<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2421746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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500 NORTH CENTRAL EXPRESSWAY
PLANO, TEXAS 75074
(972) 881-4700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MARK C. LAYTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DAISYTEK INTERNATIONAL CORPORATION
500 NORTH CENTRAL EXPRESSWAY
PLANO, TEXAS 75074
(972) 881-4700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
MORRIS BIENENFELD, ESQ. MARK A. LOEFFLER, ESQ.
WOLFF & SAMSON, P.A. POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
5 BECKER FARM ROAD 191 PEACHTREE STREET, N.E.
ROSELAND, NEW JERSEY 07068 ATLANTA, GEORGIA 30303
(973) 533-6532 (404) 572-6784
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1)(3) PER UNIT(2)(3) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.. 3,450,000 $24.16 $83,352,000 $24,589
=====================================================================================================================
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(1) Includes 450,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Pursuant to Rule 457(c), calculated based upon the average of the high and
low prices of the Common Stock on the Nasdaq National Market on February
24, 1998.
(3) After giving effect to two for one stock split effective as of March 2,
1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1998
PROSPECTUS , 1998
- --------------------------------------------------------------------------------
3,000,000
DAISYTEK INTERNATIONAL CORPORATION
COMMON SHARES
- --------------------------------------------------------------------------------
Of the 3,000,000 shares of common stock, $.01 par value (the "Common Stock"), of
Daisytek International Corporation (the "Company") offered hereby, 2,300,000 are
being sold by Company and 700,000 are being sold by the Selling Stockholder. See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholder.
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the
symbol "DZTK." On February 25, 1998, the last reported sale price of the Common
Stock on Nasdaq was $24 3/8 per share (as adjusted for a two for one stock split
effective March 2, 1998). See "Price Range of Common Stock and Dividend Policy."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-10 .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to Proceeds to
Public and Commissions(1) Company(2) Selling Stockholder(3)
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<S> <C> <C> <C> <C>
Per Common Share $ $ $ $
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Total(3) $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses estimated at $ , which will be paid by the
Company.
(3) The Company and the Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to additional shares of Common Stock on the
same terms per share solely to cover over-allotments, if any. If such option
is exercised in full, the total price to public will be $ , the total
underwriting discounts and commissions will be $ , the total proceeds
to the Company will be $ and the total proceeds to the Selling
Stockholder will be $ . See "Underwriting."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that delivery of certificates therefor
will be made at the offices of SBC Warburg Dillon Read Inc., New York, New York,
on or about , 1998. The Underwriters include:
SBC WARBURG DILLON READ INC.
PAINEWEBBER INCORPORATED
WILLIAM BLAIR & COMPANY
<PAGE> 3
[picture]
DAISYTEK'S SALES FORCE SERVICES OVER 25,000 CUSTOMER LOCATIONS.
[picture]
THE COMPANY'S "SUPERHUB" DISTRIBUTION CENTER, LOCATED IN MEMPHIS, TENNESSEE,
UTILIZES
ADVANCED TECHNOLOGICAL EQUIPMENT TO IMPROVE OPERATING EFFICIENCY AND CUSTOMER
SERVICE.
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK
AND THE IMPOSITION OF A PENALTY BID DURING AND AFTER THE OFFERING. IN ADDITION,
CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) ALSO MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES AND EXCHANGE ACT OF
1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise indicated herein,
the information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and reflects the two for one stock split of the Company's
Common Stock effective as of March 2, 1998. Unless the context otherwise
requires, references to the "Company" mean Daisytek International Corporation
and its direct and indirect subsidiaries, including Daisytek, Incorporated, the
Company's primary operating subsidiary, but do not include the Company's
recently acquired subsidiary, Steadi-Systems, Ltd., and its subsidiaries. See
"Business -- Recent Acquisition." References in this Prospectus to the Company's
fiscal year means the 12 month period ending on March 31 of such year.
THE COMPANY
Daisytek International Corporation ("Daisytek" or the "Company") is a
leading wholesale distributor of non-paper computer and office automation
supplies and accessories. The Company distributes over 10,000 products to over
25,000 customer locations, including value added resellers ("VARs"), computer
supplies dealers, office product dealers, contract stationers, buying groups,
computer and office product superstores and other retailers who resell the
products to end-users. The Company believes it is the largest wholesale
distributor of non-paper computer and office automation supplies and accessories
in the world.
The Company sells primarily nationally known, name-brand products
manufactured by over 150 original equipment manufacturers, including
Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital Equipment Corporation,
Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. The
Company's products include consumable supplies such as laser toner, inkjet
cartridges, copier toner, printer ribbons, diskettes, optical storage products,
computer tape cartridges and accessories. The Company's products are used in a
broad range of computers and office automation products, including laser and
inkjet printers, photocopiers, fax machines and data storage products.
The Company utilizes sophisticated telemarketing, direct mail programs,
frequent innovative sales promotions and electronic commerce technology to
market and distribute its products throughout the United States, Canada, Mexico,
Australia and Latin America, as well as in other international markets,
including Singapore and the Pacific Rim. The Company presently operates one
centralized "superhub" distribution center in Memphis, Tennessee, to service the
U.S. and certain international markets. To service other international markets,
the Company also operates smaller regional sales and distribution centers in
Miami, Florida, Mexico, Australia, Canada and recently opened a sales and
distribution facility in Singapore. Most of the Company's U.S. shipments are
shipped via Federal Express under a contractual arrangement which, together with
the Company's centralized distribution center, enables the Company to accept
orders until 9:00 p.m. EST and offer its customers next business day delivery of
product in stock.
The Company also operates Priority Fulfillment Services, Inc. ("PFS"), a
wholly owned subsidiary, which provides a wide array of outsourcing solutions to
major corporations. Through PFS, the Company sells its core competencies in call
center, product fulfillment, logistics and support services. PFS services
include: order entry, order tracking, customer service (inbound) and outbound
telemarketing services; product fulfillment, logistics and distribution
services; and other support services such as invoicing, credit management and
collection services, and accounting and systems support.
In January 1998, the Company expanded its product line and customer base by
acquiring Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale
distributor of a wide array of professional media products (film stock, video,
audio and data storage media) and video hardware (analog and digital equipment)
to the filmed entertainment and multimedia industries.
Industry sources estimate that the U.S. non-paper computer and office
automation supplies market was approximately $22 billion (at retail) in 1997 and
is projected to grow at a compound annual rate of approximately 10% over the
next four years. The Company believes that the demand for consumable supplies is
driven by three major trends: (i) the rapid advancement in hardware and
peripheral technology such as laser
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and inkjet printers, (ii) the increasing automation of the workplace and the
corresponding increase in the demand for computer and office automation
supplies, particularly in the small and home office environment, and (iii) the
substantial growth and acceptance of laser and color-printer technologies which
require significantly more consumable supplies than older, impact printing
technologies.
Unlike the computer hardware or office equipment industry, the Company
believes the non-paper computer and office automation supplies industry is not
generally subject to the risk of rapid technological advances and subsequent
product obsolescence. This is because the demand for non-paper consumables is
not dependent on the level or type of computer hardware or office equipment
sales in any particular year, but rather reflects the amount and type of
equipment already in use. As a result, the consumable needs for any particular
computer or item of office equipment will often continue for an extended period
of time, even after the manufacture of such computer or office equipment is
discontinued.
The Company believes that the market for outsourcing of call center
(inbound and outbound) and product fulfillment and distribution operations
should grow rapidly as more companies focus on product development and marketing
and turn to third party providers for their teleservice and distribution needs.
The Company further believes that the increasing use of the Internet for
electronic commerce activities should fuel growth for the outsourcing of small
package distribution.
The Company's net sales increased from $233.5 million in fiscal year 1993
to $603.8 million in fiscal year 1997, a compound annual revenue growth rate of
26.8%, while operating income increased from $6.4 million (without giving effect
to certain one-time events) to $23.3 million over the same period, a compound
annual operating income growth rate of 38.2%. These growth rates reflect the
Company's wide selection of popular products at competitive prices, its ability
to continually increase sales to existing customers and add new product lines
and new customers and its emphasis on controlling operating expenses and
achieving distribution efficiencies.
The key components of the Company's strategy to increase its market share
and achieve continued sales and earnings growth are to:
- Continue to Focus on the Consumable Supplies Industry by increasing
sales to existing customers within the contract stationer, VAR and computer
and office product superstore channels and initiating new customer
relationships and new channels such as mass merchants, grocery and
convenience stores. Additionally, the Company will continue to focus on the
introduction of new products such as media products, color printer
supplies, optical storage products and bar coding products.
- Continue to Implement Innovative Technology Based Tools to closely
monitor sales and profitability, improve productivity in telemarketing and
distribution and provide value-added services, such as an electronic
catalog and on-line ordering (known as "SOLO", the System for Online
Ordering), electronic data interchange ("EDI"), drop-shipping to end-users,
advanced order tracking systems and "customer links" which provide
customers with direct access to proprietary Company databases. These
technology tools should allow the Company to continue to improve overall
operating efficiency and customer service.
- Increase International Sales by utilizing the Company's strength in
marketing and distributing consumable supplies in emerging growth markets
in other areas of the world, including Latin America and the Pacific Rim.
The Company's financial strength, consumable supplies experience and broad
product range should provide the Company with strong growth opportunities
in these markets.
- Expand PFS by Leveraging the Company's Small Package Distribution
and Telemarketing Expertise as a product in itself to capitalize on the
international trend toward outsourcing. In particular, the Company believes
that the growth of electronic commerce over the Internet will provide the
Company with significant growth opportunities to offer its call center,
product fulfillment and distribution services to a wide array of customers
in a variety of industries.
- Seek Acquisitions of Selected Product Lines and Fulfillment Services
to capitalize on the Company's expertise in small package distribution,
especially products having high value low weight characteristics.
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The Company's principal executive offices are located at 500 North Central
Expressway, Plano, Texas 75074, and its telephone number is (972) 881-4700.
THE OFFERING
Common Stock offered by the
Company........................ 2,300,000 shares
Common Stock offered by the
Selling Stockholder............ 700,000 shares
Common Stock outstanding after
the Offering................... 15,961,032 shares(1)
Use of Proceeds by the Company... Repayment of indebtedness under the
Company's
bank credit facilities. See "Use of
Proceeds."
Nasdaq National Market symbol.... DZTK
- ---------------
(1) Based on the number of shares outstanding as of the date of this Prospectus.
Does not include (i) 1,731,186 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options and (ii) 2,103,452 shares of
Common Stock available for the future grant of stock options under the
Company's Stock Option Plans.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTH
PERIODS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................. $233,458 $276,699 $352,953 $464,169 $603,814 $429,471 $538,966
Gross profit............... 23,263 28,817 35,971 47,970 59,966 42,463 53,940
Income (loss) from
operations............... (2,260)(1) 8,479 12,711 18,946 23,336 16,385 20,797
Net income (loss).......... (2,921) 4,257 6,496 10,767 13,367 9,360 11,836
PER SHARE DATA(2):
Net income (loss) per
common share:
Basic.................... $ (0.34) $ 0.49 $ 0.68 $ 0.85 $ 1.03 $ 0.73 $ 0.87
Diluted.................. $ (0.34) $ 0.40 $ 0.59 $ 0.80 $ 0.97 $ 0.68 $ 0.83
Weighted average common
shares outstanding:
Basic.................... 8,620 8,676 9,550 12,602 12,934 12,904 13,530
Weighted average common and
common equivalent shares
outstanding:
Diluted.................. 8,620 10,576 11,084 13,514 13,826 13,832 14,260
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ 93,784
Total assets.............................................. 186,973
Long-term debt, net of current maturities................. 28,849
Shareholders' equity...................................... 82,140
</TABLE>
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(1) The Company's income from operations for fiscal year 1993 would have been
approximately $6.4 million without giving effect to the events described in
footnote (1) on page 13.
(2) In February 1998, the Company's Board of Directors approved a two for one
stock split to be effected in the form of a stock dividend payable on March
2, 1998 to stockholders of record on February 16, 1998. Share data is based
upon the weighted average common shares and share equivalents outstanding
for each period, adjusted to reflect the split.
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RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus, in evaluating an
investment in the Common Stock.
ADVERSE EFFECT OF COMPETITION AND SHIFTING CUSTOMER MIX
The non-paper computer and office automation product supplies wholesale
distribution industry is highly competitive. The Company competes with product
manufacturers, general office supply wholesalers, other national and regional
computer supplies wholesale distributors, computer hardware and software
distributors, and, to a lesser extent, non-specialized wholesalers. Many of the
Company's competitors such as product manufacturers and general office supply
wholesalers are larger and have substantially greater financial and other
resources than the Company. Competition in the Company's industry is generally
based on price, breadth of product lines, product and credit availability,
delivery time and the level and quality of customer services.
In addition, the Company has generally experienced and, over time, expects
to continue to experience, declining gross profit margins primarily as a result
of customer consolidation and a shifting customer mix from small and medium
sized dealers and resellers to large national accounts and computer and office
product superstores, many of whom have direct purchasing relationships with
product manufacturers, and as a result of price competition. Although,
historically, the Company has been able to offset such declines by reducing the
Company's operating expenses as a percentage of net sales, and while management
believes it will generally be able to continue to do so, no assurance can be
given in this regard. Management also expects that the continuing consolidation
among its customers may cause a reduction in the sales growth of the Company's
core domestic supplies business. The Company presently expects to partially
offset this reduced growth rate with further growth in its international and PFS
businesses, but no assurance can be given in this regard. The growth in sales to
computer and office product superstores has also created an increased
concentration of credit risk, as such customers now account for a larger
percentage of net sales and accounts receivable. See "Business -- Competition"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON SHIPPING ARRANGEMENTS WITH A THIRD PARTY
The Company presently ships approximately 85% of its U.S. shipments under a
five-year contractual arrangement with Federal Express (the "Federal Express
Agreement") pursuant to which the Company, subject to compliance with certain
conditions, receives favorable shipping rates. The Federal Express Agreement has
a scheduled termination date of November 1999, but may be terminated at any time
upon prior notice, and there can be no assurance that such termination, or a
substantial change in the operations of, or disruption of services provided by,
Federal Express, would not have a material adverse effect on the Company's
business. See "Business -- Distribution."
DEPENDENCE ON KEY SUPPLIERS
Although the Company regularly carries products and accessories
manufactured by more than 150 original equipment manufacturers, approximately
76% of the Company's net sales during the nine months ended December 31, 1997
were derived from products manufactured by the Company's ten largest suppliers,
with the sale of Hewlett-Packard and Canon products accounting for approximately
39% and 10% of total net sales, respectively, and the sale of Lexmark, Digital
Equipment Corporation, Epson, Okidata, Panasonic and Xerox products each
accounting for between approximately 3% to 6% of total net sales. In addition,
the Company's business is dependent upon terms provided by its key suppliers,
including pricing and related provisions, product availability and dealer
authorizations. The Company's direct purchasing agreements with its major
suppliers are generally terminable by the supplier at any time, with or without
cause, and, while the Company considers its relationships with its key
suppliers, including Hewlett-Packard, Canon, Lexmark, Digital Equipment
Corporation, Epson, Okidata, Panasonic and Xerox to be good, there can be no
assurance that these relationships will not be terminated or that such
relationships will continue as presently in effect. In
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addition, changes by one or more of such key suppliers of their policies
regarding wholesale distributors or volume discount schedules or other marketing
programs applicable to the Company may have a material adverse effect on the
Company's business. See "Business -- Suppliers."
RISK OF INTERNATIONAL OPERATIONS AND EXPANSION
Approximately 19% of the Company's total net sales in fiscal year 1997, and
22% of the Company's total net sales for the nine months ended December 31, 1997
were sold through the Company's Canadian, Mexican, Australian and U.S. export
operations, including Latin America. The Company believes that international
markets represent further opportunities for growth. To take advantage of the
growing Far East and Australia marketplace, in October 1996 the Company acquired
Lasercharge Pty Ltd., a large computer and office automation supplies
wholesaler, and recently opened a sales and distribution facility in Singapore.
To service the growing Latin American market, in November 1994 the Company
opened a sales office and distribution center in Mexico City, Mexico, and in
January 1996 the Company opened a similar facility in Miami, Florida. There can
be no assurance, however, that the Company will be successful in these or other
international efforts or that the risks inherent in international operations,
such as currency fluctuations or the political or economic instability of
certain foreign countries and regions, will not have a material adverse effect
on the Company's results of operations. The Company attempts to protect itself
from foreign currency translation risks by denominating substantially all of its
non-Canadian and non-Australian international sales in U.S. dollars. In
addition, on an annual basis, the Company has entered into various one-year
forward Canadian and various forward 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 may also
consider entering into other forward exchange contracts in order to hedge the
Company's net investment in its other foreign subsidiaries, although no
assurance can be given that the Company will be able to do so on acceptable
terms. The Company also has local currency lines of credit available in Canada
and Australia and may from time to time borrow in foreign currencies in order to
meet the working capital needs of one or more of its foreign subsidiaries. See
"Business -- Business Strategy, -- Sales and Marketing -- Distribution,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 1 of Notes to
Consolidated Financial Statements.
ACQUISITIONS
As part of its growth strategy, the Company pursues the acquisition of
companies that either complement or expand its existing business. As a result,
the Company regularly evaluates potential acquisition opportunities, which may
be material in size and scope. Acquisitions involve a number of risks and
uncertainties, including expansion into new geographic markets and business
areas, the requirement to understand local business practices, the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, the possible requirement to upgrade the acquired
companies' management information systems to the Company's standards, possible
dilutive issuances of equity securities, the incurrence of additional debt, the
amortization of any acquired intangible assets and potential adverse short-term
effects on the Company's operating results. See "Business -- Business Strategy."
DEPENDENCE ON INFORMATION SYSTEMS
The Company depends on a variety of information systems for its operations,
particularly its centralized information processing system which supports, among
other things, inventory management, order processing, shipping, receiving, and
accounting. Although the Company has not in the past experienced significant
failures or down time of its centralized information processing system or any of
its other information systems, and while the Company believes it presently has
adequate safeguards and backups in place, any such failure or significant down
time could prevent the Company from taking customer orders, and/or shipping
product and could prevent customers from accessing price and product
availability information from the Company. Consequently, a failure of the
Company's information systems could have a material adverse effect on the
Company's business, financial condition, or results of operations. In addition,
the inability of the Company to attract and retain the highly-skilled personnel
required to implement, maintain, and operate its centralized
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information processing system and the Company's other information systems could
have a material adverse effect on the Company's business, financial condition,
or results of operations. See "Business - Management Information Systems."
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 Company is also seeking to work
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 and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent on the skills, experience
and efforts of its senior management. The loss of the services of one or more of
its senior management could have an adverse effect on the Company's future
business and prospects. The Company currently maintains, and is the beneficiary
of, key-person term life insurance in the aggregate amount of $5 million on the
lives of certain of its executive officers. The Company does not presently
require any of its senior management to execute employment or non-competition
agreements. See "Management."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations in response to variations in the Company's quarterly operating
results, general trends in the Company's industry and other factors, as well as
general economic conditions. In addition, the stock market, at times, has
experienced substantial price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock and Dividend Policy."
AVAILABILITY OF PREFERRED SHARES FOR ISSUANCE
The Company's Certificate of Incorporation authorizes the Company to issue
up to 1,000,000 shares of preferred stock, although the Company has no present
intention to issue any shares of preferred stock. However, since the rights and
preferences of any series of preferred stock may be set by the Board of
Directors in its sole discretion, the rights and preferences of any such
preferred stock may be superior to those of the Common Stock and thus may
adversely affect the rights of holders of Common Stock. The ability to issue
preferred stock could have the effect of delaying or preventing a change in
control of the Company.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Certificate of Incorporation and Bylaws include certain
anti-takeover provisions. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of, and in the
policies formulated by, the Board of Directors. Nevertheless, these provisions,
together with certain provisions of the Delaware General Corporation Law, may
delay or prevent a takeover attempt that a stockholder of the Company might
consider to be in the best interests of the Company or its stockholders.
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<PAGE> 11
DIVIDEND POLICY
The Company currently intends to retain all future earnings to finance the
further development of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. See "Price Range of
Common Stock and Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the documents incorporated herein by reference,
contains forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. When used in this Prospectus, the words
"believe," "anticipate," "estimate," "expect" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements may include plans relating to future operations, acquisitions,
financing needs or the Company's products and services; projections of revenue
and net income and issues that may affect revenue or net income; projections of
capital expenditures; and assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. The Company's actual results and events may
differ significantly from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed herein under "Risk Factors."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,300,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$52.5 million (approximately $60.4 million if the Underwriters' over-allotment
option is exercised in full) assuming an offering price of $24 3/8 per share
(the last reported sales price of the Common Stock on the Nasdaq National Market
on February 25, 1998), after deducting the estimated underwriting discounts and
commissions and offering expenses. The net proceeds of the Offering to the
Company will be used to reduce indebtedness under the Company's revolving bank
credit facilities. As of January 31, 1998, the Company had approximately $56.7
million outstanding under these facilities at a weighted average interest rate
of 6.6%. See Note 2 of Notes to Consolidated Financial Statements regarding the
respective maturities of the Company's revolving bank credit facilities.
The receipt of the proceeds of the Offering will strengthen the Company's
balance sheet and will provide additional funding for domestic and international
growth and possible acquisitions to expand its product line and its call center
and fulfillment and distribution capabilities. While the Company regularly
reviews acquisition opportunities, and is presently commencing review of a
possible acquisition opportunity, no acquisitions are currently pending.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholder in the Offering.
10
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed and trades on the Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "DZTK." The following
table sets forth for the period indicated the high and low sale price for the
Common Stock as reported by the Nasdaq National Market, as adjusted to reflect
the two for one stock split effective as of March 2, 1998:
<TABLE>
<CAPTION>
PRICE
-----------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year 1996
First Quarter............................................. $12 1/2 $ 9 9/16
Second Quarter............................................ $16 7/16 $10 1/2
Third Quarter............................................. $16 1/2 $13 1/8
Fourth Quarter............................................ $17 7/8 $13 7/8
Fiscal Year 1997
First Quarter............................................. $23 1/2 $16 1/4
Second Quarter............................................ $22 1/16 $17 1/4
Third Quarter............................................. $21 3/4 $17 1/4
Fourth Quarter............................................ $21 $15 1/2
Fiscal Year 1998
First Quarter............................................. $19 7/8 $12 3/8
Second Quarter............................................ $24 $19 3/8
Third Quarter............................................. $22 1/2 $16 5/16
Fourth Quarter (through February 25, 1998)................ $24 7/8 $17 3/8
</TABLE>
The closing price of a share of Common Stock on February 25, 1998 was
$24 3/8. As of January 31, 1998, there were approximately 2,200 shareholders of
which 83 were record holders of the Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all earnings to finance the
further development of its business. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 and as adjusted as of such date to give effect to: (i) the
sale by the Company of the shares of Common Stock offered by it hereby (at an
assumed public offering price of $24 3/8 per share) and (ii) the application of
the estimated net proceeds thereof to reduce indebtedness under the Company's
revolving credit facilities. See "Use of Proceeds." This table should be read in
conjunction with the Company's consolidated financial statements, including the
notes thereto, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------
ACTUAL AS ADJUSTED
------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Short-term debt:
Current portion of capital lease obligations.............. $ 367 $ 367
======== ========
Long-term debt:
Revolving credit facilities(1)............................ $ 28,718 $ --
Capital lease obligations................................. 131 131
-------- --------
Total long-term debt................................... $ 28,849 $ 131
-------- --------
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding................ $ -- $ --
Common stock, $0.01 par value; 20,000,000 shares
authorized, 13,636,340 shares issued and outstanding
(actual), 15,936,340 shares issued and outstanding (as
adjusted).............................................. 136 159
Additional paid-in capital................................ 36,907 89,363
Retained earnings......................................... 46,939 46,939
Cumulative foreign currency translation adjustment........ (1,842) (1,842)
-------- --------
Total shareholders' equity............................. $ 82,140 $134,619
-------- --------
Total capitalization.............................. $110,989 $134,750
======== ========
</TABLE>
- ---------------
(1) As of January 31, 1998, the Company had approximately $56.7 million
outstanding under its revolving credit facilities.
12
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the fiscal years ended March 31, 1995, 1996 and 1997, and the selected
consolidated balance sheet data as of March 31, 1996 and 1997 have been derived
from the Company's audited consolidated financial statements, and should be read
in conjunction with those statements, which are included in this Prospectus. The
selected consolidated statements of operations data for the fiscal years ended
March 31, 1993 and 1994 and the selected consolidated balance sheet data as of
March 31, 1993, 1994 and 1995 have been derived from the Company's audited
consolidated financial statements, and should be read in conjunction with those
statements, which are not included in this Prospectus. The consolidated
statement of operations data for the nine month periods ended December 31, 1996
and 1997 and the consolidated balance sheet data at December 31, 1997 are
derived from unaudited consolidated financial statements included herein. In the
opinion of management, the unaudited information includes all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations of the Company
at the date and for the period presented. Results for the nine month period
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for the full fiscal year. The selected consolidated financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto which are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTH
PERIODS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------ -------------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales........................ $233,458 $276,699 $352,953 $464,169 $603,814 $429,471 $538,966
Cost of sales.................... 208,972 247,480 316,982 416,199 543,848 387,008 485,026
Provision for losses from
disposal of software and
hardware inventory............. 1,223 402 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Gross profit................... 23,263 28,817 35,971 47,970 59,966 42,463 53,940
Selling, general and
administrative expenses........ 21,822 20,338 23,260 29,024 36,630 26,078 33,143
Other operating expenses......... 3,701 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations................... (2,260)(1) 8,479 12,711 18,946 23,336 16,385 20,797
Interest expense................. 1,723 1,726 2,050 1,482 1,677 1,220 1,619
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................ (3,983) 6,753 10,661 17,464 21,659 15,165 19,178
Provision (benefit) for income
taxes.......................... (1,062) 2,496 4,165 6,697 8,292 5,805 7,342
-------- -------- -------- -------- -------- -------- --------
Net income (loss).............. $ (2,921) $ 4,257 $ 6,496 $ 10,767 $ 13,367 $ 9,360 $ 11,836
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA(2):
Net income (loss) per common
share:
Basic.......................... $ (0.34) $ 0.49 $ 0.68 $ 0.85 $ 1.03 $ 0.73 $ 0.87
Diluted........................ $ (0.34) $ 0.40 $ 0.59 $ 0.80 $ 0.97 $ 0.68 $ 0.83
Weighted average common shares
outstanding:
Basic.......................... 8,620 8,676 9,550 12,602 12,934 12,904 13,530
Weighted average common and
common equivalent shares
outstanding:
Diluted........................ 8,620 10,576 11,084 13,514 13,826 13,832 14,260
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- -------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $22,290 $ 28,167 $ 43,427 $ 56,663 $ 80,248 $ 93,784
Total assets............................. 57,213 67,385 94,421 128,601 175,288 186,973
Long-term debt, net of current
maturities............................. 16,815 19,640 11,334 16,419 30,454 28,849
Shareholders' equity..................... 11,844 15,937 40,817 51,661 67,193 82,140
</TABLE>
- ---------------
(1) The Company's income from operations for fiscal year 1993 would have been
approximately $6.4 million without giving effect to the following events:
(i) a $4.3 million loss from operations related to the Company's PC hardware
and software division which was eliminated in fiscal year 1993, including a
$1.2 million provision for losses from disposal of software and hardware
inventory; (ii) a $3.7 million loss from operations related to the following
other operating expenses: (1) the Company's write-off of trade receivables
and advances owing from a related party in the aggregate amount of $1.2
million and establishment of a reserve of $0.5 million for trade receivables
owing from another related party, (2) costs aggregating $1.6 million
incurred by the Company in connection with the consolidation of its five
U.S. regional distribution centers into one "superhub" distribution center
in Memphis, Tennessee, and (3) costs aggregating $0.5 million incurred by
the Company in connection with a withdrawn initial public offering; and
(iii) a $0.7 million loss from operations related to the Company's temporary
reduction of outbound shipping rates as part of a promotional marketing
program in connection with the opening of the Memphis distribution center.
(2) In February 1998, the Company's Board of Directors approved a two for one
stock split to be effected in the form of a stock dividend payable on March
2, 1998 to stockholders of record on February 16, 1998. Share data is based
upon the weighted average common shares and share equivalents outstanding
for each period, adjusted to reflect the split.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited and unaudited consolidated statements of income expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
NINE MONTH
PERIODS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------
1995 1996 1997 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 89.8 89.7 90.1 90.1 90.0
----- ----- ----- ----- -----
Gross profit..................................... 10.2 10.3 9.9 9.9 10.0
Selling, general and administrative expenses....... 6.6 6.2 6.0 6.1 6.1
----- ----- ----- ----- -----
Income from operations........................... 3.6 4.1 3.9 3.8 3.9
Interest expense................................... 0.6 0.3 0.3 0.3 0.3
----- ----- ----- ----- -----
Income before income taxes....................... 3.0 3.8 3.6 3.5 3.6
Provision for income taxes......................... 1.2 1.5 1.4 1.3 1.4
----- ----- ----- ----- -----
Net income....................................... 1.8% 2.3% 2.2% 2.2% 2.2%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth certain unaudited quarterly financial data
and certain data expressed as a percentage of net sales for fiscal year 1997 and
the first three quarters of fiscal year 1998. The unaudited quarterly
information includes all adjustments, consisting of only normal recurring
adjustments, which management considers necessary for a fair presentation of the
information shown. The financial data and ratios for any quarter are not
necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1998
------------------------------------------------ -------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------------ ----------- -------- -------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $136,894 $138,148 $154,429 $174,343 $172,812 $179,568 $186,586
Gross profit........... 13,670 13,589 15,204 17,503 17,306 17,871 18,763
Gross profit
margin............. 10.0% 9.8% 9.8% 10.0% 10.0% 10.0% 10.1%
SG&A expenses.......... $ 8,306 $ 8,397 $ 9,375 $ 10,552 $ 10,583 $ 11,052 $ 11,508
Percent of net
sales.............. 6.1% 6.1% 6.1% 6.1% 6.1% 6.2% 6.2%
Income from
operations........... $ 5,364 $ 5,192 $ 5,829 $ 6,951 $ 6,723 $ 6,819 $ 7,255
Operating margin..... 3.9% 3.8% 3.8% 4.0% 3.9% 3.8% 3.9%
Net income............. $ 3,041 $ 2,955 $ 3,364 $ 4,007 $ 3,829 $ 3,869 $ 4,138
Net margin........... 2.2% 2.1% 2.2% 2.3% 2.2% 2.2% 2.2%
</TABLE>
14
<PAGE> 16
RECENT RESULTS
The following table sets forth certain unaudited information with respect
to the results of operations of the Company for the nine month periods ended
December 31, 1996 and 1997, respectively. Such information is not necessarily
indicative of the results that may be expected for the full fiscal year, but, in
the opinion of management, includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of results of
operations for such periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales................................................... $429,471 $538,966
Cost of sales............................................... 387,008 485,026
-------- --------
Gross profit.............................................. 42,463 53,940
Selling, general and administrative expenses................ 26,078 33,143
-------- --------
Income from operations.................................... 16,385 20,797
Interest expense............................................ 1,220 1,619
-------- --------
Income before income taxes................................ 15,165 19,178
Provision for income taxes.................................. 5,805 7,342
-------- --------
Net income.................................................. $ 9,360 $ 11,836
======== ========
PER SHARE DATA(1):
Net income per common share:
Basic..................................................... $ 0.73 $ 0.87
Diluted................................................... $ 0.68 $ 0.83
Weighted average common shares outstanding:
Basic..................................................... 12,904 13,530
Weighted average common and common equivalent shares
outstanding:
Diluted................................................... 13,832 14,260
</TABLE>
- ---------------
(1) In February 1998, the Company's Board of Directors approved a two for one
stock split, to be effected in the form of a stock dividend payable on March
2, 1998 to stockholders of record on February 16, 1998. The weighted average
common share and net income per common share calculations have been adjusted
to reflect the split for all periods presented.
Results of Operations for the Nine Month Periods Ended December 31, 1997 and
1996.
Net Sales. Net sales for the nine months ended December 31, 1997 were
$539.0 million as compared to $429.5 million for the nine months ended December
31, 1996, an increase of $109.5 million, or 25.5%. This increase was the result
of an increase in U.S. net sales of $65.7 million, or 18.6%, and an increase in
international net sales of $43.8 million, or 57.5%. 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, the
Company's continued introduction of new products, and the addition of net sales
from its Australian subsidiary which was acquired by the Company during the
third quarter of fiscal year 1997. Net sales to new customers for the nine
months ended December 31, 1997 were approximately $27 million, while net sales
to existing customers increased by approximately $83 million during this period.
During November 1997, the Company announced that it would not match lower
pricing offered by a competitor to one of the Company's largest customers. Net
sales to this customer ranged from approximately 5% to 7% of the Company's total
net sales during fiscal year 1997 and the first six months of fiscal year 1998.
The Company believes that the loss of net sales to this customer in the future
will reduce the Company's growth rate in net sales, gross profit and net income
for the remainder of this fiscal year and next fiscal year. In
15
<PAGE> 17
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 nine months ended December 31, 1997 was
$53.9 million as compared to $42.5 million in the same period in 1996, an
increase of $11.4 million, or 27.0%, primarily as the result of increased sales
volume in the first nine months of fiscal year 1998. The Company's gross profit
margin as a percent of net sales was 10.0% for the nine month period ended
December 31, 1997 as compared to 9.9% for the same period in 1996. The increase
in the Company's gross profit margin as a percentage of net sales was a result
of higher margin fee revenue business for PFS, the Company's subsidiary which
provides outsourcing services, and enhanced product sourcing in fiscal year
1998. The Company believes that the competitive environment and consolidation of
its wholesale customers will continue to place downward pressure on the
Company's gross profit margin percentage during fiscal year 1998.
SG&A Expenses. SG&A expenses for the nine months ended December 31, 1997
were $33.1 million, or 6.1% of net sales, as compared to $26.1 million, or 6.1%
of net sales, for the nine months ended December 31, 1996. The increase in SG&A
expenses was primarily a result of the increase in costs associated with the
Company's increased sales volume. The Company continues to incur incremental
SG&A expenses to invest in growth areas of the business, PFS in particular. SG&A
as a percentage of net sales for the first nine months of fiscal year 1998
remained unchanged as these incremental SG&A expenses were offset by improved
operating efficiencies and staff productivity as a result of increased sales
volume and continued technological enhancements implemented by the Company.
Income from Operations. Income from operations for the nine months ended
December 31, 1997 was $20.8 million as compared to $16.4 million for the same
period during 1996, an increase of $4.4 million, or 26.9%. This increase was due
to increased sales volume and increased gross profit partially offset by
increased SG&A expenses related to the incremental volume. Income from
operations as a percentage of net sales was 3.9% for the nine months ended
December 31, 1997 as compared to 3.8% for the corresponding period ending
December 31, 1996.
Interest Expense. Interest expense for the nine months ended December 31,
1997 was $1.6 million as compared to $1.2 million for the nine months ended
December 31, 1996. Interest expense was higher during the nine months ended
December 31, 1997, due to an increase in the average amounts outstanding under
the Company's lines of credit due to increased sales volume, in addition to a
slight increase in interest rates. The weighted average interest rate was 6.9%
and 6.7% for the nine month periods ended December 31, 1997 and 1996,
respectively.
Income Taxes. The Company's provision for income taxes was $7.3 million for
the nine months ended December 31, 1997 as compared to $5.8 million for the nine
months ended December 31, 1996. The increase was primarily due to increased
pretax profits. The effective tax rate for all periods presented was
approximately 38.3%. For an analysis of the Company's provision for income
taxes, see Note 6 of the Notes to Consolidated Financial Statements.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Net Sales. Net sales for the year ended March 31, 1997 were $603.8 million
as compared to $464.2 million for the year ended March 31, 1996, an increase of
$139.6 million, or 30.1%, as the result of an increase in U.S. net sales of
$103.0 million, or 26.5%, and an increase in international net sales of $36.6
million, or 48.2%. The growth in U.S. and international net sales was primarily
due to increased sales volume to large national accounts, computer and office
product superstores, new customers and the Company's continued introduction of
new products, and the addition of net sales from its Australian subsidiary which
was acquired by the Company during the third quarter of fiscal year 1997. The
growth rate in net sales to computer and office product superstore customers for
the year ended March 31, 1997 was less than the growth rate experienced for such
customers during the prior year. Net sales to new customers for the year ended
March 31, 1997 were approximately $49 million, including the net sales from its
new Australian subsidiary, while net sales to existing customers increased by
approximately $91 million during the year.
16
<PAGE> 18
Gross Profit. Gross profit for the year ended March 31, 1997 was $60.0
million as compared to $48.0 million in fiscal year 1996, an increase of $12.0
million, or 25.0%, primarily as the result of increased sales volume in fiscal
year 1997. The Company's gross profit margin as a percent of net sales was 9.9%
for the year ended March 31, 1997 as compared to 10.3% for the prior year. Gross
profit margin percentage declined during the year ended March 31, 1997 primarily
because the prior year's results include the benefit of incremental margins
earned on the sale of certain one-time inventory purchases by the Company prior
to manufacturer price increases. If the benefits of the one-time inventory
purchase actions are excluded from the prior year's results, gross profit as a
percentage of net sales for fiscal year 1997 is slightly lower as compared to
the prior year. Increased sales at lower gross profit margins to large national
accounts and computer and office product superstores also contributed to the
decline in gross profit margin percentages during the year ended March 31, 1997.
SG&A Expenses. SG&A expenses for the year ended March 31, 1997 were $36.6
million, or 6.0% of net sales, as compared to $29.0 million, or 6.2% of net
sales, for the year ended March 31, 1996. The increase in SG&A expenses was
primarily a result of the increase in variable costs associated with the
Company's increased sales volume. The decrease in SG&A expenses as a percentage
of net sales was primarily due to improved operating efficiencies and staff
productivity as a result of increased sales volume and continued technological
enhancements implemented by the Company. During fiscal 1997, the Company
incurred incremental SG&A expenses associated with its PFS subsidiary and also
associated with an expansion of its leased facilities in Memphis and Plano.
Income from Operations. Income from operations for the year ended March 31,
1997 was $23.3 million as compared to $18.9 million for fiscal year 1996, an
increase of $4.4 million, or 23.2%. This increase was primarily due to increased
sales volume, increased gross profit and improved operating efficiencies. Income
from operations as a percentage of net sales was 3.9% for the year ended March
31, 1997 as compared to 4.1% for last year, primarily as the result of a
decrease in gross profit margin as a percentage of net sales which was somewhat
offset by a decline in SG&A expenses as a percentage of net sales. Income from
operations as a percentage of net sales for the year ended March 31, 1997
declined primarily because the prior year's results include the effects of the
one-time inventory purchase actions. When the benefits of the one-time inventory
purchase actions are excluded from the prior year's results, income from
operations as a percentage of net sales for fiscal year 1997 was slightly higher
than fiscal year 1996.
Interest Expense. Interest expense was $1.7 million during the year ended
March 31, 1997 and was $1.5 million during the year ended March 31, 1996.
Interest expense increased as a result of an increase in the average line of
credit to support a larger revenue base, which was partially offset by a
reduction in interest rates during fiscal year 1997. The weighted average
interest rate was 6.7% during the year ended March 31, 1997 as compared to 7.5%
for the previous year.
Income Taxes. The Company's provision for income taxes was $8.3 million for
the year ended March 31, 1997 as compared to $6.7 million for the year ended
March 31, 1996. The increase was primarily due to increased pretax profits. The
effective tax rate for both years was approximately 38.3%.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Net Sales. Net sales for fiscal year 1996 were $464.2 million as compared
to $353.0 million for fiscal year 1995, an increase of $111.2 million, or 31.5%,
as the result of an increase in U.S. net sales of $94.8 million, or 32.3%, and
an increase in international net sales of $16.4 million, or 27.6%. The growth in
U.S. and international net sales was primarily due to increased sales volume to
large national accounts, computer and office product superstores, new customers
and the Company's continued introduction of new products. Net sales to new
customers for fiscal year 1996 were approximately $35 million, while net sales
to existing customers increased by approximately $77 million during this period.
Gross Profit. Gross profit for fiscal year 1996 was $48.0 million as
compared to $36.0 million in fiscal year 1995, an increase of $12.0 million, or
33.4%, primarily as the result of increased sales volume in fiscal year 1996, as
well as incremental gross profit earned on the sale of certain inventory
purchased by the Company prior to manufacturer price increases. The Company's
gross profit margin was 10.3% for fiscal year 1996 as
17
<PAGE> 19
compared to 10.2% for the prior year. The increase in gross profit margin
percentage was primarily the result of incremental margins earned on the sale of
certain inventory purchased by the Company prior to manufacturer price
increases. Without the benefit gained from such incremental gross profit, gross
profit margin percentage for fiscal year 1996 decreased slightly compared to the
previous year. This gross profit margin percentage decline occurred primarily as
the result of increased sales at lower gross profit margins to large national
accounts and computer and office product superstores.
SG&A Expenses. SG&A expenses for fiscal year 1996 were $29.0 million, or
6.2% of net sales, as compared to $23.3 million, or 6.6% of net sales, for
fiscal year 1995. The increase in SG&A expenses was primarily a result of the
increase in costs associated with the Company's increased sales volume. The
decrease in SG&A expenses as a percentage of net sales was primarily due to
improved operating efficiencies and staff productivity as a result of increased
sales volume and continued technological enhancements implemented by the
Company.
Income from Operations. Income from operations for fiscal year 1996 was
$18.9 million as compared to $12.7 million for fiscal year 1995, an increase of
$6.2 million, or 49.1%. This increase was primarily due to increased sales
volume, increased gross profit and improved operating efficiencies. Income from
operations as a percentage of net sales was 4.1% for fiscal year 1996 as
compared to 3.6% for fiscal year 1995, primarily as the result of an increase in
gross profit margin, related to the one-time inventory purchase actions, and a
decline in SG&A expenses as a percentage of net sales. When the benefits of the
one-time inventory purchase actions are excluded from fiscal year 1996 results,
the Company's income from operations as a percentage of net sales increased
slightly from the prior year.
Interest Expense. Interest expense for fiscal year 1996 was $1.5 million as
compared to $2.1 million in fiscal year 1995. The decrease was primarily the
result of a reduction in the outstanding balance in the Company's line of credit
attributable to the proceeds received from the Company's initial public offering
(the "IPO") in January 1995. The weighted average interest rate was 7.5% during
fiscal year 1996 as compared to 7.9% for fiscal year 1995. Interest expense for
fiscal year 1996 was also impacted by the incremental borrowings required to
finance the Company's additional inventory purchases discussed above.
Income Taxes. The Company's provision for income taxes was $6.7 million for
fiscal year 1996 as compared to $4.2 million in fiscal year 1995. The increase
was primarily due to increased pretax profits. The effective tax rate for fiscal
year 1996 was 38.3% as compared to the effective tax rate of 39.1% for fiscal
year 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. Net cash of $10.1 million, $5.2 million and $15.6 million was
provided by financing activities during fiscal years 1995, 1996 and 1997,
respectively. During the nine months ended December 31, 1996, net cash of $11.1
million was provided by financing activities, compared to net cash provided by
financing activities of $1.7 million for the nine months ended December 31,
1997. In January 1995, the Company sold 2,760,000 shares of Common Stock in an
initial public offering and received net proceeds of approximately $18.6
million. The Company used such net proceeds, along with an aggregate of $2.3
million received by the Company concurrently with the initial public offering
from an officer of the Company and a selling stockholder in repayment of
indebtedness owing by such officer and selling stockholder to the Company, to
reduce its outstanding indebtedness under the Company's line of credit. During
fiscal years 1996 and 1997, proceeds from bank borrowings and the exercise of
Common Stock options were used to finance the Company's operations and
expansion. Cash provided by financing activities during the nine months ended
December 31, 1996 was generated primarily from the exercise of Common Stock
options, and an increase in the Company's revolving line of credit facility, and
during the nine months ended December 31, 1997, the exercise of Common Stock
options. Financing activities should provide the Company's primary source of
cash during the remainder of fiscal year 1998, primarily to support the
Company's growth.
During fiscal years 1995, 1996 and 1997, $7.5 million, $0.4 million and
$7.0 million, respectively, were used in operating activities. During the nine
months ended December 31, 1996, $4.6 million was used in
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operating activities, while net cash of $2.4 million was provided by operating
activities for the nine months ended December 31, 1997. During the fiscal years
1995, 1996 and 1997 and the nine months ended December 31, 1996, increased
working capital required to support the Company's growth was partially funded by
cash generated from operating activities. Increased working capital requirements
during the nine months ended December 31, 1997, were funded by cash generated by
the Company's operations.
The Company's principal use of funds for investing activities were for
capital expenditures of $3.7 million, $5.0 million and $5.9 million during
fiscal years 1995, 1996 and 1997, respectively. The Company's principal use of
funds for investing activities during the nine months ended December 31, 1996
and 1997 was for capital expenditures of $3.9 and $3.7 million, respectively.
Capital expenditures have consisted primarily of additions to upgrade the
Company's management information systems, including the Company's Internet based
catalog and ordering tool (SOLO) and other methods of electronic commerce, and
general expansion of its facilities, both domestic and foreign. The Company
anticipates that its total investment in upgrades and additions to facilities
for fiscal year 1998 will be approximately $5.0 million to $6.0 million, and for
fiscal year 1999 will be approximately $5.0 million to $7.0 million.
Working capital increased to $93.8 million at December 31, 1997 from $80.2
million at March 31, 1997. This increase of $13.6 million was primarily
attributable to an increase in accounts receivable and inventory and a decrease
in accounts payable. During fiscal years 1996 and 1997 and the nine month period
ended December 31, 1997, the Company generally maintained an accounts receivable
balance of approximately 45, 46 and 47 days of sales, respectively. Inventory
turnover, excluding PFS, was approximately 11 turns for fiscal years 1996 and
1997 and for the nine month period ended December 31, 1997.
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. The maximum borrowing availability at December 31,
1997, prior to amendment, was $50.0 million. Availability under the Facility is
based upon amounts of eligible accounts receivable, as defined. As of December
31, 1997, the Company had borrowed $26.0 million, leaving $24.0 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, which expires on
July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of
$7.5 million (Australian), or approximately $4.9 million (U.S.) at December 31,
1997. 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 December 31, 1997, the Company had borrowed
approximately $2.7 million (U.S.), leaving approximately $2.2 million (U.S.)
available under the Australian Facility for additional borrowings.
During December 1997, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). The Canadian Facility, which expires on July
1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum
of $15.0 million (Canadian), or approximately $10.5 million (U.S.) at December
31, 1997. The Company had no borrowings outstanding under the Canadian Facility
at December 31, 1997. 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.
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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.
During fiscal years 1995, 1996 and 1997 and the nine months ended December
31, 1997, approximately 17%, 16%, 19% and 22%, respectively, of the Company's
net sales were sold through the Company's Canadian, Mexican, Australian and U.S.
export operations, including Latin America. The Company believes that
international markets represent further opportunities for growth. The Company
attempts to protect itself from foreign currency translation risks by
denominating substantially all of its non-Canadian and non-Australian
international sales in U.S. dollars. In addition, on an annual basis, the
Company has entered into various one-year forward Canadian and various forward
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. In May 1997, the Company entered into a $9.6 million
(U.S.) one-year forward Canadian currency exchange contract to replace the
previous contract, which matured during that same month. In October 1997, the
Company entered into a $1.8 million (U.S.) one-year forward Australian currency
exchange contract to replace a previous contract, which matured during that same
month. As of December 31, 1997, the Company had incurred unrealized gains of
approximately $0.4 million and $0.1 million, net of income taxes, on these
outstanding Canadian and Australian forward exchange contracts, respectively.
The Company may consider entering into other forward exchange contracts in order
to hedge the Company's net investment in its Canadian, Australian, Mexican, and
Singaporean subsidiaries, although no assurance can be given that the Company
will be able to do so on acceptable terms.
During January 1998, the Company purchased all of the common stock of
Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media
products to the filmed entertainment and multimedia industries. The acquisition
of Steadi-Systems will be accounted for using the purchase method of accounting,
and, accordingly, the purchase price will be allocated to the assets and
liabilities assumed based on the fair values at the date of acquisition. The
Company will record one-time charges related to the completion of transition,
integration and merger activities, estimated at about $0.6 million, or
approximately $0.03 per share, in the Company's fourth financial quarter ending
March 31, 1998.
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 the net proceeds from this Offering, funds available under
the Company's various lines of credit facilities, trade credit, lease financing,
internally generated funds and by increasing the amount available under the
Company's credit facilities. In addition, depending on market conditions and the
terms thereof, the Company may also consider obtaining additional funds through
an additional line of credit, other debt financing or the sale of capital stock;
however, no assurance can be given in such regard.
The Company has developed plans to ensure its information systems are
capable of properly utilizing dates beyond December 31, 1999. The Company
believes that with upgrades or modifications to existing software and conversion
to new software, the impact of the Year 2000 issue can be mitigated. However, if
such upgrades, modifications and conversions are not made, or are not made in a
timely manner, the Year 2000 issue could have a material impact on the Company's
operations. The total cost of implementing these system upgrades and
modifications is not expected to be material to the Company's results of
operations or cash flows, and the Company estimates completion by December 31,
1998. The costs of the Year 2000 project and the
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date on which the Company plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from these estimates.
To the extent it can, the Company is also working with its customers,
suppliers and other service providers to ensure their systems are Year 2000
compliant. There can be no assurance that customers or suppliers will
successfully implement Year 2000 compliant systems. In the event that numerous
or significant customers or suppliers do not successfully implement Year 2000
compliant systems, the Company's operations could be materially affected. In the
event any service providers are unable to convert their systems appropriately,
the Company plans to switch to providers capable of performing such processing.
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 are higher than the Company would
normally carry in its core wholesale business.
SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine any specific seasonal factors that may cause quarterly
variability in operating results. Management believes, however, that factors
that may influence quarterly variability include the overall growth in the
non-paper computer supplies industry and shifts in demand for the Company's
products due to a variety of factors, including sales increases resulting from
the introduction of new computer supplies products. The Company generally
experiences a relative slowness in sales during the summer months, which may
adversely affect the Company's first and second fiscal quarter results in
relation to sequential quarter performance. The Company believes that results of
operations for a quarterly period may not be indicative of the results for any
other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share ("EPS"). The Company adopted SFAS No. 128 during the quarter
ended December 31, 1997. The Company restated its EPS data for all periods
presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements are effective for fiscal years beginning
after December 15, 1997; however, earlier adoption is permitted. SFAS No. 130
requires
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the presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 131 requires the disclosure of financial and
descriptive information about reportable operating segments. Both SFAS No. 130
and 131 are modifications of existing disclosure requirements which will have no
effect on the results of operations or financial condition of the Company. The
Company is currently evaluating the standards and their potential impact on
disclosures and will adopt these pronouncements in its fiscal year 1999
financial statements.
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BUSINESS
The Company is a leading wholesale distributor of non-paper computer and
office automation supplies and accessories. The Company distributes over 10,000
products to over 25,000 customer locations, including value-added resellers
("VARs"), computer supplies dealers, office product dealers, contract
stationers, buying groups, computer and office product superstores and other
retailers who resell the products to end-users. The Company believes it is the
largest wholesale distributer of non-paper computer and office automation
supplies and accessories in the world.
The Company sells primarily nationally known, name-brand products
manufactured by over 150 original equipment manufacturers, including
Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital Equipment Corporation,
Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. The
Company's products include consumable supplies such as laser toner, inkjet
cartridges, copier toner, printer ribbons, diskettes, optical storage products,
computer tape cartridges and accessories. The Company's products are used in a
broad range of computers and office automation products, including laser and
inkjet printers, photocopiers, fax machines and data storage products.
The Company utilizes sophisticated telemarketing, direct mail programs,
frequent innovative sales promotions and electronic commerce technology to
market and distribute its products throughout the United States, Canada, Mexico,
Australia and Latin America, as well as in other international markets,
including Singapore and the Pacific Rim. The Company presently operates one
centralized "superhub" distribution center in Memphis, Tennessee, to service the
U.S. and certain international markets. To service other international markets,
the Company also operates smaller regional sales and distribution centers in
Miami, Florida, Mexico, Australia and Canada and recently opened a sales and
distribution facility in Singapore. Most of the Company's U.S. shipments are
shipped via Federal Express under the Federal Express Agreement which, together
with the Company's centralized distribution center, enables the Company to
accept orders until 9:00 p.m. EST and offer its customers next business day
delivery of product in stock.
During fiscal year 1996, the Company formed PFS to provide outsourcing
solutions to its business partners and other customers. Through PFS, the Company
sells its core competencies in call center, product fulfillment, logistics and
support services. PFS customizes these services to meet the specific
requirements of these companies. PFS's call-center services include: order
entry, order tracking and customer service (inbound), outbound telemarketing
services and customized reporting of customer and call information. PFS also
provides other support services such as invoicing, credit management and
collection services, and accounting and systems support. PFS utilizes the
Company's distribution facilities and maintains relationships with a number of
shipping companies to provide next business day delivery on domestic package
orders, truck shipments on larger domestic orders and a variety of air and
surface delivery options for international orders. PFS presently provides its
services under both fee based contracts (where revenue is based on either the
sales value of the products or service activity volume) and transaction based
contracts (where PFS takes title and resells the products).
INDUSTRY
Industry sources estimate that the U.S. non-paper computer and office
automation supplies market was approximately $22 billion (at retail) in 1997 and
is projected to grow at a compound annual rate of approximately 10% over the
next four years. The Company believes that the demand for consumable supplies is
driven by three major trends: (i) the rapid advancement in hardware and
peripheral technology such as laser and inkjet printers, (ii) the increasing
automation of the workplace and the corresponding increase in the demand for
computer and office automation supplies, particularly in the small and home
office environment, and (iii) the substantial growth and acceptance of laser and
color-printer technologies which require significantly more consumable supplies
than older, impact printing technologies.
Advances in printing technologies will further increase the demand for
consumable supplies products. The comparison of a typewriter and a printer
exemplifies the change in demand for consumables. Of the total expenditures
incurred over the average lifespan of the standard typewriter, 90% is spent on
the cost and service of the machine itself and only 10% on the supplies consumed
in its operation. In contrast, approximately 40%
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of the total expenditures over the average lifespan of the standard inkjet or
laser printer are for the machine, with 60% spent on consumables. In addition,
color printing is expected to further drive the consumption of supplies. The
page coverage or amount of ink used on a traditional black and white printed
page is approximately 5% of the page. In contrast, color printing typically
covers approximately 40% of the page, using significantly more toner or ink jet
supplies.
The Company believes that the role of wholesale distributors in the
industry generally has increased in importance in recent years as an increasing
number of vendors choose to sell a wider range of products through wholesale
distributors, rather than to resellers or dealers directly. This has occurred
primarily because of the vendor's high cost of direct sales, warehousing,
financing and distribution associated with dealing directly with numerous small
dealers or resellers.
Unlike the computer hardware or office equipment industry, the Company
believes that the non-paper computer and office automation supplies industry is
not generally subject to the risk of rapid technological advances and subsequent
product obsolescence. In general, the demand for non-paper computer supplies is
not dependent on the level or type of computer hardware or office equipment
sales in any particular year, but rather reflects the amount and type of
equipment already in use (the "installed base"). As a result, the consumable
needs for any particular computer or office equipment will often continue for an
extended period of time, even after the manufacture of such computer or office
equipment is discontinued. Nevertheless, the Company attempts to insulate itself
from the risk of technological obsolescence faced by manufacturers by (i)
distributing a wide range of brand-name products so that the Company is not
dependent upon the success of any particular computer or office equipment
manufacturer, (ii) carrying primarily consumable supplies for computer or office
equipment which the Company believes has a substantial installed base and (iii)
entering into agreements with major suppliers under which the Company can return
slow-moving inventory.
The Company believes that the market for outsourcing of call center
(inbound and outbound) and product fulfillment and distribution operations
should grow rapidly as more companies focus on product development and marketing
and turn to third party providers for their teleservice and distribution needs.
The Company further believes that the increasing use of the Internet for
electronic commerce activities should fuel growth for the outsourcing of small
package distribution.
BUSINESS STRATEGY
The Company believes its growth is attributable to its wide selection of
popular products at competitive prices, its ability to continually increase
sales to existing customers, add new product lines and attract new customers and
the overall growth in the consumable supplies industry. The Company strives to
differentiate itself from its competitors through high order fill rates, next
business day delivery at ground shipping rates, same-day shipments, and the
quality and breadth of its value-added customer services, such as innovative
marketing programs, on-line order processing, automated order tracking and a
product knowledgeable sales staff.
The key components of the Company's strategy to increase its market share
and achieve continued sales and earnings growth are to:
1. Continue to Focus on the Growing Consumable Supplies Industry by
increasing sales to existing customers within the contract stationer, VAR and
computer and office product superstore channels and initiating new customer
relationships and new channels such as mass merchants, grocery and convenience
stores. The Company believes that the contract stationer, VAR and computer and
office product superstore customer segments will continue to grow faster than
the industry's growth rate. Additionally, the Company will continue to focus on
the introduction of new products. Management believes these initiatives will
allow the Company to capture further market share in the industry's fastest
growing segments.
The Company believes that its continued sales growth will be driven, in
part, by the following opportunities:
- Sales to computer and office product superstores will continue to
present opportunities for growth as the Company demonstrates its ability to
serve the superstores' needs. The Company believes that it is
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able to serve the needs of its superstore customers for timely delivery of
fast-moving products and efficient distribution of a variety of product
lines to multiple store locations at a lower net cost than if the
superstore customer purchased the products directly from the manufacturer.
The Company believes that it can also increase sales to VARs by offering
value-added services such as drop-shipping directly to end-users and
same-day shipping.
- The Company will continue to establish direct purchasing
relationships with new suppliers and will regularly introduce new products
such as media products, color printer supplies, optical storage products
and bar coding products, from new and existing suppliers.
- With the proliferation of personal and home computers, the Company
believes that new channels of distribution, such as grocery and convenience
stores, will emerge to satisfy the growing need for consumable supplies.
The Company believes that its expertise in product selection, fulfillment
and distribution should enable it to take advantage of these growth
opportunities and increase sales.
2. Continue to Implement Innovative Technology Based Tools to closely
monitor sales and profitability, improve productivity in telemarketing and
distribution and provide value-added services, such as EDI, drop-shipping to
end-users, advanced order tracking systems and "customer links" which provide
customers with direct access to proprietary Company databases. These technology
tools should allow the Company to continue to improve overall operating
efficiency and customer service.
The Company believes that improving operating efficiency, cost control and
profit margin monitoring are critical factors for success within the industry.
As a result, the Company's organizational structure is designed to closely
supervise and monitor sales profitability and facilitate cost containment. The
Company utilizes customized computer systems to provide daily sales and margin
reporting, inventory control and automated order processing. In particular,
since April 1991, the Company has invested approximately $10.2 million in
various management information systems, including client-server and EDI
technology, to enhance its ability to improve efficiency, monitor its
operations, manage inventory risks and offer faster and higher levels of service
to its customers and vendors.
The Company plans further initiatives to improve efficiency and promote
growth. These include:
- The Company receives approximately 30% of its U.S. and Canadian
revenue from orders placed electronically. The Company presently offers an
electronic catalog and on-line ordering (known as "SOLO", the System for
Online Ordering) and the Company intends to continue to develop a variety
of technology based tools that will further automate and improve the
efficiency of the transactions it conducts with its business partners.
- The Company is developing new innovative product merchandising
methods, such as EDI, same day shipping, customized product catalogues and
drop-shipping services, which will allow its customers to offer a broader
range of consumable products in a manner that is substantially more
efficient than the traditional approach of keeping large quantities of
inventory on-hand in each store.
Further, the Company continues to use its advanced management information
systems and distribution efficiency to provide highly attractive customer
services. For example, the Company delivers "fax flyers" to its customers to
announce price changes. The Company delivers next day "Daisygrams" to provide
daily customer information by fax on orders processed by the Company and
delivered by Federal Express.
3. Increase International Sales by utilizing the Company's strength in
marketing and distributing consumable supplies in emerging growth markets in
other areas of the world, including Latin America and the Pacific Rim. The
Company's financial strength, consumable supplies experience and broad product
range should provide the Company with strong growth opportunities in these
markets.
- In November 1994, the Company opened a sales and distribution
facility in Mexico City, Mexico, to service the Mexican consumable supplies
market. In January 1996, the Company opened a sales and distribution
facility in Miami, Florida, to service the Latin American consumable
supplies market outside
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of Mexico. The Company believes there are strong growth opportunities in
these markets and that these facilities will enable it to more effectively
compete in these regions.
- In order to enter the growing Australian and Pacific Rim market, in
October 1996 the Company acquired Lasercharge Pty Ltd., a large computer
and office automation supplies wholesaler in Australia, and in January 1998
the Company opened a sales and distribution facility in Singapore.
4. Expand PFS by Leveraging the Company's Small Package Distribution and
Telemarketing Expertise to capitalize on the international trend toward
outsourcing. Since fiscal year 1996, the Company's PFS subsidiary has offered a
wide array of logistical support, marketing services, order processing, product
drop-shipping, receivable financing and other operating and distribution
services to its business partners enabling them to focus on product development
and increasing their sales to end-users and other customers. The Company
believes that by offering this program, it can provide many of its business
partners with a more cost-effective and reliable means of marketing and
distributing their products.
- Since beginning operations in fiscal year 1996, PFS has entered into
over 20 contracts to provide various call center, credit management and
distribution service functions and presently distributes products for a
variety of clients, including IBM, Hewlett-Packard and others. The Company
believes that PFS is well positioned to capitalize on the growing
international business trend toward outsourcing as major corporations, in
an effort to improve speed and quality of service while simultaneously
reducing costs, look to outsource their call center and distribution
logistics service requirements.
- The Company believes that the growth of electronic and Internet
commerce will present additional growth opportunities for PFS to offer its
call center, logistics and distribution services to a wide variety of
customers across a spectrum of markets and industries.
- In addition to the growth opportunities in outsourcing, the PFS
business offers the potential of higher gross margins since it is primarily
fee or activity based.
5. Seek Acquisitions of Selected Product Lines and Fulfillment Services to
capitalize on the Company's expertise in small package distribution, especially
products having high value low weight characteristics.
- The Company plans to take advantage of its strong financial
position, vendor relationships and distribution expertise to continue to
expand its business in additional strategic product lines and geographic
markets, as well as expanding its call center, fulfillment and distribution
capabilities. The Company's expansion strategy focuses on identifying
companies with significant market positions and quality management teams.
The Company seeks to enhance value by providing capital, delivering value-
added services and providing operational and logistics expertise.
- The Company recently expanded its product line by acquiring
Steadi-Systems, an independent wholesale distributor of media products and
video hardware to the filmed entertainment and multimedia industries.
PRODUCTS
The Company distributes over 10,000 different non-paper computer and office
automation supplies and related products and regularly updates its product line
to reflect advances in technology and provide a wide product range of the most
popular products. The Company's major product categories can generally be
classified as follows:
Non-Impact Printer Supplies. Non-impact printer supplies include toner
cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and
fax supplies. Non-impact printers, such as laser printers, personal copiers and
fax machines, are rapidly growing in popularity and have a wide range of
applications. Sales of non-impact printer supplies accounted for approximately
56% of the Company's total net sales in the nine months ended December 31, 1997.
The Company also sells specialized all-in-one toner cartridges for laser
printers produced by manufacturers such as Canon, Hewlett-Packard, Digital,
Brother and Apple. Sales of these supplies accounted for approximately 23% of
the Company's total net sales in the nine months ended December 31, 1997.
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Magnetic Media Products. Magnetic media products include computer tapes,
data cartridges, diskettes, optical disks and other products which store or
record computer information and are used in a variety of computers ranging from
notebook and personal computers to large mainframe computer systems. Sales of
magnetic media products accounted for approximately 8% of the Company's total
net sales in the nine months ended December 31, 1997.
Impact Printer Supplies. Impact printer supplies include printwheels,
ribbons, elements, fonts and other consumable supplies used in impact printers
ranging from electronic typewriters to high speed dot matrix printers. While new
technology is moving toward non-impact printing, the Company believes that a
substantial installed base of impact printers, such as dot matrix printers, are
still in use and require a continuing amount of consumable computer supplies.
Sales of impact printer supplies accounted for approximately 8% of the Company's
total net sales in the nine months ended December 31, 1997.
Accessories and Other Products. Accessories sold by the Company include
cleaning supplies, disk storage boxes, data cartridge storage, racks, surge
protection devices, workstation accessories and anti-glare screens. The Company
also sells a number of other products such as transparencies, banking supplies
and selected business machines. Sales of accessories and other products
accounted for approximately 5% of the Company's total net sales in the nine
months ended December 31, 1997.
SUPPLIERS
The Company's products are manufactured by over 150 original equipment
manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital
Equipment Corporation, Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox,
Brother and Maxell. During the nine months ended December 31, 1997,
approximately 76% of the Company's total net sales were derived from products
supplied by the Company's ten largest suppliers, with the sale of
Hewlett-Packard and Canon products accounting for approximately 39% and 10% of
total net sales, respectively, and the sale of Lexmark, Digital Equipment
Corporation, Epson, Okidata, Panasonic and Xerox products each accounting for
between approximately 3% to 6% of total net sales.
Many of the Company's suppliers offer rebate programs under which, subject
to the Company purchasing certain predetermined amounts of inventory, the
Company receives rebates based on a percentage of the dollar volume of total
rebate program purchases. The Company also takes advantage of several other
programs offered by substantially all of its suppliers. These include price
protection plans under which the Company receives credits against future
purchases if the supplier lowers prices on previously purchased inventory and
stock rotation or stock balancing privileges under which the Company can return
slow moving inventory in exchange for other products. In addition, in order to
introduce new products, many suppliers will permit the Company to return all
unsold inventory after an introductory trial period. Material changes by one or
more of the Company's key suppliers of their pricing arrangements or other
marketing programs may materially and adversely affect the Company's business.
The Company's purchases of inventory are closely tied to sales and are
generally based upon the sales volume of the most recent six to ten week
periods. Many of the Company's suppliers require minimum annual purchases which,
for fiscal year 1998, will aggregate approximately $47 million.
The Company has entered into written distribution agreements with
Hewlett-Packard, Canon, Lexmark, Okidata, Digital Equipment Corporation,
Panasonic and Xerox and many of the other major suppliers of the products it
distributes. As is customary in the industry, these agreements generally provide
non-exclusive distribution rights, have one year renewable terms and are
terminable by either party at any time, with or without cause. The Company
considers its relationships with its major suppliers, including Hewlett-Packard,
Canon, Lexmark, Okidata, Digital Equipment Corporation, Panasonic and Xerox to
be good; nevertheless, there can be no assurance that a material change in the
Company's relationship with one or more of its major suppliers will not have a
material adverse effect on the Company's business.
Although the Company purchases most of its products directly from
authorized U.S. manufacturers, the Company also imports products from foreign
sources, particularly when fluctuations in foreign exchange rates
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<PAGE> 29
or product prices make it attractive to do so. Similarly, depending upon product
pricing and availability, the Company also purchases products from secondary
sources, such as other wholesalers and selected dealers, rather than directly
from the manufacturer. The Company utilizes its ability to purchase imported and
secondary source products in order to provide its customers with competitive
prices and a wide range of product lines. In order to ensure that such imported
and secondary source products are not produced by unauthorized manufacturers,
the Company has established various procedures which it believes enable it to
identify unauthorized products and, to the extent possible, return such
unauthorized products to the foreign or secondary source. Nevertheless, there
can be no assurance that the Company will be completely successful in such
efforts or that such imported and secondary source products will continue to be
available or that any unavailability will not have a material adverse effect on
the Company's business.
SALES AND MARKETING
The Company utilizes sophisticated telemarketing, direct mail programs and
frequent innovative sales promotions and other marketing efforts to distribute
its products to a wide array of dealers, VARs, retailers and other resellers.
The Company's customer and prospect list includes U.S., Canadian,
Australian, Mexican, Latin American and other foreign computer supplies dealers,
office product dealers, VARs, buying groups, computer stores, contract
stationers, computer and office product superstores, catalog merchandisers,
college bookstores and other resellers. The Company currently ships its products
to over 25,000 customer locations. The Company's typical customer is a small to
medium sized reseller who does not have the resources to establish direct
purchasing relationships with multiple manufacturers and, instead, must rely on
wholesale distributors like the Company. The Company also sells its products to
computer and office product superstores, which the Company believes will become
an increasingly important group of customers as the Company demonstrates its
ability to serve the superstores' need for timely delivery of fast-moving
products and efficient distribution of a variety of product lines to multiple
store locations in a more cost-effective manner than presently provided by many
product manufacturers. No single customer accounts for more than 10% of the
Company's sales for each of the fiscal years ended March 31, 1995, 1996 and 1997
or the nine month period ended December 31, 1997. At March 31, 1997 and December
31, 1997, five computer and office product superstores and warehouse clubs
represent approximately 26% and 25%, respectively, of the Company's trade
accounts receivable, with the largest being approximately 12% and 10%,
respectively, of trade accounts receivable, and reflects the significance of
this market segment. As a result of customer consolidation, the Company's U.S.
sales growth has been slowing. The Company presently expects to partially offset
this reduced sales growth through international expansion, growth in its PFS
business and acquisitions of complementary product lines. There can be no
assurance, however, that these activities will be successful.
The Company's international sales accounted for approximately 19% of the
Company's total net sales in fiscal year 1997 and approximately 22% of the
Company's total net sales for the nine months ended December 31, 1997, and the
Company believes that international markets represent further opportunities for
growth. To take advantage of the growing Far East and Australia marketplace, in
October 1996, the Company acquired Lasercharge Pty Ltd., a large computer and
office automation supplies wholesaler in Australia, and in January 1998, the
Company opened a sales and distribution facility in Singapore. To service the
growing Latin American market, the Company opened a sales office and
distribution center in Mexico City, Mexico in November 1994 and opened a similar
facility in Miami, Florida, in January 1996. The Company also has sales and
distribution operations in Canada. There can be no assurance, however, that the
Company will be successful in these or other international efforts or that the
risks inherent in international operations, such as currency fluctuations or the
political or economic instability of certain foreign countries and regions, such
as Mexico and the Pacific Rim, will not have a material adverse effect on the
Company's results of operations. See Note 8 of the Notes to Consolidated
Financial Statements for certain financial information regarding the Company's
domestic and international sales during the last three fiscal years.
The Company's sales force, as of December 31, 1997, consisted of
approximately 197 telemarketing sales representatives located in the Company's
headquarters in Plano, Texas, 37 telemarketing sales representatives located in
Memphis, Tennessee, 43 telemarketing sales representatives located in the
Company's office in
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<PAGE> 30
Canada, 14 telemarketing sales representatives located in the Company's office
in Mexico, 15 telemarketing sales representatives located in the Company's
office in Australia, and three telemarketing sales representatives located in
the Company's office in Miami, Florida.
The Company's sales and telemarketing department is divided into several
groups or teams, each having its own particular sales objective. For example,
the Retail Department focuses specifically on large computer retailers and
office product superstores and highlights the Company's ability to more
efficiently distribute a wide variety of small shipments to a larger number of
store locations than presently provided by product manufacturers. Similarly, a
separate group of sales representatives are responsible for a select group of
national accounts, such as contract stationers, office products dealers and
buying groups, while others focus on new accounts, existing business or
international and export sales. By utilizing sophisticated telemarketing
software and call management systems, including caller identification, sales
representatives are able to verify customer account numbers and contact persons
and quickly identify a customer's buying patterns, recent purchases, credit
availability and other sales and marketing information. The telecommunications
software also enables sales and marketing management to better identify, control
and monitor sales representatives' prospecting activity with the Company's
customers.
The Company provides extensive training for new sales personnel with
special emphasis on the need for regular customer contact, response to
customers' demands for product information and the need to inform customers of
technological advancements by the Company's suppliers. The Company, together
with its major suppliers, provide the Company's sales personnel with ongoing
product-specific training and education emphasizing computer supplies as well as
new technologies, new products and new product applications.
In order to maintain its position as a low cost wholesale distributor, the
Company regularly monitors the efficiency of its sales staff. By utilizing
sophisticated telecommunications equipment, the Company is able to measure the
number of calls being fielded by a sales representative, their success rate in
terms of orders obtained compared to calls taken and customer service
statistics, such as abandoned call rates and average response times. The
Company's sales force receives a base salary as well as varying sales incentives
based on gross profit margin achievements. In addition, a number of suppliers
periodically offer sales bonus programs in connection with specific product
sales campaigns which can further augment a sales representative's compensation.
One of the Company's primary marketing tools is its quarterly catalog,
known as the "Book of Deals." In order to promote its image as a low cost
wholesaler and provider of value-added services, the Book of Deals will usually
highlight a theme related to specific products, customer services or a
combination of the two. The Company presently distributes a total of
approximately 40,000 catalogs and contract price books to its active U.S.
customers each quarter. The Company also distributes a separate Book of Deals
designed specifically for each of its Canadian, Mexican and Australian
subsidiaries. Other catalog-type marketing tools used by the Company include
customized catalogs produced by the Company for the reseller to distribute to
its end-user customers. The Company also distributes "flyers" which announce new
product line additions or special promotions and are usually inserted in the
Book of Deals or mailed directly to customers.
Although the Book of Deals remains one of the Company's primary marketing
tools, the Company also uses electronic commerce marketing tools as well. The
Company believes it has established itself as a leader in the deployment of
electronic commerce in the computer and office automation supplies and
accessories industry. These tools are designed to win further market share and
to reduce cost in the customer relationship by automating information flow. By
accepting both externally developed commercially available technologies as well
as internally developed proprietary technologies, the Company can offer a suite
of electronic commerce solutions including: traditional X.12 and proprietary
EDI; third party software systems such as DDMS, OPUS, Britannia, and Moore O.P.
Services; and Internet, intranet, and extranet systems.
During fiscal year 1997, the Company introduced an electronic catalog and
on-line ordering tool, known as "SOLO", the System for Online Ordering. SOLO
provides customers with on-line ordering capabilities; fingertip access to
up-to-date pricing, product and order information; search and retrieval
capabilities based on part numbers, manufacturers, product description, retail
price, machine compatibility and other factors; and
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<PAGE> 31
convenient access to manufacturers' product literature and training videos. The
Company provides CD-ROM, diskette and World Wide Web versions of SOLO.
Certain of the Company's suppliers provide the Company with cooperative
advertising programs, marketing development funds and other types of incentives
and discounts which offset the production costs of the Company's quarterly Book
of Deals, other published marketing tools and other related costs.
The Company permits its customers to return defective products (most of
which are then returned by the Company to the manufacturer) and incorrect
shipments for credit against other purchases. During the last three fiscal
years, the Company's net expense for returns of the Company's consumable supply
products has not been material.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains advanced management information systems and has
automated virtually all key business functions using on-line, real time systems.
These on-line systems provide management with information concerning sales,
inventory levels, customer payments and other operations which is essential for
the Company to operate as a low cost, high efficiency wholesale distributor.
The implementation of these systems has allowed the Company to offer an
advanced suite of electronic commerce tools to its customers so that the Company
can communicate with their computer systems and automatically process, send and
receive purchase orders, invoices and acknowledgments. The Company offers
"customer links" to provide customers with direct access to a proprietary
Company database to examine pricing, credit information, product description and
availability and promotional information. This link also allows customers to
place orders directly into the Company's order processing system. These systems
also allow the Company to offer similar features to its customers through SOLO.
The Company has also invested in advanced telecommunications, voice
response equipment, electronic mail and messaging, automated fax technology,
scanning, wireless technology, bar-coding, fiber optic network communications
and automated inventory management. The Company has developed and utilizes
telecommunications technology which provide for automatic customer call
recognition and customer profile recall for inbound telemarketing
representatives and computer generated outbound call objectives for outbound
telemarketing representatives.
The Company plans to continue to invest in various management information
systems enhancements and upgrades to improve efficiency, monitor its operations,
manage inventory risks and offer faster and higher levels of service to its
customers and vendors.
DISTRIBUTION
During fiscal year 1993, the Company consolidated its five U.S. regional
distribution centers into a new "superhub" distribution center located in
Memphis, Tennessee. During fiscal year 1997, the Company more than doubled the
size of this facility to its current size of 371,233 square feet. The facility
is located approximately four miles from the Federal Express hub facility and
contains automated conveyors, in-line scales and shipment photographs for
automatic accuracy checking, computerized sorting equipment, powered material
handling equipment and scanning and bar-coding systems.
Since the consolidation of its regional distribution centers and the
opening of the Memphis distribution center, the Company has (i) reduced the
amount of "safety stock" inventory previously carried in different distribution
centers, which, in turn, has reduced the Company's working capital borrowings,
(ii) increased its inventory turnover rate from approximately nine turns to
approximately 11 turns in fiscal year 1997, (iii) improved its order fill rate
to a level of approximately 95%, (iv) improved personnel productivity and
reduced shipping errors and their associated costs, (v) improved delivery time
to most geographic areas through later order acceptance times (currently 9:00
p.m. eastern standard time) and next business day delivery with the
implementation of the Federal Express Agreement and (vi) reduced real estate
expenses.
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<PAGE> 32
The Company believes that consumable supplies and other products sold by
the Company are particularly suited to cost effective overnight delivery because
of their unique value to weight characteristics. Accordingly, all of the
Company's U.S. package orders are shipped via Federal Express, except for
certain "heavyweight" packages or as otherwise requested by the customer. The
Company's centralized distribution center, together with the implementation of
the Federal Express Agreement, enables the Company to offer to its customers
next business day delivery to most U.S. geographic areas. The Company ships
virtually 100% of U.S. orders for product in stock on the same day.
The material handling system at its Memphis distribution center includes
several high technology enhancements, including an automated package routing
system and a paperless order picking system. These systems have allowed the
Company to substantially increase the package movement capacity within the
existing facility, further improve package shipment accuracy and enhance the
Company's ability to perform value-added services for its customers, including
custom labeling and price stickering.
The Company's U.S. sales and executive and administrative offices are
located in a 65,419 square foot central office facility located in Plano, Texas,
a Dallas suburb. The Company also operates regional sales and distribution
centers in Singapore; Toronto, Ontario; Mexico City, Mexico; Vancouver, British
Columbia; Sydney, Australia; and Miami, Florida. The Company's central
distribution center is located in Memphis, Tennessee.
All of the Company's facilities are leased under leases which contain one
or more multiple year renewal options.
EMPLOYEES
As of December 31, 1997, the Company had 669 full-time employees and 93
part-time employees, of which 216 were in executive and administrative
positions, including accounting, purchasing, credit and management information
systems, 309 were in sales and marketing and 237 were in warehousing and related
functions. None of the Company's employees are represented by a labor union, and
the Company has never suffered an interruption of business as a result of a
labor dispute. The Company considers its relations with its employees to be
favorable, and the Company believes it will be able to continue this
relationship by various employee incentive and participation programs, including
employee stock options.
The Company also actively recruits college graduates through on-campus
recruiting programs. Each newly-hired employee from this program is placed into
the Company's training program for approximately three months which introduces
them to most aspects of the Company's business. Management believes that this
program is an important tool in recruiting and developing high quality
individuals with management potential to support the Company's future growth.
COMPETITION
The Company believes that most, if not all, of its customers maintain
several sources of supply for their product requirements. Accordingly, the
Company competes with product manufacturers, general office supply wholesalers,
other national and regional wholesale computer supplies distributors, computer
hardware and software distributors and, to a lesser extent, non-specialized
wholesaler distributors. Many of these competitors such as product
manufacturers, computer hardware distributors and general office supply
wholesalers are larger and have substantially greater financial and other
resources than the Company. Competition in the Company's industry is generally
based on price, breadth of product lines, product and credit availability,
delivery time and the level and quality of customer services. The Company
competes primarily on the basis of its ability to offer low prices and quality
service while maintaining a high level of operating efficiency. The Company
believes its competitive advantages over product manufacturers and other
wholesale distributors include its ability to efficiently maintain a wide
selection of name brand products in stock ready to be shipped on a same-day
basis and delivered overnight, to efficiently distribute its products, to
provide innovative and high quality value-added customer service programs and to
respond to changing customer demands and product development.
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<PAGE> 33
BACKLOG
The Company does not have a significant backlog of orders and does not
consider backlog to be material to an understanding of its business.
LITIGATION
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial condition or results of
operations.
RECENT ACQUISITION
In January 1998, the Company expanded its product line and customer base by
acquiring Steadi-Systems, an independent wholesale distributor of media products
to the filmed entertainment and multimedia industries. Steadi-Systems
distributes a wide array of professional media products (film stock, video,
audio and data storage media) and video hardware (analog and digital equipment)
and is an authorized dealer for leading manufacturers such as Sony, Fuji, JVC,
Avid and others. Steadi-Systems' customers include production companies,
post-production operations, educational institutions, governmental agencies,
television stations and other professional and individual customers. The Company
believes that the integration of Steadi-Systems and the Company's call center
technology, management information systems and distribution expertise should
provide Steadi-Systems with the opportunity to expand its customer base and
offer higher and more efficient levels of service, although no assurance can be
given in this regard.
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<PAGE> 34
MANAGEMENT
Set forth below are the names, ages and positions of the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Heap........................ 54 Chairman of the Board
Mark C. Layton....................... 38 President, Chief Executive Officer, Chief Operating
Officer and Director
Christopher Yates.................... 43 Senior Vice President -- Business Development and
Director
James R. Powell...................... 36 Senior Vice President -- Sales and Marketing and
Director
Steven Graham........................ 45 Senior Vice President -- Information Technologies,
Chief Information Officer
Harvey H. Achatz..................... 56 Vice President -- Administration and Secretary
Thomas J. Madden..................... 36 Vice President -- Finance, Chief Financial Officer,
Chief Accounting Officer and Treasurer
Peter D. Wharf....................... 38 Vice President -- International Operations
Suzanne Garrett...................... 33 Vice President -- Product Management and Marketing
Peter P. J. Vikanis.................. 47 Director
Timothy M. Murray.................... 45 Director
Edgar D. Jannotta, Jr................ 37 Director
</TABLE>
DAVID A. HEAP has served as Chairman of the Board since 1982, as Chief
Executive Officer from 1982 until his retirement in April 1997 and as President
from 1982 to 1990. From 1970 to 1985, Mr. Heap served as Chairman of ISA
International plc (and its predecessors) ("ISA"), a now publicly traded company
he founded in England in 1970. ISA is a distributor of computer supplies in
Western Europe.
MARK C. LAYTON has served as President, Chief Executive Officer and Chief
Operating Officer since April 1997 and as a Director since 1988. Mr. Layton
served as President, Chief Operating Officer and Chief Financial Officer from
1993 to April 1997, as Executive Vice President from 1990 to 1993 and as Vice
President -- Operations from 1988 to 1990. Prior to joining the Company, Mr.
Layton served as a management consultant with Arthur Andersen & Co., S.C. for
six years through 1988 specializing in wholesale and retail distribution and
technology.
CHRISTOPHER YATES was appointed Senior Vice President -- Business
Development in February 1996 and served as Vice President -- Business
Development from November 1995 to February 1996, as a Director of the Company
since February 1995, as Vice President -- Marketing from January 1994 to
November 1995, as Vice President -- Sales from 1988 to 1994 and in various other
sales capacities for the Company since 1982. Prior to joining the Company, Mr.
Yates served in various sales capacities for ISA.
JAMES R. POWELL has served as a Director and Senior Vice President -- Sales
and Marketing since 1996. Mr. Powell served as Vice President -- Sales from 1992
to 1996, and in various other sales capacities from 1988 to 1992. Prior to
joining the Company, Mr. Powell was engaged in various sales and marketing
activities.
STEVEN GRAHAM has served as Senior Vice President of Information
Technologies and Chief Information Officer since 1996. Prior to joining the
Company, Mr. Graham was employed by Ingram Micro, a major microcomputer
distributor. Mr. Graham has over 23 years of experience in the
information-technology field.
HARVEY H. ACHATZ serves as Vice President -- Administration and Secretary,
positions he has held since 1993 and 1984, respectively. Mr. Achatz served as
Vice President -- Finance from 1985 to 1993, as Controller from 1981 to 1985 and
as a Director from 1984 to 1990.
THOMAS J. MADDEN was appointed Chief Financial Officer in July 1997 and
serves as Vice President -- Finance, Treasurer and as Chief Accounting Officer,
positions he has held since November 1994, March 1994 and 1992, respectively.
From 1992 to 1994 he also served as Controller. From 1983 to 1992, Mr. Madden
served in various capacities with Arthur Andersen & Co., S.C., including
financial consulting and audit manager. Mr. Madden is a certified public
accountant.
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<PAGE> 35
PETER D. WHARF serves as Vice President -- International Operations, a
position he has held since February 1996. Mr. Wharf joined the Company in 1992
and has served in various export and international sales capacities since such
time. Prior to joining the Company, Mr. Wharf served in various sales capacities
for ISA.
SUZANNE GARRETT was recently promoted to Vice President of Product
Management and Marketing and has served as new-products manager, marketing
manager, and director of product management and marketing. Prior to joining the
Company in 1991, Ms. Garrett served as an account executive for United Media.
PETER P. J. VIKANIS was appointed a Director of the Company during fiscal
year 1996. Mr. Vikanis served as Chief Operating Officer of ISA from 1991 to
1995, as a director of ISA from 1979 to 1995, and also served in various
management capacities at ISA from 1971 to 1991.
TIMOTHY M. MURRAY has served as a Director of the Company since 1991. Mr.
Murray is a Principal of William Blair & Company, L.L.C., an investment banking
firm he joined in 1979. Mr. Murray is also a director of several privately held
corporations.
EDGAR D. JANNOTTA, JR. has served as a Director of the Company since 1991.
Mr. Jannotta is a Principal of William Blair & Company, L.L.C., an investment
banking firm he joined in 1988. Mr. Jannotta is also a director of Gibraltar
Packaging Group, Inc., a diversified packaging company, and several privately
held corporations.
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<PAGE> 36
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of the date of this Prospectus, certain
information regarding the beneficial ownership of the Common Stock by (i) each
person who is known to the Company to beneficially own more than 5% of the
Common Stock, (ii) each of the Directors and executive officers of the Company
individually, (iii) the Directors and executive officers of the Company as a
group and (iv) the Selling Stockholder. The information contained in this table
reflects "beneficial ownership" as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Unless otherwise
indicated, the stockholders identified in this table have sole voting and
investment power with respect to the shares owned of record by them.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK OWNED BEFORE STOCK OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
--------------------- -------------------
NUMBER SHARES TO BE SOLD NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT IN THE OFFERING OF SHARES PERCENT
------------------------------------ ----------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
David A. Heap(2)...................... 2,187,163 16.0% 700,000 1,487,163 9.3%
500 North Central Expressway
Plano, Texas 75074
Royal Bank of Canada Trust Company
(Jersey) Limited, Brian Gerald
Balleine and Kenneth Edward Rayner,
Trustees, of the David Heap Life
Interest Settlement (No. 10)(3)..... 1,169,346 8.6% -- 1,169,346 7.3%
19-21 Broad Street
St. Helier, Jersey, Channel Islands
Robert Fleming Inc.(4)................ 1,053,910 7.7% -- 1,053,910 6.6%
1285 Avenue of the Americas
New York, New York 10019
Amvescap Plc(5)....................... 915,600 6.7% -- 915,600 5.7%
11 Devonshire Square
London, England
Wasatch Advisors Inc.(6).............. 779,736 5.7% -- 779,736 4.9%
68 S. Main St.
Salt Lake City, Utah 84101
William Blair & Company, L.L.C.(7).... 684,010 5.0% -- 684,010 4.3%
222 W. Adams
Chicago, Illinois 60606
Mark C. Layton(8)..................... 245,213 1.8% -- 245,213 1.5%
Christopher Yates(9).................. 32,849 * -- 32,849 *
Harvey H. Achatz(10).................. 57,694 * -- 57,694 *
James R. Powell(11)................... 11,957 * -- 11,957 *
Steven Graham(12)..................... 9,000 * -- 9,000 *
Thomas J. Madden(13).................. 45,933 * -- 45,933 *
Edgar D. Jannotta, Jr.(14)............ 38,768 * -- 38,768 *
Timothy M. Murray(15)................. 69,468 * -- 69,468 *
Peter P.J. Vikanis(16)................ 1,914 * -- 1,914 *
Suzanne Garrett(17)................... 5,374 * -- 5,374 *
Peter D. Wharf(18).................... 7,251 * -- 7,251 *
All directors and executive officers
as a group (11 persons)(19)......... 2,712,584 19.9% 700,000 2,012,584 12.6%
</TABLE>
- ---------------
* Represents less than 1%
(1) This table is based on 13,661,032 shares of Common Stock outstanding on
February 25, 1998 and 15,961,032 shares of Common Stock outstanding after
consummation of the Offering.
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<PAGE> 37
(2) Includes outstanding options to purchase 60,565 shares of Common Stock
which are fully vested and exercisable. Does not include (i) 1,800 shares
held by Mr. Heap's spouse as custodian for minor children as to which
beneficial ownership is disclaimed, (ii) options to purchase 166,655 shares
of Common Stock which are not vested or exercisable and (iii) 1,169,346
shares of Common Stock held of record by the trust set forth above (the
"Heap Trust"). Although Mr. Heap and members of his family are the primary
beneficiaries of the Heap Trust, neither Mr. Heap nor such beneficiaries
have voting or investment power with respect to such shares.
(3) Shares are held of record by a Trust established by Mr. Heap for which he
and members of his family are the primary beneficiaries, although neither
Mr. Heap nor such beneficiaries may exercise voting or investment power
with respect to such shares.
(4) Based upon a Schedule 13G dated February 19, 1998 filed by Robert Fleming
Inc. reporting beneficial ownership and shared voting and dispositive power
as of December 31, 1997.
(5) Based upon a Schedule 13G dated February 9, 1998 filed by Amvescap Plc, as
parent holding company of Avz, Inc., AIM Management Group, Inc., Amvescap
Group Services Inc., Invesco, Inc., and Invesco North American Holdings
Inc., reporting beneficial ownership and shared voting and dispositive
power as of December 31, 1997.
(6) Based upon a Schedule 13G dated February 11, 1998 filed by Wasatch Advisors
Inc. reporting beneficial ownership as of December 31, 1997.
(7) Based upon a Schedule 13G dated February 14, 1998 filed by William Blair &
Company, L.L.C. reporting beneficial ownership as of December 31, 1997.
(8) Includes outstanding options to purchase 38,039 shares of Common Stock
which are fully vested and exercisable. Does not include outstanding
options to purchase 132,431 shares of Common Stock which are not vested or
exercisable.
(9) Includes outstanding options to purchase 32,849 shares of Common Stock
which are fully vested and exercisable. Does not include outstanding
options to purchase 92,169 shares of Common Stock which are not vested or
exercisable.
(10) Includes outstanding options to purchase 57,694 shares of Common Stock
which are fully vested and exercisable. Does not include outstanding
options to purchase 8,164 shares of Common Stock which are not vested or
exercisable.
(11) Includes outstanding options to purchase 11,417 shares of Common Stock
which are fully vested and exercisable. Does not include outstanding
options to purchase 78,703 shares of Common Stock which are not vested or
exercisable.
(12) Includes outstanding options to purchase 9,000 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 51,000 shares of Common Stock which are not vested or exercisable.
(13) Includes outstanding options to purchase 44,483 shares of Common Stock
which are fully vested and exercisable. Does not include outstanding
options to purchase 65,999 shares of Common Stock which are not vested or
exercisable.
(14) Includes outstanding options to purchase 300 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 4,180 shares of Common Stock which are not vested or exercisable.
(15) Includes outstanding options to purchase 300 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 4,180 shares of Common Stock which are not vested or exercisable.
(16) Includes outstanding options to purchase 300 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 4,180 shares of Common Stock which are not vested or exercisable.
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<PAGE> 38
(17) Includes outstanding options to purchase 5,374 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 36,244 shares of Common Stock which are not vested or exercisable.
(18) Includes outstanding options to purchase 7,251 shares of Common Stock which
are fully vested and exercisable. Does not include outstanding options to
purchase 54,261 shares of Common Stock which are not vested or exercisable.
(19) Includes outstanding options to purchase 267,572 shares of Common Stock
which are fully vested and exercisable. Does not include (i) outstanding
options to purchase 698,166 shares of Common Stock which are not vested or
exercisable or (ii) shares of Common Stock held by the Heap Trust.
37
<PAGE> 39
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares which each has severally agreed to purchase
from the Company and the Selling Stockholder, subject to the terms and
conditions specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
SBC Warburg Dillon Read Inc. ...............................
PaineWebber Incorporated....................................
William Blair & Company, L.L.C. ............................
Total.............................................
</TABLE>
The Managing Underwriters are SBC Warburg Dillon Read Inc., PaineWebber
Incorporated and William Blair & Company, L.L.C.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares of Common Stock will be so purchased. The
Underwriting Agreement contains certain provisions whereby, if any Underwriter
defaults in its obligation to purchase such shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed 10% of the shares
offered hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The shares of Common Stock offered hereby are being initially offered
severally by the Underwriters for sale at the price set forth on the cover page
hereof, or at such price less a concession not to exceed $ per share on
sales to certain dealers. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to certain other
dealers. The offering of the shares is made for delivery when, as, and if
accepted by the Underwriters and subject to prior sale and withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares. After the
public offering, the public offering price, the concession and the reallowance
may be changed by the Managing Underwriters.
The Company and the Selling Stockholder have granted to the Underwriters an
option, which may be exercised within 30 days after the date of this Prospectus,
to purchase up to 345,000 and 105,000 additional shares of Common Stock,
respectively, to cover over-allotments, if any, on the same terms per share. To
the extent the Underwriters exercise this option, each of the Underwriters will
be obligated, subject to certain conditions, to purchase the number of
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
During the 90 day period following the date of this Prospectus, the
Company, all of its officers and directors, the Selling Stockholder and the Heap
Trust have agreed not to sell, transfer or otherwise dispose of, directly or
indirectly, an aggregate of 2,914,358 shares of Common Stock without the prior
written consent of SBC Warburg Dillon Read Inc. (except for the issuance or
exercise of employee stock options).
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Managing
Underwriters to reclaim a selling concession from a syndicate
38
<PAGE> 40
member when the Common Stock originally sold by such syndicate member is
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common Stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company and the Selling Stockholder by Wolff & Samson, P.A.,
Roseland, New Jersey. Certain legal matters in connection with the Offering are
being passed upon for the Underwriters by Powell, Goldstein, Frazer & Murphy
LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of Daisytek
International Corporation and subsidiaries included and incorporated by
reference in this Prospectus and elsewhere in the Registration Statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"), all
of which may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material also can be obtained at
prescribed rates by writing to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy and information
statements and other information concerning the Company can also be inspected at
The Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006 or
from the Commission's World Wide Web site at http://www.sec.gov.
This Prospectus constitutes part of a Registration Statement filed by the
Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement in accordance
with the rules and regulations of the Commission. Reference is hereby made to
the
39
<PAGE> 41
Registration Statement and related exhibits for further information with respect
to the Company and the Common Stock. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
where a copy of such document has been filed as an exhibit to the Registration
Statement or otherwise has been filed with the Commission, reference is made to
the copy so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act, File No. 0-25400, and are incorporated herein by
reference:
1. Annual Report on Form 10-K for the fiscal year ended March 31,
1997.
2. Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
3. Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
4. Quarterly Report on Form 10-Q for the quarter ended December 31,
1997.
5. Current Report on Form 8-K dated April 29, 1997.
6. Current Report on Form 8-K dated May 13, 1997.
7. Current Report on Form 8-K dated July 23, 1997.
8. Current Report on Form 8-K dated November 5, 1997.
9. Current Report on Form 8-K dated January 28, 1998.
10. Current Report on Form 8-K dated February 9, 1998.
11. Proxy Statement for the Annual Meeting of Shareholders held on
August 15, 1997.
12. The Registration Statement on Form 8-A under the Exchange Act as
filed with the Commission on January 20, 1995.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference into such
documents). Requests for such copies should be directed to Mr. Harvey Achatz,
Vice President and Secretary of the Company, at Daisytek International
Corporation, 500 North Central Expressway, Plano, Texas 75074.
40
<PAGE> 42
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997,
and December 31, 1997 (unaudited)......................... F-3
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 1995, 1996 and 1997, and the Nine Month Periods
Ended December 31, 1996 (unaudited) and December 31, 1997
(unaudited)............................................... F-4
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended March 31, 1995, 1996 and 1997, and the
Nine Month Period Ended December 31, 1997 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1995, 1996 and 1997, and the Nine Month
Periods Ended December 31, 1996 (unaudited) and December
31, 1997 (unaudited)...................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daisytek International Corporation:
We have audited the accompanying consolidated balance sheets of Daisytek
International Corporation (a Delaware corporation) and subsidiaries as of March
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Daisytek International
Corporation and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Arthur Andersen LLP
Dallas, Texas,
April 25, 1997
F-2
<PAGE> 44
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 204 $ 552 $ 914
Accounts receivable, net of allowance for doubtful
accounts of $1,758 and $2,360 at March 31, 1996 and
1997, respectively, and $2,262 at December 31, 1997..... 69,740 90,778 95,943
Inventories, net:
Inventories, excluding Priority Fulfillment Services.... 44,358 54,426 58,631
Inventories, Priority Fulfillment Services.............. -- 10,354 11,664
Prepaid expenses and other current assets................. 2,120 1,214 2,616
Deferred income tax asset................................. 762 565 --
-------- -------- --------
Total current assets............................... 117,184 157,889 169,768
-------- -------- --------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment......................... 15,325 20,949 24,249
Leasehold improvements.................................... 306 673 991
-------- -------- --------
15,631 21,622 25,240
Less - Accumulated depreciation and amortization.......... (6,136) (9,648) (12,727)
-------- -------- --------
Net property and equipment......................... 9,495 11,974 12,513
EMPLOYEE RECEIVABLE......................................... 395 423 448
EXCESS OF COST OVER NET ASSETS ACQUIRED, net................ 1,527 5,002 4,244
-------- -------- --------
Total assets....................................... $128,601 $175,288 $186,973
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 650 $ 662 $ 367
Trade accounts payable.................................... 55,222 69,321 65,194
Accrued expenses.......................................... 4,230 6,260 7,415
Income taxes payable...................................... 419 1,398 1,940
Deferred income tax liability............................. -- -- 1,068
-------- -------- --------
Total current liabilities.......................... 60,521 77,641 75,984
-------- -------- --------
LONG-TERM DEBT, less current portion........................ 16,419 30,454 28,849
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized at March 31, 1996 and 1997, and December 31,
1997; none issued and outstanding....................... -- -- --
Common stock, $0.01 par value; 10,000,000 shares
authorized at March 31, 1996, and 20,000,000 shares
authorized at March 31, 1997 and December 31, 1997;
12,685,506, 13,041,418 and 13,636,340 shares issued and
outstanding at March 31, 1996 and 1997, and December 31,
1997, respectively...................................... 127 130 136
Additional paid-in capital................................ 30,810 33,266 36,907
Retained earnings......................................... 21,736 35,103 46,939
Cumulative foreign currency translation adjustment........ (1,012) (1,306) (1,842)
-------- -------- --------
Total shareholders' equity......................... 51,661 67,193 82,140
-------- -------- --------
Total liabilities and shareholders' equity......... $128,601 $175,288 $186,973
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 45
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES....................................... $352,953 $464,169 $603,814 $429,471 $538,966
COST OF SALES................................... 316,982 416,199 543,848 387,008 485,026
-------- -------- -------- -------- --------
Gross profit.................................. 35,971 47,970 59,966 42,463 53,940
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 23,260 29,024 36,630 26,078 33,143
-------- -------- -------- -------- --------
Income from operations........................ 12,711 18,946 23,336 16,385 20,797
INTEREST EXPENSE................................ 2,050 1,482 1,677 1,220 1,619
-------- -------- -------- -------- --------
Income before income taxes.................... 10,661 17,464 21,659 15,165 19,178
PROVISION (BENEFIT) FOR INCOME TAXES:
Current....................................... 4,470 6,460 8,095 5,567 5,709
Deferred...................................... (305) 237 197 238 1,633
-------- -------- -------- -------- --------
4,165 6,697 8,292 5,805 7,342
-------- -------- -------- -------- --------
NET INCOME...................................... $ 6,496 $ 10,767 $ 13,367 $ 9,360 $ 11,836
======== ======== ======== ======== ========
NET INCOME PER COMMON SHARE(1):
Basic......................................... $ 0.68 $ 0.85 $ 1.03 $ 0.73 $ 0.87
Diluted....................................... $ 0.59 $ 0.80 $ 0.97 $ 0.68 $ 0.83
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING(1):
Basic......................................... 9,550 12,602 12,934 12,904 13,530
WEIGHTED AVERAGE COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING(1):
Diluted....................................... 11,084 13,514 13,826 13,832 14,260
</TABLE>
- ---------------
(1) In February 1998, the Company's Board of Directors approved a two for one
stock split, which provides for each holder of common stock to receive one
additional share for each share held. The weighted average common shares
outstanding, common share equivalents outstanding and net income per common
share calculations have been adjusted to reflect the split.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 46
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK WARRANTS ADDITIONAL CUMULATIVE
------------------- -------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT WARRANTS AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
---------- ------ ---------- ------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
March 31, 1994..................... 8,932,008 $ 89 1,738,698 $ 1,600 $10,608 $ 4,473 $ (833) $15,937
Net income....................... -- -- -- -- -- 6,496 -- 6,496
Exercise and termination of
common stock warrants......... 797,356 8 (1,738,698) (1,600) 1,596 -- -- 4
Issuance and net proceeds from
sale of common stock.......... 2,760,000 28 -- -- 18,529 -- -- 18,557
Foreign currency translation
adjustment.................... -- -- -- -- -- -- (177) (177)
---------- ---- ---------- ------- ------- ------- ------- -------
BALANCE,
March 31, 1995..................... 12,489,364 125 -- -- 30,733 10,969 (1,010) 40,817
Net income....................... -- -- -- -- -- 10,767 -- 10,767
Net proceeds from exercise of
common stock options.......... 196,142 2 -- -- 561 -- -- 563
Costs associated with secondary
offering of stock............. -- -- -- -- (484) -- -- (484)
Foreign currency translation
adjustment.................... -- -- -- -- -- -- (2) (2)
---------- ---- ---------- ------- ------- ------- ------- -------
BALANCE,
March 31, 1996..................... 12,685,506 127 -- -- 30,810 21,736 (1,012) 51,661
Net income....................... -- -- -- -- -- 13,367 -- 13,367
Net proceeds from exercise of
common stock options.......... 315,796 3 -- -- 1,635 -- -- 1,638
Issuance of common stock for
acquisition of subsidiary..... 38,562 -- -- -- 791 -- -- 791
Issuance of common stock......... 1,554 -- -- -- 30 -- -- 30
Foreign currency translation
adjustment.................... -- -- -- -- -- -- (294) (294)
---------- ---- ---------- ------- ------- ------- ------- -------
BALANCE,
March 31, 1997..................... 13,041,418 130 -- -- 33,266 35,103 (1,306) 67,193
Net income (unaudited)........... -- -- -- -- -- 11,836 -- 11,836
Net proceeds from exercise of
common stock options
(unaudited)................... 592,384 6 -- -- 3,596 -- -- 3,602
Issuance of common stock
(unaudited)................... 2,538 -- -- -- 45 -- -- 45
Foreign currency translation
adjustment (unaudited)........ -- -- -- -- -- -- (536) (536)
---------- ---- ---------- ------- ------- ------- ------- -------
BALANCE,
December 31, 1997 (unaudited)...... 13,636,340 $136 -- $ -- $36,907 $46,939 $(1,842) $82,140
========== ==== ========== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 47
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 6,496 $ 10,767 $ 13,367 $ 9,360 $ 11,836
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 1,393 2,296 3,786 2,704 3,356
Provision for doubtful accounts............. 750 999 1,594 908 1,250
Deferred income tax provision (benefit)..... (305) 237 197 238 1,626
Changes in operating assets and
liabilities --
Accounts receivable....................... (16,368) (18,888) (22,801) (11,186) (7,415)
Inventories, net.......................... (9,863) (12,017) (19,580) (12,196) (6,189)
Trade accounts payable and accrued
expenses............................... 9,839 18,495 14,559 4,386 (1,230)
Income taxes payable...................... 575 (478) 969 198 710
Prepaid expenses and other current
assets................................. 32 (1,776) 873 960 (1,516)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities................. (7,451) (365) (7,036) (4,628) 2,428
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (3,740) (4,959) (5,931) (3,932) (3,679)
Acquisition of subsidiary...................... -- -- (2,105) (2,105) --
Collections (advances) of employee receivables,
net......................................... 1,575 (80) (30) (94) (81)
-------- -------- -------- -------- --------
Net cash used in investing
activities........................... (2,165) (5,039) (8,066) (6,131) (3,760)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) revolving lines of
credit, net................................. (7,918) 5,735 14,660 10,130 (1,382)
Payments on capital leases and notes payable... (541) (571) (656) (478) (513)
Net proceeds from sale of stock and exercise of
stock options and warrants.................. 18,561 79 1,638 1,492 3,602
-------- -------- -------- -------- --------
Net cash provided by financing
activities........................... 10,102 5,243 15,642 11,144 1,707
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH................. (82) (83) (192) (32) (13)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH.................. 404 (244) 348 353 362
CASH, beginning of period........................ 44 448 204 204 552
-------- -------- -------- -------- --------
CASH, end of period.............................. $ 448 $ 204 $ 552 $ 557 $ 914
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 48
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1997 AND RELATED TO THE NINE MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED.)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Daisytek International Corporation (a Delaware corporation) and
subsidiaries (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 toner, printer ribbons, diskettes, optical
storage products, computer tape cartridges and accessories such as cleaning kits
and media storage files. The Company's products are used in a broad range of
computers and office automation products including laser and inkjet printers,
photocopiers, fax machines and data storage products. The Company, through its
wholly owned subsidiaries in the U.S., Canada, Australia, Mexico and Singapore,
sells products primarily in North America, as well as in Latin America,
Australia, Singapore, the Pacific Rim, Europe, and Africa.
The Company's customers include value-added resellers, computer supplies
dealers, office product dealers, contract stationers, buying groups, computer
and office product superstores and other retailers who resell the products to
end-users. No single customer accounted for more than 10% of the Company's
annual net sales for the fiscal years ended March 31, 1995, 1996 and 1997, or
the nine month period ended December 31, 1997. At March 31, 1997 and December
31, 1997, five computer and office product superstores and warehouse clubs
represent approximately 26% and 25%, respectively, of trade accounts receivable,
with the largest being approximately 12% and 10%, respectively, of trade
accounts receivable, reflecting the significance of this market segment.
The Company recognizes revenue upon shipment of product to customers and
provides for estimated returns and allowances. The Company permits its customers
to return defective products (many of which are then returned by the Company to
the manufacturer) and incorrect shipments for credit against other purchases.
The Company offers terms to its customers that it believes are standard for its
industry.
During fiscal year 1996, the Company formed Priority Fulfillment Services,
Inc. ("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its
business partners and other customers. Through PFS, the Company sells its core
competencies in call-center, product fulfillment, logistics and support services
to client companies worldwide. PFS customizes these services to meet specific
requirements of these companies. PFS's call-center services include: order
entry, order tracking and customer service (inbound), outbound telemarketing
services and customized reporting of customer and call information. PFS also
provides other support services such as invoicing, credit management and
collection services, and accounting and systems support. PFS utilizes primarily
the Company's centralized distribution facility in Memphis, Tennessee and also
the Company's foreign distribution facilities, and maintains relationships with
a number of shipping companies to provide next business day delivery on domestic
package orders, truck shipments on larger domestic orders and a variety of air
and surface delivery options for international orders. PFS presently provides
its services under both fee based contracts (where revenue is based on either
the sales value of the products or service activity volume) and transaction
based contracts (where PFS takes title and resells the product).
Basis of Presentation
The consolidated financial statements include the accounts of Daisytek
International Corporation and its subsidiaries. All significant intercompany
transactions are eliminated. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
F-7
<PAGE> 49
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain prior year data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows.
Inventories
Inventories (merchandise held for resale, all of which is finished goods)
are stated at the lower of weighted average cost or market.
Inventories held and owned by the Company's PFS subsidiary relate to
product fulfillment and logistics services provided for third parties, and are
presented separately in the consolidated balance sheet as certain of these
distribution agreements generally allow for the third party to manage the levels
of inventory held by the Company. As a result, the levels of inventory held by
the Company under these contracts are higher than the Company would normally
carry in its core wholesale business.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets
which range from one to seven years.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line
basis over 20 to 40 years. The related amortization expense for each of the
fiscal years 1995 and 1996 was approximately $50,000, and was $140,000 for
fiscal year 1997. Amortization expense for the nine month periods ended December
31, 1996 and 1997 was $82,000 and $163,000, respectively. Accumulated
amortization as of March 31, 1996 and 1997, and December 31, 1997 was $468,000,
$608,000 and $741,000, respectively.
Foreign Currency Translation and Transactions
For the Company's Canadian and Australian subsidiaries, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of shareholders' equity. In
addition, the Company periodically enters into foreign exchange contracts in
order to hedge the Company's net investment in, and its intercompany payable
balance (of a long-term investment nature) applicable to its Canadian and
Australian subsidiaries. In May 1997, the Company entered into a one-year, $9.6
million (U.S.) forward Canadian currency exchange contract. As of December 31,
1997, the Company had incurred a gain of approximately $0.4 million, net of
applicable income taxes, on this contract. In October 1997, the Company entered
into a one-year, $1.8 million (U.S.) forward Australian currency exchange
contract. As of December 31, 1997, the Company had incurred a gain of
approximately $0.1 million, net of applicable income taxes, on this contract.
For the fiscal years ended March 31, 1995, 1996, and 1997, the Company
incurred losses of approximately $31,000 and $59,000, and a gain of
approximately $44,000, net of income taxes, respectively, related to a one-year,
$3.0 million (U.S.) forward Canadian currency exchange contract that expired in
May 1995, a one-year, $4.3 million (U.S.) forward Canadian currency exchange
contract that expired in April 1996, and a one-year, $6.6 million (U.S.) forward
Canadian currency exchange contract that expired in May 1997, respectively.
These gains and losses are included as a component of shareholders' equity.
For the Company's Mexican subsidiary, the U.S. dollar is the functional
currency. Monetary assets and liabilities are translated at the rates of
exchange on the balance sheet date and certain assets (notably inventory, and
property and equipment) are translated at historical rates. Income and expense
items are
F-8
<PAGE> 50
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
translated at average rates of exchange for the period except for those items of
expense which relate to assets which are translated at historical rates. The
gains and losses from foreign currency transactions and translation related to
the Mexican subsidiary are included in net income and have not been material.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average common shares outstanding for each period. Diluted net
income is calculated by dividing net income by the weighted average common
shares and share equivalents outstanding for each period. The difference between
the Company's basic and diluted weighted average common shares outstanding is
due to dilutive common stock options outstanding. The stock splits discussed in
Note 3 have been reflected in the net income per common share calculations for
all periods presented.
Adoption of New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," in fiscal year 1997. SFAS No. 121 requires companies
to periodically evaluate long-lived assets and to record an impairment loss if
the expected undiscounted future cash flows is less than the carrying value of
those assets. The effect of the application of SFAS No. 121 was not material.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in fiscal year 1997. The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its plans, and has
opted to comply with the disclosure requirements of SFAS No. 123.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This statement establishes new standards for
computing and presenting earnings per share ("EPS"). The Company adopted SFAS
No. 128 during the quarter ended December 31, 1997. The Company restated its EPS
data for all periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements are effective for fiscal years beginning
after December 15, 1997; however, earlier adoption is permitted. SFAS No. 130
requires the presentation of comprehensive income and its components in a full
set of financial statements. SFAS No. 131 requires the disclosure of financial
and descriptive information about reportable operating segments. Both SFAS No.
130 and 131 are modifications of existing disclosure requirements, which will
have no effect on the results of operations or financial condition of the
Company. The Company is currently evaluating the standards and their potential
impact on disclosures and will adopt these pronouncements in its fiscal year
1999 financial statements.
Acquisition of Subsidiary
Effective October 1, 1996, the Company acquired, with cash and common
stock, substantially all of the assets and liabilities of Lasercharge Pty Ltd
("Lasercharge"). Lasercharge is an Australian wholesale distributor of computer
and office automation supplies and accessories. The acquisition of Lasercharge
was accounted for using the purchase method of accounting, and, accordingly, the
purchase price has been allocated to the assets and liabilities assumed based on
fair values at the date of acquisition. This resulted in cost in excess of fair
value of approximately $3.6 million which is being amortized on a straight-line
basis over 20 years. Pro forma results of operations have not been presented
because the effects of the acquisition were not significant.
F-9
<PAGE> 51
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. DEBT
Debt at March 31, 1996 and 1997, and at December 31, 1997 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit with commercial banks,
interest (weighted average rate of 6.6% and 6.8%
at March 31, 1997 and December 31, 1997,
respectively) at the Company's option at the
prime rate of a bank (8.5% at March 31, 1997 and
December 31, 1997) or the Eurodollar rate plus
0.625% to 1.125% (6.3% and 6.8% at March 31,
1997 and December 31, 1997, respectively), due
December 31, 2000............................... $15,440 $30,100 $26,000
Revolving line of credit with commercial bank,
interest (weighted average of 5.6% at December
31, 1997) at the Australian Bank Bill Rate plus
0.75% (5.6% at December 31, 1997), due July 1,
1999............................................ -- -- 2,718
Notes payable and obligations under capital leases
for warehouse equipment, computer equipment,
office furniture and fixtures, interest at
varying rates ranging from 8% to 21%, with
initial lease terms varying from three to seven
years........................................... 1,629 1,016 498
------- ------- -------
Long-term debt.................................. 17,069 31,116 29,216
Less: current portion of long-term debt........... (650) (662) (367)
------- ------- -------
Long-term debt, less current portion............ $16,419 $30,454 $28,849
======= ======= =======
</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
in February 1998, has a maximum borrowing availability of $65.0 million and
expires on December 31, 2000. The maximum borrowing availability at March 31,
1997 and December 31, 1997, prior to amendment, was $50.0 million. 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 (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. As of March 31, 1997 and December 31,
1997, approximately $19.9 million and $24.0 million, respectively, was available
under the Facility 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, which expires on
July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of
$7.5 million (Australian), or approximately $4.9 million (U.S.) at December 31,
1997. 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 December 31, 1997, the Company had borrowed
F-10
<PAGE> 52
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $2.7 million (U.S.), leaving approximately $2.2 million (U.S.)
available under the Australian Facility for additional borrowings.
During December 1997, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). The Canadian Facility, which expires on July
1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum
of $15.0 million (Canadian), or approximately $10.5 million (U.S.) at December
31, 1997. The Company had no borrowings outstanding under the Canadian Facility
at December 31, 1997. The Canadian Facility accrues interest at the Company's
option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's
U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25%
is charged on the unused portion of the Canadian Facility.
The Company is a party to a number of non-cancelable capital lease
agreements involving warehouse equipment, computer equipment, and office
furniture and fixtures. The Company's property held under capital leases,
included in furniture, fixtures and equipment in the balance sheet, amounted to
approximately $1,112,000, net of accumulated amortization of approximately
$1,560,000 at March 31, 1996, approximately $684,000, net of accumulated
amortization of approximately $2,054,000 at March 31, 1997, and approximately
$385,000, net of accumulated amortization of approximately $2,353,000 at
December 31, 1997.
Annual maturities of long-term debt and capital leases are as follows (in
thousands), after giving effect to the February 1998 amendment to the Facility
which extended the maturity of the Facility to December 31, 2000, for the
December 31, 1997 presentation:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
Three month period ended March 31, 1998..................... $ -- $ 144
Fiscal year ended March 31,
1998...................................................... 662 --
1999...................................................... 30,364 264
2000...................................................... 90 2,808
2001...................................................... -- 26,000
------- -------
Total............................................. $31,116 $29,216
======= =======
</TABLE>
3. STOCK OPTIONS AND SHAREHOLDERS' EQUITY
Public Offerings
In January 1995, the Company completed an initial public offering (the
"IPO") of 2,760,000 shares of common stock. In January 1996, the Company
completed a secondary offering of 2,415,500 shares of common stock, sold by
certain principal and selling shareholders. The Company did not receive any of
the proceeds from the sale of shares by these principal and selling
shareholders. The Company incurred approximately $484,000 in costs related to
the secondary offering, which is reflected as a reduction in Shareholders'
Equity.
Preferred Stock
In connection with the IPO, the Company authorized the issuance of up to
1,000,000 shares of preferred stock, par value $1.00 per share, none of which is
issued or outstanding at March 31, 1996 and 1997, and December 31, 1997.
F-11
<PAGE> 53
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Splits
In conjunction with the IPO, the Company's Board of Directors approved the
conversion of each share of common stock into 1.45 shares upon consummation of
the IPO. In February 1998, the Company's Board of Directors approved a two for
one stock split which provides for each holder of common stock to receive one
additional share for each share held. The stock split is to be effected in the
form of a stock dividend payable as of March 2, 1998 to stockholders of record
as of February 16, 1998. The consolidated financial statements and the notes
thereto have been adjusted to reflect these stock splits on a retroactive basis
for all periods presented.
Stock Purchase Agreement
Pursuant to a stock purchase agreement dated December 13, 1991, as amended
on December 23, 1991 (the "Stock Purchase Agreement"), the Company issued to a
private investor 3,333,660 shares of common stock, warrants to purchase 797,356
shares of common stock (the "A Warrants"), and warrants to purchase 941,342
shares of common stock (the "B Warrants") for an aggregate consideration of
$10,000,000. The A Warrants contained an exercise price of $0.005 per share,
were only exercisable upon the occurrence of certain specified events, and,
subject to certain conditions, granted the Company the right to repurchase all
or a portion of the A Warrants at prices ranging from $2.315 per share to $2.405
per share. Such warrants were exercised simultaneous with the IPO. The B
Warrants contained an exercise price of $0.005 per share and, pursuant to their
terms, terminated in January 1995 in conjunction with the IPO.
Stock Options
At March 31, 1997 and December 31, 1997, the Company had stock option
compensation plans and a non-employee Director stock option plan, which are
described below. The Company may also, from time to time, issue non-qualified
options outside these plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for these stock options. Accordingly, no
compensation cost has been recognized for stock-based compensation awards. Pro
forma net income and earnings per share assuming compensation cost for the
Company had been determined under SFAS No. 123, "Accounting for Stock-Based
Compensation," are as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTH PERIODS ENDED
MARCH 31, DECEMBER 31,
------------------ --------------------------
1996 1997 1996 1997
------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income:
As reported........................... $10,767 $13,367 $9,360 $11,836
Pro forma............................. $10,039 $11,202 $7,741 $ 9,293
Earnings per share:
Basic:
As reported........................ $ 0.85 $ 1.03 $ 0.73 $ 0.87
Pro forma.......................... $ 0.80 $ 0.87 $ 0.60 $ 0.69
Diluted
As reported........................ $ 0.80 $ 0.97 $ 0.68 $ 0.83
Pro forma.......................... $ 0.74 $ 0.81 $ 0.56 $ 0.65
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in fiscal year 1996: no dividends; expected volatility of 38.51%;
risk-free interest rate of 6.9%; and expected life of 6 years. The following
assumptions were used for grants during fiscal year 1997: no dividends, expected
volatility ranging between 39.25% and 39.50%; risk-free interest rate ranging
between 5.9% and 6.6%; and expected life of 6 years. The following assumptions
were used for grants during the nine months ended December 31, 1997: no
dividends, expected
F-12
<PAGE> 54
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
volatility ranging between 40.97% and 41.19%; risk-free interest rate ranging
between 6.2% and 6.8%; and expected life of 6 years.
In January 1989, the Company established an employee stock option plan (the
"Plan") in which shares of common stock are reserved for the granting of options
at an amount not less than market price, as determined by the Board of
Directors, at the date of grant. As of March 31, 1996 and 1997, 12,758 and
17,108 options, respectively, remain available to be granted under the Plan.
There were no options available at December 31, 1997 to be granted under the
plan.
In 1994, the Company adopted the 1994 Stock Option Plan for Key Employees
of Daisytek International Corporation (the "1994 Plan"). The 1994 Plan
authorizes the Company to grant options to selected officers and other key
employees of the Company and to non-employee directors. The 1994 Plan provides
for the granting to employees of both incentive stock options and nonqualified
stock options. The maximum number of shares of common stock for which options
may be granted is 1,450,000, subject to adjustments for certain changes in the
shares issued and outstanding as described in the 1994 Plan.
The exercise price of incentive stock options granted under the 1994 Plan
may not be less than the fair market value at the date of the grant. The
exercise price of nonqualified stock options granted under the 1994 Plan is
determined by the option committee of the Board of Directors. As of March 31,
1996 and 1997, and December 31, 1997, 984,000, 510,904, and 46,488 options,
respectively, remain to be granted in the future under the 1994 Plan.
During fiscal year 1997, the Company adopted the Non-Employee Director
Stock Option and Retainer Plan (the "Non-Employee Director Plan"). The
Non-Employee Director Plan authorizes the Company to grant nonqualified common
stock options to non-employee directors at the fair market value of the
Company's common stock on the date of grant. The options vest over a three-year
period starting on the date of grant. The maximum number of shares which may be
granted under the Non-Employee Director Plan is 100,000 shares, subject to
adjustments for certain changes in the shares issued and outstanding as
described in the plan. As of March 31, 1997 and December 31, 1997, there were
6,000 and 7,440 options, respectively, granted under the Non-Employee Director
Plan.
During the nine months ended December 31, 1997, the Company adopted the
1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the Company
to grant options to selected officers, directors and other key employees of the
Company. The 1994 Plan provides for the granting to employees of both incentive
stock options and nonqualified stock options. The maximum number of shares of
common stock for which options may be granted is 2,000,000, subject to
adjustments for certain changes in the shares issued and outstanding as
described in the 1997 Plan.
The exercise price of incentive stock options granted under the 1997 Plan
may not be less than the fair market value of the Company's stock at the date of
the grant. In the case of an individual then owning more than 10% of the total
combined voting power of the Company, the exercise price may not be less than
110% of the fair market value of the Company's stock at the date of the grant.
As of December 31, 1997, 1,914,442 options remain to be granted in the future
under the 1997 Plan.
During fiscal years 1995, 1996 and 1997, and the nine months period ended
December 31, 1997, the Company granted options to certain employees pursuant to
its employee stock option plans. In addition to the options under such plans,
during fiscal years 1996 and 1997, and the nine month period ended December 31,
1997, the Company granted options to certain key employees, executives and
directors to purchase 45,000, 110,000 and 79,266 shares of common stock,
respectively. These options were granted at the fair market value at the date of
the grant and become exercisable over a three-year period starting on the date
of the grant.
During the nine months ended December 31, 1997, the Company, at the option
of individual employees, canceled options issued during fiscal year 1997 and
issued replacement options, granted at the fair market
F-13
<PAGE> 55
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the Company's common stock on the date of the replacement grant. Such
options also become exercisable over a three year period starting with the date
of the replacement grant, based on vesting percentages.
The following table summarizes stock option activity for the three years in
the period ended March 31, 1997, and the nine month period ended December 31,
1997.
<TABLE>
<CAPTION>
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
--------- --------- ----------------
<S> <C> <C> <C>
Outstanding, March 31, 1994............... 1,127,188 $ 0.64 - $ 2.65 $ 1.74
Granted................................. 8,700 $ 3.80 $ 3.80
Exercised............................... -- -- --
Canceled................................ (12,758) $ 2.65 $ 2.65
---------
Outstanding, March 31, 1995............... 1,123,130 $ 0.64 - $ 3.80 $ 1.75
Granted................................. 520,000 $ 9.75 $ 9.75
Exercised............................... (196,142) $ 0.64 - $ 3.80 $ 1.84
Canceled................................ (9,000) $ 9.75 $ 9.75
---------
Outstanding, March 31, 1996............... 1,437,988 $ 0.64 - $ 9.75 $ 4.58
Granted................................. 678,228 $16.25 - $20.00 $16.54
Exercised............................... (315,796) $ 0.64 - $ 9.75 $ 2.45
Canceled................................ (93,482) $ 3.80 - $16.25 $13.27
---------
Outstanding, March 31, 1997............... 1,706,938 $ 0.64 - $20.00 $ 9.25
Granted (Unaudited)..................... 1,286,650 $12.50 - $22.44 $12.72
Exercised (Unaudited)................... (592,384) $ 0.64 - $16.25 $ 2.52
Canceled (Unaudited).................... (646,302) $ 9.75 - $20.00 $16.30
---------
Outstanding, December 31, 1997
(Unaudited)............................. 1,754,902 $ 0.64 - $22.44 $11.47
=========
</TABLE>
The weighted average fair values of options granted during each of the
years ended March 31, 1996 and 1997, and the nine months ended December 31,
1997, were $4.85, $8.08 and $6.15 respectively. As of March 31, 1996 and 1997,
and December 31, 1997, 806,788, 682,543 and 258,472, respectively, of options
outstanding were exercisable. The remaining options will become exercisable over
the next three years based on vesting percentages.
The following table summarizes information about the Company's stock
options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS REMAINING AVERAGE EXERCISABLE AS AVERAGE
EXERCISE PRICES OF 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE OF 3/31/97 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.64 - $ 5.00 626,018 4.6 $ 1.59 626,018 $1.59
$ 5.01 - $10.00 457,260 8.1 $ 9.75 56,525 $9.75
$10.01 - $20.00 623,660 9.1 $16.57 -- --
</TABLE>
F-14
<PAGE> 56
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS REMAINING AVERAGE EXERCISABLE AS AVERAGE
EXERCISE PRICES OF 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE OF 12/31/97 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.64 - $ 5.00 103,050 3.8 $ 1.85 103,050 $ 1.85
$ 5.01 - $10.00 381,324 7.4 $ 9.75 153,892 $ 9.75
$10.01 - $15.00 1,219,660 9.3 $12.50 -- --
$15.01 - $22.44 50,868 9.2 $19.15 1,530 $16.25
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS PERIODS
ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest........................... $2,119 $1,445 $1,830 $1,274 $1,644
Income taxes....................... $3,896 $6,953 $6,411 $4,493 $2,832
Fixed assets acquired under capital
leases............................. $ 212 $ -- $ -- $ -- $ --
Acquisition of subsidiary:
Fair value of net assets
acquired........................ $ -- $ -- $2,896 $2,896 $ --
Stock issued....................... -- -- (791) (791) --
------ ------ ------ ------ ------
Net cash paid for acquisition... $ -- $ -- $2,105 $2,105 $ --
====== ====== ====== ====== ======
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company has made various loans to its President, a Senior Vice
President, and a Vice President. These loans accrue interest at the Company's
effective borrowing rate (6.8% and 7.0% at March 31, 1997 and December 31, 1997,
respectively). The Company had notes receivable (including accrued interest)
from its President of approximately $395,000, $423,000 and $448,000 as of March
31, 1996 and 1997, and December 31, 1997, respectively, which are classified as
non-current assets in the consolidated balance sheet. The Company's note
receivable from a Senior Vice President as of March 31, 1997 and December 31,
1997 were approximately $122,000 and $181,000, respectively. The Company's notes
receivable from a Vice President as of March 31, 1997 was $61,000. These notes
are classified as accounts receivable in the accompanying consolidated balance
sheet.
The Company also had trade accounts receivable due from companies in which
either the Company or its largest shareholder owns a minority interest. Such
sales were made in accordance with the Company's usual terms, except that such
companies were provided with extended payment terms. In fiscal year 1993, the
principal shareholder transferred his minority interest in all but one of these
companies to a subsidiary of the Company for a nominal amount, which
approximated the fair market value of these minority interests. In fiscal year
1997, the Company sold its remaining interest in one of the companies, and as
such, the fiscal year 1997 information presented below excludes such information
for this former related party. Trade accounts receivable and advances from these
related party companies totaled approximately $757,000 and $517,000 at March 31,
1996 and 1997, respectively, and $377,000 at December 31, 1997 and are
classified as accounts receivable in the accompanying consolidated balance
sheet. Sales to these related parties totaled approxi-
F-15
<PAGE> 57
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately $2,285,000, $2,707,000 and $1,844,000 for the fiscal years ended March
31, 1995, 1996 and 1997, respectively, and $1,247,000 and $1,693,000 for the
nine month periods ended December 31, 1996 and 1997.
6. INCOME TAXES
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. These differences relate
primarily to provisions for doubtful accounts, capitalization of inventory
costs, reserves for inventory, book versus tax depreciation differences, and
certain accrued expenses deducted for book purposes but not yet deductible for
tax purposes. A reconciliation of the difference between the expected income tax
provision at the U.S. Federal statutory corporate tax rate (34.0%, 34.9% and
35.0% in fiscal years 1995, 1996 and 1997, respectively, and 35.0% in the nine
month periods ended December 31, 1996 and 1997) and the Company's effective tax
rate is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTH PERIODS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision computed at statutory
rate............................... $3,625 $6,086 $7,581 $5,308 $6,712
Impact of foreign taxation at
different rates.................... 137 141 270 154 317
State income taxes, net of federal
benefit............................ 174 297 335 221 249
Expenses not deductible for tax
purposes........................... 49 56 104 60 97
Change in valuation reserve.......... 378 8 (123) (94) (77)
Other................................ (198) 109 125 156 44
------ ------ ------ ------ ------
Provision for income
taxes.................... $4,165 $6,697 $8,292 $5,805 $7,342
====== ====== ====== ====== ======
</TABLE>
The consolidated income before taxes, by domestic and foreign entities, is
as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTH PERIODS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic.......................... $ 9,991 $16,355 $18,703 $13,428 $15,522
Foreign........................... 670 1,109 2,956 1,737 3,656
------- ------- ------- ------- -------
Total................... $10,661 $17,464 $21,659 $15,165 $19,178
======= ======= ======= ======= =======
</TABLE>
F-16
<PAGE> 58
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTH PERIODS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Domestic......................... $3,576 $5,349 $6,317 $4,516 $3,891
State............................ 263 456 515 340 383
Foreign.......................... 631 655 1,263 711 1,435
------ ------ ------ ------ ------
Total current............ 4,470 6,460 8,095 5,567 5,709
------ ------ ------ ------ ------
Deferred
Domestic......................... (237) 265 197 239 1,630
Foreign.......................... (68) (28) -- (1) 3
------ ------ ------ ------ ------
Total Deferred........... (305) 237 197 238 1,633
------ ------ ------ ------ ------
Total.................. $4,165 $6,697 $8,292 $5,805 $7,342
====== ====== ====== ====== ======
</TABLE>
The components of the deferred tax asset (liability) as of March 31, 1996
and 1997, and the nine month period ended December 31, 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts................... $ 670 $ 872 $ 583
Capitalized inventory costs....................... 84 170 211
Inventory obsolescence reserve.................... 288 273 170
Accrued straight-line rent........................ 81 70 65
Accrued vacation.................................. 58 58 60
Foreign net operating loss carryforwards.......... 687 631 1,269
Other............................................. 266 204 32
----- ------ -------
2,134 2,278 2,390
Less -- Valuation reserve......................... (386) (263) (186)
----- ------ -------
Total deferred tax asset.................. 1,748 2,015 2,204
----- ------ -------
Deferred tax liability:
Property and equipment............................ (487) (426) (257)
Accounts receivable discount...................... -- (411) (1,701)
Foreign inventory purchases....................... (404) (463) (1,111)
Other............................................. (95) (150) (203)
----- ------ -------
Total deferred liability.................. (986) (1,450) (3,272)
----- ------ -------
Deferred tax asset (liability), net................. $ 762 $ 565 $(1,068)
===== ====== =======
</TABLE>
For financial reporting purposes, the tax benefit of cumulative temporary
differences is recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not". As of
March 31, 1996 and 1997 and December 31, 1997, a valuation allowance was
recorded due to uncertainties regarding the Company's utilization of its Mexico
subsidiary's net tax asset.
F-17
<PAGE> 59
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease equipment and facilities under
operating leases expiring in various years through fiscal year 2002. In most
cases, management expects that, in the normal course of business, leases will be
renewed or replaced by other leases. Minimum future annual rental payments under
non-cancelable operating leases having original terms in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
Three month period ending March 31, 1998................... $ -- $ 1,047
Fiscal year ending March 31, 1998.......................... 3,085 --
1999..................................................... 2,635 3,528
2000..................................................... 2,382 3,363
2001..................................................... 1,724 2,195
2002..................................................... 943 1,051
Thereafter............................................... -- --
------- -------
Total............................................ $10,769 $11,184
======= =======
</TABLE>
Total rental expense under operating leases approximated $1,900,000,
$2,255,000 and $3,107,000 for the fiscal years ended March 31, 1995, 1996 and
1997, respectively, and approximately $2,206,000 and $2,545,000 for the nine
month periods ended December 31, 1996 and 1997, respectively.
Although the Company carries products and accessories supplied by numerous
vendors, the Company's net sales from products manufactured by its ten largest
suppliers were approximately 66%, 72% and 74% of total net sales during fiscal
years 1995, 1996 and 1997, respectively, and 75% and 76% of total net sales for
the nine month periods ended December 31, 1996 and 1997, respectively. The
Company has entered into written distribution agreements with nearly all of its
major suppliers. As is customary in the industry, these agreements generally
provide non-exclusive distribution rights, have one-year renewable terms and are
terminable by either party at any time, with or without cause. Certain of these
agreements require minimum annual purchases. Total minimum purchase requirements
for fiscal year 1998 approximate $47 million. Additionally, many of the
Company's suppliers offer rebate programs under which, subject to the Company
purchasing certain predetermined amounts of inventory, the Company receives
rebates based on a percentage of the dollar volume of total rebate program
purchases. The Company also takes advantage of several other programs offered by
substantially all of its suppliers. These include price protection plans under
which the Company receives credits against future purchases if the supplier
lowers prices on previously purchased inventory and stock rotation or stock
balancing privileges under which the Company can return slow-moving inventory in
exchange for other products. Certain of the Company's suppliers also provide the
Company with cooperative advertising programs, marketing development funds and
other types of incentives and discounts which offset the production costs of the
Company's published marketing tools and other related costs.
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations
8. FOREIGN OPERATIONS AND EXPORTS
The Company, through its wholly owned subsidiaries, Daisytek (Canada) Inc.,
Daisytek Australia Pty Ltd and Daisytek de Mexico, S.A. de C.V., sells products
in Canada, Australia and in Mexico. All intercompany activity is eliminated in
computing net sales and net income. Information related to the
F-18
<PAGE> 60
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's Australia and Mexico subsidiaries are included in Other in the
following table. Financial information, summarized by geographical area, is as
follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTH PERIODS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Domestic................... $323,462 $424,667 $541,710 $388,812 $464,111
Canada..................... 38,487 44,459 57,295 39,046 54,947
Other...................... 1,368 8,932 26,425 15,946 38,459
Intercompany
eliminations............ (10,364) (13,889) (21,616) (14,333) (18,551)
-------- -------- -------- -------- --------
Consolidated............ $352,953 $464,169 $603,814 $429,471 $538,966
======== ======== ======== ======== ========
Net income:
Domestic................... $ 6,437 $ 10,284 $ 11,675 $ 8,396 $ 9,617
Canada..................... 640 759 1,346 810 1,332
Other...................... (581) (276) 346 154 887
-------- -------- -------- -------- --------
Consolidated............ $ 6,496 $ 10,767 $ 13,367 $ 9,360 $ 11,836
======== ======== ======== ======== ========
Identifiable assets:
Domestic................... $ 83,194 $115,219 $144,836 $129,561 $149,804
Canada..................... 9,055 10,360 16,924 14,543 19,677
Other...................... 2,172 3,022 13,528 12,016 17,492
-------- -------- -------- -------- --------
Consolidated............ $ 94,421 $128,601 $175,288 $156,120 $186,973
======== ======== ======== ======== ========
</TABLE>
The Company also exports its products for sale throughout Latin America
(through its wholly owned subsidiary, Daisytek Latin America, Inc., beginning in
January 1996), Europe, the Far East, Africa and Australia. Total export sales to
these geographic regions for fiscal years 1995, 1996 and 1997, included in
Domestic sales in the preceding table, were approximately $28.0 million, $31.8
million and $33.5 million, respectively. Total export sales to these geographic
regions for the nine month periods ended December 31, 1996 and 1997, included in
domestic sales in the preceding table, were approximately $24.8 million and
$27.3 million, respectively.
9. EMPLOYEE SAVINGS PLAN
In fiscal year 1994, the Company implemented a defined contribution
employee savings plan under Section 401(k) of the Internal Revenue Code.
Substantially all full-time and part-time U.S. employees are eligible to
participate in the plan. The Company, at its discretion, may match employee
contributions to the plan and also make an additional matching contribution in
the form of profit sharing in recognition of Company performance. For fiscal
years 1995 and 1996, the Company matched 25% of the employee contributions
resulting in charges against income of approximately $81,000 and $95,000,
respectively. For fiscal year 1997, the Company matched 20% of the employee
contributions resulting in a charge against income of approximately $78,000. For
the nine month period ended December 31, 1997, the Company matched 10% of the
employee contributions, resulting in a charge against income of approximately
$37,000.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing
F-19
<PAGE> 61
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
parties, other than in a forced sale or liquidation. The fair values of all
non-derivative financial instruments approximate their carrying amounts in the
accompanying consolidated balance sheets.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company's derivative
financial instruments outstanding as of March 31, 1996 and 1997, and December
31, 1997, consisted of forward foreign currency exchange contracts used to hedge
the Company's net investment in, and its intercompany payable balance applicable
to its Canadian and Australian subsidiaries (See Note 1). The fair value of
these contracts based on fiscal year-end exchange rates, excluding related
income taxes, was a net loss of approximately $90,000 at March 31, 1996, and net
gains of approximately $67,000 and $472,000 at March 31, 1997 and December 31,
1997, respectively.
11. SUBSEQUENT EVENTS (UNAUDITED)
During January 1998, the Company purchased all of the common stock of
Steadi-Systems, Ltd. ("Steadi-Systems"). Steadi-Systems is an independent
wholesale distributor of media products to the filmed entertainment and
multimedia industries. The acquisition of Steadi-Systems will be accounted for
using the purchase method of accounting, and, accordingly, the purchase price
will be allocated to the assets and liabilities assumed based on the fair values
at the date of acquisition. The Company will record a one-time charge related to
the completion of transition, integration and merger activities, estimated at
about $0.6 million, or approximately $0.03 per share, in the Company's fourth
financial quarter ending March 31, 1998.
After giving effect to operating leases entered into after December 31,
1997, including operating leases of Steadi-Systems, the Company's minimum future
annual rental payments under non-cancelable operating leases having original
terms in excess of one year are approximately $1.2 million, $4.3 million, $4.5
million, $3.3 million, $2.1 million, $0.9 million and $5.9 million for the three
month period ending March 31, 1998, fiscal years ending March 31, 1999, 2000,
2001, 2002, 2003 and thereafter, respectively.
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 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.
In February 1998, the Company's Board of Directors approved a two for one
stock split which provides for each holder of common stock to receive one
additional share for each share held. The stock split is to be effected in the
form of a stock dividend payable as of March 2, 1998 to stockholders of record
as of February 16, 1998. The consolidated financial statements and the notes
thereto have been adjusted to reflect these stock splits on a retroactive basis
for all periods presented.
In February 1998, the Company filed a Form S-3 registration statement with
the Securities and Exchange Commission. The Company intends to reduce
outstanding indebtedness under the Company's line of credit through the
application of the net proceeds from the sale of 2,300,000 shares of common
stock. The unaudited supplemental income per share data has been calculated
assuming this offering occurred as of the beginning of the respective period.
F-20
<PAGE> 62
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
DECEMBER 31, 1997
-----------------
(UNAUDITED)
<S> <C>
Supplemental net income per common share
Basic..................................................... $ 0.82
Diluted................................................... $ 0.79
Supplemental weighted average common shares outstanding (in
thousands):
Basic..................................................... 15,830
Diluted................................................... 16,560
</TABLE>
F-21
<PAGE> 63
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, the Selling Stockholder or any Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, shares of Common Stock in any jurisdiction to any person to whom it is
not lawful to make any such offer or solicitation in such jurisdiction or in
which the person making such offer or solicitation is not qualified to do so.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
- ------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 10
Price Range of Common Stock and
Dividend Policy..................... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 23
Management............................ 33
Principal and Selling Stockholders.... 35
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Available Information................. 39
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
PROSPECTUS , 1998
3,000,000
DAISYTEK INTERNATIONAL CORPORATION
COMMON SHARES
SBC WARBURG DILLON READ INC.
PAINEWEBBER INCORPORATED
WILLIAM BLAIR & COMPANY
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an itemized statement of all expenses in connection with
the sale and distribution of the securities being registered by this
Registration Statement, other than underwriting discounts and commissions. All
amounts are estimated except the Registration fee, NASDAQ listing fee and the
NASD filing fee. All such expenses shall be paid by the Company.
<TABLE>
<S> <C>
Registration fee............................................ $24,589
NASDAQ listing fee.......................................... 17,500
NASD filing fee............................................. 8,835
Blue sky fees and expenses.................................. 5,000
Legal fees and expenses..................................... 100,000
Accounting fees and expenses................................ 115,000
Printing and engraving expenses............................. 120,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 99,076
----------
TOTAL............................................. $500,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is organized under the laws of the State of Delaware. The
Delaware General Corporation Law, as amended (the "Act"), provides that a
Delaware corporation has the power generally to indemnify its directors,
officers, employees and other agents (each, a "Corporate Agent") against
expenses and liabilities (including amounts paid in settlement) in connection
with any proceeding involving such person by reason of his being a Corporate
Agent, other than a proceeding by or in the right of the corporation, if such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal proceeding, such person had no reasonable cause to believe his conduct
was unlawful. In the case of an action brought by or in the right of the
corporation, indemnification of a Corporate Agent against expenses is permitted
if such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, however, no
indemnification is permitted in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery or the court in which
such proceeding was brought shall determine upon application that despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to such indemnification. To the
extent that a Corporate Agent has been successful on the merits of such
proceeding, whether or not by or in the right of the corporation, or in the
defense of any claim, issue or matter therein, the corporation is required to
indemnify the Corporate Agent for expenses in connection therewith. Expenses
incurred by a Corporate Agent in connection with a proceeding may, under certain
circumstances, be paid by the corporation in advance of the final disposition of
the proceeding as authorized by the board of directors. The power to indemnify
and advance expenses under the Act does not exclude other rights to which a
Corporate Agent may be entitled to under the certificate of incorporation,
bylaws, agreement, vote of stockholders or disinterested directors or otherwise.
Under the Act, a Delaware corporation has the power to purchase and
maintain insurance on behalf of any Corporate Agent against any liabilities
asserted against and incurred by him in such capacity, whether or not the
corporation has the power to indemnify him against such liabilities under the
Act.
As permitted by the Act, the Company's Certificate of Incorporation
contains provisions which limit the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors except to the extent
such limitation of liability is prohibited by the Act. In accordance with the
Act, these provisions do not limit the liability of any director for any breach
of the director's duty of loyalty to the Company or its
II-1
<PAGE> 65
stockholders; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; for certain unlawful
payments of dividends or stock repurchases under Section 174 of the Act; or for
any transaction from which the director derives an improper personal benefit.
These provisions do not limit the rights of the Company or any stockholder to
seek an injunction or any other non-monetary relief in the event of a breach of
a director's fiduciary duty. In addition, these provisions apply only to claims
against a director arising out of his role as a director and do not relieve a
director from liability for violations of statutory law, such as certain
liabilities imposed on a director under the federal securities laws.
In addition, the Company's Certificate of Incorporation and By-laws provide
for the indemnification of Corporate Agents for certain expenses, judgments,
fines and payments incurred by them in connection with the defense or settlement
of claims asserted against them in their capacities as Corporate Agents to the
fullest extent authorized by the Act. The Company has purchased directors and
officers liability insurance in order to limit its exposure to liability for
indemnification of directors and officers.
Reference is made to Sections 102(b)(7) and 145 of the Act in connection
with the above summary of indemnification, insurance and limitation of
liability.
The purpose of these provisions is to assist the Company in retaining
qualified individuals to serve as officers, directors or other Corporate Agents
of the Company by limiting their exposure to personal liability for serving as
such.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.0 -- Form of Underwriting Agreement.
5.0 -- Opinion of Wolff & Samson, P.A.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Wolff & Samson appears in its opinion filed as
Exhibit 5.
24.0(*) -- Power of Attorney.
27.0(**) -- Financial Data Schedule
</TABLE>
- ---------------
(*) Power of Attorney appears on Page II-4.
(**) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to provisions set forth in Item 14, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
<PAGE> 66
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plano, State of Texas on February 26, 1998.
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ THOMAS J. MADDEN
------------------------------------
Thomas J. Madden
Vice President-Finance
POWER OF ATTORNEY
Each person whose signature to this Registration Statement appears below
hereby appoints Thomas J. Madden and Harvey Achatz, or either of them, as his
attorney-in-fact to sign on his behalf individually and in the capacity stated
below and to file all amendments and post-effective amendments to this
Registration Statement, and any and all instruments or documents filed as a part
of or in connection with this Registration Statement or the amendments thereto,
and the attorney-in-fact, or either of them, may make such changes and additions
to this Registration Statement as the attorney-in-fact, or either of them, may
deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ DAVID A. HEAP Chairman of the Board February 26, 1998
-------------------------------------------------
David A. Heap
By: /s/ MARK C. LAYTON President, Chief Executive February 26, 1998
------------------------------------------------- Officer, Chief Operating
Mark C. Layton Officer and Director
(Principal Executive
Officer)
By: /s/ THOMAS J. MADDEN Vice President-Finance, Chief February 26, 1998
------------------------------------------------- Financial Officer
Thomas J. Madden (Principal Financial
Officer and Principal
Accounting Officer)
By: /s/ CHRIS YATES Senior Vice February 26, 1998
------------------------------------------------- President-Business
Chris Yates Development and Director
By: /s/ JAMES R. POWELL Senior Vice President-Sales February 26, 1998
------------------------------------------------- and Marketing and Director
James R. Powell
</TABLE>
II-4
<PAGE> 68
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ EDGAR D. JANNOTTA, JR. Director February 26, 1998
-------------------------------------------------
Edgar D. Jannotta, Jr.
By: /s/ TIMOTHY M. MURRAY Director February 26, 1998
-------------------------------------------------
Timothy M. Murray
By: /s/ PETER P.J. VIKANIS Director February 26, 1998
-------------------------------------------------
Peter P.J. Vikanis
</TABLE>
II-5
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.0 -- Form of Underwriting Agreement.
5.0 -- Opinion of Wolff & Samson, P.A.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Wolff & Samson appears in its opinion filed as
Exhibit 5.
24.0(*) -- Power of Attorney.
27.0(**) -- Financial Data Schedule
</TABLE>
- ---------------
(*) Power of Attorney appears on Page II-4.
(**) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997.
<PAGE> 1
EXHIBIT 1.0
DAISYTEK INTERNATIONAL CORPORATION
3,000,000
SHARES OF
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
- ----------, 1998
<PAGE> 2
UNDERWRITING AGREEMENT
----------, 1998
SBC Warburg Dillon Read Inc.
535 Madison Avenue
New York, New York 10022
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
William Blair & Company, L.L.C.
222 W. Adams Street
Chicago, Illinois 60606
as Managing Underwriters
Dear Sirs:
Daisytek International Corporation, a Delaware corporation
(the "Company"), proposes to issue and sell and David A. Heap (the "Selling
Stockholder") proposes to sell to the underwriters named in Schedule A (the
"Underwriters") an aggregate of 3,000,000 shares (the "Firm Shares") of Common
Stock, par value $.01 per share (the "Common Stock"), of the Company, of which
2,300,000 shares are to be issued and sold by the Company and 700,000 are to be
sold by the Selling Stockholder. In addition, solely for the purpose of
covering overallotments, the Company proposes to issue and sell and the Selling
Stockholder proposes to sell, at the Underwriters' option, an aggregate of up
to 450,000 additional shares of the Common Stock (the "Additional Shares"), of
which 345,000 are to be issued and sold by the Company and 105,000 are to be
sold by the Selling Stockholder. The Additional Shares and the Firm Shares are
hereinafter collectively sometimes referred to as the "Shares." The Shares are
described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder (collectively called the "Act"), with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3, including a
prospectus, relating to the Shares, which incorporates by reference documents
that the Company has filed in accordance with the provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder
(collectively the "Exchange Act"). The Company has furnished to you, for use
by the Underwriters and by dealers, copies of one or more preliminary
prospectuses and all documents incorporated by reference therein (collectively,
the "Preliminary Prospectus") relating to the Shares. Except where the context
otherwise requires, the registration statement, as amended when it becomes
effective, including all
<PAGE> 3
documents filed as a part thereof or incorporated by reference therein, and
including any registration statement filed pursuant to Rule 462(b) under the
Act increasing the size of the offering registered under the Act and in any
information contained in a prospectus subsequently filed with the Commission
pursuant to Rule 424(b) under the Act and deemed to be part of the registration
statement at the time of effectiveness, is herein called the "Registration
Statement," and the prospectus, in the form filed by the Company with the
Commission as part of the Registration Statement at the time of effectiveness
or, if Rule 424(b) is applicable, pursuant to Rule 424(b) under the Act, is
herein called the "Prospectus."
The Company, the Selling Stockholder and the Underwriters
agree as follows:
1. SALE AND PURCHASE. On the basis of the
representations and warranties and the other terms and conditions herein set
forth, each of the Company and the Selling Stockholder, severally and not
jointly, agrees to sell to the respective Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase from each of the
Company and the Selling Stockholder the respective number of Firm Shares
(subject to such adjustment as you may determine to avoid fractional shares)
which bears the same proportion to the number of Firm Shares to be sold by the
Company or by the Selling Stockholder, as the case may be, as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule A bears
to the total number of Firm Shares to be sold by the Company and the Selling
Stockholder, in each case at a purchase price of $_____ per Share. You shall
release the Firm Shares for public sale promptly after this Agreement becomes
effective. You may from time to time increase or decrease the public offering
price after the initial offering to the public to such extent as you may
determine.
In addition, on the basis of the representations and
warranties and the other terms and conditions herein set forth, the Company and
the Selling Stockholder hereby grant to the several Underwriters an option to
purchase, and the Underwriters shall have the right to purchase, severally and
not jointly, from the Company and the Selling Stockholder, ratably in
accordance with the number of Firm Shares to be purchased from each of them
(subject to such adjustment as you shall determine to avoid fractional shares),
all or a portion of the Additional Shares as may be necessary to cover
overallotments made in connection with the offering of the Firm Shares, at the
same purchase price per share to be paid by the several Underwriters to the
Company and the Selling Stockholder for the Firm Shares. This option may be
exercised at any time (but not more than once) on or before the thirtieth day
following the date hereof, by written notice from you to the Company and the
Selling Stockholder. Such notice shall set forth the aggregate number of
Additional Shares as to which the option is being exercised, and the date and
time when the Additional Shares are to be delivered (such date and time being
herein referred to as the "additional time of purchase"); provided, however,
that the additional time of purchase shall not be earlier than the "time of
purchase" (as defined below) nor earlier than the second business day* after
the date on which the option shall have been exercised nor later than the
eighth business day after the date on which the option shall have been
exercised. The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same proportion to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule A bears to the total
- ----------------------------------
* As used herein, business day shall mean a day on which the New York
Stock Exchange is open for trading.
2
<PAGE> 4
number of Firm Shares (subject, in each case, to such adjustment as you may
determine to eliminate fractional shares).
Pursuant to powers of attorney, which shall be satisfactory to
counsel for the Underwriters, granted by the Selling Stockholder, Morris
Bienenfeld, Esq. will act as the representative of the Selling Stockholder.
The foregoing representative is authorized, on behalf of the Selling
Stockholder, to execute any documents necessary or desirable in connection with
the sale of the Shares to be sold hereunder by the Selling Stockholder, to make
delivery of the certificates of such Shares, to receive the proceeds of the
sale of such Shares, to give receipts for such proceeds, to distribute the
balance of such proceeds to the Selling Stockholder, to receive notices on
behalf of the Selling Stockholder and to take such other action as may be
necessary or desirable in connection with the transactions contemplated by this
Agreement.
2. PAYMENT AND DELIVERY. Payment of the purchase price
for the Firm Shares shall be made to the Company and the Attorney-in-Fact
referred to in Section 4(c) on behalf of the Selling Stockholder by certified
or official bank checks, in New York Clearing House funds (next day funds), at
the offices of SBC Warburg Dillon Read Inc. in New York City, against delivery
of the certificates for the Firm Shares to you for the respective accounts of
the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New
York City time, on __________, 1998 (unless another time shall be agreed to by
you, the Company and the Selling Stockholder or unless postponed in accordance
with the provisions of Section 10). The time at which such payment and
delivery are actually made is hereinafter sometimes called the "time of
purchase." Certificates for the Firm Shares shall be delivered to you in
definitive form in such names and in such denominations as you shall specify on
the second business day preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall
be made at the additional time of purchase in the same manner and at the same
office as the payment for the Firm Shares. Certificates for the Additional
Shares shall be delivered to you in definitive form in such names and in such
denominations as you shall specify on the second business day preceding the
additional time of purchase.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each of the Underwriters that:
(a) each Preliminary Prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the Act,
complied when so filed in all material respects with the Act, and when
the Registration Statement becomes or became effective and at all
times subsequent thereto up to the time of purchase and the time of
additional purchase, the Registration Statement and the Prospectus,
and any supplements or amendments thereto, complied and will comply in
all material respects with the provisions of the Act, and the
Registration Statement and the Prospectus at all such times did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the Company
makes no
3
<PAGE> 5
representation or warranty with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in
conformity with information concerning the Underwriters and furnished
in writing by or on behalf of any Underwriter through you to the
Company expressly for use in the Registration Statement or the
Prospectus; provided, further, that such information furnished by or
on behalf of the Underwriters shall be limited to the section of the
Registration Statement and Prospectus entitled "Underwriting;" the
documents incorporated by reference in the Prospectus, at the time
they were filed with the Commission, complied in all material respects
with the requirements of the Exchange Act, and do not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission or by the state securities or Blue Sky authority of any
jurisdiction;
(b) all legal or governmental proceedings, or any
contract, agreement, instrument, lease, license, arrangement or
understanding required by the Act, or the applicable published rules
and regulations thereunder, to be described in the Registration
Statement or the Prospectus have been properly described therein; and
any contract, agreement, instrument, lease or license required by the
Act, or the applicable published rules and regulations thereunder, to
be filed as an exhibit to the Registration Statement has been so filed
or, if previously filed with the Commission, has been properly
incorporated by reference;
(c) the Company has authorized capitalization
consisting of 20,000,000 shares of Common Stock, of which __________
shares are issued and outstanding on the date hereof and no shares are
held in the Company's treasury, and 1,000,000 shares of Preferred
Stock, par value $1.00 per share, of which no shares are issued and
outstanding on the date hereof; all of the issued and outstanding
shares of capital stock (including Common Stock of the Company) have
been duly authorized and validly issued and are fully paid and
nonassessable; the Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with full corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement and the Prospectus and to execute and deliver this Agreement
and to issue, sell and deliver the Shares to be issued and sold by it
as herein contemplated;
(d) all of the issued and outstanding shares of
capital stock of each of Daisytek, Incorporated, a Delaware
corporation, or its wholly-owned subsidiaries, Daisytek (Canada) Inc.,
Working Capital of America, Inc., Working Capital Canada, Inc., Home
Tech Depot, Inc., Daisytek De Mexico S.A. de C.V., Daisytek Latin
America, Inc., Supplies Express, Inc., Priority Fulfillment Services,
Inc., Priority Fulfillment Services of Canada, Inc., Daisytek De
Mexico Services, S.A. de C.V., Priority Fulfillment Services of
Australia, Priority Fulfillment Services de Mexico, S.A. de C.V.,
Daisytek Australia Pty. Ltd and Steadi- Systems, Ltd. [AND ITS
SUBSIDIARIES] (Daisytek, Incorporated,
4
<PAGE> 6
Daisytek (Canada) Inc., Working Capital of America, Inc., Working
Capital Canada Inc., Home Tech Depot Inc., Daisytek De Mexico S.A. de
C.V., Daisytek Latin America, Inc., Supplies Express, Inc., Priority
Fulfillment Services, Inc., Priority Fulfillment Services of Canada,
Inc., Daisytek De Mexico Services, S.A. de C.V., Priority Fulfillment
Services of Australia, Priority Fulfillment Services de Mexico, S.A.
de C.V., Daisytek Australia Pty. Ltd and Steadi-Systems, Ltd. [AND ITS
SUBSIDIARIES] are collectively called the "Subsidiaries") are owned
directly or indirectly by the Company, except for directors'
qualifying shares; all of such shares have been duly authorized and
validly issued and are fully paid and nonassessable and, except as
described in the Prospectus, are owned free and clear of any pledge,
lien, encumbrance, security interest or other claim; there are no
outstanding rights, subscriptions, warrants, calls, preemptive rights,
options or other agreements of any kind with respect to the capital
stock of any of the Subsidiaries;
(e) each of the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation, with
full corporate power and authority to own its respective properties
and to conduct its respective business;
(f) the Company and each of the Subsidiaries have
good and marketable title in fee simple to all real properties and
good title to all other material properties and assets owned by them,
in each case free and clear of all liens, security interests, pledges,
charges, encumbrances, mortgages and defects (except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company or the
Subsidiaries); and the property held under lease by the Company and
each of the Subsidiaries is held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property
and buildings by the Company or the Subsidiaries;
(g) the Company and each of the Subsidiaries are
duly qualified as foreign corporations and are in good standing in
each other jurisdiction in which they own or lease property or conduct
their business and in each other jurisdiction in which the failure,
individually or in the aggregate, to be so qualified or licensed could
have a material adverse effect on the properties, assets, operations,
business or condition (financial or otherwise) of the Company and the
Subsidiaries taken as a whole; and the Company and the Subsidiaries
are in compliance in all material respects with the laws, orders,
rules, regulations and directives issued or administered by such
jurisdictions;
(h) neither the Company nor any of the
Subsidiaries is in breach of, or in default under (nor has any event
occurred which with notice, lapse of time or both would constitute a
breach of, or default under), its charter or bylaws, or in the
performance or observance of any obligation, agreement, covenant or
condition contained in any license, indenture, lease, mortgage, deed
of trust, bank loan, credit agreement, material supply or vendor
agreement or other agreement or instrument to which the Company or any
of the Subsidiaries is a party or by which any of them is bound, the
effect of which could have a material adverse effect on the
properties, assets, operations,
5
<PAGE> 7
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with, or result in any breach of
or constitute a default under (nor constitute any event which with
notice, lapse of time or both would constitute a breach of, or default
under), any provision of the charter or bylaws of the Company or any
of the Subsidiaries, any provision of any partnership agreement, any
provision of any license, indenture, lease, mortgage, deed of trust,
bank loan, credit agreement, material supply or vendor agreement or
other agreement or instrument to which the Company or any of the
Subsidiaries is a party of by which any of them or any of their
properties may be bound or affected, or under any federal, state,
local or foreign law, regulation or rule or any decree, judgment or
order applicable to the Company, which conflict, breach or default
would, individually or in the aggregate, have a material adverse
effect on the properties, assets, operations, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole;
(i) (A) this Agreement has been duly authorized,
executed and delivered by the Company and is a legal, valid and
binding agreement of the Company enforceable in accordance with its
terms, except as rights to indemnity and contribution hereunder may be
limited by federal or state securities laws and except as the
enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and general principles of equity; and (B) the Shares to be
issued and sold by the Company hereunder, when issued and delivered to
and paid for by the Underwriters as contemplated hereby, will be duly
authorized and validly issued and fully paid and nonassessable, free
and clear of any pledge, lien, encumbrance, security interest,
preemptive right or other claim.
(j) the capital stock of the Company, including
the Shares, conforms in all material respects to the description
thereof contained in the Registration Statement and Prospectus and the
certificates for the Shares are in due and proper form and the holders
of the Shares after making payment therefor will not be subject to
personal liability by reason of being such holders; and all offers and
sales of the Company's capital stock prior to the date hereof were at
all relevant times duly registered under the Act or exempt from the
registration requirements of the Act by reason of Sections 3(b), 4(2)
or 4(6) thereof, and were duly registered or the subject of an
available exemption from the registration requirements of the
applicable state securities or Blue Sky laws, or any actions under the
Act or any state securities or Blue Sky laws in respect of any such
offers or sales are effectively barred by the applicable statutes of
limitations or by effective waivers (except no representation is made
as to the registration or exemption requirements of the applicable
state securities or Blue Sky laws which were applicable to the
issuance of capital stock in the Company's initial public offering);
(k) all approvals, authorizations, consents or
orders of or filings with any national, state or local governmental or
regulatory commission, board, body, authority or agency required in
connection with the issuance and sale of the Shares as contemplated
hereby have been obtained, other than registration of the Shares under
the Act, clearance of the offering of the Shares with the National
Association of Securities
6
<PAGE> 8
Dealers, Inc. (the "NASD") and any necessary qualification under the
securities laws of the various jurisdictions in which the Shares are
being offered by the Underwriters;
(l) except as disclosed in the Registration
Statement and the Prospectus, no person has the right, contractual or
otherwise, to cause the Company to issue to it, or register pursuant
to the Act, any shares of capital stock of the Company in consequence
of the sale of the Shares to the Underwriters hereunder, nor does any
person have preemptive rights, rights of first refusal or other rights
to purchase any of the Shares;
(m) except as described in the Registration
Statement and the Prospectus, no person holds a right to require or
participate in a registration under the Act of Common Stock or any
other equity securities of the Company;
(n) Arthur Andersen LLP, whose reports on the
consolidated financial statements of the Company and the Subsidiaries
are included or incorporated by reference in the Registration
Statement and the Prospectus, are independent public accountants as
required by the Act and the applicable published rules and regulations
thereunder;
(o) the Company and each of the Subsidiaries have
all necessary licenses, authorizations, consents and approvals and
have made all necessary filings required under any federal, state,
local or foreign law, regulation or rule, and have obtained all
necessary authorizations, consents, licenses and approvals from other
persons, in order to conduct their business except where the absence
of any such license, authorization, consent, approval or filing would
not have a material adverse effect on the properties, assets,
operations, business or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole; neither the Company nor
any of the Subsidiaries is in violation of, or in default under, any
such license, authorization, consent or approval or any federal,
state, local or foreign law, regulation or rule or any decree, order
or judgment applicable to the Company or any of the Subsidiaries;
(p) there is no action, suit or proceeding
pending or threatened against the Company or any of the Subsidiaries
or any of their properties, at law or in equity, or before or by any
federal, state, local or foreign governmental or regulatory
commission, board, body, authority or agency which could result in a
judgment, decree or order having a material adverse effect on the
properties, assets, operations, business or condition (financial or
otherwise) of the Company and the Subsidiaries taken as a whole;
(q) the audited and unaudited financial
statements (including the related notes) and the financial schedules
included or incorporated by reference in the Registration Statement
and the Prospectus present fairly the consolidated financial condition
of the Company and the Subsidiaries as of the dates indicated and the
consolidated results of operations and cash flows of the Company and
the Subsidiaries for the periods specified, subject, in the case of
the Company's unaudited financial statements, to normal recurring year
end adjustments; such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
7
<PAGE> 9
consistent basis during the periods involved; and no other financial
statements or schedules are required by the Act or the applicable
published rules and regulations thereunder to be included in the
Registration Statement or the Prospectus;
(r) subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, and except as may be otherwise stated in the Registration
Statement or the Prospectus, there has not been (i) any material and
unfavorable change, financial or otherwise, in the business,
properties, prospects, results of operations or condition (financial
or otherwise), present or reasonably foreseeable, of the Company and
the Subsidiaries, taken as a whole, (ii) any transaction, which is
material to the Company and the Subsidiaries, taken as a whole,
contemplated or entered into by the Company or any of the Subsidiaries
or (iii) any obligation, contingent or otherwise, directly or
indirectly incurred by the Company which is material to the Company
and the Subsidiaries, taken as a whole;
(s) the Company has obtained the agreement of (i)
each of The David Anthony Heap 1995 Interest in Possession Settlement
(No. 2), David A. Heap, The David Heap Life Interest Settlement (No.
10), Harvey H. Achatz, Edgar D. Jannotta, Jr., Timothy M. Murray and
Peter P.J. Vikanis to the effect set forth in Exhibit I hereto and
(iii) each of [MARK C. LAYTON, CHRISTOPHER YATES, JAMES R. POWELL,
THOMAS J. MADDEN, STEVE GRAHAM, PETER D. WHARF AND SUZANNE GARRETT] to
the effect set forth in Exhibit II hereto;
(t) neither the Company nor any of the
Subsidiaries, nor any employee of the Company or any of the
Subsidiaries, has made any payment of funds of the Company or any of
the Subsidiaries prohibited by law, and no funds of the Company or any
of the Subsidiaries have been set aside to be used for any payment
prohibited by law;
(u) the Company and the Subsidiaries have filed
all federal and state income and franchise tax returns required to be
filed and have paid all taxes shown thereon as due, and there is no
material tax deficiency which has been or might be asserted against
the Company or any of the Subsidiaries; all material tax liabilities
are adequately provided for on the books of the Company and the
Subsidiaries;
(v) the Company has not incurred any liability
for any finder's fees or similar payments in connection with the
transactions herein contemplated;
(w) the business, operations and facilities of
the Company and the Subsidiaries have been and are being conducted in
compliance in all material respects with all material applicable laws,
ordinances, rules, regulations, licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and
health, or pollution, or protection of health or the environment, or
reclamation (including without limitation those relating to emissions,
discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes
into ambient air, surface water, groundwater or land, or relating to
the manufacture,
8
<PAGE> 10
processing, distribution, use, treatment, storage, disposal, transport
or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid,
gaseous or liquid in nature) or otherwise relating to remediating real
property in which the Company or any of the Subsidiaries has any
interest, whether owned or leased, of any governmental department,
commission, board, bureau, agency or instrumentality of the United
States, any state or political subdivision thereof or any foreign
jurisdiction and all applicable judicial or administrative agency or
regulatory decrees, awards, judgments and orders relating thereto; and
neither the Company nor any of the Subsidiaries has received any
notice from a governmental instrumentality or any third party alleging
any violation thereof or liability thereunder (including without
limitation liability for costs of investigating or remediating sites
containing hazardous substances or damages to natural resources);
(x) neither the Company nor any of the
Subsidiaries is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or is subject to
regulation under such Act;
(y) except as maybe disclosed in writing to the
Managing Underwriters, no labor dispute with the employees of the
Company or any of the Subsidiaries exists or is imminent, and the
Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, manufacturers or
contractors which might be expected to result in any material change
in the condition (financial or otherwise), or in the earnings, affairs
or business prospects of the Company and the Subsidiaries considered
as a whole;
(z) the Company owns or possesses, or can acquire
on reasonable terms, the patents, patent rights, licenses, inventions,
copyrights, know how (including trade secrets and other unpatented and
unpatentable proprietary or confidential information, systems or
procedures), trade marks, service marks and trade names presently
employed by it in connection with the business now operated by it, and
the Company has not received any notice of continuing infringement of
or continuing conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in any
material adverse change in the condition (financial or otherwise), or
in the earnings, affairs or business prospects of the Company;
(aa) the Shares to be issued and sold by the
Company under this Agreement have been listed for trading on the
Nasdaq National Market upon official notice of issuance (subject to
the additional listing of the shares of Common Stock, if any, being
registered pursuant to Rule 462(b)) and the Company is in compliance
with the maintenance and designation criteria applicable to Nasdaq
National Market issuers;
(bb) otherwise than as set forth in or
contemplated in the Prospectus or the documents incorporated by
reference therein, there are no transactions with affiliates, as
defined in Rule 405 of the rules and regulations of the Commission,
which are required to be disclosed under the Act and the applicable
rules and regulations thereunder; and
9
<PAGE> 11
(cc) the Company is not aware that any executive,
key employee or group of employees of the Company or any of the
Subsidiaries plans to terminate employment with the Company or any of
the Subsidiaries or that any such executive or key employee is subject
to any noncompete, nondisclosure, confidentiality, employment,
consulting or similar agreement with any third party in conflict with
the present or proposed business activities of the Company or any of
the Subsidiaries.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDER. The Selling Stockholder represents and warrants to each
Underwriter that:
(a) the Selling Stockholder is and at the time of
delivery of the Shares to be sold by the Selling Stockholder will be
the lawful owner of the number of Shares to be sold by the Selling
Stockholder pursuant to this Agreement and, at the time of delivery
thereof, will have valid and marketable title to such Shares, and upon
delivery of and payment for such Shares the Underwriters will acquire
valid and marketable title to such Shares free and clear of any claim,
lien, encumbrance, security interest, community property right,
restriction on transfer or other defect in title (other than those
imposed by the Act and the securities laws of certain jurisdictions),
assuming each of the Underwriters has purchased the Shares purchased
by it in good faith and without notice of any adverse claim;
(b) the Selling Stockholder has and at the time
of delivery of such Shares will have full legal right, power and
capacity, and any approval required by law to sell, assign, transfer
and deliver such Shares in the manner provided in this Agreement;
(c) this Agreement and the Selling Stockholder's
Custody Agreement and Power of Attorney (the "Custody Agreement and
Power of Attorney"), dated as of __________, 1998, by and among the
Selling Stockholder, Morris Bienenfeld, Esq., as the Attorney-in-Fact
for and on behalf of the Selling Stockholder (the "Attorney-in-Fact")
and Wolff & Samson, P.A., as the Custodian, have been duly executed
and delivered by the Selling Stockholder and are legal, valid and
binding agreements of the Selling Stockholder in accordance with their
terms, except as rights to indemnity and contribution hereunder may be
limited by federal or state securities laws and except as the
enforceability hereof and thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and general principles of equity;
(d) the Selling Stockholder has duly and
irrevocably authorized the Attorney-in-Fact, on behalf of the Selling
Stockholder, to execute and deliver this Agreement and any other
document necessary or desirable in connection with the transactions
contemplated hereby and to deliver the Shares to be sold by the
Selling Stockholder and receive payment therefor pursuant hereto;
(e) the sale of the Shares by the Selling
Stockholder pursuant hereto is not prompted by any material adverse
information concerning the Company; and all
10
<PAGE> 12
information furnished in writing by or on behalf of the Selling
Stockholder specifically for use in the Registration Statement and
Prospectus, and any supplement or amendment thereto, is and will be
when the Registration Statement became effective and at all times
subsequent thereto up to the time of purchase and the additional time
of purchase, true and correct and complete and at all such times did
not and will not contain any untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
(f) the consummation of the transactions
contemplated hereby and by the Custody Agreement and Power of Attorney
and the fulfillment of the terms hereof and thereof will not
constitute a breach or violation of or default under any trust,
indenture, agreement or other instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound;
and
(g) the Selling Stockholder is not aware, without
having made any independent investigation except as otherwise may be
required under the circumstances, that any of the representations and
warranties set forth in Section 3 of this Agreement is untrue or
inaccurate in any material respect.
5. CERTAIN COVENANTS OF THE COMPANY. The Company hereby
agrees:
(a) to furnish such information as may be
required and otherwise to cooperate in qualifying the Shares for
offering and sale under the securities or Blue Sky laws of such states
as you may designate and to maintain such qualifications in effect so
long as required for the distribution of the Shares; provided, that,
the Company shall not be required to qualify as a foreign corporation
or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale
of the Shares); and promptly to advise you of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;
(b) to make available to you in New York City, as
soon as practicable after the Registration Statement becomes
effective, and thereafter from time to time to furnish to the
Underwriters, at the Company's expense, as many copies of the
Prospectus (or of the Prospectus as amended or supplemented if the
Company shall have made any amendment or supplement thereto after the
effective date of the Registration Statement) as the Underwriters may
request for the purposes contemplated by the Act;
(c) to advise you promptly and (if requested by
you) to confirm such advice in writing (i) when the Registration
Statement has become effective and when any post-effective amendment
thereto becomes effective and (ii) if Rule 430A under the Act is used,
when the Prospectus is filed with the Commission pursuant to Rule
424(b) under the Act, if required under the Act (which the Company
agrees to file in a timely manner under such Rule);
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<PAGE> 13
(d) to advise you promptly, confirming such
advice in writing, of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information with respect thereto, or of notice of
institution of proceedings for, or the entry of, a stop order
suspending the effectiveness of the Registration Statement and, if the
Commission should enter a stop order suspending the effectiveness of
the Registration Statement, to make every reasonable effort to obtain
the lifting or removal of such order as soon as possible; to advise
you promptly of any proposal to amend or supplement the Registration
Statement or the Prospectus and to file no such amendment or
supplement to which you shall object in writing;
(e) to furnish to you and, upon request, to each
of the other Underwriters for a period of five years from the date of
this Agreement (i) copies of all reports or other communications which
the Company shall send to its stockholders or from time to time shall
publish or publicly disseminate, (ii) copies of all annual, quarterly
and current reports filed with the Commission on Forms 10-K, 10-Q and
8-K, or such other similar form as may be designated by the Commission
and (iii) so long as you continue to make a market in the Common Stock
and you agree to treat as confidential such information which has not
been, or will not be, publicly disclosed, such other information
concerning the business and financial condition of the Company as you
reasonably may request;
(f) to advise the Underwriters promptly of the
happening of any event known to the Company within the time during
which a prospectus relating to the Shares is required to be delivered
under the Act which, in the judgment of the Company, would require the
making of any change in the Prospectus then being used so that the
Prospectus would not include an untrue statement of a material fact or
omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they are made,
not misleading and, during such time, promptly to prepare and furnish,
at the Company's expense, to the Underwriters such amendments or
supplements to such Prospectus as may be necessary to reflect any such
change in such quantities as requested by the Underwriters, and to
furnish you a copy of such proposed amendment or supplement before
filing any such amendment or supplement with the Commission;
(g) to make generally available to its security
holders, and to deliver to you, an earnings statement of the Company
(which need not be audited and which will satisfy the provisions of
Section 11(a) of the Act including, at the option of the Company, Rule
158 of the Act) covering a period of 12 months beginning after the
effective date of the Registration Statement but ending not later than
15 months after the date of the Registration Statement, as soon as is
reasonably practicable after the termination of such 12-month period;
(h) to furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income, stockholders'
equity and changes in financial position of the Company certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the
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<PAGE> 14
effective date of the Registration Statement), summary financial
information of the Company for such quarter in reasonable detail;
(i) to furnish to you three signed copies of the
Registration Statement, as initially filed with the Commission, and of
all amendments thereto (including all exhibits thereto and documents
incorporated by reference therein) and sufficient conformed copies of
the foregoing (other than exhibits) for distribution of a copy to each
of the other Underwriters;
(j) to furnish to you as early as practicable
prior to the time of purchase and the additional time of purchase, as
the case may be, but not later than two business days prior thereto, a
copy of the latest available unaudited interim consolidated financial
statements, if any, of the Company and the Subsidiaries that have been
read by the Company's independent certified public accountants as
stated in their letter to be furnished pursuant to Section 8(b);
(k) to furnish to you, contemporaneous with
filing with the Commission, subsequent to the effective date of the
Registration Statement and during the period referred to in Section
5(e), a copy of any document filed by the Company pursuant to Section
12, 13, 14 or 15(d) of the Exchange Act;
(l) to apply the net proceeds from the sale of
the Shares sold by the Company in the manner set forth under the
caption "Use of Proceeds" in the Registration Statement and the
Prospectus; and
(m) to refrain from investing the proceeds from
the sale of the Shares sold by the Company in a manner to cause the
Company or any of the Subsidiaries to become an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
6. CERTAIN OTHER COVENANTS OF THE COMPANY AND OF THE
SELLING STOCKHOLDERS. The Company further agrees, and the Selling Stockholders
agrees, with each Underwriter as follows:
(a) (i) as to the Company, not to offer, sell,
contract to sell, grant any option to sell, transfer or otherwise
dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common
Stock with respect to any shares of Common Stock or permit the
registration under the Act of any shares of Common Stock, except for
the registration of the Shares and the sales to you pursuant to this
Agreement and except that the Company may issue Common Stock and stock
options pursuant to the Company's existing stock option plans, as
described in the Registration Statement, for a period commencing on
the date hereof and continuing for 90 days after the date of the
Prospectus, without the prior written consent of SBC Warburg Dillon
Read Inc., and (ii) as to the Selling Stockholder, to the effect set
forth in Exhibit I hereto;
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<PAGE> 15
(b) in such proportion (aggregating 100%) as they
shall agree between themselves, to pay all out-of-pocket expenses,
fees and taxes incurred by them (other than any transfer taxes and
fees and disbursements of your counsel except as set forth under
Section 7 or clause (iv) of this Section 6(b) and any advertising
expenses incurred by you in connection with your offering of the
Shares) in connection with (i) the preparation and filing of the
Registration Statement, each Preliminary Prospectus, the Prospectus
and any amendment or supplement thereto, and the printing and
furnishing of copies of each thereof to you and to dealers (including
costs of mailing and shipment), (ii) the sale and delivery of the
Shares by the Selling Stockholder, (iii) the printing of this
Agreement, any Agreement Among Underwriters and any dealer agreements,
and the printing and furnishing of copies of each thereof to you and
to dealers (including costs of mailing and shipment), (iv) the
qualification of the Shares for offering and sale under state laws as
aforesaid (including legal fees and filing fees and other
disbursements of your counsel in connection therewith) and the
printing and furnishing of copies of the Blue Sky Surveys to you and
to dealers, (v) the filing for review of the public offering of the
Shares by the NASD and (vi) the performance of the Company's and the
Selling Stockholder's other obligations hereunder; and
(c) the Shares represented by the certificates
held in custody pursuant to the Custody Agreement and Power of
Attorney are for the benefit of and coupled with and subject to the
interests of the Underwriters and the Selling Stockholder hereunder,
and that the arrangement for such custody and the appointment of the
Attorney-in-Fact is irrevocable; the obligations of the Selling
Stockholder shall not be terminated by operation of law, whether by
the death or incapacity of the Selling Stockholder, or any other
event; of the Selling Stockholder should die or become incapacitated
or any other event occur before the delivery of the Shares hereunder,
certificates for the Shares to be sold by the Selling Stockholder
shall be delivered on behalf of the Selling Stockholder in accordance
with the terms and conditions of this Agreement and the Custody
Agreement and Power of Attorney, and action taken by the
Attorney-in-Fact under the Custody Agreement and Power of Attorney
shall be as valid as if such death, incapacity or other event had not
occurred, whether or not the Custodian or the Attorney-in-Fact shall
have notice of such liquidation, dissolution, death, incapacity or
other event.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the
Shares are not delivered for any reason other than the termination of this
Agreement pursuant to the second paragraph of Section 9 or the default by one
or more of the Underwriters in its or their respective obligations hereunder,
the Company and the Selling Stockholder, in such proportion (aggregating 100%)
as they shall agree between themselves, shall reimburse the Underwriters for
all of their reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of their counsel.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters hereunder are subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholder on the date hereof and at the time of purchase (and the several
obligations of the Underwriters at the additional time of purchase are subject
to the accuracy of the representations and warranties on the part of the
Company and the Selling
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<PAGE> 16
Stockholder on the date hereof and at the time of purchase (unless previously
waived) and at the additional time of purchase (any representation and warranty
made as of a specified date shall be true and correct as of the additional time
of purchase), as the case may be), the performance by each of the Company and
the Selling Stockholder of its and his obligations hereunder and to the
following conditions:
(a) the Company shall furnish to you at the time of
purchase and at the additional time of purchase, as the case may be,
an opinion of Wolff & Samson, P.A., counsel for the Company and the
Selling Stockholder, addressed to the Underwriters, and dated the time
of purchase or the additional time of purchase, as the case may be,
with reproduced copies for each of the other Underwriters and in form
reasonably satisfactory to Powell, Goldstein, Frazer & Murphy LLP,
counsel for the Underwriters, stating that:
(i) the Company has been duly
organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware, with full
corporate power and authority to own its properties and
conduct its business as described in the Registration
Statement and the Prospectus and to execute and deliver this
Agreement and to issue, sell and deliver the Shares to be
issued and sold by it as herein contemplated;
(ii) each of the Subsidiaries has
been duly organized and is validly existing as a corporation
in good standing under the laws of the state of its
jurisdiction of incorporation, with full corporate power and
authority to own its properties and to conduct its business as
described in the Registration Statement and the Prospectus; to
the best of such counsel's knowledge, the Company does not own
any interest in any other corporation, joint venture or
partnership;
(iii) all of the issued and
outstanding shares of each of the Subsidiaries are owned
directly or indirectly by the Company, except for directors'
qualifying shares; all of such shares have been duly
authorized and validly issued and are fully paid and
nonassessable and except as described in the Prospectus are so
owned free and clear of any pledge, lien, encumbrance,
security interest, preemptive right or other claim; there are
no outstanding rights, options or other agreements of any kind
with respect to the capital stock of the Subsidiaries;
(iv) the Company and each of the
Subsidiaries are duly qualified or licensed to do business as
a foreign corporation by each jurisdiction in which they
conduct their business or own property and in which the
failure, individually or in the aggregate, to be so licensed
or qualified could have a material adverse effect on the
properties, assets, operations, business or condition
(financial or otherwise) of the Company and the Subsidiaries
taken as a whole;
(v) (A) this Agreement has been
duly authorized, executed and delivered by the Company and is
a legal, valid and binding
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<PAGE> 17
agreement of the Company enforceable in accordance with its
terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws
and except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally and general
principles of equity; and (B) the Shares to be issued and sold
by the Company hereunder, when issued and delivered to and
paid for by the Underwriters as contemplated hereby, will be
duly authorized and validly issued and fully paid and
nonassessable, free and clear of any pledge, lien,
encumbrance, security interest, preemptive right or other
claim.
(vi) (A) the Company has an
authorized share capitalization as set forth under the heading
"Capitalization" in the Registration Statement and the
Prospectus; and (B) the outstanding shares of capital stock of
the Company have been duly authorized and validly issued and
are fully paid, nonassessable and free of statutory and
contractual preemptive rights;
(vii) (A) the capital stock of the
Company, including the Shares, conforms in all material
respects to the description thereof contained in the
Registration Statement and the Prospectus; and (B) the
certificates for the Shares are in due and proper form and the
holders of the Shares will not be subject to personal
liability by reason of being such holders;
(viii) the Registration Statement and
the Prospectus (except as to the financial statements and
schedules contained therein as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Act;
(ix) the Registration Statement has
become effective under the Act and, to the best of such
counsel's knowledge after due inquiry, no stop order
proceedings with respect thereto are pending or threatened
under the Act;
(x) no approval, authorization,
consent or order of or filing with any national, state or
local governmental or regulatory commission, board, body,
authority or agency is required in connection with the sale of
the Shares as contemplated hereby other than such as has been
obtained or made (specifying the same) and registration of the
Shares under the Act (except such counsel need express no
opinion as to any necessary qualification under the securities
or Blue Sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters);
(xi) the execution, delivery and
performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated
hereby do not and will not conflict with, or result in any
breach of, or constitute a default under (nor constitute any
event which with notice, lapse of time or both would
constitute a breach of or default under), any
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<PAGE> 18
provision of the charter or bylaws of the Company or any of
the Subsidiaries or any provision of any partnership agreement
or under any provision of any license, indenture, lease,
mortgage, deed of trust, bank loan, credit agreement, material
supply or vendor agreement or other material agreement or
instrument known to such counsel to which the Company or any
of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries or their properties are bound or affected,
or under any law, regulation or rule or any decree, judgment
or order applicable to the Company or any of the Subsidiaries,
which conflict, breach or default would, individually or in
the aggregate, have a material adverse effect on the
properties, assets, operations, business or condition
(financial or otherwise) of the Company and the Subsidiaries,
taken as a whole;
(xii) to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of
the Subsidiaries is in breach of, or in default under (nor has
any event occurred which with notice, lapse of time or both
would constitute a breach of, or default under), any license,
indenture, lease, mortgage, deed of trust, bank loan, credit
agreement, material supply or vendor agreement or any other
agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the
Subsidiaries or their properties are bound or affected or
under any law, regulation or rule or any decree, judgment or
order applicable to the Company or any of the Subsidiaries,
which breach or default would, individually or in the
aggregate, have a material adverse effect on the properties,
assets, operations, business or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a
whole;
(xiii) to the best of such counsel's
knowledge after due inquiry, there are no contracts, licenses,
agreements, leases or documents of a character which are
required to be filed as exhibits to the Registration Statement
or to be summarized or described in the Prospectus which have
not been so filed, summarized or described;
(xiv) to the best of such counsel's
knowledge after due inquiry, there are no actions, suits or
proceedings pending or threatened against the Company or any
of the Subsidiaries or any of their properties, at law or in
equity or before or by any commission, board, body, authority
or agency which are required to be described in the Prospectus
but are not so described;
(xv) to the best of such counsel's
knowledge after due inquiry, each person who has the right,
contractual or otherwise, to request the Company to register
pursuant to the Act shares of capital stock of the Company
upon the sale of the Shares to the Underwriters hereunder or
who has preemptive rights, rights of first refusal or other
rights to purchase any of the Shares, has exercised or waived
their right to include any such shares in this offering, or
was excluded from any preemptive rights, rights of first
refusal or other purchase rights, in accordance with the terms
thereof;
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<PAGE> 19
(xvi) the documents incorporated by
reference in the Registration Statement and Prospectus, when
they were filed (or, if an amendment with respect to any such
document was filed, when such amendment was filed), complied
as to form in all material respects with the Exchange Act
(except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by
reference therein, as to which such counsel need express no
opinion);
(xvii) neither the Company nor any of
the Subsidiaries is an "investment company" or a person
"controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended;
(xviii) the sales of securities by the
Company described in Item 15 of the Registration Statement
were exempt from the registration requirements of the Act;
(xix) this Agreement and the Custody
Agreement and Power of Attorney have been duly executed and
delivered by the Selling Stockholder; the Custody Agreement
and Power of Attorney is a legal, valid and binding agreement
of the Selling Stockholder enforceable in accordance with its
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally and general
principles of equity;
(xx) the Selling Stockholder has
full legal right and power, and has obtained any authorization
or approval required by law (other than those imposed by the
Act and the securities or Blue Sky laws of certain
jurisdictions), to sell, assign, transfer and deliver the
Shares to be sold by the Selling Stockholder in the manner
provided in this Agreement;
(xxi) delivery of certificates for
the Shares to be sold by the Selling Stockholder pursuant
hereto will pass title thereto to the Underwriters severally,
free and clear of any claim, lien, encumbrance, security
interest, community property right, restriction on transfer or
other defect in title assuming that the several Underwriters
are good faith purchasers and without notice of any adverse
claim;
(xxii) to the best of such counsel's
knowledge after due inquiry, the consummation of the
transactions contemplated hereby and by the Custody Agreement
and Power of Attorney and the fulfillment of the terms hereof
and thereof will not constitute a breach or violation of or
default under any trust, indenture, agreement or other
instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound;
(xxiii) the Attorney-in-Fact has been
duly authorized by the Selling Stockholder to execute and
deliver, on behalf of the Selling
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<PAGE> 20
Stockholder, this Agreement and any other document necessary
or desirable in connection with the transactions contemplated
hereby and to deliver the Shares to be sold by the Selling
Stockholder and receive payment therefor pursuant hereto;
(xxiv) no approval, authorization,
consent or order of or filing with any federal, state or local
governmental or regulatory commission, board, body, authority
or agency is required in connection with the sale of the
Shares to be sold by the Selling Stockholder as contemplated
hereby other than registration of such Shares under the Act
(except such counsel need express no opinion as to any
necessary qualification under the state securities or Blue Sky
laws of the various jurisdictions in which the Shares are
being offered by the Underwriters); and
(xxv) to the best of such counsel's
knowledge, the statements in the Prospectus under the caption
"Principal and Selling Stockholders" insofar as such
statements constitute a summary of the matters referred to
therein present fairly the information called for with respect
to such matters.
In addition, such counsel shall state that such counsel have
participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants of
the Company, the Selling Stockholder and representatives of the
Underwriters at which the contents of the Registration Statement and
the Prospectus were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (except as and to the extent
stated in clause (xv) of this Section 8(a), on the basis of the
foregoing nothing has come to the attention of such counsel that
causes them to believe that the Registration Statement or any
amendment thereto at the time such Registration Statement or amendment
became effective and at all times up to and including the time of
purchase or additional time of purchase, as the case may be, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus or any supplement
thereto at the date of such Prospectus or such supplement, and at all
times up to and including the time of purchase or additional time of
purchase, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no comment with
respect to the financial statements and schedules included in the
Registration Statement or the Prospectus).
In rendering such opinion, counsel may rely, to the extent
they deem such reliance proper, upon an opinion or opinions, each
dated the time of purchase or the additional time of purchase, as the
case may be, of other counsel with respect to Daisytek (Canada) Inc.,
Working Capital Canada, Inc., Daisytek Latin America, Inc., Daisytek
De Mexico S.A. de C.V. Priority Fulfillment Services of Canada, Inc.,
Daisytek De Mexico Services
19
<PAGE> 21
S.A. de C.V. and Daisytek Australia Pty. Ltd.; provided, that (i) each
such local counsel is acceptable to you and your counsel, (ii) counsel
shall state in their opinion that they have no reason to believe that
they and you are not justified in relying thereon and (iii) such
reliance is expressly authorized by each opinion so relied upon and a
copy of each such opinion is delivered to you and is in form and
substance satisfactory to you and your counsel.
(b) You shall have received from Arthur Andersen LLP
letters dated, respectively, the date of this Agreement and the time
of purchase and additional time of purchase, as the case may be, and
addressed to the Underwriters (with reproduced copies of each of the
Underwriters) in the forms heretofore approved by you.
(c) You shall have received at the time of purchase and
at the additional time of purchase, as the case may be, the favorable
opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel for the
Underwriters, dated the time of purchase or the additional time of
purchase, as the case may be, as to the matters referred to in clauses
(v), (vii) (as to subclause (A) only) and (viii) of Section 8(a).
In addition, such counsel shall state that such counsel have
participated in conferences with officers and other representatives of
the Company, counsel for the Company and the Selling Stockholder,
representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the
Prospectus (except as to matters referred to under clause (vii) (as to
subclause (A) only) of Section 8(a)), on the basis of the foregoing,
no facts have come to the attention of such counsel that cause them to
believe that the Registration Statement or any amendment thereto at
the time such Registration Statement or amendment became effective
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or the Prospectus as of its date or
any supplement thereto as of its date and at the time of purchase or
the additional time of purchase, as the case may be, contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no
comment with respect to the financial statements and schedules and
other financial and statistical data included in the Registration
Statement or the Prospectus).
(d) No amendment or supplement to the Registration
Statement or the Prospectus to which you object in writing shall be
filed prior to the time the Registration Statement becomes effective .
(e) The Registration Statement shall become effective at
or before 5:00 P.M., New York City time, on the date of this Agreement
and, if Rule 430A under the Act is
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<PAGE> 22
applicable, the Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) under the Act at or before 5:00 P.M., New York
City time, on the second full business day after the date of this
Agreement; provided, however, that the Company, the Selling
Stockholder and you and any group of Underwriters, including you, who
have agreed hereunder to purchase in the aggregate at least 50% of the
Firm Shares from time to time may agree in writing or by telephone,
confirmed in writing, on a later date.
(f) Prior to the time of purchase or the additional time
of purchase, as the case may be: (i) no stop order with respect to the
effectiveness of the Registration Statement shall have been issued
under the Act or proceedings initiated under Section 8(d) or 8(e) of
the Act; (ii) the Registration Statement and all amendments thereto,
or modifications thereof, if any, shall not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and (iii) the Prospectus and all amendments or supplements
thereto, or modifications thereof, if any, shall not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(g) Between the time of execution of this Agreement and
the time of purchase or the additional time of purchase, as the case
may be, (i) no material and unfavorable change, financial or otherwise
(other than as specifically referred to in the Registration Statement
and the Prospectus), in the business, condition or prospects of the
Company and the Subsidiaries, taken as a whole, shall occur or become
known, (ii) no transaction which is material and unfavorable to the
Company and the Subsidiaries, taken as a whole, shall have been
entered into by the Company or any of the Subsidiaries and (iii) there
has not been any obligation, contingent or otherwise, directly or
indirectly incurred by the Company or any of the Subsidiaries which is
material to the Company and the Subsidiaries, taken as a whole.
(h) The Company, at the time of purchase or additional
time of purchase, as the case may be, shall have delivered to you a
certificate of the President, Chief Executive Officer and Chief
Operating Officer and the Vice President-Finance, Chief Financial
Officer, Chief Accounting Officer and Treasurer of the Company to the
effect that the representations and warranties of the Company as set
forth in this Agreement and the conditions set forth in Section 8(f)
and Section 8(g) have been met and that they are true and correct as
of each such date.
(i) You shall have received a signed letter, dated the
date of this Agreement, from (i) The David Anthony Heap 1995 Interest
in Possession Settlement (No. 2) David A. Heap, The David Heap Life
Interest Settlement (No. 10), Harvey H. Achatz, Edgar D. Jannotta,
Jr., Timothy M. Murray and Peter P.J. Vikanis to the effect set forth
in Exhibit I hereto and (ii) each of [MARK C. LAYTON, CHRISTOPHER
YATES, JAMES R. POWELL, THOMAS J. MADDEN, STEVE GRAHAM, PETER D. WHARF
AND SUZANNE GARRETT] to the effect set forth in Exhibit II hereto.
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(j) The Company and the Selling Stockholder shall have
furnished to you such other documents and certificates as to the
accuracy and completeness of any statement in the Registration
Statement or the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you reasonably may
request.
(k) The Company and the Selling Stockholder shall have
performed such of their respective obligations under this Agreement as
are to be performed by the terms hereof at or before the time of
purchase and at or before the additional time of purchase, as the case
may be.
(l) The Shares to be issued and sold by the Company
hereby shall have been listed for trading on the Nasdaq National
Market upon official notice of issuance.
(m) The Attorney-in-Fact, at the time of purchase or
additional time of purchase, as the case may be, shall have delivered
to you a certificate to the effect that the Attorney-in-Fact is not
aware that any of the representations and warranties of the Selling
Stockholder as set forth in this Agreement are not true and correct as
of such date.
9. EFFECTIVE DATE OF AGREEMENT; TERMINATION. This
Agreement shall become effective (i) if Rule 430A under the Act is not
applicable, when you shall have received notification of the effectiveness of
the Registration Statement or (ii) if Rule 430A under the Act is applicable,
when the parties hereto have executed and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be
subject to termination in the absolute discretion of you or any group of
Underwriters (which may include you) which has agreed to purchase in the
aggregate at least 50% of the Firm Shares if, at any time prior to the time of
purchase or, with respect to the purchase of any Additional Shares, the
additional time of purchase, as the case may be, trading in securities on the
New York Stock Exchange shall have been suspended or minimum prices shall have
been established on the New York Stock Exchange or if a banking moratorium
shall have been declared either by the United States or New York State
authorities, or if the United States shall have declared war in accordance with
its constitutional processes or there shall have occurred any material outbreak
or escalation of hostilities or other national or international calamity or
crisis of such magnitude in its effect on the financial markets of the United
States as, in your judgment or in the judgment of such group of Underwriters,
to make it impracticable to market the Shares.
If you or any group of Underwriters elect to terminate this
Agreement as provided in this Section 9, the Company, the Selling Stockholder
and each other Underwriter shall be notified promptly by letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated
by this Agreement, is not carried out by the Underwriters for any reason
permitted under this Agreement or if such sale is not carried out because the
Company or the Selling Stockholder, as the case may be, shall be unable to
comply with any of the terms of this Agreement, the Company or the Selling
Stockholder, as the case may be, shall not be under any obligation or liability
under this Agreement (except to the extent provided in Sections 6(b), 7 and
11), and the Underwriters shall
22
<PAGE> 24
be under no obligation or liability to the Company and the Selling Stockholder
under this Agreement (except to the extent provided in Section 11) or to one
another hereunder.
10. INCREASE IN UNDERWRITERS' COMMITMENTS. If any
Underwriter shall default in its obligation to take up and pay for the Firm
Shares to be purchased by it hereunder and if the number of Firm Shares which
all Underwriters so defaulting shall have agreed but failed to take up and pay
for does not exceed 10% of the total number of Firm Shares, the non-defaulting
Underwriters shall take up and pay for (in addition to the aggregate principal
amount of Firm Shares they are obligated to purchase pursuant to Section 1) the
number of Firm Shares agreed to be purchased by all such defaulting
Underwriters as hereinafter provided. Such Shares shall be taken up and paid
for by such non-defaulting Underwriter or Underwriters in such amount or
amounts as you may designate with the consent of each Underwriter so designated
or, in the event no such designation is made, such Shares shall be taken up and
paid for by all non-defaulting Underwriters pro rata in proportion to the
aggregate number of Firm Shares set opposite the names of such non-defaulting
Underwriters in Schedule A.
Without relieving any defaulting Underwriter from its
obligations hereunder, the Company and the Selling Stockholder agree with the
non-defaulting Underwriters that they will not sell any Firm Shares hereunder
unless all of the Firm Shares are purchased by the Underwriters (or by
substituted underwriters selected by you with the approval of the Company or
selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the
Underwriters or by the Company for a defaulting Underwriter or Underwriters in
accordance with the foregoing provision, the Company or you shall have the
right to postpone the time of purchase for a period not exceeding five business
days in order that any necessary changes in the Registration Statement and the
Prospectus and other documents may be affected.
The term Underwriter as used in this Agreement shall refer to
and include any Underwriter substituted under this Section 10 with like effect
as if such substituted Underwriter had originally been named in Schedule A.
11. INDEMNITY BY THE COMPANY, THE SELLING STOCKHOLDER AND
THE UNDERWRITERS. (a) The Company and the Selling Stockholder, jointly and
severally, agree to indemnify, defend and hold harmless each Underwriter and
any person who controls any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any loss, expense,
liability or claim (including the reasonable cost of investigation) which,
jointly or severally, any such Underwriter or any such controlling person may
incur under the Act, the Exchange Act or otherwise insofar as such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement (or in the Registration Statement as amended by any post-effective
amendment thereof by the Company) or in a Prospectus (the term Prospectus for
the purpose of this Section 11 being deemed to include any Preliminary
Prospectus, the Prospectus and the Prospectus as amended or supplemented by the
Company), or arises out of or is based upon any omission or alleged omission to
state a material fact required to be stated in either such Registration
Statement or such Prospectus or necessary to make the
23
<PAGE> 25
statements made therein not misleading, except insofar as such loss, expense,
liability or claim arises out of or is based upon any untrue statement or
alleged untrue statement of a material fact contained in and in conformity with
information furnished in writing by any Underwriter through you to the Company
expressly for use with reference to such Underwriter in such Registration
Statement or such Prospectus or arises out of or is based upon any omission or
alleged omission to state a material fact in connection with such information
required to be stated in either such Registration Statement or such Prospectus
or necessary to make such information not misleading; provided, however, that
each Underwriter or such controlling person shall seek recovery under this
Section 11(a) and Section 11(c) only as follows: (i) such Underwriter or
controlling person shall first use reasonable efforts to recover any such loss,
expense, liability or claim from the Company and (ii) such Underwriter or
controlling person shall then be limited to recovering any amounts not
recovered in respect of such loss, expense, liability or claim under the
immediately preceding clause (i) from the Selling Stockholder in an amount up
to the net proceeds received by the Selling Stockholder (before deducting
expenses) from the sale of the Shares by the Selling Stockholder. The Company
and the Selling Stockholder may agree, between themselves and without limiting
the rights of the Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be responsible.
If any action is brought against an Underwriter or controlling
person in respect of which indemnity may be sought against the Company or the
Selling Stockholder pursuant to the foregoing paragraph, such Underwriter shall
promptly notify the Company and the Selling Stockholder in writing of the
institution of such action and the Company and the Selling Stockholder shall
assume the defense of such action, including the employment of counsel and
payment of expenses. Such Underwriter or such controlling person shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or of such
controlling person unless the employment of such counsel shall have been
authorized in writing by the Company and the Selling Stockholder in connection
with the defense of such action or the Company or the Selling Stockholder shall
not have employed counsel to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to
those available to the Company or the Selling Stockholder (in which case the
Company and the Selling Stockholder shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any
of which events such fees and expenses shall be borne by the Company and the
Selling Stockholder and paid as incurred (it being understood, however, that
the Company and the Selling Stockholder shall not be liable for the expenses of
more than one separate counsel in any one action or series of related actions
in the same jurisdiction representing the indemnified parties who are parties
to such action). Anything in this paragraph to the contrary notwithstanding,
neither the Company nor the Selling Stockholder shall be liable for any
settlement of any such claim or action effected without their written consent.
(b) Each Underwriter severally agrees to indemnify,
defend and hold harmless the Company, its directors and officers, the Selling
Stockholder and any person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act from and against any
loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, the Company, the Selling
Stockholder or any such person may incur
24
<PAGE> 26
under the Act or otherwise, insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in and in conformity with information furnished in
writing by or on behalf of such Underwriter (such information so furnished in
writing shall be limited to the Underwriting section of the Preliminary
Prospectus and the Prospectus) through you to the Company expressly for use
with reference to such Underwriter in the Registration Statement (or in the
Registration Statement as amended by any post- effective amendment thereof by
the Company) or in a Prospectus, or arises out of or is based upon any omission
or alleged omission to state a material fact in connection with such
information required to be stated either in such Registration Statement or
Prospectus or necessary to make such information not misleading.
If any action is brought against the Company, the Selling
Stockholder or any such person in respect of which indemnity may be sought
against any Underwriter pursuant to the foregoing paragraph, the Company, the
Selling Stockholder or such person promptly shall notify such Underwriter and
you in writing of the institution of such action and such Underwriter shall
assume the defense of such action, including the employment of counsel and
payment of expenses. The Company, the Selling Stockholder or such person shall
have the right to employ its own counsel in any case, but the fees and expenses
of such counsel shall be at the expense of the Company, the Selling Stockholder
or such person unless the employment of such counsel shall have been authorized
in writing by such Underwriter in connection with the defense of such action or
such Underwriter shall not have employed counsel to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are
different from or additional to those available to such Underwriter (in which
case such Underwriter shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by such Underwriter and paid as incurred
(it being understood, however, that such Underwriter shall not be liable for
the expenses of more than one separate counsel in any one action or series of
related actions in the same jurisdiction representing the indemnified parties
who are parties to such action). Anything in this paragraph to the contrary
notwithstanding, no Underwriter shall be liable for any settlement of any such
claim or action effected without the written consent of such Underwriter.
(c) If the indemnification provided for in this Section
11 is unavailable to or insufficient to hold harmless an indemnified party
under Section 11(a) or Section 11(b) in respect of any loss, expense, liability
or claim referred to therein, then each applicable indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, expense, liability
or claim (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholder on the one hand
and the Underwriters on the other hand from the offering of the Shares or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholder on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions which resulted in
such losses, expenses, liabilities or claims, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Stockholder on the one hand and the Underwriters on the other hand
shall be deemed to be in the same
25
<PAGE> 27
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the
Company and the Selling Stockholder bears to the total underwriting discounts
and commissions received by the Underwriters. The relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things, whether the
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company, by the Selling
Stockholder or by the Underwriters (such information so furnished shall be
limited to the Underwriting section of the Preliminary Prospectus and
Prospectus) and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, expenses, liabilities and
claims referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any claim or action.
(d) The Company, the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 11 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in Section 11(c). Notwithstanding the provisions of this Section
11, no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by such
Underwriter and distributed to the public were offered to the public exceeds
the amount of any damages which such Underwriter otherwise has been required to
pay by reason of such untrue statement or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 11 are several
in proportion to their respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained
in this Section 11 and the covenants, representations and warranties of the
Company and the Selling Stockholder contained in this Agreement shall remain in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter, or any person who controls any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf
of the Company, its directors and officers, the Selling Stockholder or any
person who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and shall survive any termination of this
Agreement or the issuance and delivery of the Shares. The Company, the Selling
Stockholder and each Underwriter agree promptly to notify the other of the
commencement of any litigation or proceeding against it and, in the case of the
Company, against any of the Company's officers and directors, in connection
with the issuance and sale of the Shares, or in connection with the
Registration Statement or the Prospectus.
12. NOTICES. Except as otherwise herein provided, all
statements, requests, notices and agreements shall be in writing or by telegram
and, if to the Underwriters, shall be sufficient in all respects if delivered
or sent to SBC Warburg Dillon Read Inc., 535 Madison Avenue, New York, New York
10022, Attention: Syndicate Department, if to the Company, shall be sufficient
in all respects if delivered or sent to the Company at the offices of the
26
<PAGE> 28
Company at 500 North Central Expressway, Plano, Texas 75074-6763, Attention:
Mark C. Layton, President, Chief Executive Officer and Chief Operating Officer
and if to the Selling Stockholder, shall be sufficient in all respects, if
delivered or sent to Morris Bienenfeld, Esq., as Attorney-in-Fact for the
Selling Stockholder, at Wolff & Samson, P.A., 5 Becker Farm Road, Roseland, New
Jersey 07068.
13. CONSTRUCTION. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. THE
SECTION HEADINGS IN THIS AGREEMENT HAVE BEEN INSERTED AS A MATTER OF
CONVENIENCE OF REFERENCE AND ARE NOT A PART OF THIS AGREEMENT.
14. PARTIES AT INTEREST. The Agreement herein set forth
has been and is made solely for the benefit of the Underwriters, the Company,
the Selling Stockholder and the controlling persons, directors and officers
referred to in Section 11, and the respective successors, assigns, executors
and administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from any of the Underwriters) shall
acquire or have any right under or by virtue of this Agreement.
15. COUNTERPARTS. This Agreement may be signed by the
parties in counterparts which together shall constitute one and the same
agreement among the parties.
16. MISCELLANEOUS. SBC Warburg Dillon Read Inc., an
indirect, wholly owned subsidiary of Swiss Bank Corporation, is not a bank and
is separate from any affiliated bank, including any U.S. branch or agency of
Swiss Bank Corporation. Because SBC Warburg Dillon Read Inc. is a separately
incorporated entity, it is solely responsible for its own contractual
obligations and commitments, including obligations with respect to sales and
purchases of securities. Securities sold, offered or recommended by SBC
Warburg Dillon Read Inc. are not deposits, are not insured by the Federal
Deposit Insurance Corporation, are not guaranteed by a branch or agency, and
are not otherwise an obligation or responsibility of a branch or agency.
A lending affiliate of SBC Warburg Dillon Read Inc. may have
lending relationships with issuers of securities underwritten or privately
placed by SBC Warburg Dillon Read Inc. To the extent required under the
securities laws, prospectuses and other disclosure documents for securities
underwritten or privately placed by SBC Warburg Dillon Read Inc. will disclose
the existence of any such lending relationships and whether the proceeds of the
issue will be used to repay debts owed to affiliates of SBC Warburg Dillon Read
Inc.
Without your prior written approval, the U.S. branches and
agencies of Swiss Bank Corporation will not share with SBC Warburg Dillon Read
Inc. any non-public information concerning you, and SBC Warburg Dillon Read
Inc. will not share any non-public information received from you with any of
such U.S. branches and agencies of Swiss Bank Corporation.
If the foregoing correctly sets forth the understanding among
the Company, the Selling Stockholder and the Underwriters, please so indicate
in the space provided below for
27
<PAGE> 29
such purpose, whereupon this letter and your acceptance shall constitute a
binding agreement among the Company, the Selling Stockholder and the
Underwriters, severally.
Very truly yours,
DAISYTEK INTERNATIONAL CORPORATION
By:
----------------------------------------
Name: Mark C. Layton
Title: President, Chief Executive Officer
and Chief Operating Officer
DAVID A. HEAP
By:
----------------------------------------
Morris Bienenfeld, Esq.,
as Attorney-in-Fact acting on
behalf of the Selling Stockholder
Accepted and agreed to as of
the date first above written,
on behalf of themselves,
PaineWebber Incorporated and
William Blair & Company, L.L.C.
and the other several Underwriters
named in Schedule A
SBC WARBURG DILLON READ INC., as
Managing Underwriter
By:
---------------------------------------
Name:
Title:
By:
----------------------------------------
Name:
Title:
28
<PAGE> 30
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
- ----------- -----------
<S> <C>
SBC Warburg Dillon Read Inc.
------
PaineWebber Incorporated
------
William Blair & Company, L.L.C.
------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
- ------------------------------------------- ------
Total ------
</TABLE>
<PAGE> 31
EXHIBIT I
---------, 1998
SBC Warburg Dillon Read Inc.
PaineWebber Incorporated
William Blair & Company, L.L.C.
As Representatives of the
several Underwriters
c/o SBC Warburg Dillon Read Inc.
535 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
Reference is made to that certain proposed Underwriting Agreement (the
"Underwriting Agreement") by and among Daisytek International Corporation, a
Delaware corporation (the "Company"), the Selling Stockholder (as defined in
the Underwriting Agreement), and SBC Warburg Dillon Read Inc., PaineWebber
Incorporated and William Blair & Company, L.L.C. as representatives of the
several underwriters named in Schedule A to the Underwriting Agreement (the
"Underwriters"). Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Underwriting Agreement.
In order to induce the Underwriters to enter into the Underwriting
Agreement and to consummate the transactions contemplated therein, and pursuant
to, and in compliance with, Section 8(i) of the Underwriting Agreement, the
undersigned hereby agrees not to offer, sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly, any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, except as provided below and except for sales to
you pursuant to the Underwriting Agreement, for a period of 90 days from the
date of the Prospectus (the "Lock-up Period"), without the prior written
consent of SBC Warburg Dillon Read Inc.; provided, however, that upon prior
written notice to SBC Warburg Dillon Read Inc.
Very truly yours,
-----------------------------------
Name:
------------------------------
<PAGE> 32
EXHIBIT II
------------, 1998
SBC Warburg Dillon Read Inc.
PaineWebber Incorporated
William Blair & Company, L.L.C.
As Representatives of the
several Underwriters
c/o SBC Warburg Dillon Read Inc.
535 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
Reference is made to that certain proposed Underwriting Agreement (the
"Underwriting Agreement") by and among Daisytek International Corporation, a
Delaware corporation (the "Company"), the Selling Stockholder (as defined in
the Underwriting Agreement), and SBC Warburg Dillon Read Inc., PaineWebber
Incorporated and William Blair & Company, L.L.C. as representatives of the
several underwriters named in Schedule A to the Underwriting Agreement (the
"Underwriters"). Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Underwriting Agreement.
In order to induce the Underwriters to enter into the Underwriting
Agreement and to consummate the transactions contemplated therein, and pursuant
to, and in compliance with, Section 8(i) of the Underwriting Agreement, the
undersigned hereby agrees not to offer, sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly, any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, except as provided below and except for sales to
you pursuant to the Underwriting Agreement, for a period of 90 days from the
date of the Prospectus (the "Lock-up Period"), without the prior written
consent of SBC Warburg Dillon Read Inc.; provided, however, that upon prior
written notice to SBC Warburg Dillon Read Inc.; [PROVIDED, HOWEVER, THAT THE
ABOVE RESTRICTION SHALL NOT APPLY TO ANY SHARES OF COMMON STOCK ISSUED AND
OUTSTANDING AS OF THE DATE HEREOF, BUT SHALL APPLY TO ANY AND ALL SHARES OF
COMMON STOCK THAT ARE ISSUED AND OUTSTANDING AS OF THE DATE HEREOF, BUT SHALL
APPLY TO ANY AND ALL SHARES OF COMMON STOCK THAT ARE ISSUED PURSUANT TO THE
EXERCISE OF ANY STOCK OPTIONS PURSUANT TO AGREEMENTS BY AND BETWEEN THE
UNDERSIGNED AND THE COMPANY].
Very truly yours,
-----------------------------------
Name:
------------------------------
<PAGE> 1
EXHIBIT 5
WOLFF & SAMSON
5 Becker Farm Road
Roseland, New Jersey 07068
February 26, 1998
Daisytek International Corporation
500 North Central Expressway
Plano, Texas 75074
Gentlemen:
We have acted as counsel to Daisytek International Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a Registration Statement (the "Registration Statement") on Form
S-3 relating to the public offering by the Company and a selling stockholder
(the "Selling Stockholder") of an aggregate of 3,000,000 shares of Common Stock,
par value $.01 per share, of the Company (the "Firm Shares") pursuant to an
Underwriting Agreement ("Underwriting Agreement") to be entered into among the
Company, the Selling Stockholder and SBC Warburg Dillon Read Inc., PaineWebber
Incorporated and William Blair & Company, L.L.C. (the "Underwriters"). The
offering also involves the grant by the Company and the Selling Stockholder to
the Underwriters of an option to purchase an additional 450,000 shares of Common
Stock (the "Option Shares"). The Firm Shares and the Option Shares hereinafter
collectively are referred to as the "Shares".
We have examined copies of the Certificate of Incorporation and By-Laws
of the Company, as amended and restated, the Registration Statement, and such
other corporate records and documents as we deemed necessary to form the basis
of the opinion hereinafter expressed. In our examination of such material, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to original documents
of all copies submitted to us. As to various questions of fact material to
this opinion, we have relied upon statements and certificates of officers and
representatives of the Company and others.
On the basis of such examination, it is our opinion that, subject to (i)
the Underwriting Agreement being entered into by the proper parties in
substantially the form thereof filed as an exhibit to the Registration
Statement or as may be filed as an amendment thereto or under cover of a report
on Form 8-K, (ii) the Shares being sold for value as contemplated by the terms
of the Underwriting Agreement, (iii) compliance with the pertinent provisions
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended; and (iv) compliance with the applicable provisions of the
securities or "blue sky" laws of the various states, the Shares to be sold by
the Selling Stockholder are, and the Shares to be sold by the Company will be,
when certificates therefor have been duly executed, countersigned, registered,
issued and delivered by the proper officers of the Company, duly and validly
issued, fully paid, nonassessable shares of the Company's Common Stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the reference to us in the Prospectus and to the
filing of this opinion as an exhibit to any application made by or on behalf of
the Company or any dealer in connection with the registration of the Shares
under the securities or blue sky laws of any state or jurisdiction. In giving
such permission, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ WOLFF & SAMSON
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our reports dated April 25, 1997 included in
Daisytek International Corporation's Form 10-K for the year ended March 31,
1997 and to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
------------------------
Arthur Andersen LLP
