders,
own any shares of Daisytek Common Stock, except as may be issued hereunder.
3.3. CHARTER DOCUMENTS; OFFICERS, DIRECTORS AND AFFILIATES.
(a) The copies of the certificates or articles of
incorporation and by-laws of each Seller, certified by the respective
secretaries or assistant secretaries thereof, which have been delivered to
Purchaser are complete and correct in all respects. The minute books of each
Seller which have been delivered to Purchaser are complete in all material
respects and correctly reflect all corporate action (including, without
limitation, the issuance of any shares of capital stock) taken by the
respective stockholders and boards of directors (and committees thereof) of
each of the Sellers.
(b) Schedule 3.3 sets forth for each Seller the
name of each of its officers and directors and each Person who may be deemed an
"affiliate" of such Seller, as such term is used in Rule 145 promulgated under
the Act.
3.4. TITLE TO SELLER COMMON STOCK. Except as set forth in
Schedule 3.4, the Stockholders are the lawful record and beneficial owners of
all of the issued and outstanding shares of Seller Common Stock and have 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 any Stockholder at any time, or upon the happening of any
stated event, any shares of Seller Common Stock.
3.5. AUTHORITY; BINDING OBLIGATION. The Stockholders and the
Sellers have all requisite power and authority to execute, deliver and perform
their respective obligations under this Agreement and the Additional Agreements
to which they are a party and consummate the transactions contemplated herein
and therein. The execution and delivery of this Agreement and the Additional
Agreements and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors and stockholders of
each Seller, and no other action on the part of any Seller or Stockholder is
necessary to consummate the
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<PAGE> 12
transactions contemplated hereby or thereby. This Agreement and the Additional
Agreements have been duly executed and delivered by the Stockholders and
Sellers (to the extent each is a party thereto) and constitute the legal, valid
and binding obligation of the Stockholders and Sellers (to the extent each is a
party thereto) 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.
3.6. NO VIOLATIONS. Except as set forth in Schedule 3.6, the
execution, delivery and performance of this Agreement and the Additional
Agreements and the consummation of the transactions contemplated herein and
therein by the Stockholders and the Sellers (to the extent each is a party
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 or articles of incorporation, by-laws or other charter documents of
any Seller, (ii) any statutes, laws, rules, regulations, ordinances or permits
of any Governmental Authority applicable to any Stockholder or Seller or (iii)
any Governmental Order binding upon any Seller or Stockholder 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 loan
agreement, mortgage, indenture, financing agreement, lease or any other
contract, agreement or instrument to which any Seller or Stockholder 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 any Stockholder
or Seller.
3.7. FINANCIAL STATEMENTS. The Sellers have furnished to the
Purchaser the combined balance sheet of the Sellers as at March 31, 1998 and
the related combined statement of operations for the twelve months then ended
(the "FINANCIAL STATEMENTS"). The Financial Statements (i) were prepared in all
material respects in accordance with the books of account and other financial
records of the Sellers, (ii) fairly present the combined financial condition
and results of operations for Sellers as of the dates and for the periods
covered thereby and (iii) have been prepared in accordance with GAAP, except
for the absence of footnotes thereto.
3.8. BOOKS OF ACCOUNTS. The books of account and other
financial records of each Seller (i) reflect all items of income and expense
and all assets and liabilities required to be reflected therein in accordance
with GAAP consistently applied, (ii) are in all material respects complete and
correct and do not contain or reflect any material inaccuracies or
discrepancies and (iii) have been maintained in accordance with good business
and accounting practices.
3.9. ABSENCE OF UNDISCLOSED LIABILITIES. No Seller has any
Liabilities, except: (a) Liabilities that were reflected, disclosed or
reserved against in the Financial Statements and not heretofore paid or
discharged; (b) Liabilities specifically disclosed in Schedule 3.9; (c)
Liabilities incurred in, or as a result of, the ordinary course of the Business
consistent with past practice since March 31, 1998 which do not exceed $25,000
for any one transaction or $100,000 in the aggregate; and (d) Liabilities in
respect of Inventory purchase orders in the ordinary course of Business
consistent with past practice, except as set forth in Schedule 3.9.
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3.10. ACCOUNTS RECEIVABLE. Schedule 3.10 sets forth an aged
list of accounts receivable arising from the sale of Inventory and the
rendering of services in the ordinary course of the Business as of March 31,
1998 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
set forth therein, all accounts receivable reflected on the Financial
Statements (a) have arisen only in the ordinary course of the Business
consistent with past practice, (b) represent the legal, valid and binding
obligation of the account debtor, and (c) are not subject to any valid
defenses, set-offs or counterclaims (except for warranty claims arising in the
ordinary course of business) and (d) to the Stockholders' knowledge, are good
and collectible in full in the ordinary course of business without resort to
litigation or extraordinary collection activity not later than 90 days after
the applicable invoice date. Except as set forth in Schedule 3.10, each Seller
has good and marketable title to all of its accounts receivable, free and clear
of any Encumbrances.
3.11. INVENTORY.
(a) Except as set forth in Schedule 3.11, all
Inventories are in the physical possession of the Sellers at the facilities
located on the Leased Real Property. Subject to amounts reserved therefor, the
value at which all Inventories are carried in the Financial Statements reflect
the historical inventory valuation policy of the Sellers of stating such
Inventories at the lower of their cost or market value and all Inventories are
valued in accordance with GAAP consistently applied. Except as set forth in
Schedule 3.11, each Seller has good and marketable title to all of its
Inventories, free and clear of all Encumbrances. Except as set forth in
Schedule 3.11, the Inventory does not include any items held on consignment for
others, and no Seller 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. All Inventory is of a quantity and quality which is usable in
the ordinary course of the Business consistent with past practice and within a
reasonable period of time and is in good and merchantable condition in all
material respects.
3.12. ASSETS. The Sellers own and have good title to all of
their assets and properties reflected as owned on the balance sheet included in
the Financial Statements, free and clear of any and all Encumbrances, except
for (i) the Encumbrances reflected in the Financial Statements, (ii) assets and
properties disposed of, or subject to purchase or sale orders, in the ordinary
course of Business consistent with past practice since March 31, 1998, (iii)
Encumbrances securing the liens of materialmen, carriers, landlords and like
persons, all of which are not yet due and payable, (iv) Encumbrances for Taxes
not yet due and payable and (v) Encumbrances that, in the aggregate, are not
material to the Business. Since March 31, 1998 all the assets of the Sellers
(including, without limitation, the benefit of any licenses, leases or other
agreements or arrangements) have been acquired for a consideration not more
than the fair market value of such assets at the date of such acquisition.
3.13. [deleted]
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<PAGE> 14
3.14. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN
CHANGES.
(a) Since March 31, 1998, except as disclosed in
Schedule 3.14 or in the Financial Statements, there has not been any change in
the condition (financial or otherwise) of the Business or the Liabilities,
assets, operations, results of operations or condition (financial or otherwise)
of the Sellers, taken as a whole, or, to the Stockholders' knowledge, in the
customer or supplier relations or prospects of the Sellers, 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 March 31, 1998, except as disclosed in
Schedule 3.14 or in the Financial Statements, 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 3.14 or in the Financial
Statements, since March 31, 1998, no Seller has:
(i) permitted or allowed any of its
assets or properties (whether tangible or intangible) to be subjected to any
Encumbrance, other than Encumbrances that have been or will be released at or
prior to the Closing;
(ii) amended, terminated, canceled or
compromised any material claims or waived any other rights of value in excess
of $10,000;
(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 $10,000,
other than the sale of Inventories and used machinery and equipment in the
ordinary course of the Business consistent with past practice;
(iv) disclosed to a third party any
material Intellectual Property to which, or under which, it has any right or
license and which is confidential to the Business or permitted to lapse any
material Intellectual Property (or any registration thereof or any application
relating thereto), to which, or under which, it has any right or license;
(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 increases which do not exceed $100,000, or (B)
established or increased or promised or proposed to increase any benefits under
any Plan (as defined below), in either case except as required by law and
except for ordinary increases consistent with the past practice of the
Business;
(vi) made any 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
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<PAGE> 15
course of the Business consistent with past practice, or as may be required by
any applicable law, rule or regulation;
(viii) made any material changes, other
than in accordance with prudent business practice, in its customary methods of
operations of the Business, including, without limitation, material practices
and policies relating to, purchasing, Inventories, marketing, selling and
pricing;
(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 for borrowings under revolving lines of credit reflected in the
Financial Statements;
(x) failed to pay any creditor any
material amount owed to such creditor when due, which amount remains unpaid,
except for amounts contested in good faith in the ordinary course of the
Business consistent with past practice;
(xi) redeemed any of its capital stock
or, declared, made or paid any dividends or distributions (whether in cash,
securities or other property);
(xii) issued or sold any capital stock,
notes, bonds or other securities, or any option or warrant to purchase the
same;
(xiii) amended or restated its charter or
by-laws;
(xiv) made any capital expenditure or
commitment for any capital expenditure in excess of $25,000 individually or
$100,000 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;
(xvi) entered into any agreement,
arrangement or transaction 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 Sellers;
(xviii) materially amended, modified or
consented to the termination of any Material Contract (as defined below) or any
of its rights therein;
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<PAGE> 16
(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;
(xx) failed in the aggregate to maintain
its plant, property and equipment in a general state of good repair and
operating condition, ordinary wear and tear excepted;
(xxi) terminated, discontinued, closed or
disposed of any plant, facility or other business operation, or laid off any
employees (other than part-time employees, within the meaning of 20 CFR Section
639.3(h), and other than layoffs of less than 50 employees who are not such
part-time employees in any six-month period in the ordinary course of business
consistent with past practice) or implemented any early retirement, separation
or program providing early retirement window benefits within the meaning of
Section 1.401(a)-4 of the Regulations or announced or planned any such action
or program for the future;
(xxii) made any charitable contribution in
excess of $10,000 in any one instance or $50,000 in the aggregate;
(xxiii) suffered any casualty loss or damage
with respect to any of its assets, plant, property or equipment which has a
replacement cost of more than $25,000, 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.
3.15. LITIGATION. Except as set forth in Schedule 3.15
(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), there are no Actions, pending or, to the
Stockholders' knowledge, threatened, against any Seller, except for Actions as
to which the Sellers are fully covered by insurance (except for the applicable
deductible) and for which the insurer has not denied or disclaimed coverage.
Except as set forth in Schedule 3.15, no Seller, nor any of their respective
assets or properties, is subject to any Governmental Order (nor, to the
knowledge of the Stockholders, are there any such Governmental Orders
threatened to be imposed by any Governmental Authority) which has had or would
have a Material Adverse Effect.
3.16. COMPLIANCE WITH LAWS. Except as set forth in
Schedule 3.16, to the Stockholders' knowledge, each Seller has conducted and
continues to conduct the Business 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, and no Seller is in
violation of any such law, ordinance, statute, rule, regulation or Governmental
Order, except for such failures and breaches which, in the aggregate, will not
have a Material Adverse Effect. No
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<PAGE> 17
Seller nor any officer, director, employee, agent or representative of any
Seller has violated or is currently in violation of the Foreign Corrupt
Practices Act of 1977, as amended.
3.17. ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED
MATTERS.
(a) Except as disclosed in Schedule 3.17, to the
Stockholders' knowledge, each Seller 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, and all such Permits and Environmental Permits are in full force and
effect. Schedule 3.17 contains a true, correct and complete list of all Permits
held by each Seller (setting forth the issuer thereof and any expiration or
terminate date). Except as disclosed in Schedule 3.17, to the Stockholders'
knowledge, there is no existing practice, action or activity of any Seller and
no existing condition of the properties or assets of any Seller, 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.
No Seller 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 3.17, to the Stockholders'
knowledge, each Seller is in all material respects in compliance with all
applicable Permits, all applicable Environmental Laws and the requirements of
all applicable Environmental Permits.
(b) Except as disclosed in Schedule 3.17, to the
Stockholders' knowledge (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) on any Leased Real
Property; (ii) the Sellers 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 any basis for asserting the same, against any Seller,
or any Leased Real Property; and (iv) no 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.
3.18. MATERIAL CONTRACTS.
(a) Schedule 3.18 lists each of the following
contracts and agreements to which any Seller is a party, other than leases of
Leased Real Property (such contracts and agreements being collectively referred
to herein as the "MATERIAL CONTRACTS"):
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<PAGE> 18
(i) all contracts, agreements, invoices,
purchase orders and other arrangements, whether oral or written, for the
purchase of Inventory, merchandise, supplies, spare parts, other materials or
personal property with any supplier or for the furnishing of services to any
Seller or otherwise related to the Business; provided, however, that only such
contracts, agreements, invoices, purchase orders and other arrangements under
the terms of which any Seller, as to any individual item: (A) has paid more
than $250,000 during the period beginning on April 1, 1997 and ending on March
31, 1998 or (B) is obligated to pay more than $250,000 over the remaining term
thereof and, in each case, which was not, nor is not, terminable without
penalty or further payment at any time upon less than 30 calendar days' notice
shall be deemed a Material Contract; and provided, further, however, that
Inventory purchase orders arising in the ordinary course of Business consistent
with past practice shall not be deemed Material Contracts;
(ii) all contracts, agreements, invoices,
sales orders and other arrangements, whether oral or written, for the sale of
Inventory, merchandise, other materials or personal property or for the
furnishing of services by any Seller, or otherwise related to the Business;
provided, however, that only such contracts, agreements, invoices, sales orders
and other arrangements which, as to any individual item (A) involve
consideration of more than $250,000 during the period beginning on April 1,
1997 and ending on March 31, 1998 or (B) involve consideration of more than
$250,000 over the remaining term thereof and, in each case, which was not, nor
is not, terminable without penalty or further payment at any time upon less
than 30 calendar days' notice shall be deemed a Material Contract; and
provided, further, however, that contracts and agreements relating to the sale
of Inventory in ordinary course of Business consistent with past practice shall
not be deemed Material Contracts;
(iii) all broker, distributor, dealer,
manufacturer's representative, franchise, agency, sales promotion, market
research, marketing and advertising contracts, management contracts and
consulting contracts to which any Seller is a party and which involve payments,
or the provision of goods or services having a value in excess of $250,000 and
which are not cancelable without penalty or further payment within 30 calendar
days of notice of such cancellation;
(iv) all Indebtedness in excess of
$250,000 principal amount (including without limitation, all promissory notes,
bonds, debentures, credit agreements, letters of credit, acceptances and other
similar items) as to which any Seller has any Liability;
(v) all contracts and agreements with
any Governmental Authority to which any Seller is a party;
(vi) all contracts and agreements with
manufacturers under which Seller is designated as an exclusive distributor;
(vii) all contracts and agreements that
limit the ability of any Seller to compete in any line of business or with any
Person or entity or in any geographic area or during any period of time;
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<PAGE> 19
(viii) all contracts, agreements and other
arrangements (including without limitation those relating to employment)
between or among any Seller and any Stockholder (or any member of any
Stockholder's Immediate Family);
(ix) [deleted]
(x) all partnership agreements, joint
venture agreements, stockholder agreements or operating agreements to which any
Seller is a party; and
(xi) all other contracts, agreements and
other arrangements, whether or not 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
3.18 (which shall identify each such Material Contract), each Material
Contract: (i) is valid and binding on the Seller that is a party to such
Material Contract and, to the Stockholders' knowledge, 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. To the Stockholders' knowledge, no Seller is in material breach
or default under the terms of any Material Contract.
(c) Except as expressly set forth in Schedule
3.18 (which shall identify each such Material Contract), to the Stockholders'
knowledge, no other party to any Material Contract is in material breach or
default thereunder.
(d) Except as expressly set forth in Schedule
3.18, 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 Seller.
3.19. INTELLECTUAL PROPERTY.
(a) Schedule 3.19 sets forth a true and complete
list and a brief description, including a description of any registration,
license or sublicense thereof, of all Intellectual Property claimed to be
unique or having a value in excess of $50,000 in which any Seller has any
interest, whether as owner, licensor or licensee. Except as otherwise described
in Schedule 3.19, in each case where a registration or application for
registration listed in Schedule 3.19 is held by assignment, the assignment has
been duly recorded with the applicable Trademark Office from which the original
registration issued or before which the application for registration is
pending.
(b) Except as disclosed in Schedule 3.19, as to
all Intellectual Property set forth therein which is owned by any Seller: (i)
such Intellectual Property is owned by a Seller, free and clear of any
Encumbrance, and (ii) to the Stockholders' knowledge, no Actions have been made
or asserted or are pending against any Seller based upon or challenging or
seeking to
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<PAGE> 20
deny or restrict the use by any Seller of any of such Intellectual Property;
(iii) to the Stockholders' knowledge, no Person is using any patents,
copyrights, trademarks, service marks, trade names, trade secrets or similar
property that infringe upon such Intellectual Property or upon the rights of
any Seller therein; (iv) no Seller has granted any license or other right
currently outstanding to any other Person with respect to such Intellectual
Property; and (v) the consummation of the transactions contemplated by this
Agreement will not result in the termination or material impairment of any of
such Intellectual Property.
(c) The Stockholders have delivered to the
Purchaser correct and complete copies of all licenses for all Intellectual
Property set forth in Schedule 3.19 as to which any Seller is a licensor or
licensee. With respect to each of these licenses:
(i) such license is legal, valid,
binding, enforceable and in full force and effect in all material respects with
respect to the Seller that is a party thereto and, to the Stockholders'
knowledge, with respect to all other parties thereto and is the entire
agreement between the respective licenser and licensee with respect to such
license;
(ii) except as otherwise set forth in
Schedule 3.19, such license will not cease to be legal, valid, binding,
enforceable and in full force and effect in all material respects on terms
identical to those currently in effect as a result of the consummation of the
transactions contemplated by this Agreement, nor will the consummation of the
transactions contemplated hereby constitute a breach or default under such
license or otherwise give the licenser or licensee a right to terminate such
license;
(iii) except as otherwise disclosed in
Schedule 3.19, with respect to each such license: (A) no Seller has received
any notice of cancellation or termination under such license and, to the
Stockholders' knowledge, no licensor or licensee has any right of termination
or cancellation under such license except in connection with any default
thereunder, (B) no Seller has received any notice of a breach or default under
such license, which breach or default has not been cured, and (C) no Seller has
granted to any other Person any sublicense under such license;
(iv) no Seller nor, to the Stockholders'
knowledge, any other party to such license, is in breach or default in any
material respect, and, to the Stockholders' knowledge, no event has occurred
that, with notice or lapse of time would constitute such a breach or default by
any Seller or permit termination, modification or acceleration under such
license;
(v) except as set forth in Schedule
3.19, to the Stockholders' knowledge, no Actions have been made or asserted or
are pending or threatened against any Seller either (A) based upon or
challenging or seeking to deny or restrict the use by any Seller of any of such
licensed Intellectual Property or (B) alleging that any such licensed
Intellectual Property is being licensed, sublicensed or used in violation of
any patents or trademarks, or any other rights of any Person; and
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(vi) to the Stockholders' knowledge, no
Person is using any patents, copyrights, trademarks, service marks, trade
names, trade secrets or similar property that infringe upon such licensed
Intellectual Property or upon the rights of any Seller therein.
3.20. REAL PROPERTY.
(a) No Seller currently owns or has ever owned
any real property.
(b) Schedule 3.20 lists: (i) the address of each
parcel of Leased Real Property, (ii) the identity of the lessor, lessee and
current occupant (if different from lessee) of each such parcel of Leased Real
Property and (iii) the term (referencing applicable renewal periods) and rental
payment terms of the leases (and any subleases) pertaining to each such parcel
of Leased Real Property.
(c) Except as described in Schedule 3.20 (i) to
the Stockholders' knowledge, there is no material violation of any law,
regulation or ordinance relating to the Leased Real Property and (ii) 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. The
Stockholders have made available to the Purchaser true and correct copies of,
to the extent available and in its possession, if any, all certificates of
occupancy, environmental reports, appraisals, and other documents relating to
or otherwise affecting the Leased Real Property. The Seller listed in Schedule
3.20 as the lessee of each parcel of Leased Real Property is in peaceful and
undisturbed possession of such parcel of Leased Real Property, as the lessee,
and, to the Stockholders' knowledge, there are no contractual or legal
restrictions that preclude or restrict the ability to use the subject premises
for the purposes for which they are currently being used. All existing
utilities required for the use, occupancy, operation and maintenance of the
Leased Real Property are adequate for the conduct of the Business as presently
conducted. To the Stockholders' knowledge, there are no material latent defects
or material adverse physical conditions affecting the Leased Real Property,
other than ordinary wear and tear. Except as set forth in Schedule 3.20, no
Seller has leased or subleased any parcel of Leased Real Property to any other
Person, nor has any Seller assigned its interest under any lease or sublease
set forth in Schedule 3.20 to any third party.
(d) The Stockholders have delivered to the
Purchaser correct and complete copies of all leases and subleases set forth in
Schedule 3.20 and any and all material ancillary documents pertaining thereto
(including, but not limited to, any amendments and evidence of commencement
dates and expiration dates). With respect to each of these leases and
subleases:
(i) such lease or sublease is legal,
valid, binding, enforceable and in full force and effect with respect to the
Seller that is a party thereto, and, to the Stockholders' knowledge, with
respect to all other parties thereto and is the entire agreement between the
parties thereto with respect to such property;
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(ii) except as otherwise set forth in
Schedule 3.20, such lease or sublease will not cease to be legal, valid,
binding, enforceable and in full force and effect on terms identical to those
currently in effect as a result of the consummation of the transactions
contemplated by this Agreement, nor will the consummation of the transactions
contemplated hereby constitute a breach or default under such lease or sublease
or otherwise give the landlord a right to terminate, recapture or modify such
lease or sublease;
(iii) except as otherwise disclosed in
Schedule 3.20, with respect to each such lease or sublease: (A) no Seller has
received any notice of cancellation or termination under such lease or sublease
and, to the Stockholders' knowledge, no lessor has any right of termination or
cancellation under such lease or sublease except in connection with the default
of a Seller thereunder, (B) no Seller has received any notice of a breach or
default by any Seller under such lease or sublease, which breach or default has
not been cured, and (C) no Seller has granted to any other Person any material
rights, adverse or otherwise, under such lease or sublease; and
(iv) except as set forth in Schedule
3.20, no Seller nor, to the Stockholders' knowledge, any other party to such
lease or sublease is in breach or default in any material respect, and, to the
Stockholders' knowledge, 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 or sublease.
(e) To the Stockholders' knowledge, there are no
condemnation proceedings or eminent domain proceedings of any kind pending or
threatened against the Leased Real Property.
(f) Except as set forth in Schedule 3.20, to the
Stockholders' knowledge, all the Leased Real Property is occupied under a valid
and current certificate of occupancy or similar permit, the transactions
contemplated by this Agreement will not require the issuance of any new or
amended certificate of occupancy and there are no facts that would prevent the
Leased Real Property from being occupied after the Closing Date in the same
manner as before.
(g) To the Stockholders' knowledge, all
improvements on the Leased Real Property constructed by or on behalf of any
Seller were constructed in compliance with all applicable federal, state and
local statutes, laws, ordinances, regulations, rules, codes, orders or
requirements (including, but not limited to, any building or zoning laws or
codes) affecting such Leased Real Property.
3.21. TANGIBLE PERSONAL PROPERTY.
(a) Schedule 3.21 lists each item of machinery,
equipment, tools, furniture, fixtures, personalty, vehicles and other tangible
personal property (excluding Inventory) which (i) has an original cost or value
of more than $100,000, (ii) as of March 31, 1998, had a
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<PAGE> 23
useful life of more than one year, (iii) is used in the ordinary course of the
Business and (iv) is owned or leased by any Seller (the "TANGIBLE PERSONAL
PROPERTY").
(b) The Stockholders have delivered to the
Purchaser correct and complete copies of all leases and subleases for Tangible
Personal Property with remaining annual rental payments in excess of $100,000
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 and subleases:
(i) such lease or sublease is legal,
valid, binding, enforceable and in full force and effect in all material
respects with respect to the Seller that is a party thereto and, to the
Stockholders' knowledge, with respect to all other parties thereto and is the
entire agreement between the parties thereto with respect to such property;
(ii) except as set forth in Schedule
3.21, such lease or sublease will not cease to be legal, valid, binding,
enforceable and in full force and effect on terms identical to those currently
in effect as a result of the consummation of the transactions contemplated by
this Agreement, nor will the consummation of the transactions contemplated
hereby constitute a breach or default under such lease or sublease or otherwise
give the lessor a right to terminate, recapture or modify such lease or
sublease:
(iii) except as otherwise disclosed in
Schedule 3.21, with respect to each such lease or sublease: (A) no Seller has
received any notice of cancellation or termination under such lease or sublease
and, to the Stockholders' knowledge, no lessor has any right of termination or
cancellation under such lease or sublease except in connection with the default
of a Seller thereunder, (B) no Seller has received any notice of a breach or
default under such lease or sublease, which breach or default has not been
cured, and (C) no Seller has granted to any other Person any material rights
still outstanding, adverse or otherwise, under such lease or sublease; and
(iv) no Seller, nor, to the Stockholders'
knowledge, any other party to such lease or sublease, is in breach or default
in any material respect, and, to the Stockholders' knowledge, 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 or sublease.
3.22. CUSTOMERS. Listed in Schedule 3.22 are the names and
addresses of (i) the top ten customers of the Business (by revenue) during the
twelve (12) month period ended March 31, 1998 and (ii) each customer of the
Business which ordered and has been shipped goods or merchandise with an
aggregate purchase price of $500,000 or more during such twelve (12) month
period, and, in each case, the amount for which each such customer was invoiced
during such period. Except as disclosed in Schedule 3.22, no Seller has
received any written notice that any customer listed in Schedule 3.22 has
ceased, or will cease, to use the products, equipment, goods or services of the
Sellers, or has substantially reduced, or will substantially reduce, the use of
such products, equipment, goods or services following the Closing Date.
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3.23. SUPPLIERS. Listed in Schedule 3.23 are the names and
addresses of (i) the top ten suppliers of the Business (by purchase order
dollar amount) during the twelve (12) month period ended March 31, 1998 and
(ii) each supplier from which any Seller ordered materials, supplies,
merchandise and other goods for the Business and to which such Seller paid, or
is obligated to pay, an aggregate purchase price of $500,000 or more during
such twelve (12) month period and, in each case, the amount for which each such
supplier invoiced such Seller during such period. Except as disclosed in
Schedule 3.23, no Seller has received any written notice that any supplier
listed in Schedule 3.23 will not sell materials, supplies, merchandise and
other goods to the Sellers at any time after the Closing Date on terms and
conditions similar to those imposed on current sales subject to general and
customary price increases.
3.24. EMPLOYEE BENEFIT MATTERS.
(a) Plans and Material Documents. Schedule 3.24
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, and all employment,
termination, severance or other contracts or agreements to which any Seller is
a party, with respect to which any Seller has any obligation or which are
maintained, contributed to or sponsored by any Seller for the benefit of any
current or former employee, officer or director of such member (excluding any
confidentiality or restrictive covenant agreement entered into by any current
or former employee for the benefit of any Seller) and (ii) each employee
benefit plan for which any Seller could incur liability 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 3.24, each Plan is in writing
and the Stockholders 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
3.24, there are no other employee benefit plans, programs, arrangements or
agreements, whether formal or informal, whether in writing or not, to which any
Seller is a party, with respect to which any Seller has any obligation or which
are maintained, contributed to or sponsored by any Seller for the benefit of
any current or former employee, officer or director of such Seller.
(b) Absence of Certain Types of Plans. None of
the Plans is a Multiemployer Plan (within the meaning of Section 3(37) of
ERISA) or a single employer pension plan (within the meaning of Section
4001(a)(15) of ERISA) for which any Seller could incur liability under Section
4063 or 4064 of ERISA (a "MULTIPLE EMPLOYER PLAN"). Except as set forth in
Schedule 3.24, none of the Plans provides for the payment of separation,
severance, termination or similar type benefits to any Person or obligates any
Seller to pay separation, severance, termination or similar type benefits
solely as a result of any transaction contemplated by this Agreement or as a
result of a "change in control", within the meaning of such term under Section
280G of the Code. Except as set forth in Schedule 3.24, none of the Plans
provide for or
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promise medical, disability or life insurance benefits to be paid or provided
by any Seller for any current or former employee, officer or director of any
Seller after termination of employment with such member other than as required
by Section 601 et seq. of ERISA.
(c) Compliance with Applicable Law. Each Plan
offered by any Seller 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 Stockholders' knowledge, 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. Each Seller 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. No legal action, suit or claim is pending or, to the knowledge of the
Sellers, threatened with respect to any Plan (other than claims for benefits in
the ordinary course) and, to the Stockholders' knowledge, no fact or event
exists that could give rise to any such action, suit or claim.
(d) Qualification of Certain Plans. Each Plan
which is intended to be qualified under Section 401(a) of the Code or Section
401(k) of the Code has received a favorable determination letter from the IRS
that it is so qualified and each trust established in connection with any Plan
which is intended to be exempt from federal income taxation under Section
501(a) of the Code is so exempt and, to the Stockholders' knowledge, no fact or
event has occurred since the date of such determination letter from the IRS to
adversely affect the qualified status of any such Plan or the exempt status of
any such trust. Each trust maintained or contributed to by any Seller which is
intended to be qualified as a voluntary employees' beneficiary association and
which is intended to be exempt from federal income taxation under Section
501(c)(9) of the Code has received a favorable determination letter from the
IRS that it is so qualified and so exempt, and, to the Stockholders' knowledge,
no fact or event has occurred since the date of such determination by the IRS
to adversely affect such qualified or exempt status.
(e) Absence of Certain Liabilities and Events. To
the Stockholders' knowledge, 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 Stockholders' knowledge, no Seller has incurred any
liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B of
the Code and, to the Stockholders' knowledge, no fact or event exists which
could give rise to any such liability. No Seller 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), including, without limitation, any material liability
in connection with the termination or reorganization of any employee benefit
plan subject to Title IV of ERISA or the withdrawal from any Multiemployer Plan
or Multiple Employer Plan; and, to the Stockholders knowledge, no fact or event
exists which could give rise to any such liability. No complete or partial
termination has occurred within the five years preceding the date hereof with
respect to any Plan subject to Title IV of ERISA. 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. 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
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recently ended plan year of such Plan. None of the assets of any Seller is the
subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of
the Code; no Seller has been required to post any security under Section 307 of
ERISA or Section 401(a)(29) of the Code; and, to the Stockholders' knowledge,
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. 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. All such
contributions have been fully deducted for income tax purposes and no such
deduction has been challenged or disallowed by any Governmental Authority and,
to the Stockholders' knowledge, no fact or event exists which could give rise
to any such challenge or disallowance. 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).
3.25. LABOR MATTERS. Except as set forth in Schedule 3.25,
(a) no Seller is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by any Seller and currently there
are no organizational campaigns, petitions or other unionization activities
seeking recognition of a collective bargaining unit which could affect any
Seller; (b) there are no strikes, slowdowns or work stoppages pending or, to
the Stockholders' knowledge, threatened between any Seller and any of their
respective employees, and no Seller has experienced any such strike, slowdown
or work stoppage within the past three years; (c) no Seller has breached or
otherwise failed to comply materially with the provisions of any collective
bargaining or union contract and there are no grievances outstanding against
any Seller under any such agreement or contract that would have a Material
Adverse Effect; (d) there are no unfair labor practice complaints pending
against any Seller before the National Labor Relations Board or any other
Governmental Authority or any current union representation questions involving
employees of any Seller which could have a Material Adverse Effect; (e) to the
Stockholders' knowledge, each Seller is currently in 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 Seller and is not liable for any arrears of wages, taxes, penalties or
other sums for failure to comply with any of the foregoing; (f) each Seller has
paid in full to all employees of such Seller (or, as of March 31, 1998,
adequately accrued for in accordance with GAAP) all wages, salaries,
commissions, bonuses (to the extent declared or earned), benefits and other
compensation due to or on behalf of such employees; (g) 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 Stockholders' knowledge, threatened
before any Governmental Authority with respect to any persons currently or
formerly employed by any Seller; (h) no Seller is a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental Authority
relating to employees or employment practices; (i) 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, to
the Stockholders' knowledge, threatened with respect to any Seller; (j) there
is no charge of discrimination in employment or employment practices, for any
reason, including, without limitation, age, gender, race, religion or other
legally
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protected category, which has been asserted in the past 12 months or is now
pending or, to the Stockholders' knowledge, threatened in writing before the
United States Equal Employment Opportunity Commission, or any other
Governmental Authority in any jurisdiction in which any Seller has employed
employees; and (k) no Seller has violated or otherwise failed to comply with
the requirements of the Workers Adjustment and Retraining Notification Act.
3.26. KEY EMPLOYEES. Schedule 3.26 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 Seller whose annual compensation exceeds $100,000
for the twelve (12) month period ending March 31, 1998, except for that certain
Nonqualified Incentive Compensation Plan dated March 31, 1998 of certain of the
Sellers, a true and complete copy of which has been delivered to the Purchaser.
3.27. CERTAIN INTERESTS.
(a) Except as disclosed in Schedule 3.27, no
Stockholder or officer or director of any Seller or Immediate Family member
thereof:
(i) has any direct or indirect financial
interest in any competitor, supplier or customer of any Seller, 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 Seller uses or proposes to use in the conduct of
the Business;
(iii) has outstanding any Indebtedness in
excess of $10,000 to any Seller; or
(iv) has any claim, demand or cause of
action, direct or indirect, contingent or liquidated, accrued or inchoate,
against any Seller.
(b) Except as disclosed in Schedule 3.27, no
Seller has any Liability or any other obligation of any nature whatsoever to
any Stockholder, officer, director or shareholder of any Seller or Immediate
Family member thereof, other than as an employee of such Seller.
3.28. TAX MATTERS; POOLING.
(a) Except as set forth in Schedule 3.28, (i) all
returns and reports in respect of Taxes required to be filed with respect to
each Seller or the Business have been timely filed; (ii) all Taxes required to
be shown on such returns and reports or otherwise due have been
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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
Stockholders' knowledge, no basis exists for any such adjustment; (v) there are
no pending or, to the Stockholders' knowledge, threatened actions or
proceedings for the assessment or collection of Taxes against any Seller or any
corporation that was included in the filing of a return with any Seller on a
consolidated or combined basis; (vi) no consent under Section 341(f) of the
Code has been filed with respect to any Seller; (vii) there are no Tax liens on
any assets of any Seller 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 Seller may be subject; (ix) there are no
requests for information currently outstanding that could affect the Taxes of
any Seller; (x) there are no proposed reassessments of any property owned by
any Seller; (xi) no power of attorney that is currently in force has been
granted with respect to any matter relating to Taxes; (xii) any provision for
Taxes reflected in the balance sheet included in the Financial Statements is
adequate for payment of any and all Tax liabilities for periods ending on or
before March 31, 1998; and (xiii) there has not been any audit of any Tax
return filed by any Seller and no audit of any such Tax return is in progress
and no Seller has been notified by any Tax authority that any such audit is
contemplated or pending.
(b) None of the Sellers nor, to the Stockholders'
knowledge, any Affiliate of any Seller has taken or agreed to take any action
that would prevent the Merger from being treated as a "pooling of interests" in
accordance with GAAP and the rules and regulations of the SEC or from
constituting a reorganization within the meaning of Section 368(a) of the Code.
3.29. INSURANCE.
(a) Schedule 3.29 sets forth the following
information with respect to each material insurance policy (including policies
providing property, casualty, liability, workers' compensation, and bond and
surety arrangements) under which any Seller is currently a named insured or
otherwise the principal beneficiary of coverage:
(i) the name of the insurer and the
names of the principal insured and each named insured;
(ii) the policy number and the period of
coverage;
(iii) the type, scope (including an
indication of whether the coverage was on a claims made, occurrence or other
basis) and amount (including a description of how deductibles, retentions and
aggregates are calculated and operate) of coverage; and
(iv) the premium charged for the policy,
including, without limitation, a description of any retroactive premium
adjustments or other loss-sharing arrangements.
(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 Seller that is a
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party thereto and, to the Stockholders' knowledge, with respect to the other
parties thereto and, except for policies that have expired under their terms in
the ordinary course, is in full force and effect; (ii) no Seller 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; (iii) no
party to the policy has repudiated, or given notice of an intent to repudiate,
any provision thereof; and (iv) to the Stockholders' knowledge, no insurer on
the policy has been declared insolvent or placed into receivership,
conservatorship or liquidation.
(c) Schedule 3.29 sets forth all risks against
which any Seller is self-insured or which are covered under any risk retention
program in which any Seller participates and details for the last five years
loss experience of each Seller with respect to such risks. 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 Seller 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 Seller or the
Seller bearing such risk of the Business, in each case, in such types and
amounts and covering such risks as, to the Stockholders' knowledge, are
consistent with customary practices and standards of companies engaged in
businesses and operations similar to those of the Sellers.
(e) At no time during the past three years has
any Seller (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 and except for increases in respect of health insurance. During the
past three years, no insurance carrier has canceled, failed to renew or
materially reduced any insurance coverage for any Seller or given any notice or
other indication of its intention to cancel, not renew or reduce any such
coverage.
(f) All insurance policies of the Sellers are
currently in effect and duly in force and no change thereto shall arise as the
result of the consummation of the transactions contemplated by this Agreement.
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<PAGE> 30
3.30. ACCOUNTS; LOCKBOXES; SAFE DEPOSIT BOXES; POWERS OF
ATTORNEY. Schedule 3.30 is a true and complete list of (i) the names of each
bank, savings and loan association, or other financial institution in which any
Seller 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 Seller 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 Seller relating to the Business. No Seller has any such
account, lockbox or safe deposit box other than those listed in Schedule 3.30,
nor has any additional Person been authorized to draw thereon or have access
thereto or to hold any such power of attorney. Except as disclosed in Schedule
3.30, no Seller has commingled monies or accounts of any Seller with other
monies or accounts of the Stockholders.
3.31. BROKERS. 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 Stockholder.
3.32. FULL DISCLOSURE. No Stockholder has knowledge of any
facts pertaining to the Sellers or the Business which could have a Material
Adverse Effect and which have not been disclosed in this Agreement or any of
the Schedules hereto (except for general economic conditions or factors
affecting the industry as a whole in which the Business operates). No
representation or warranty of the Stockholders in this Agreement, or any
Schedules hereto, or any certificate furnished to the Purchaser pursuant to
this Agreement, contains any untrue statement of a material fact, or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
DAISYTEK, THE PURCHASER AND THE ACQUISITION SUBS
Daisytek, the Purchaser and the Acquisition Subs, jointly and
severally, represent and warrant to the Stockholders as follows:
4.1. ORGANIZATION AND QUALIFICATION. Each of Daisytek, the
Purchaser and the Acquisition Subs 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 Daisytek, the Purchaser and the Acquisition
Subs is duly qualified or authorized to transact business, and is in good
standing as a foreign corporation, in all jurisdictions in which such
qualification or authorization is required by law, except for jurisdictions in
which the failure to be so qualified or authorized will not have a Material
Adverse Effect. The Purchaser is a wholly owned subsidiary of Daisytek, and the
Acquisition Subs are wholly owned subsidiaries of the Purchaser.
4.2. AUTHORITY; BINDING OBLIGATION. Each of Daisytek, the
Purchaser and the Acquisition Subs have all requisite power and authority to
execute, deliver and perform their
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respective obligations under this Agreement and the Additional Agreements to
which they are a party and consummate the transactions contemplated herein and
therein. The Purchaser's, Daisytek's and the Acquisition Subs' execution,
delivery and performance of this Agreement and the Additional Agreements to
which they are a party and the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action and no other action
on the part of Daisytek, the Purchaser or any Acquisition Sub is necessary to
consummate the transactions contemplated hereby and thereby. This Agreement
and the Additional Agreements have been duly executed and delivered by the
Purchaser, Daisytek and the Acquisition Subs (to the extent each is a party
thereto) and constitute the legal, valid and binding obligation of the
Purchaser, Daisytek and Acquisition Subs (to the extent each is a party
thereto) 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.
4.3. 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, Daisytek and the
Acquisition Subs 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, Daisytek or any Acquisition Sub, (ii) any statutes, laws, rules,
regulations, ordinances or Permits of any Governmental Authority applicable to
Purchaser, Daisytek or any Acquisition Sub or (iii) any Governmental Order
binding upon the Purchaser, Daisytek or any Acquisition Sub 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, Daisytek or any
Acquisition Sub 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, Daisytek or any Acquisition Sub.
4.4. DAISYTEK COMMON STOCK. The shares of Daisytek Common
Stock to be issued hereunder have been duly authorized and, upon issuance
thereof in accordance with the terms set forth herein, will be validly issued,
fully paid, non-assessable and free of any pre-emptive rights in full
compliance with the Act and all applicable federal and state securities laws,
rules and regulations.
4.5. SEC DOCUMENTS. Daisytek has filed all required reports,
schedules, forms, statements and other documents with the SEC the ("SEC
DOCUMENTS"). Daisytek has made available to the Stockholders true, correct and
complete copies of all Registration Statements on Form S-1, S-3 and S-8, 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, including
without limitation, Daisytek's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and Daisytek's Prospectus dated March 26, 1998. 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
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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.
4.6. FINANCIAL STATEMENTS. Daisytek's consolidated financial
statements included in the SEC Documents (i) were prepared in all material
respects in accordance with the books of account and other financial records of
Daisytek and its subsidiaries, (ii) fairly present the consolidated financial
condition, results of operations, changes in retained earnings and cash flow of
Daisytek and its 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 (except as may be indicated in the notes thereto
or, in the case of unaudited statements, as permitted by Form 10-Q, and, with
respect to interim statements, subject to year-end adjustments).
4.7. NO MATERIAL ADVERSE CHANGE. Since March 31, 1998,
except as disclosed in the SEC Documents, there has not been any change in the
condition (financial or otherwise) of the Daisytek Business or the liabilities,
assets, customer or supplier relations, operations, results of operations,
prospects or condition (financial or otherwise) of Daisytek and its
subsidiaries, 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.
4.8. BROKERS AND FINDERS. 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 Daisytek or Purchaser.
4.9. ACQUISITION SUBS. Each Acquisition Sub was organized
solely for the purpose of the transactions contemplated hereby and has not
conducted any activities other than in connection with its organization, and
negotiation and execution of this Agreement and the consummation of the
transaction contemplated hereby.
4.10. POOLING. Neither Daisytek, the Purchaser nor any
Acquisition Sub has taken or agreed to take any action that would prevent the
Merger from being treated as a "pooling of interests" in accordance with GAAP
and the rules and regulations of the SEC or from constituting a reorganization
within the meaning of Section 368(a) of the Code.
4.11 FULL DISCLOSURE. No representation or warranty of
Daisytek, the Purchaser and the Acquisition Subs in this Agreement or any
certificate furnished to the Stockholders pursuant to this Agreement contain
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein not misleading.
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ARTICLE V
CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS
The obligation of the Sellers to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction, prior to
or at the Closing, of each of the following conditions precedent. The
execution and delivery of this Agreement by the Sellers shall constitute
confirmation that the following conditions precedent have been so satisfied.
5.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Daisytek, the Purchaser and the Acquisition Subs 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).
5.2. PERFORMANCE OF OBLIGATIONS. Daisytek, the Purchaser and
the Acquisition Subs 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.
5.3. COMPLIANCE CERTIFICATE. Daisytek, the Purchaser and the
Acquisition Subs, shall each have delivered to the Sellers 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
Daisytek, the Purchaser and the Acquisition Subs, 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 Daisytek, the Purchaser and the Acquisition Subs,
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
5.4. 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.
5.5. 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.
5.6. RESOLUTIONS. The Sellers shall have received a true and
complete copy, certified by the Secretary or Assistant Secretary of each of
Daisytek, the Purchaser and the Acquisition Subs, of the resolutions duly
adopted by the Board of Directors of each of Daisytek, the Purchaser and the
Acquisition Subs, evidencing its authorization of the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
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<PAGE> 34
5.7. INCUMBENCY CERTIFICATE. The Sellers shall have received
a certificate of the Secretary or Assistant Secretary of each of Daisytek, the
Purchaser and the Acquisition Subs, certifying the names and signatures of the
officers of Daisytek, the Purchaser and the Acquisition Subs, authorized to
sign this Agreement.
5.8. LEGAL OPINION. The Sellers shall have received a legal
opinion, dated as of the Closing Date, of counsel to the Purchaser, Daisytek
and the Acquisition Subs as to the matters set forth in Sections 4.1, 4.2, 4.3
and 4.4.
5.9. ADDITIONAL AGREEMENTS. The Stockholders shall have
received duly executed copies of the Additional Agreements.
5.10. DAISYTEK COMMON STOCK. The Stockholders shall have
received one or more certificates evidencing the shares of Daisytek Common
Stock to be issued hereunder in accordance with the terms and provisions of
Article II above.
ARTICLE VI
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
The obligation of the Purchaser and Daisytek to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, prior to or at the Closing, of each of the following conditions
precedent. The execution and delivery of this Agreement by the Purchaser and
Daisytek shall constitute confirmation that the following conditions precedent
have been so satisfied.
6.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Stockholders 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).
6.2. PERFORMANCE OF OBLIGATIONS. The Sellers and the
Stockholders 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.
6.3. COMPLIANCE CERTIFICATE. The Stockholders shall have
delivered to Purchaser on the Closing Date a certificate signed by or on behalf
of the Stockholders and dated as of the Closing Date to the effect that each of
the representations and warranties of the Stockholders 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 the Stockholders have complied with, fulfilled and
performed each of the covenants, terms and conditions to be complied with,
fulfilled or performed by the Stockholders under this Agreement on or prior to
the Closing Date.
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6.4. 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.
6.5. 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, except for such
consents as are set forth on Schedule 6.5 hereof. 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.
6.6. RESOLUTIONS. The Purchaser shall have received a true
and complete copy, certified by Secretary or Assistant Secretary of each
Seller, of the resolutions duly adopted by the Board of Directors and
stockholders of each Seller evidencing its authorization of the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby.
6.7. INCUMBENCY CERTIFICATE. The Purchaser shall have
received a certificate of the Secretary or Assistant Secretary of each Seller
certifying the names and signatures of the officers of each Seller authorized
to sign this Agreement.
6.8. ORGANIZATIONAL DOCUMENTS; MINUTE BOOKS. The Purchaser
shall have received for each Seller (i) its certificate or articles of
incorporation, as amended, certified by the Secretary of State (or other similar
official) of its state of incorporation, and accompanied by a certificate of the
Secretary or Assistant Secretary of such Seller, dated as of the Closing Date,
stating that no amendments have been made to such certificate or articles of
incorporation since such date, (ii) a 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 3.1 hereof, (iii) a copy of its
By-laws, certified by the Secretary or Assistant Secretary of such Seller, (iv)
the original minute book and stock ledger or register, certified by the
Secretary of such Seller and (v) the resignation of each officer and member of
its Board of Directors.
6.9. LEGAL OPINION. The Purchaser shall have received a
legal opinion, dated as of the Closing Date, of counsel to the Stockholders and
the Sellers as to the matters set forth in Section 3.1, 3.2, 3.5, 3.6 and 3.15.
6.10. ADDITIONAL AGREEMENTS. The Purchaser shall have
received duly executed copies of each of the Additional Agreements.
6.11. [deleted]
6.12. DUE DILIGENCE. The Purchaser shall have completed to
its satisfaction (in its sole and absolute discretion) its due diligence review
and analysis of the Business and the Sellers.
6.13. NO MATERIAL ADVERSE EFFECT. No circumstance, change
in, or effect on the Business (including any material adverse change arising in
connection with or as the result of any
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<PAGE> 36
fire, explosion, earthquake, disaster, accident, labor dispute, loss of
material customer or supplier, shortage, cessation or interruption of inventory
shipments or any similar event, occurrence or circumstance) shall have occurred
since March 31, 1998 which in the reasonable judgment of the Purchaser has, or
would have, a Material Adverse Effect.
6.14. STOCK CERTIFICATES. The Purchaser shall have received
original stock certificates evidencing all of the issued and outstanding shares
of Seller Common Stock, 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.
6.15. [deleted]
6.16. [deleted]
ARTICLE VII
INDEMNIFICATION AND OTHER MATTERS
7.1. INDEMNIFICATION BY STOCKHOLDERS. From and after the
Closing, the Stockholders shall, jointly and severally, but subject to the
limitations hereof, reimburse, indemnify and hold harmless the Purchaser,
Daisytek and their respective officers, directors, employees, agents,
representatives and successors and assigns from and against and in respect of
each of the following:
(a) any and all damages, losses, deficiencies,
liabilities, claims, demands, charges, costs and expenses of every nature and
character whatsoever, including, without limitation, reasonable attorneys' fees
and costs (collectively, the "LOSSES") that result from, relate to or arise out
of any misrepresentation or breach of warranty or covenant of the Stockholders
in this Agreement, the Additional Agreements or any of the Schedules provided
hereunder or thereunder; 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.
7.2. INDEMNIFICATION OF STOCKHOLDERS. From and after the
Closing, the Purchaser and Daisytek shall, jointly and severally, but subject
to the limitations hereof, reimburse, indemnify and hold harmless the
Stockholders and each of their respective heirs, estate, successors and assigns
from and against and in respect of each of the following:
(a) any and all Losses that result from, relate
to or arise out of any misrepresentation or breach of warranty or covenant of
the Purchaser or Daisytek in this Agreement, the Additional Agreements; 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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<PAGE> 37
7.3. 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 such Losses. The parties agree to submit a claim under such
insurance policies prior to or promptly following making a request for
indemnification hereunder.
(b) The aggregate liability of the Stockholders,
on the one hand, or the Purchaser and Daisytek, on the other hand, shall not
exceed the Purchase Price.
(c) The sum of all Losses incurred by the
Purchaser and Daisytek in the aggregate, or the sum of all Losses incurred by
the Stockholders in the aggregate, must exceed $100,000 before such parties
shall be entitled to indemnification hereunder; provided, however, once such
Losses exceed $100,000, such parties shall be entitled to indemnification for
all Losses.
(d) No party shall have any liability hereunder
in respect of claims asserted against any Indemnified Party on or after one
year from the Closing Date; provided, however, the representations and
warranties of the Stockholders relating to (i) title to the Seller Common Stock
shall survive indefinitely and (ii) Taxes and Environmental matters shall
survive until the applicable statute of limitations has expired. The
limitation set forth in this paragraph shall not apply to any claim asserted on
or before such one year anniversary.
(e) The limitations set forth herein shall not
apply in the case of a fraudulent or intentional misrepresentation or breach by
any party.
7.4. 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, 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. The Indemnifying Party shall not settle or compromise any
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<PAGE> 38
such claim without the Indemnified Party's prior written consent(which shall
not be unreasonably withheld), unless the terms of such settlement or
compromise release the Indemnified Party from any and all liabilities with
respect to such Third Party Claim.
(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.
7.5. SURVIVAL; EXCLUSIVE REMEDY. Notwithstanding any right of
any party to fully investigate the affairs of the other party and
notwithstanding any knowledge of facts determined or determinable by such party
pursuant to such investigation or right of investigation, each party has the
right to rely fully upon the representations, warranties, covenants and
agreements of each other party in this Agreement or in any certificate,
financial statement or other document delivered by any party pursuant hereto.
All such representations, warranties, covenants and agreements shall survive the
execution and delivery hereof and the Closing hereunder, subject to the
limitations set forth herein. No person shall have a right to recovery against
any party (or any officer, director, employee or agent of a party) other than
through the exercise of the indemnification rights set forth herein, which shall
constitute the sole and exclusive remedy after the Closing for any breach by a
party of any representation, warranty or covenant contained herein or in any
certificate or other instrument delivered pursuant hereto, other than a
fraudulent or intentional breach, as to which each party shall have all rights
and remedies available at law or in equity.
7.6. RESTRICTION ON TRANSFER. The Stockholders acknowledge
that the Merger Consideration shall be subject to certain restrictions on
transfer pursuant to the terms of the Affiliate Letter. The existence of the
Affiliate Letter and the terms and provisions thereof shall not limit or
restrict the ability of the Purchaser or Daisytek from asserting claims for
indemnification hereunder in excess of the value of the shares subject to the
provisions thereof or from recovering from the Stockholders the full amount of
any such claim, subject, however, to the limitations set forth herein.
7.7 S CORPORATION STATUS. The parties acknowledge that each
Seller which has elected to be treated as an S corporation for federal and state
income tax purposes shall terminate such election as of the Effective Time, and
such Sellers shall close their books for tax purposes as of such date.
7.8 PAYMENT OF INDEBTEDNESS. As of the Effective Time and
concurrently with the Closing, the Purchaser shall cause (i) that certain
Promissory Note of TC Illinois dated July 25, 1997 in the original principal
amount of $3,584,748 payable to Mark Rath and (ii) the Sellers' indebtedness for
money borrowed owing to American National Bank and Trust Company of Chicago to
be repaid in full.
7.9 PURCHASER GUARANTY. As of the Effective Time, the
Purchaser does hereby irrevocably and absolutely guaranty all obligations of TC
Illinois and certain of the Sellers to pay the Incentive Compensation described
in that certain Nonqualified Incentive Compensation Plan
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<PAGE> 39
of such Sellers dated March 31, 1998, and such guaranty shall remain in effect
regardless of any modification, amendment or waiver of such Plan arising at any
time following the date hereof.
ARTICLE VIII
MISCELLANEOUS
8.1. 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.
8.2. 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.
8.3. 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 Daisytek, in which event
notice thereof shall be given to the Stockholders. 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.
8.4. 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
Stockholders.
8.5. 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.
8.6. 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 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
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<PAGE> 40
having been sent by certified or registered U.S. mail, return receipt
requested, postage prepaid, addressed as follows:
If to Sellers:
Michael Cullen
Robert Daly
The Tape Company, Inc.
700 Creel Drive
Wood Dale, Illinois 60191
Telecopier: 708-595-0052
- with a copy to -
Chuhak & Tecson
225 West Washington Street
Chicago, Illinois 60606
Attn: Donald J. Russ, Jr., Esq.
Telecopier: 312-444-9027
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.
8.7. 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.
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<PAGE> 41
8.8. GOVERNING LAW; PERSONAL JURISDICTION. This Agreement
shall be governed by, and be construed in accordance with, the laws of the
State of Illinois without regard to the conflicts of laws principles thereof.
8.9. 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.
8.10. 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.
8.11. 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.
8.12. 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.
8.13. PUBLICITY. Except as otherwise required by applicable
laws or regulations, no party hereto nor any Affiliate thereof, shall issue any
press release or make any other public statement regarding the transactions
described in this Agreement 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.
8.14 ARBITRATION. Any and all disputes or controversies
arising hereunder shall be submitted to arbitration and shall be settled by
arbitration by a panel of three (3) Arbitrators, in accordance with the rules
then pertaining of the American Arbitration Association, and judgment upon the
decision rendered may be enforced in any court of competent jurisdiction. The
cost of such arbitration proceedings shall be borne equally by the parties,
each of which shall bear its own attorney's fees, except as said arbitrators
may otherwise determine to be fair and equitable under the circumstances. In
any such arbitration, each party shall be entitled to discovery and evidentiary
standards as provided in the Federal Rules of Civil Procedure as then in
effect. The foregoing shall not restrict any party from seeking or obtaining
equitable relief in any court of competent jurisdiction.
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<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
DAISYTEK INTERNATIONAL CORPORATION
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
(SIGNATURES CONTINUED ON NEXT PAGE)
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<PAGE> 43
DAISYTEK, INCORPORATED
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC ILLINOIS ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC MICHIGAN ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC GEORGIA ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC OHIO ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC PENNSYLVANIA ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
(SIGNATURES CONTINUED ON NEXT PAGE)
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<PAGE> 44
TC TEXAS ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
TC MINNESOTA ACQUISITION CORP.
By:
---------------------------------------
Name: Tom Madden
Title: Vice President
THE TAPE COMPANY, INC.,
an Illinois corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
THE TAPE COMPANY, INC.,
a Michigan Corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
THE TAPE COMPANY, INC.,
a Georgia Corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
(SIGNATURES CONTINUED ON NEXT PAGE)
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<PAGE> 45
THE TAPE COMPANY, INC.,
an Ohio Corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
TAPE DISTRIBUTORS, INC.,
a Pennsylvania Corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
TAPE DISTRIBUTORS OF TEXAS, INC.,
a Texas Corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
TAPE DISTRIBUTORS OF MINNESOTA, INC.,
a Minnesota corporation
By:
---------------------------------------
Name: Michael Cullen
Title: President
------------------------------------------
MICHAEL CULLEN
------------------------------------------
ROBERT DALY
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<PAGE> 1
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of June 1, 1998 by and among Daisytek International
Corporation, a Delaware corporation ("DAISYTEK"), and Michael Cullen and Robert
Daly (the "STOCKHOLDERS").
R E C I T A L S
A. Concurrently herewith Daisytek, Daisytek, Incorporated, a
wholly owned subsidiary of Daisytek (the "PURCHASER"), TC Illinois Acquisition
Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition Corp., TC Ohio
Acquisition Corp., TC Pennsylvania Acquisition Corp., TC Texas Acquisition
Corp. and TC Minnesota Acquisition Corp., each a wholly owned subsidiary of the
Purchaser (collectively, the "ACQUISITION SUBS"), The Tape Company, Inc., an
Illinois corporation, The Tape Company, Inc., a Michigan corporation, The Tape
Company, Inc., a Georgia corporation, The Tape Company, Inc., an Ohio
corporation, Tape Distributors, Inc., a Pennsylvania corporation, Tape
Distributors of Texas, Inc., a Texas corporation, and Tape Distributors of
Minnesota, Inc., a Minnesota corporation (collectively, the "SELLERS") and the
Stockholders are entering into that certain Agreement and Plan of Merger (the
"MERGER AGREEMENT") pursuant to which the Acquisition Subs are merging (the
"MERGER") with and into the Sellers, with the Sellers remaining as the
surviving corporations thereof.
B. Pursuant to the terms of the Merger Agreement and as a
consequence of the Merger, all of the shares of Daisytek Common Stock of the
Sellers issued and outstanding and held of record by the Stockholders are
concurrently herewith being converted into shares of Daisytek Common Stock,
$.01 par value (the "DAISYTEK COMMON STOCK"), of Daisytek.
C. In connection with the transactions contemplated by the Merger
Agreement, Daisytek has agreed to grant to the Stockholders certain piggy-back
registration rights as more fully set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS.
1.1 DEFINITIONS. For purposes of this Agreement:
(a) HOLDER. The term "HOLDER" means any person
owning of record Registrable Securities that have not been sold to the public
or pursuant to Rule 144 promulgated under the Securities Act or any assignee of
record of such Registrable Securities to whom rights under this Agreement have
been duly assigned in accordance with this Agreement.
<PAGE> 2
(b) REGISTRABLE SECURITIES. The term
"REGISTRABLE SECURITIES" means: (1) all the shares of Daisytek Common Stock
issued to the Stockholders pursuant to the terms of the Merger Agreement and
(2) any shares of Daisytek Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, all such shares of Daisytek Common Stock described in clause
(1) of this subsection (b); excluding in all cases, however, any Registrable
Securities sold by a person in a transaction in which rights under this Section
2 are not assigned in accordance with this Agreement or any Registrable
Securities sold to the public or sold pursuant to Rule 144 promulgated under
the Securities Act. In addition, all shares of Daisytek Common Stock which are
held in escrow under the terms of the Merger Agreement shall not be deemed
Registrable Securities hereunder for so long as such shares are held in escrow.
(c) REGISTRATION. The terms "REGISTER,"
"REGISTERED," and "REGISTRATION" refer to a registration effected by preparing
and filing a registration statement in compliance with the Securities Act, and
the declaration or ordering of effectiveness of such registration statement.
(d) SEC. The term "SEC" or "COMMISSION" means the
U.S. Securities and Exchange Commission.
(e) SECURITIES ACT. The term "SECURITIES ACT"
means the Securities Act of 1933, as amended.
2. REGISTRATION RIGHTS.
2.1 PIGGYBACK REGISTRATIONS. Daisytek shall notify all
Holders of Registrable Securities in writing at least thirty (30) days prior to
filing any registration statement under the Securities Act for purposes of
effecting a public offering of Daisytek Common Stock (including, but not
limited to, registration statements relating to secondary offerings of Daisytek
Common Stock, but excluding registration statements on Form S-8 or S-4 or
otherwise relating to relating to any employee benefit plan or a corporate
reorganization) and will afford each such Holder an opportunity to include in
such registration statement all or any part of the Registrable Securities then
held by such Holder. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held by such Holder
shall, within twenty (20) days after receipt of the above-described notice from
Daisytek, so notify Daisytek in writing, and in such notice shall inform
Daisytek of the number of Registrable Securities such Holder wishes to include
in such registration statement. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by
Daisytek, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by Daisytek with respect to offerings
of Daisytek Common Stock (except as aforesaid), all upon the terms and
conditions set forth herein.
2.2 UNDERWRITING. If a registration statement under
which Daisytek gives notice under this Section is for an underwritten offering,
then Daisytek shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable
2
<PAGE> 3
Securities to be included in a registration pursuant to this Section shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. The selection of such underwriter(s), and the terms
and provisions of any underwriting agreement to be entered into with such
underwriter(s), shall be in the sole and absolute discretion of Daisytek,
regardless of whether Daisytek is offering any shares of Daisytek Common Stock
thereunder. All Holders proposing to distribute their Registrable Securities
through such underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter(s) selected for such underwriting.
2.3 PRIORITY. Notwithstanding any other provision of
this Agreement, if the managing underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, then the managing underwriter may exclude shares (including
Registrable Securities) from the registration and the underwriting, and the
number of shares that may be included in the registration and the underwriting
shall be allocated, first, to Daisytek (to the extent Daisytek is offering any
shares of Daisytek Common Stock thereunder), and second, to the Holders and
other persons requesting inclusion of their Registrable Securities and Daisytek
Common Stock in such registration statement on a pro rata basis based on the
following formula (as applicable to each such Holder or other person): the
number of shares of Registrable Securities or Daisytek Common Stock requested
to be included in such registration statement by such Holder or person (the
"REQUESTED SHARES"), multiplied by a fraction, the numerator of which is such
Holder's or person's Requested Shares, and the denominator of which is the
total number of Requested Shares of all Holders and other persons. If, as the
result of such allocation, any Holder wishes to withdraw from such registration
and underwriting, such Holder may elect to do so by written notice to Daisytek
and the underwriter, delivered as promptly as possible following the
determination of such allocation, but in no event later than five business days
prior to the effective date of the registration statement.
2.4 EXPENSES. All expenses incurred in connection with a
registration pursuant to this Section (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for Daisytek (but not counsel for any Holder)
shall be borne by Daisytek.
2.5 OBLIGATIONS OF DAISYTEK. Whenever required to effect
the registration of any Registrable Securities under this Agreement, Daisytek
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to ninety (90)
days.
(b) Prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
3
<PAGE> 4
(c) Furnish to the Holders such number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
(d) Use its best efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that Daisytek shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter(s) of
such offering. Each Holder participating in such underwriting shall also enter
into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
2.6 FURNISH INFORMATION. It shall be a condition
precedent to the obligations of Daisytek to take any action pursuant to Section
2.2 that the selling Holders shall complete any and all documents and furnish
to Daisytek such information regarding themselves, the Registrable Securities
held by them, and the intended method of disposition of such securities as
shall be required to timely effect the registration of their Registrable
Securities.
2.7 DELAY OF REGISTRATION. No Holder shall have any
right to obtain or seek an injunction restraining or otherwise delaying any
registration in which Daisytek is registering shares of Daisytek Common Stock
to be sold by it as the result of any controversy that might arise with respect
to the interpretation or implementation of this Agreement.
2.8 INDEMNIFICATION. In the event any Registrable
Securities are included in a registration statement under this Agreement:
(a) BY DAISYTEK. To the extent permitted by law,
Daisytek will indemnify and hold harmless each Holder, the partners, officers
and directors of each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended, (the "1934 ACT"), against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"):
4
<PAGE> 5
(i) any untrue statement or alleged
untrue statement of a material fact contained in such
registration statement, including any preliminary
prospectus or final prospectus contained therein or
any amendments or supplements thereto;
(ii) the omission or alleged omission to
state therein a material fact required to be stated
therein, or necessary to make the statements therein
not misleading, or
(iii) any violation or alleged violation
by Daisytek of the Securities Act, the 1934 Act, any
federal or state securities law or any rule or
regulation promulgated under the Securities Act, the
1934 Act or any federal or state securities law in
connection with the offering covered by such
registration statement;
and Daisytek will reimburse each such Holder, partner, officer or
director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them, as incurred, in connection with investigating or
defending any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this subsection shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of Daisytek (which consent
shall not be unreasonably withheld), nor shall Daisytek be liable in any such
case for any such loss, claim, damage, liability or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in
connection with such registration by such Holder, partner, officer, director,
underwriter or controlling person of such Holder.
(b) BY SELLING HOLDERS. To the extent permitted
by law, each selling Holder will indemnify and hold harmless Daisytek, each of
its directors, each of its officers who have signed the registration statement,
each person, if any, who controls Daisytek within the meaning of the Securities
Act, any underwriter and any other Holder selling securities under such
registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the 1934 Act, against any losses, claims, damages or
liabilities (joint or several) to which Daisytek or any such director, officer,
controlling person, underwriter or other such Holder, partner or director,
officer or controlling person of such other Holder may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise
out of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by Daisytek or any such director, officer,
controlling person, underwriter or other Holder, partner, officer, director or
controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which
5
<PAGE> 6
consent shall not be unreasonably withheld; and provided further, that the
total amounts payable in indemnity by a Holder under this Section in respect of
any Violation shall not exceed the net proceeds received by such Holder in the
registered offering out of which such Violation arises.
(c) NOTICE. Promptly after receipt by an
indemnified party under this Section of notice of the commencement of any
action (including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under
this Section, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if representation
of such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential conflict of interests between
such indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section, but the omission so
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section.
(d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The
foregoing indemnity agreements of Daisytek and Holders are subject to the
condition that, insofar as they relate to any Violation made in a preliminary
prospectus but eliminated or remedied in the amended prospectus on file with
the SEC at the time the registration statement in question becomes effective or
the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the
"FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of
any person if a copy of the Final Prospectus was furnished to the indemnified
party and was not furnished to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities
Act.
(e) CONTRIBUTION. In order to provide for just
and equitable contribution to joint liability under the Securities Act in any
case in which either (i) any Holder exercising rights under this Agreement, or
any controlling person of any such Holder, makes a claim for indemnification
pursuant to this Section but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
selling Holder or any such controlling person in circumstances for which
indemnification is provided under this Section; then, and in each such case,
Daisytek and such Holder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that such Holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Securities offered by and sold under the registration statement bears to the
public offering price of all securities offered by and sold under such
registration statement, and Daisytek and other selling Holders are responsible
for the
6
<PAGE> 7
remaining portion; provided, however, that, in any such case, (A) no such
Holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered and sold by such
Holder pursuant to such registration statement; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
(f) SURVIVAL. The obligations of Daisytek and
Holders under this Section shall survive the completion of any offering of
Registrable Securities in a registration statement, and otherwise.
2.9 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby
agrees that it shall not, to the extent requested by Daisytek or an underwriter
of securities of Daisytek, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of Daisytek then owned by such
Holder (other than to donees or partners of the Holder who agree to be
similarly bound) for up to 90 days following the effective date of a
registration statement of Daisytek filed under the Securities Act; provided,
however, that such agreement shall be applicable only to a registration
statement of Daisytek which covers securities to be sold on its behalf to the
public in an underwritten offering (and not to Registrable Securities sold
pursuant to such registration statement). In order to enforce the foregoing
covenant, Daisytek shall have the right to place restrictive legends on the
certificates representing the shares subject to this Section and to impose stop
transfer instructions with respect to the Registrable Securities and such other
shares of stock of each Holder (and the shares or securities of every other
person subject to the foregoing restriction) until the end of such period.
2.10 TERMINATION OF DAISYTEK'S OBLIGATIONS. Daisytek
shall have no obligations pursuant to Section 2.2 with respect to: (i) any
request or requests for registration made by any Holder on a date more than
three years after the Closing Date under the Merger Agreement or (ii) any
Registrable Securities proposed to be sold by a Holder in a registration
pursuant to Section 2.2 if, in the opinion of counsel to Daisytek, all such
Registrable Securities proposed to be sold by a Holder may be sold in a
three-month period without registration under the Securities Act pursuant to
Rule 144 under the Securities Act.
3. ASSIGNMENT AND AMENDMENT.
3.1 ASSIGNMENT. Notwithstanding anything herein to the
contrary, the registration rights of a Holder under Section 2 hereof may be
assigned only to a party who acquires at least 250,000 shares of Registrable
Securities from a Holder; provided, however that no party may be assigned any
of the foregoing rights unless Daisytek is given written notice by the
assigning party at the time of such assignment stating the name and address of
the assignee and identifying the securities of Daisytek as to which the rights
in question are being assigned; and provided further that any such assignee
shall receive such assigned rights subject to all the terms and conditions of
this Agreement, including without limitation the provisions of this Section 3.
3.2 AMENDMENT OF RIGHTS. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance
7
<PAGE> 8
and either retroactively or prospectively), only with the written consent of
Daisytek and the party to be charged with such amendment or waiver. Each Holder
acknowledges and agrees that the grant of piggyback registration rights on a
pari passu basis with the piggyback registration rights of the Holders under
Section 2.2 shall not be deemed to be a material and adverse change to the
piggyback registration rights of the Holders under this Agreement and, to the
extent that such rights are granted to any person with respect to Daisytek
Common Stock acquired after the date hereof, each Holder (and/or any of his
permitted successors or assigns) shall be deemed to have consented to such
grant. Any amendment or waiver effected in accordance with this Section 3.2
shall be binding upon each Holder, each permitted successor or assignee of such
Holder and Daisytek.
4. GENERAL PROVISIONS.
4.1 NOTICES. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or if deposited with an overnight
courier service or if deposited in the U.S. mail by registered or certified
mail, return receipt requested, postage prepaid, as follows:
(a) if to Daisytek, at 500 North Central
Expressway, Plano, Texas 75074;
(b) if to a Stockholder, at such Stockholder's
address as set forth on the signature page hereof.
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.
4.2 ENTIRE AGREEMENT. This Agreement constitutes and
contains the entire agreement and understanding of the parties with respect to
the subject matter hereof and supersedes any and all prior negotiations,
correspondence, agreements, understandings, duties or obligations between the
parties respecting the subject matter hereof.
4.3 GOVERNING LAW. This Agreement shall be governed by
and construed exclusively in accordance with the laws of the State of Delaware,
excluding that body of law relating to conflict of laws and choice of law.
4.4 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, then such
provision(s) shall be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision(s) were so excluded and
shall be enforceable in accordance with its terms.
4.5 THIRD PARTIES. Nothing in this Agreement, express or
implied, is intended to confer upon any person, other than the parties hereto
and their successors and assigns, any rights or remedies under or by reason of
this Agreement.
8
<PAGE> 9
4.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Section 3.1, the provisions of this Agreement shall inure to the benefit of,
and shall be binding upon, the successors and permitted assigns of the parties
hereto.
4.7 CAPTIONS. The captions to sections of this Agreement
have been inserted for identification and reference purposes only and shall not
be used to construe or interpret this Agreement.
4.8 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.9 COSTS AND ATTORNEYS' FEES. In the event that any
action, suit or other proceeding is instituted concerning or arising out of
this Agreement or any transaction contemplated hereunder, the prevailing party
shall recover all of such party's costs and attorneys' fees incurred in each
such action, suit or other proceeding, including any and all appeals or
petitions therefrom.
4.10 ADJUSTMENTS FOR STOCK SPLITS, ETC. Wherever in this
Agreement there is a reference to a specific number of shares of Daisytek
Common Stock of any class or series, then, upon the occurrence of any
subdivision, combination or stock dividend of such class or series of stock,
the specific number of shares so referenced in this Agreement shall
automatically be proportionally adjusted to reflect the affect on the
outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.
4.11 AGGREGATION OF STOCK. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first above written.
DAISYTEK INTERNATIONAL CORPORATION
By:
---------------------------------------
Tom Madden, Vice President
------------------------------------------
Michael Cullen
577 Lakeview Terrace
Glen Ellen, Illinois 60137
------------------------------------------
Robert Daly
242 Hillandale
Bloomingdale, Illinois 60108
10
<PAGE> 1
EXHIBIT 11
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 5,393 $ 4,100
========= ========
Net income per common share - diluted $ 0.30 $ 0.27
========= ========
Pro forma data(2):
Historical net income $ 5,393 $ 4,100
Pro forma adjustments:
Provision for income taxes (291) (82)
Acquisition related costs, net of tax 246 --
--------- --------
Pro forma net income 5,348 4,018
========= ========
Pro forma net income per common share - diluted $ 0.30 $ 0.27
========= ========
Weighted average of common shares outstanding 17,814 14,983
========= ========
Calculation of weighted average common shares
outstanding:
Weighted average of common stock outstanding 17,005 14,339
Weighted average common stock options, utilizing
the treasury stock method(1) 809 644
--------- --------
17,814 14,983
========= ========
</TABLE>
(1) Utilizing the weighted average stock price of $24.38 and $15.88 per
share for the three months ended June 30, 1998 and 1997, respectively.
(2) Pro forma data is presented for informational purposes only and
includes the following adjustments: (1) A business unit of a business
combination with The Tape Company, Inc., which was accounted for as
a pooling of interests, was organized as a subchapter S corporation,
whereby income taxes were paid individually by the owners. The pro
forma provision for income tax adjustment is provided to reflect income
tax under a corporate tax structure. (2) Daisytek incurred various
acquisition related accounting, legal and other costs applicable to the
acquisition of The Tape Company. The pro forma adjustment for
acquisition related costs, net of tax, excludes such costs from pro
forma net income for the three months ended June 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 725
<SECURITIES> 0
<RECEIVABLES> 116,726
<ALLOWANCES> 2,075
<INVENTORY> 119,722
<CURRENT-ASSETS> 241,044
<PP&E> 31,945
<DEPRECIATION> 16,307
<TOTAL-ASSETS> 278,591
<CURRENT-LIABILITIES> 98,038
<BONDS> 37,261
0
0
<COMMON> 170
<OTHER-SE> 143,298
<TOTAL-LIABILITY-AND-EQUITY> 278,591
<SALES> 222,589
<TOTAL-REVENUES> 222,589
<CGS> 196,062
<TOTAL-COSTS> 196,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 525
<INTEREST-EXPENSE> 852
<INCOME-PRETAX> 8,395
<INCOME-TAX> 3,002
<INCOME-CONTINUING> 5,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,393
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RETROACTIVELY
RESTATED TO COMBINE THE ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE
TAPE COMPANY, INC., WHICH WAS ACQUIRED BY DAISYTEK DURING JUNE 1998 AND
ACCOUNTED FOR AS A POOLING OF INTEREST
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 1,085
<SECURITIES> 0
<RECEIVABLES> 97,385
<ALLOWANCES> 2,124
<INVENTORY> 76,278
<CURRENT-ASSETS> 175,278
<PP&E> 23,745
<DEPRECIATION> 11,526
<TOTAL-ASSETS> 193,382
<CURRENT-LIABILITIES> 87,549
<BONDS> 33,779
0
0
<COMMON> 146
<OTHER-SE> 75,475
<TOTAL-LIABILITY-AND-EQUITY> 193,382
<SALES> 182,777
<TOTAL-REVENUES> 182,777
<CGS> 163,154
<TOTAL-COSTS> 163,154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 586
<INCOME-PRETAX> 6,515
<INCOME-TAX> 2,415
<INCOME-CONTINUING> 4,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,100
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
