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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-881-4700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 11, 1999 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System) was
$236,044,518.
As of June 11, 1999, there were 17,166,814 shares outstanding of the
registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Prospectus dated March 26, 1998
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Unless the context otherwise requires, references to Daisytek International
Corporation include its direct and indirect subsidiaries, including Daisytek,
Incorporated, the Company's primary operating subsidiary. References in this
Report to the Company's fiscal year means the 12 month period ending on March 31
of such year.
INDEX
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PART 1 Page
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Item 1. Business .................................................................... 3
Item 2. Properties .................................................................. 11
Item 3. Legal Proceedings ........................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ......................... 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................................. 12
Item 6. Selected Consolidated Financial Data ........................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 14
Item 7a. Quantitative and Qualitative Disclosure About Market Risk ................... 23
Item 8. Financial Statements and Supplementary Data ................................. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant .......................... 49
Item 11. Executive Compensation ...................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management .............................................................. 54
Item 13. Certain Relationships and Related Transactions .............................. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................................. 57
SIGNATURES ............................................................................... 62
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PART I
ITEM 1. BUSINESS
GENERAL
Daisytek International Corporation (the "Company" or "Daisytek") is a
leading wholesale distributor of non-paper computer and office automation
supplies and accessories ("computer supplies products") and professional-grade
audio and video media products ("professional tape products"). Through its
Priority Fulfillment Services subsidiaries ("PFS"), the Company is also a
leading provider of end-to-end transaction management and e-commerce logistics
business solutions. The Company has four business segments: (1) U.S. Computer
Supplies; (2) International Computer Supplies; (3) Professional Tape Products;
and (4) Priority Fulfillment Services.
The Company began its U.S. Computer Supplies business in the 1980's and
started to expand internationally in 1989 with its Canadian operations. The
Computer Supplies segments distribute over 10,000 computer supplies products to
over 28,000 customer locations, including value-added resellers ("VARs"),
computer supplies dealers, office product dealers, contract stationers, buying
groups, computer and office product superstores and other retailers who resell
the products to end-users. The Company believes it is the largest wholesale
distributor of computer supplies products in the world.
The Computer Supplies segments sell primarily nationally known, name-brand
computer supplies products manufactured by over 150 original equipment
manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Apple,
Panasonic, Tektronix, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell.
The Computer Supplies products include laser toner, inkjet cartridges, copier
and fax supplies, printer ribbons, diskettes, optical storage products, computer
tape cartridges and accessories. These products are used in a broad range of
computers and office automation products, including laser and inkjet printers,
photocopiers, fax machines and data storage products.
The Computer Supplies segments utilize sophisticated telemarketing, direct
mail programs, frequent innovative sales promotions and electronic commerce
technology to market computer supplies products throughout the United States,
Canada, Mexico, Australia and Latin America, as well as in other international
markets, including Singapore and the Pacific Rim. The U.S. Computer Supplies
segment presently operates sales offices in Plano, Texas, and Memphis,
Tennessee, and one centralized "superhub" distribution center in Memphis,
Tennessee, to service the U.S. and certain international markets. To service
other international markets, the International Computer Supplies segment
operates smaller regional sales and distribution centers in Miami, Florida,
Mexico, Australia, Canada and Singapore. Most of the Company's U.S. computer
supplies products shipments are shipped via Federal Express under an agreement
(the "Federal Express Agreement") which, together with the Company's centralized
distribution center, currently enables the Company to accept orders for computer
supplies products until 10:30 p.m. Eastern Standard Time (EST) and offer its
customers next business day delivery of product in stock.
In 1998, the Company added its Professional Tape Products segment with the
acquisitions of The Tape Company, Inc. ("The Tape Company") and Steadi-Systems,
Ltd. ("Steadi-Systems"). In late March 1999, the Company purchased the
professional tape division of Videotape Products, Inc. ("VTP"). In connection
with this purchase, the Company also sold certain assets of Steadi-Systems'
professional hardware division to VTP. As part of the agreement, both VTP and
the Company have entered into a long-term strategic alliance, under which both
companies will work jointly to provide a full range of products to their
combined customers.
The Professional Tape Products segment is based in Chicago, Illinois and
operates as a wholesale distributor of media products to the film, entertainment
and multimedia industries. The Professional Tape Products segment distributes
more than 2,000 professional tape products to over 18,000 customers.
Professional Tape Products include videotape, audiotape, motion picture film,
and data storage media used in video and audio production. Customers primarily
include production companies, post-production operations, broadcast stations,
corporate in-house production facilities, advertising agencies and cable
television providers.
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PFS, formed in 1996, is a leading provider of end-to-end transaction
management and e-commerce logistics solutions. PFS delivers these services to a
number of clients in a wide variety of industries, both domestically and
internationally. Services include sales and order processing, call center
management, product warehousing with real time inventory management, customized
packaging, product fulfillment and transaction management accounting. A rapid
growing component of the PFS business is PFSweb, an outsourcing solution for
companies conducting sales over the Internet by providing the infrastructure
needed to support web-based activity, including online order processing,
warehousing and shipping of product. PFS and PFSweb utilize primarily the
Company's call center and distribution facilities in Plano, Texas, and Memphis,
Tennessee, and also the Company's international sales and distribution
facilities. In addition, in December 1998, PFS established a European operation
("PFS Europe") to provide fulfillment logistics call center activities and
distribution services for clients throughout Europe, the Middle East and Africa.
PFS Europe operates a call center in Maastrict, The Netherlands, and a
distribution center in Aachen, Germany and expects to move into a new
distribution facility in Leige, Belgium in fiscal 2000.
SEGMENT INFORMATION
For financial information about the results of the Company's operating segments
for each of the last three fiscal years, see Note 9 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data.
PRODUCTS AND SERVICES
The Company distributes more than 10,000 different computer supplies
products and more than 2,000 professional tape products. The Company regularly
updates its product line to reflect advances in technology and to provide a wide
product range of the most popular products. Computer supplies product and
professional tape product net sales represented approximately 79% and 11%,
respectively, of the Company's total net sales in fiscal year 1999. The
Company's major product and service categories can generally be classified as
follows:
Non-Impact Printer Supplies. Non-impact printer supplies include toner
cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and
fax supplies. Non-impact printers, such as laser printers, personal copiers and
fax machines, continue to grow in popularity and have a wide range of
applications. Sales of non-impact printer supplies accounted for approximately
57% of the Computer Supplies net sales in fiscal year 1999. 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 22% of the Computer Supplies net
sales in fiscal year 1999.
Magnetic Media Products. Magnetic media products include computer tapes,
data cartridges, diskettes, optical disks, compact disc recordable drives and
media, zip drives and media, and other products which store or record computer
information and are used in a variety of computers ranging from notebook and
personal computers to large mainframe computer systems. Sales of magnetic media
products accounted for approximately 9% of the Computer Supplies net sales in
fiscal year 1999.
Impact Printer Supplies. Impact printer supplies include printwheels,
ribbons, elements, fonts and other consumable supplies used in impact printers
ranging from electronic typewriters to high-speed dot matrix printers. While new
technology is moving toward non-impact printing, the Company believes that a
substantial installed base of impact printers, such as dot matrix printers, are
still in use and require a continuing amount of computer supplies products.
Sales of impact printer supplies accounted for approximately 6% of the Computer
Supplies net sales in fiscal year 1999.
Accessories and Other Products. Accessories sold by the Computer Supplies
segments 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 specialty paper,
banking supplies and selected business machines. Sales of accessories and other
products accounted for approximately 6% of the Computer Supplies net sales in
fiscal year 1999.
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Professional Video and Audio Products. Professional video and audio
products include digital and analog formats of professional video and audio
recording media, the majority of which are cassette based. The Company also
sells motion picture film, disc-based media such as recordable compact discs and
recordable DVD, and data storage media products that are used in the editing and
archiving of video and audio productions. In addition, the Company sells
accessory items such as videotape cases, sleeves, labels, audio tape reels,
storage/mailing boxes, and high density media storage systems such as shelving,
cabinets, etc. The Professional Tape Products segment accounted for
approximately 11% of the Company's total net sales in fiscal year 1999.
Outsourcing Services. PFS offers end-to-end transaction management and
e-commerce logistics business solutions. PFSweb provides e-business solutions to
enable companies to do commerce on the Internet by providing the infrastructure
needed to support web-based activity, including online order processing,
warehousing and shipping of product. See Item 1. Business - Sales and Marketing
- - PFS.
SUPPLIERS
The Company's computer supplies products are manufactured by over 150
original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark,
IBM, Okidata, Apple, Panasonic, Tektronix, Kodak, Imation, Epson, Sony, Xerox,
Brother and Maxell. During fiscal year 1999, approximately 77% of the Computer
Supplies product net sales were derived from products supplied by the Computer
Supplies segments' ten largest suppliers. The sale of Hewlett-Packard products
accounted for approximately 41% of Computer Supplies net sales, with the sales
of the other nine largest suppliers each accounting for between 2% to 8% of
Computer Supplies net sales.
The Company's professional tape products are supplied by over 25
manufacturers, including Sony, Fuji, Quantegy, Maxell, Panasonic, BASF, TDK,
Kodak, JVC, Russ Bassett, Plastic Reel Corporation and Alpha Enterprises. During
fiscal year 1999, approximately 87% of the Professional Tape Products net sales
were derived from products supplied by the segment's four largest suppliers,
with the sales of the remaining suppliers each accounting for less than 5% of
Professional Tape Products 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 many of its suppliers. These include price protection plans
under which the Company receives credits if the supplier lowers prices on
previously purchased inventory and stock rotation or stock balancing privileges
under which the Company can return slow moving inventory in exchange for other
products. In addition, in order to introduce new products, many suppliers will
permit the Company to return all unsold inventory after an introductory trial
period. Material changes by one or more of the Company's key suppliers of their
pricing arrangements or other marketing programs may materially and adversely
affect the Company's business.
The Company's purchases of computer supplies and professional tape products
inventory are closely tied to sales and are generally based upon the sales
volume of the most recent six to ten week periods. Some of the Company's
suppliers require minimum annual purchases, which, for fiscal year 2000, will
aggregate approximately $50 million.
The Company has entered into written distribution agreements with
Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata and many
of the other major suppliers of the products it distributes. As is customary in
the industry, these agreements generally provide non-exclusive distribution
rights, have one-year renewable terms and are terminable by either party at any
time, with or without cause. The Company considers its relationships with its
major suppliers, including Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson,
Brother, Sony, Fuji, Maxell, Tektronix and Okidata to be good. Nevertheless,
there can be no assurance that a material change in the Company's relationship
with one or more of its major suppliers will not have a material adverse effect
on the Company's business.
Although the Company purchases most of its products directly from
authorized U.S. manufacturers, the Company also imports products from foreign
sources, particularly when fluctuations in foreign exchange rates or product
prices make it attractive to do so. Similarly, depending upon product pricing
and availability, the Company also purchases products from secondary sources,
such as other wholesalers and selected dealers, rather than directly from
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the manufacturer. The Company utilizes its ability to purchase imported and
secondary source products in order to provide its customers with competitive
prices and a wide range of product lines. In order to ensure that such imported
and secondary source products are not produced by unauthorized manufacturers,
the Company has established various procedures which it believes enable it to
identify unauthorized products and, to the extent possible, return such
unauthorized products to the foreign or secondary source. Nevertheless, there
can be no assurance that the Company will be completely successful in such
efforts or that such imported and secondary source products will continue to be
available or that any lack of availability will not have a material adverse
effect on the Company's business.
SALES AND MARKETING
COMPUTER SUPPLIES
The Computer Supplies segments utilize sophisticated telemarketing, direct
mail programs and frequent innovative sales promotions and other marketing
efforts to market its computer supplies products to a wide array of dealers,
contract stationers, VARs, retailers and other resellers.
The customer and prospect list for computer supplies products includes
U.S., Canadian, Australian, Mexican, Latin American, Singaporean and other
foreign computer supplies dealers, office product dealers, VARs, buying groups,
computer stores, contract stationers, computer and office product superstores,
catalog merchandisers, drug and grocery stores, mass merchandisers, direct mail
marketers, college bookstores and other resellers. The Company currently ships
its Computer Supplies products to over 28,000 customer locations. The typical
Computer Supplies customer is a small to medium sized reseller who does not have
the resources to establish direct purchasing relationships with multiple
manufacturers and, instead, must rely on wholesale distributors like the
Company. The Company also sells its products to a number of large customers,
including computer and office product superstores and contract stationers, which
benefit from the Company's product breadth, timely delivery of fast-moving
products, and efficient distribution of a variety of product lines to multiple
locations. No single customer accounts for more than 10% of the Computer
Supplies sales for each of the fiscal years ended March 31, 1999, 1998 and 1997.
As a result of customer consolidation and office product superstores reducing
inventory levels and buying direct from manufacturers, the Company's U.S. sales
growth of computer supplies products has been slowing.
International Computer Supplies sales accounted for approximately 34% of
the Company's Computer Supplies net sales in fiscal year 1999, and the Company
believes that international markets represent further opportunities for growth.
The Company began its International Computer Supplies presence with sales and
distribution operations in Canada. Net sales in Canada represent about 41% of
total International Computer Supplies net sales. 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. To take advantage of the growing Far East and
Australia marketplace, in October 1996, the Company acquired a large computer
and office automation supplies wholesaler in Australia, and in January 1998, the
Company opened a sales and distribution facility in Singapore. 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 9 of the Notes to Consolidated Financial Statements for certain financial
information regarding the Company's domestic and international sales during the
last three fiscal years.
The Company's Computer Supplies sales and telemarketing department is
divided into several groups or teams, each having its own particular sales
objective. For example, the Retail Department focuses specifically on large
computer retailers and office product superstores. Similarly, separate groups of
sales representatives are responsible for a select group of national accounts,
such as contract stationers, office products dealers and buying groups, while
other groups focus on new accounts, VARS, convenience stores and mass merchant
customers, existing business or international and export sales. 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
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information. The telecommunications software also enables sales and marketing
management to better identify, control and monitor sales representatives'
prospecting activity with the Company's customers.
The Company provides extensive training for new computer supplies products
sales personnel with special emphasis on the need for regular customer contact,
prompt response to customers' demands for product information and the continuous
need to inform customers of technological advancements by the Company's
suppliers. The Company, together with its major suppliers, provides the
Company's sales personnel with ongoing product-specific training and education
emphasizing computer supplies as well as new technologies, new products and new
product applications.
In order to maintain its position as a low cost wholesale distributor, the
Company regularly monitors the efficiency of its sales staff. By utilizing
sophisticated telecommunications equipment, the Company is able to measure the
number of calls being fielded by a sales representative, their success rate in
terms of orders obtained compared to calls taken and customer service
statistics, such as abandoned call rates and average response times. The
Company's sales force receives a base salary as well as varying sales incentives
based on gross profit margin 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 Computer Supplies' 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 U.S. Computer Supplies business presently
distributes a total of approximately 52,000 catalogs and contract price books to
its active U.S. customers each quarter. The International Computer Supplies
segment also distributes a separate Book of Deals designed specifically for each
of its Canadian, Mexican, Australian and Singaporean subsidiaries. Other
catalog-type marketing tools used by the Computer Supplies business include
customized catalogs produced by the Company for the reseller to distribute to
its end-user customers. The Computer Supplies business 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 primary marketing tools for
sales of computer supplies products, the Company also uses electronic commerce
marketing tools as well. The Company believes it has established itself as a
leader in the deployment of electronic commerce in the computer supplies
products industry. These tools are designed to win further market share and to
reduce cost in the customer relationship by automating information flow. By
accepting both externally developed commercially available technologies as well
as internally developed proprietary technologies, the Company can offer a suite
of electronic commerce solutions including: traditional X.12, proprietary EDI,
and integrated FTP; third party software systems such as DDMS, Copas, and The
Systems House; and Internet, intranet, and extranet systems.
During fiscal year 1997, the Company introduced a CD-ROM based electronic
catalog of computer supplies products and on-line ordering tool, known as
"SOLO", the System for Online Ordering, and during fiscal year 1998, introduced
a World Wide Web version of the product, known as "SOLOnet". These electronic
tools provide customers with on-line ordering capabilities; fingertip access to
up-to-date pricing, product and order information; search and retrieval
capabilities based on part numbers, manufacturers, product description, retail
price, machine compatibility and other factors; and convenient access to
manufacturers' product literature and training videos; and allows customers to
view their own account information.
During fiscal year 1999, the Company developed an Application Programming
Interface ("API") known as the Business Interface. This API will allow companies
with their own Internet technology to make live calls into the Company's
inventory, tax, freight, and credit card systems for a real-time shopping
experience. The order can be built simultaneously on the reseller's system and
the Company's system, providing instantaneous fulfillment of the order.
Certain of the Company's computer supplies manufacturers 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.
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PROFESSIONAL TAPE PRODUCTS
The Professional Tape Products segment utilizes sophisticated
telemarketing, direct mail programs and frequent sales promotions and other
marketing efforts to market its products to customers, primarily including
production companies, post-production operations, broadcast stations, corporate
in-house production facilities, advertising agencies and cable television
providers. The Professional Tape Products segment delivers products to more than
18,000 customers, which are primarily located in the U.S.
The Professional Tape Products segment has account executives in the field
covering major markets in the U.S. Account executives target to be in the field
approximately three days per week to actively solicit new business of targeted
high volume customers, maintain regular customer contact, respond to customers'
demand for product information and inform customers of technological
advancements by Professional Tape Products suppliers. The inbound call center
teams supplement customer service provided by the account executives. The
Professional Tape Products segment utilizes the Company's sophisticated
telemarketing and call-center systems, as previously discussed.
The Professional Tape Products segment provides extensive training for new
account executives and, together with its major suppliers, provide the account
executives with ongoing product-specific training and education emphasizing
professional tape products as well as new technologies, new products and new
product applications. The Professional Tape Products' call center teams receive
the same training as the account executives.
The Professional Tape Products segment publishes and distributes a catalog
semiannually. The Professional Tape Products segment, with certain of its
suppliers, offers quarterly promotions to its customers. With these programs,
Professional Tape Products' customers earn and accumulate points on select
purchases, which can be redeemed for merchandise like cameras, video equipment
or service.
PFS
PFS provides end-to-end transaction management and e-commerce logistics
solutions, on an outsourced basis, to companies looking to improve their overall
service levels, reduce costs or to address new markets or channels of
distribution. PFS provides call center, inventory management, distribution
services, credit and collection and returns processing to clients primarily on a
fee basis. 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 services are available both domestically and
internationally through the Company's distribution facilities and call centers
in the United States, Canada, Mexico, Australia, Singapore and PFS's operation
in Europe.
Through PFSweb, the Company provides these services to companies looking to
enter, expand or improve their overall business via sales over the Internet and
other e-business type models. PFSweb offers the services necessary for companies
to conduct sales over the Internet, from online order processing -- including
credit card processing and call center support -- to warehousing and shipping of
product. Electronic orders enter PFSweb's computer system and then are processed
automatically and sent for shipment from PFS's or the clients' distribution
facilities.
In fiscal year 1999, PFS and PFSweb moved over $367 million of its clients'
product, more than double the amount for the fiscal year 1998. Client
relationships number over 30 and include major brands like IBM, Tektronix,
Hewlett-Packard, Exabyte and Nokia, amongst others.
PFS presently provides services primarily under fee-based contracts (where
revenue is based on either the sales value of the products or service activity
volume) and, in certain limited circumstances, under master distribution
agreements (where PFS takes title and resells the product).
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MANAGEMENT INFORMATION SYSTEMS
The Company maintains advanced management information systems and has
automated virtually all key business functions using on-line, real time systems.
These on-line systems provide management with information concerning sales and
margins, inventory levels, customer payments and other operations which are
essential for the Company to operate as a low cost, high efficiency wholesale
distributor. These systems also serve as the platform from which the Company
offers its PFS services.
The implementation of these systems has allowed the Company to offer an
advanced suite of electronic commerce tools to its customers so that the Company
can communicate with their computer systems and automatically process, send and
receive purchase orders, invoices and acknowledgments. The Company offers
"customer links" to provide customers with direct access to a proprietary
Company database to examine pricing, credit information, product description and
availability and promotional information. This link also allows customers to
place orders directly into the Company's order processing system. These systems
also allow the Company to offer similar features to its customers through
SOLOnet.
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 OF PRODUCTS
The Company operates a "superhub" distribution center located in Memphis,
Tennessee. The Company has expanded its facilities space at the "superhub" from
370,000 square feet in 1997 to 613,000 square feet in 1999. The facility is
located approximately four miles from the Memphis International airport, where
both Federal Express and United Parcel Service operate large hub facilities. The
"superhub" 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.
The Company believes that computer supplies and professional tape products
sold by the Company are particularly suited to cost effective overnight delivery
because of their unique value to weight characteristics. Accordingly, almost all
of the Company's U.S. computer supplies package orders are shipped via Federal
Express, except for certain "heavyweight" packages or as otherwise requested by
the customer. The Company's centralized distribution center, together with the
implementation of the Federal Express Agreement, currently enables the Company
to offer to its customers next business day delivery to most U.S. geographic
areas. The Company ships virtually 100% of U.S. computer supplies orders for
product in stock on the same day.
The material handling system at its Memphis distribution center includes
several high technology enhancements, including an automated package routing
system and a paperless order picking system. These systems have allowed the
Company to substantially increase the package movement capacity within the
existing facility, further improve package shipment accuracy and enhance the
Company's ability to perform value-added services for its customers, including
custom labeling and price stickering.
Substantially all of the Company's U.S. computer supplies products sales
are distributed from the Memphis distribution center. In order to effectively
service international markets, the Company operates smaller, regional warehouse
and distribution facilities in Toronto and Vancouver, Canada; Mexico City,
Mexico; Sydney, Australia; Singapore; and Miami, Florida.
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The Company's Professional Tape Products segment operates regional
warehouses to effectively service its local markets on a same-day basis.
Regional Professional Tape Products warehouses are located in Chicago, Illinois;
New York, New York; Hollywood, San Francisco and Irvine, California; Atlanta,
Georgia; Philadelphia and Pittsburgh, Pennsylvania; Detroit, Michigan;
Minneapolis, Minnesota; Cincinnati, Ohio; Dallas, Texas; Phoenix, Arizona;
Kansas City, Missouri; Orlando, Florida; and Seattle, Washington. In addition,
Professional Tape Products utilizes the Company's distribution facility in
Miami, Florida, to service the local market.
PFS and PFSweb utilize the same distribution facilities as the Computer
Supplies business in the U.S., Canada, Mexico, Australia, and Singapore. PFS
Europe operates a distribution center in Aachen, Germany and expects to move
into a new distribution facility in Liege, Belgium in fiscal 2000. PFS maintains
relationships with a number of shipping companies to provide up to next business
day delivery on domestic package orders, truck shipments on larger domestic
orders and a variety of air and surface delivery options for international
orders.
EMPLOYEES
As of March 31, 1999, the Company had 1,021 full-time employees and 160
part-time employees. 908 of those employees were located in the United States.
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 Company
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 option and stock purchase plans.
The Company also actively recruits college graduates through on-campus
recruiting programs. Each newly hired employee for this program is placed into
the Company's training program for approximately three months, 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 Computer Supplies and
Professional Tape customers maintain several sources of supply for their product
requirements. Accordingly, the Company's Computer Supplies segments compete with
product manufacturers, general office supply wholesalers, other national and
regional wholesale computer supplies distributors, computer hardware and
software distributors and, to a lesser extent, non-specialized wholesaler
distributors. The Professional Tape segment competes with product manufacturers,
mail-order houses, video and audio equipment distributors, and other regional
and local professional tape distributors. Competition in the distribution
business is generally based on price, breadth of product lines, product and
credit availability, delivery time and the level and quality of customer
services. The Computer Supplies and Professional Tape Products segments compete
primarily on the basis of their ability to offer competitive prices and quality
service while maintaining a high level of operating efficiency. 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.
The Company believes that the market for its outsourcing services is highly
competitive. The Company competes with customer in-house operations, regional
and national logistics providers, telemarketing firms, public warehouses and
shipping and trucking companies. The Company believes that its service offering
is unique due to its wide array of high quality, value-added services. PFS's
competitive advantage is based on various factors including its ability to offer
an end-to-end transaction management solution. Many competitors offer some or
substantially all of the same services, and many of these competitors have
greater financial, distribution and marketing resources than the Company.
-10-
<PAGE> 11
BACKLOG
The Company does not have a significant backlog of orders and does not
consider backlog to be material to an understanding of its business.
ITEM 2. PROPERTIES
The Company's Computer Supplies and PFS businesses are headquartered in a
65,419 square foot central office facility located in Plano, Texas, a Dallas
suburb. The Company operates a central distribution center in Memphis,
Tennessee, which is utilized by U.S. Computer Supplies, Professional Tape
Products, and PFS. The Company also operates regional sales and distribution
centers in Singapore; Toronto, Ontario; Mexico City, Mexico; Vancouver, British
Columbia; Sydney, Australia; and Miami, Florida, which are utilized by
International Computer Supplies and PFS. PFS's European operations are
headquartered in Maastrict, The Netherlands, with initial distribution
operations in Aachen, Germany. PFS's European distribution will be moving in
mid-1999 to a larger facility in Leige, Belgium. The Company's Professional Tape
Products business is headquartered in Wood Dale, Illinois, a Chicago suburb. The
Professional Tape Products segment also operates regional offices in New York,
New York; Hollywood, San Francisco and Irvine, California; Atlanta, Georgia;
Philadelphia and Pittsburgh, Pennsylvania; Detroit, Michigan; Minneapolis,
Minnesota; Cincinnati, Ohio; Dallas, Texas; Phoenix, Arizona; Kansas City,
Missouri; Seattle, Washington; and Orlando and Miami, Florida.
All of the Company's facilities are leased and the material lease
agreements contain one or more multiple year renewal options.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-11-
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and trades on the Nasdaq Stock Market
under the symbol "DZTK." The following table sets forth for the period indicated
the high and low sale price for the Common Stock as reported by the Nasdaq
National Market, as adjusted to reflect the two for one stock split effective
March 2, 1998:
<TABLE>
<CAPTION>
PRICE
-------------------------
HIGH LOW
----------- ----------
<S> <C> <C>
Fiscal Year 1998
First Quarter....................... $ 19 7/8 $ 12 3/8
Second Quarter...................... $ 24 $ 19 3/8
Third Quarter....................... $ 22 1/2 $ 16 5/16
Fourth Quarter ..................... $ 28 1/4 $ 17 3/8
Fiscal Year 1999
First Quarter....................... $ 26 7/8 $ 21 1/4
Second Quarter...................... $ 27 $ 16 3/4
Third Quarter....................... $ 23 1/4 $ 12 3/4
Fourth Quarter ..................... $ 23 1/2 $ 15 1/4
</TABLE>
As of June 11, 1999, there were approximately 3,000 shareholders of which
84 were record holders of the Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all earnings to finance the
further development of its business. The payment of any future cash dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of income data for each of
the fiscal years ended March 31, 1999, 1998 and 1997, and the selected
consolidated balance sheet data as of March 31, 1999 and 1998 have been derived
from the Company's audited consolidated financial statements, and should be read
in conjunction with those statements, which are included in this Form 10-K. The
selected consolidated statements of income data for the fiscal years ended March
31, 1996 and 1995 and the selected consolidated balance sheet data as of March
31, 1997, 1996 and 1995 have been derived from the Company's consolidated
financial statements, and should be read in conjunction with those statements,
which are not included in this Form 10-K. The selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto which are included elsewhere in this Form 10-K. The
following selected consolidated financial data for fiscal years 1998, 1997, 1996
and 1995 has been restated to combine the results of operations and financial
positions of Daisytek with The Tape Company, which was acquired by the Company
during June 1998 and accounted for as a pooling of interests. See Note 2 of
Notes to Consolidated Financial Statements for further discussion.
-12-
<PAGE> 13
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net sales ............................ $ 908,630 $ 800,112 $ 639,511 $ 492,097 $ 377,085
Cost of sales ........................ 800,263 712,568 571,448 437,970 335,731
--------- --------- --------- --------- ---------
Gross profit ......................... 108,367 87,544 68,063 54,127 41,354
Selling, general and
administrative expenses ........... 70,648 55,974 41,870 32,565 26,367
--------- --------- --------- --------- ---------
Income from operations before
acquisition and disposition
costs ............................ 37,719 31,570 26,193 21,562 14,987
Acquisition related costs ............ 1,111 735 -- -- --
Loss on disposition of business ...... 2,800 -- -- -- --
--------- --------- --------- --------- ---------
Income from operations ............... 33,808 30,835 26,193 21,562 14,987
Interest expense ..................... 2,797 3,134 1,847 1,542 2,126
--------- --------- --------- --------- ---------
Income before income
taxes ............................. 31,011 27,701 24,346 20,020 12,861
Provision for income
taxes ............................. 11,823 10,185 8,432 6,725 4,198
--------- --------- --------- --------- ---------
Income before cumulative effect of
accounting change ................ 19,188 17,516 15,914 13,295 8,663
Cumulative effect of accounting
change, net of tax ............... (405) -- -- -- --
--------- --------- --------- --------- ---------
Net income ........................... $ 18,783 $ 17,516 $ 15,914 $ 13,295 $ 8,663
========= ========= ========= ========= =========
PER SHARE DATA:
Net income per common share:
Basic
Income before cumulative effect
of accounting change ............... $ 1.12 $ 1.20 $ 1.14 $ 0.98 $ 0.82
Cumulative effect of accounting
change, net of tax ................. (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Net income .......................... $ 1.10 $ 1.20 $ 1.14 $ 0.98 $ 0.82
========= ========= ========= ========= =========
Diluted
Income before cumulative effect
of accounting change ............... $ 1.08 $ 1.14 $ 1.08 $ 0.92 $ 0.72
Cumulative effect of accounting
change, net of tax ................. (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Net income .......................... $ 1.06 $ 1.14 $ 1.08 $ 0.92 $ 0.72
========= ========= ========= ========= =========
Weighted average common and
common share equivalents
outstanding:
Basic ......................... 17,101 14,541 13,909 13,577 10,525
Diluted ....................... 17,789 15,318 14,801 14,489 12,059
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital ................. $138,764 $123,986 $ 82,389 $ 58,453 $ 43,591
Total assets .................... 315,879 257,845 185,226 135,477 99,783
Long-term debt, net of
current maturities .......... 43,021 16,916 30,454 16,419 11,334
Shareholders' equity ............ 157,170 137,731 70,383 53,720 41,307
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
The matters discussed in this report on Form 10-K, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's prospectus
dated March 26, 1998, which is incorporated by reference herein, as well as
general economic conditions, industry trends, the loss of key suppliers or
customers, the loss of strategic product shipping relationships, customer
demand, product availability, competition (including pricing and availability),
risks inherent in acquiring, integrating and operating new businesses,
concentrations of credit risk, distribution efficiencies, capacity constraints,
technological difficulties, exchange rate fluctuations, and the regulatory and
trade environment (both domestic and foreign).
BUSINESS STRATEGY
Daisytek is a low cost distributor and outsourcing services provider. The
Company bases its continued growth on the following strategies:
1) Capitalize on e-commerce and outsourcing trends through expansion of
its PFS and PFSweb operations.
2) Focus on the growing computer supplies and professional tape
industries in the U.S. and international markets.
3) Seek acquisitions to supplement growth in the Company's computer
supplies business, professional tape business, and fulfillment service
business or to add selected product lines.
Through its PFS business, the Company utilizes its core strengths in
distribution and telemarketing to provide its business partners with end-to-end
transaction management and e-commerce logistics solutions on an international
basis. Services include sales and order processing, call center management,
product warehousing with real-time inventory management, customized packaging,
product fulfillment and transaction management accounting. Through PFSweb, the
Company offers e-commerce outsourcing solutions for companies to conduct sales
over the Internet by providing the infrastructure needed to support web-based
activity, including online order processing, warehousing, and shipping of
product. The PFS segment of the Company's business strategy offers the potential
for higher margins because it is primarily service fee- and revenue-based.
The Company's Computer Supplies segments specialize in computer supplies
that have longer life cycles and lower risk of technological obsolescence than
hardware and software products. The Company believes that the demand for these
products remains strong due to the advancement and reduction in price points of
printer and computer technologies, which in turn grows the installed base of
equipment that consumes the products the Company distributes. Continuing
automation of the workplace and the tremendous growth in color printing
technologies that use consumable supplies at higher rates also fuel the demand
for the computer supplies product offering. The Company offers these products to
its customers using value-added services such as next-business-day delivery, the
latest order cutoff times in the industry, order confirmation, product
drop-shipping, and customized product catalogs. The Company plans to expand
sales to existing customers including those in the contract stationers,
value-added resellers, computer and
-14-
<PAGE> 15
office-product dealer, and superstore channels. The Company is also focusing on
new distribution channels such as mass merchants, grocery and convenience stores
and direct mail marketers.
The Company continues to research new markets to expand its international
computer supplies business. Many international markets are emerging markets that
have exponentially higher growth opportunities for consumable computer supplies
compared with the United States. Presently, the Company operates sales and
distribution centers in Canada, Mexico, Australia and Singapore and exports
products into Latin America and throughout much of the rest of the world. The
Company's computer supplies experience and broad product range place the Company
in a competitive position in emerging international markets.
The Company began its Professional Tape Products segment in 1998, and has
grown this division primarily through acquisitions. This segment operates as a
wholesale distributor of media products to the film, entertainment and
multimedia industries. The wholesale sector of this industry is highly
fragmented and regionally focused. The Company's acquisition strategy is to
acquire businesses which the Company believes can benefit from Daisytek's core
competencies in telemarketing and distribution management to create efficiencies
and provide value-added services to the customer base. Such businesses are
integrated to create economies of scale. The Company believes this strategy will
allow it to maintain the strong gross margins earned in this segment, while at
the same time reducing the SG&A costs as a percentage of sales, and, thus,
increasing profit margins.
The Company plans to enhance growth by seeking acquisition opportunities to
supplement growth in the Company's computer consumables business, professional
tape business, and fulfillment service business or to add selected product lines
that can capitalize on Daisytek's expertise in distribution and call-center
management and offer the Company an opportunity to expand its product line and
increase profit margins.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited consolidated statements of income expressed as a percentage of
net sales. Financial data for fiscal years 1998 and 1997 has been restated for
pooling of interests to combine the results of operations of Daisytek and The
Tape Company. See Note 2 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 88.1 89.1 89.4
------- ------- -------
Gross profit...................................... 11.9 10.9 10.6
Selling, general and administrative expenses........ 7.8 7.0 6.5
Acquisition related costs........................... 0.1 0.1 --
Loss on disposition of business..................... 0.3 -- --
------- ------- -------
Income from operations............................ 3.7 3.8 4.1
Interest expense.................................... 0.3 0.4 0.3
------- ------- -------
Income before income taxes........................ 3.4 3.4 3.8
Provision for income taxes.......................... 1.3 1.2 1.3
------- ------- -------
Income before cumulative effect of accounting
change.......................................... 2.1 2.2 2.5
Cumulative effect of accounting change.............. 0.0 -- --
------- ------- -------
Net income........................................ 2.1% 2.2% 2.5%
======= ======= =======
</TABLE>
-15-
<PAGE> 16
The following table sets forth certain unaudited quarterly financial data
and certain data expressed as a percentage of net sales for fiscal years 1999
and 1998. Financial data for fiscal year 1998 has been restated for pooling of
interests to combine the results of operations of Daisytek and The Tape Company.
See Note 2 of Notes to Consolidated Financial Statements. 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 1999 FISCAL YEAR 1998
-------------------------------------------- ------------------------------------------------
4TH QTR 3RD QTR 2ND QTR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR
-------- -------- -------- -------- ---------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............ $240,383 $225,507 $220,151 $222,589 $ 229,500 $197,775 $190,060 $182,777
Gross profit ......... $ 28,331 $ 26,786 $ 26,723 $ 26,527 $ 26,227 $ 21,368 $ 20,326 $ 19,623
Gross profit
margin ........... 11.8% 11.9% 12.1% 11.9% 11.4% 10.8% 10.7% 10.7%
SG&A expenses ........ $ 18,898 $ 17,803 $ 17,145 $ 16,802 $ 16,717 $ 13,641 $ 13,094 $ 12,522
Percent of net
sales ............ 7.9% 7.9% 7.8% 7.6% 7.3% 6.9% 6.9% 6.9%
Acquisition
related
costs ............. $ 379 $ 197 $ 130 $ 405 $ 735 $ -- $ -- $ --
Percent of net
sales ............ 0.2% 0.1% 0.1% 0.2% 0.3% -- -- --
Loss on
disposition of
business .......... $ 2,800 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Percent of net
sales ............ 1.2% -- -- -- -- -- -- --
Income from
operations ........ $ 6,254 $ 8,786 $ 9,448 $ 9,320 $ 8,775 $ 7,727 $ 7,232 $ 7,101
Operating
margin ........... 2.6% 3.9% 4.3% 4.2% 3.8% 3.9% 3.8% 3.9%
Income before
cumulative
effect of
accounting
change ............ $ 3,488 $ 4,981 $ 5,281 $ 5,438 $ 4,845 $ 4,424 $ 4,147 $ 4,100
Percent of net
sales ............. 1.5% 2.2% 2.4% 2.4% 2.1% 2.2% 2.2% 2.2%
Net income ........... $ 3,488 $ 4,981 $ 5,281 $ 5,033 $ 4,845 $ 4,424 $ 4,147 $ 4,100
Net margin ......... 1.5% 2.2% 2.4% 2.4% 2.1% 2.2% 2.2% 2.2%
</TABLE>
-16-
<PAGE> 17
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Net Sales. Net sales for the year ended March 31, 1999 increased $108.5 million,
or 13.6%, to $908.6 million as compared to $800.1 million for the year ended
March 31, 1998. International Computer Supplies sales increased 32.4% in fiscal
1999 over fiscal 1998 primarily due to market share growth and higher industry
growth rates in the international markets, such as Canada, Latin America,
Australia and the Far East. Professional Tape Products sales increased 80.2% in
fiscal 1999 over fiscal 1998 due to organic growth of approximately 10% and the
acquisition of Steadi-Systems in January 1998. Also, net sales grew during
fiscal year 1999 as a result of higher sales volumes of products under master
distribution outsourcing contracts in PFS. U.S. Computer Supplies sales
decreased 8.6% in fiscal 1999 over fiscal 1998 due to a reduction in business
with large office superstores and a warehouse club and a slower growth rate in
the U.S. market. The growth in sales for the U.S. Computer Supplies business has
slowed from previously realized levels. The Company believes this reduction is
due in large part to slower industry growth, large channel shifts, turmoil in
certain customer segments and slower printer placements.
Gross Profit. The Company's gross profit margin as a percent of net sales was
11.9% for the year ended March 31, 1999 as compared to 10.9% for the prior year.
The increase in the Company's gross profit margin as a percentage of net sales
was primarily a result of (i) enhanced product sourcing in the Computer Supplies
segments, (ii) a reduction in net sales of computer supplies with lower gross
margins to large office superstores and a warehouse club, and (iii) an increase
in Professional Tape Product sales, which have higher gross margins than the
Company's computer supplies products, as a percent of total net sales. The
Company believes that the competitive environment, consolidation of its computer
supplies products customers and potentially reduced future product sourcing
opportunities may negatively impact the Company's gross profit margin percentage
during fiscal year 2000.
SG&A Expenses. SG&A expenses for the year ended March 31, 1999 were $70.6
million (excluding acquisition related costs and a charge related to the
disposition of the Professional Tape Products hardware division), or 7.8% of net
sales, as compared to $56.0 million, or 7.0% of net sales, for the year ended
March 31, 1998. The increase in SG&A expenses as a percentage of net sales for
fiscal year 1999 was due primarily to (i) a reduction in net sales with lower
SG&A expense ratios to large office superstores and a warehouse club, and (ii)
the impact of the higher SG&A expense ratio in the Company's Professional Tape
Products segment.
Acquisition Related Costs. During June 1998, the Company completed the
acquisition of The Tape Company through a stock-for-stock merger, which is
accounted for as a pooling of interests in the accompanying Consolidated
Financial Statements and notes thereto. Daisytek incurred various acquisition
costs related to accounting, legal and other costs applicable to the acquisition
of The Tape Company of $0.4 million in June 1998. During the fiscal year ended
March 31, 1999, the Company incurred costs of approximately $0.7 million related
to transition, integration and merger activities.
Loss on Disposition of Business. The Company recorded a charge of $2.8
million related to the disposition of its professional tape hardware division in
March 1999. See Note 2 of Notes to Consolidated Financial Statements.
Interest Expense. Interest expense was $2.8 million during the year ended
March 31, 1999 and was $3.1 million during the year ended March 31, 1998.
Interest expense was higher in fiscal 1999 primarily due to an increase in the
average line of credit to support working capital requirements and business
acquisitions, partially offset by a slight decrease in interest rates. The
weighted average interest rate was 6.5% and 6.7% during the years ended March
31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate increased to 38.1% for the
year ended March 31, 1999 as compared to 36.8% for the year ended March 31,
1998. The increase was primarily due to non-deductible goodwill amortization
from the Steadi-Systems acquisition combined with additional state income taxes
resulting from the acquisitions of both Steadi-Systems and The Tape Company. On
a pro forma basis, excluding the impact of The Tape Company's subchapter S
corporation status prior to the June 1998 merger, the Company's effective tax
rate would have been approximately 39% in fiscal 1999.
-17-
<PAGE> 18
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Net Sales. Net sales for the year ended March 31, 1998 were $800.1 million
as compared to $639.5 million for the year ended March 31, 1997, an increase of
$160.6 million, or 25.1%. International Computer Supplies sales increased 45.6%
in fiscal 1998 over fiscal 1997 due primarily to market share growth and higher
industry growth rates in the international markets, such as Canada, Latin
America and Australia. U.S. Computer Supplies sales increased 11.5% in fiscal
1998 over fiscal 1997 due to increased sales volume to large national accounts
and office superstores. The increase in U.S. Computer Supplies was offset by a
reduction in sales to one of its largest customers due to the Company deciding
it would not match lower pricing offered by a competitor. Net sales to this
customer represented approximately 7% to 8% of U.S. Computer Supplies revenue in
fiscal 1997 and the first half of fiscal 1998. Professional Tape Products sales
increased 59.8% in fiscal 1998 over fiscal 1997 due primarily to organic growth
of approximately 10% and the acquisition of Steadi-Systems in January 1998.
Also, net sales grew during fiscal year 1998 as a result of higher sales volumes
of products under master distribution outsourcing contracts in PFS.
Gross Profit. The Company's gross profit margin as a percent of net sales
was 10.9% for the year ended March 31, 1998 as compared to 10.6% for the prior
year. The increase in the Company's gross profit margin percentage for fiscal
year 1998 was primarily the result of enhanced computer supplies product
sourcing in fiscal year 1998 and an increase in Professional Tape Products
sales, which have higher margins than the Company's computer supplies products,
as a percent of total net sales.
SG&A Expenses. SG&A expenses for the year ended March 31, 1998 were $56.0
million (excluding acquisition related costs), or 7.0% of net sales, as compared
to $41.9 million, or 6.5% of net sales, for the year ended March 31, 1997. The
increase in SG&A expenses as a percentage of net sales for fiscal year 1998 was
due primarily to increased SG&A costs from investments associated with the PFS
business and the impact of the higher SG&A expense ratio in the Company's
Professional Tape Products segment which grew strongly through organic growth
and acquisition year over year. The increased costs during fiscal year 1998 were
partially offset by lower costs due to improved operating efficiencies and staff
productivity as a result of increased sales volume and continued technological
enhancements implemented by the Company.
Acquisition Related Costs. During January 1998, the Company purchased all
of the common stock of Steadi-Systems. The Company recorded a pretax charge
related to the completion of the transition, integration and merger activities
of about $0.7 million in the Company's fourth financial quarter ended March
31, 1998.
Interest Expense. Interest expense was $3.1 million during the year ended
March 31, 1998 and was $1.8 million during the year ended March 31, 1997.
Interest expense increased as a result of an increase in the average credit line
to support a larger revenue base, the acquisition of Steadi-Systems, and the
higher inventory levels due to purchasing opportunities. The weighted average
interest rate was 6.7% during the years ended March 31, 1998 and 1997.
Income Taxes. The Company's effective tax rate increased to 36.8% for the
year ended March 31, 1998 as compared to 34.6% for the year ended March 31,
1997. The increase was primarily due to the pooling of interests with The Tape
Company. Prior to its acquisition by the Company, The Tape Company included a
business unit organized as a subchapter S corporation, whereby income taxes were
paid individually by the owners. In fiscal year 1997, The Tape Company's income
before taxes represented a larger percentage of the Company's total income
before income taxes than in fiscal year 1998, which increases the effective tax
rate for fiscal year 1998. See Notes 2 and 7 to Notes to Consolidated Financial
Statements.
-18-
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. Net cash provided by financing activities was $24.8 million, $30.8
million and $16.2 million for fiscal years 1999, 1998 and 1997, respectively.
Cash provided by financing activities was generated primarily from proceeds from
revolving lines of credit during the fiscal year ended March 31, 1999. In
conjunction with the Professional Tape segments' business combinations in fiscal
1999 and 1998, certain acquired debt of these entities was paid in full by the
Company. Included in cash flows from financing activities are also distributions
made to shareholders of The Tape Company relating to taxes incurred by these
shareholders for earnings of the business unit of The Tape Company, which was
organized as a subchapter S corporation. These distributions were made prior to
the business combination with the Company. During the fiscal year ended March
31, 1998, cash provided by financing activities was generated primarily through
the issuance of 2.3 million shares of common stock, which was used to reduce the
Company's indebtedness.
Net cash provided by operating activities in fiscal 1999 was $13.0 million.
Net cash used in operating activities was $16.7 million and $5.9 million for
fiscal years 1998 and 1997, respectively. Working capital requirements increased
in each of the three fiscal years ended March 31, 1999, primarily as a result of
the growth in the Company's business. In fiscal 1999, such requirements were
funded by cash generated from operations. In fiscal 1998 and 1997, these
requirements were partially funded by cash generated by the Company's
operations, with the remainder provided by financing activities.
The Company's principal use of funds for investing activities was capital
expenditures of $10.5 million, $6.3 million and $6.3 million for fiscal years
1999, 1998 and 1997, respectively, and for acquisitions of businesses and
incremental costs of acquired businesses of $20.6 million, 6.3 million, and $3.4
million, in fiscal years 1999, 1998, and 1997, respectively. See Note 2 of
Notes to Consolidated Financial Statements. In addition, PFS has entered into a
long-term contractual agreement with one of its clients whereby PFS finances
certain of the client's inventory, which was $12.1 million at March 31, 1999
(see Note 1 of Notes to Consolidated Financial Statements). Capital expenditures
have consisted primarily of additions to upgrade the Company's management
information systems, including the Company's Internet based customer tools, it's
on-line catalog and ordering tool (SOLOnet), 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 2000 will be approximately $12.0 to $15.0 million. The
increase in anticipated capital expenditures over fiscal 1999 relates primarily
to capital expenditures applicable to the PFS segment, including its new Belgium
distribution facility.
Working capital increased to $138.8 million at March 31, 1999 from $124.0
million at March 31, 1998, an increase of $14.8 million, which was primarily
attributable to increases in inventory associated with the Company's PFS
segment and an increase in accounts receivable primarily related to revenue
growth. These increases were partially offset by an increase in accounts
payable.
The Company has entered into an agreement with certain banks for an
unsecured revolving line of credit facility (the "Facility") that, as amended on
March 29, 1999, has a maximum borrowing availability of $85.0 million and
expires on December 31, 2000. Availability under the Facility is based upon
amounts of eligible accounts receivable and inventory, as defined. As of March
31, 1999, the Company had borrowed $29.8 million, leaving $55.2 million
available under the Facility for additional borrowings. The Facility accrues
interest, at the Company's option, at the prime rate of a bank or a Eurodollar
rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's
financial performance. A commitment fee of 0.20% to 0.25% is charged on the
unused portion of the Facility. The Facility contains various covenants
including, among other things, the maintenance of certain financial ratios
including the achievement of a minimum fixed charge ratio and minimum level of
tangible net worth, and restrictions on certain activities of the Company,
including loans and payments to related parties, incurring additional debt,
acquisitions, investments and asset sales.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, as amended in
July 1998, expires on December 31, 2000, and allows the Company to borrow
Australian dollars up to a maximum of $7.5 million (Australian), or
approximately $4.8 million (U.S.) at March 31, 1999. The Australian Facility
accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian
bank's overnight rate plus 0.75%. A
-19-
<PAGE> 20
commitment fee of 0.25% is charged on the total amount of the Australian
Facility. As of March 31, 1999, there was no unused availability under the
Australian Facility.
During December 1997, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). The Canadian Facility, which expires on
December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a
maximum of $15.0 million (Canadian), or approximately $9.9 million (U.S.) at
March 31, 1999. The Company had borrowed approximately $8.1 million (U.S.),
leaving approximately $1.8 million (U.S.) available under the Canadian Facility
at March 31, 1999. The Canadian Facility accrues interest at the Company's
option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's
U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25%
is charged on the unused portion of the Canadian Facility.
During December 1998, the Company entered into a promissory note agreement
with a bank, which allows the Company to borrow up to a maximum of $10.0
million. Amounts borrowed under this note agreement bear interest at the bank's
discretion, primarily based on a money market borrowing rate plus an adjustment.
The maturity date of any amounts borrowed will occur prior to January 2000, the
expiration date of the note. The Company had no borrowings outstanding under
this promissory note agreement at March 31, 1999.
The Company believes that international markets represent further
opportunities for growth. The Company attempts to protect itself from foreign
currency fluctuations by denominating substantially all its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company has
entered into various forward Canadian and Australian currency exchange contracts
in order to hedge the Company's net investments in, and its intercompany
payables applicable to, its Canadian and Australian subsidiaries. The Company
has the following forward currency exchange contracts outstanding as of March
31, 1999:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
<S> <C> <C> <C>
Canadian Dollars $9.7 million Sell Canadian Dollars May 1999
Australian Dollars $5.8 million Sell Australian Dollars April 1999
Australian Dollars $1.3 million Sell Australian Dollars August 1999
</TABLE>
As of March 31, 1999, the Company had incurred net unrealized losses of
approximately $184,000 on these outstanding Canadian and Australian forward
exchange contracts, which are included as a component of shareholders' equity.
The Company may consider entering into other forward exchange contracts in order
to hedge the Company's net investment in its Canadian, Australian, Mexican, and
Singaporean subsidiaries, although no assurance can be given that the Company
will be able to do so on acceptable terms.
In the future, the Company may attempt to acquire other businesses to
expand its existing computer supplies and professional tape businesses in the
U.S. or internationally, expand its product line similar to the Company's entry
into the Professional Tape segment and expand its services or capabilities in
connection with its efforts to grow its PFS business. The Company currently has
no binding agreements to acquire any such businesses. Should the Company be
successful in acquiring other businesses, the Company may require additional
financing to consummate such a transaction. Acquisitions involve certain risks
and uncertainties, therefore, the Company can give no assurance with respect to
whether it will be successful in identifying such a business to acquire, whether
it will be able to obtain financing to complete such an acquisition, or whether
the Company will be successful in operating the acquired business.
The Company believes it will be able to satisfy its working capital needs
for fiscal year 2000, as well as business growth and planned capital
expenditures, through funds available under the Company's various 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.
-20-
<PAGE> 21
YEAR 2000 ISSUE
The Company utilizes a significant number of computer software programs and
information systems in its operations ("IT systems"). The mission-critical IT
systems include the Company's operating, accounting and telecommunications
systems, such as IT software applications that allow the Company to maintain
inventory and customer information and to communicate with its suppliers and
customers. The Company also makes use of a variety of machinery and equipment in
its business which are operated by or reliant upon non-information technology
systems ("non-IT systems"), for example, equipment or mechanical systems which
contain embedded technology such as microcontrollers. To the extent that the
source code of the software applications of these IT systems or the embedded
technologies of these non-IT systems are unable to appropriately interpret and
process the upcoming calendar year 2000, some level of modification or possible
replacement of such applications would be necessary for proper continuous
performance. Without such modification or replacement, the normal course of the
Company's business could be disrupted or otherwise adversely impacted. This
potential problem is commonly referred to as the year 2000 compliance issue
("Y2K").
In fiscal 1997, the Company began to address Y2K. The Company has formed a
Y2K task force under its Chief Information Officer to coordinate and implement
measures designed to prevent disruption in its business operations related to
Y2K. The Company is scheduled to complete the remediation of its
mission-critical IT applications software in August 1999 and is scheduled to
complete remediation of its non-mission critical applications software by
October 1999. The Company is assessing the effect of Y2K on its non-IT systems
and intends to modify or replace non-IT systems as necessary to insure Y2K
readiness by October 1999.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate Y2K. However, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company. The Company is developing
contingency plans to address the risks created by third parties' failure to
remediate Y2K. These plans include procuring alternative suppliers, when
available, when the Company is able to conclude that an existing supplier will
not be Y2K ready. The Company is scheduled to complete these contingency plans
by September 1999.
The Company continues to grow through business acquisitions. All
acquisitions of the Company have been converted to the Company's operating
system.
During fiscal year 1999, the Company incurred approximately $0.5 million of
expenses related to Y2K. In total, the Company's assessment and remediation of
Y2K has a budget of approximately $0.8 million, which includes both external
costs, such as outside consultants, software and hardware applications, as well
as internal costs, primarily payroll related, which are not separately tracked.
Funding for Y2K expenses will be generated from on-going operations and
available borrowings under the Company's revolving line of credit facilities.
There can be no assurance that Y2K remediation by the Company or third
parties will be properly and timely completed and failure to do so could have a
material adverse effect on the Company's financial condition. The Company cannot
predict the actual effects of Y2K, which depends on numerous uncertainties such
as: (1) whether major third parties address this issue properly and timely and
(2) whether broad-based or systemic economic failures may occur. The Company is
currently unaware of any events, trends, or conditions regarding this issue that
may have a material effect on the Company's results of operations, liquidity,
and financial position. If Y2K is not resolved by January 1, 2000, the Company's
results of operations or financial condition could be materially adversely
affected.
INVENTORY MANAGEMENT
The Company manages its inventories held for sale in its wholesale
distribution business by maintaining sufficient quantities of product to achieve
high order fill rates while at the same time maximizing inventory turnover
rates. Inventory balances will fluctuate as the Company adds new product lines
and makes large purchases from suppliers to take advantage of attractive terms.
To reduce the risk of loss to the Company due to supplier price reductions and
slow moving inventory, the Company's purchasing agreements with many of its
suppliers, including
-21-
<PAGE> 22
most of its major suppliers, contain price protection and stock return
privileges under which the Company receives credits if the supplier lowers
prices on previously purchased inventory or the Company can return slow moving
inventory in exchange for other products.
Certain of PFS's product fulfillment and distribution service agreements
provide that PFS 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 PFS under these contracts are generally higher
than the Company would normally carry in its wholesale distribution businesses.
SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine the specific or, if any, seasonal factors that may cause
quarterly variability in operating results. Management believes, however, that
factors that may influence quarterly variability include the overall growth in
the non-paper computer supplies industry and shifts in demand for the Company's
computer supplies products due to a variety of factors, including sales
increases resulting from the introduction of new products. The Company generally
experiences a relative slowness in sales during the summer months, which may
adversely affect the Company's first and second fiscal quarter results in
relation to sequential quarter performance.
The seasonality of the Company's PFS business is dependent upon the
seasonality of the customers' products which PFS distributes or provides
services for. Accordingly, management must rely upon the projections of its PFS
customers in assessing quarterly variability.
The Company believes that results of operations for a quarterly period may
not be indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investments in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial instruments
in other comprehensive income as a part of the cumulative translation
adjustment. The Company is currently evaluating the provisions of SFAS No. 133
and its effect on the accounting treatment of these financial instruments. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000, with
initial application as of the beginning of an entity's fiscal quarter. Early
adoption of the standard is allowed, however, the statement cannot be applied
retroactively to financial statements of prior periods.
-22-
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest
rates and foreign currency exchange rates. Interest rate exposure is limited to
the Company's outstanding balances on its revolving lines of credit which
amounted to $42.7 million at March 31, 1999. The interest rates on the revolving
lines of credit float with the market. A 50 basis point movement in interest
rates would result in approximately $214,000 annualized increase or decrease in
interest expense based on the outstanding balance of the revolving line of
credit at March 31, 1999.
The Company's foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars, and Singapore Dollars. The
Company's international sales and purchases are generally U.S. Dollar based,
except in Canada and Australia. In order to mitigate foreign currency rate risk,
the Company periodically enters into foreign currency forward contracts to hedge
the net investments and long-term intercompany payable balances applicable to
its Canadian and Australian subsidiaries. The Company had three outstanding
foreign currency forward contracts at March 31, 1999. If the foreign exchanges
rates of the Canadian and Australian currencies fluctuate 10% from the March 31,
1999 rates, gains or losses in fair value on the three outstanding contracts
would be $1.4 million.
-23-
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants............................................................. 25
Consolidated Balance Sheets as of March 31, 1999 and 1998............................................ 26
Consolidated Statements of Income for the Fiscal Years Ended March 31, 1999, 1998 and 1997........... 28
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 1999, 1998
and 1997........................................................................................... 29
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1999, 1998 and 1997....... 30
Notes to Consolidated Financial Statements........................................................... 31
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-24-
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited the accompanying consolidated balance sheets of Daisytek
International Corporation (a Delaware corporation) and subsidiaries as of March
31, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 5, 1999
-25-
<PAGE> 26
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1999 1998 (a)
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................................. $ 1,551 $ 2,087
Accounts receivable, net of allowance for doubtful accounts of
$2,857 and $2,765 at March 31, 1999 and 1998, respectively.......... 139,864 127,563
Inventories, net:
Inventories, excluding Priority Fulfillment Services................ 77,557 81,956
Inventories, Priority Fulfillment Services.......................... 30,361 11,634
Prepaid expenses and other current assets............................. 4,982 3,944
Deferred tax asset.................................................... 137 --
---------- ----------
Total current assets........................................... 254,452 227,184
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment..................................... 37,807 28,391
Leasehold improvements................................................ 2,399 1,907
--------- ---------
40,206 30,298
Less-- Accumulated depreciation and amortization...................... (20,296) (15,025)
--------- ---------
Net property and equipment..................................... 19,910 15,273
OTHER ASSET............................................................. 12,070 --
EMPLOYEE RECEIVABLE..................................................... 485 459
EXCESS OF COST OVER NET ASSETS ACQUIRED, net............................ 28,962 14,929
--------- ---------
Total assets................................................... $ 315,879 $ 257,845
========== ==========
</TABLE>
- -----------------
(a) Restated to combine the financial positions of Daisytek International
Corporation (the "Company" or "Daisytek") with The Tape Company, Inc.
("The Tape Company"), which was acquired by Daisytek during June 1998
and accounted for as a pooling of interests. (See Note 2 of these
Consolidated Financial Statements.)
The accompanying notes are an integral part of
these consolidated balance sheets.
-26-
<PAGE> 27
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1999 1998 (a)
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ............................................ $ 146 $ 3,010
Trade accounts payable ....................................................... 103,179 87,390
Accrued expenses ............................................................. 11,802 9,768
Income taxes payable ......................................................... 561 1,484
Deferred income tax liability ................................................ -- 1,546
--------- ---------
Total current liabilities ............................................. 115,688 103,198
--------- ---------
LONG-TERM DEBT, less current portion ........................................... 43,021 16,916
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized at
March 31, 1999 and 1998, none issued and outstanding ....................... -- --
Common stock, $0.01 par value; 30,000,000 and 20,000,000 shares authorized
at March 31, 1999 and 1998, respectively; 17,162,382 and 16,935,896 shares
issued and outstanding at March 31, 1999 and 1998, respectively ............ 172 170
Additional paid-in capital ................................................... 87,394 85,501
Retained earnings ............................................................ 71,801 53,991
Accumulated other comprehensive income ....................................... (2,197) (1,931)
--------- ---------
Total shareholders' equity ............................................ 157,170 137,731
--------- ---------
Total liabilities and shareholders' equity ............................ $ 315,879 $ 257,845
========= =========
</TABLE>
- -----------------
(a) Restated to combine the financial positions of the Company with The
Tape Company, which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests. (See Note 2 of these
Consolidated Financial Statements.)
The accompanying notes are an integral part of
these consolidated balance sheets.
-27-
<PAGE> 28
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1999 1998 (a) 1997(a)
--------- --------- ---------
<S> <C> <C> <C>
NET SALES .................................................. $ 908,630 $ 800,112 $ 639,511
COST OF SALES .............................................. 800,263 712,568 571,448
--------- --------- ---------
Gross profit ............................. 108,367 87,544 68,063
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............................ 70,648 55,974 41,870
ACQUISITION RELATED COSTS .................................. 1,111 735 --
LOSS ON DISPOSITION OF BUSINESS ............................ 2,800 -- --
--------- --------- ---------
Income from operations ................... 33,808 30,835 26,193
INTEREST EXPENSE ........................................... 2,797 3,134 1,847
--------- --------- ---------
Income before income taxes ............... 31,011 27,701 24,346
PROVISION FOR INCOME TAXES:
Current .................................. 13,506 8,074 8,235
Deferred ................................. (1,683) 2,111 197
--------- --------- ---------
11,823 10,185 8,432
--------- --------- ---------
Income before cumulative effect of
accounting change ..................... 19,188 17,516 15,914
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ......... (405) -- --
--------- --------- ---------
NET INCOME ................................................. $ 18,783 $ 17,516 $ 15,914
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic
Income before cumulative effect of accounting change .... $ 1.12 $ 1.20 $ 1.14
Cumulative effect of accounting change, net of tax ...... (0.02) -- --
--------- --------- ---------
Net income .............................................. $ 1.10 $ 1.20 $ 1.14
========= ========= =========
Diluted
Income before cumulative effect of accounting change .... $ 1.08 $ 1.14 $ 1.08
Cumulative effect of accounting change, net of tax ...... (0.02) -- --
--------- --------- ---------
Net income .............................................. $ 1.06 $ 1.14 $ 1.08
========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON SHARE EQUIVALENTS
OUTSTANDING:
Basic ............................................. 17,101 14,541 13,909
Diluted ........................................... 17,789 15,318 14,801
</TABLE>
- -----------------
(a) Restated to combine the results of operations of Daisytek with The Tape
Company, which was acquired by Daisytek during June 1998 and accounted
for as a pooling of interests. (See Note 2 of these Consolidated
Financial Statements.)
The accompanying notes are an integral part of
these consolidated statements.
-28-
<PAGE> 29
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, ..........................
March 31, 1996 (a) ................ 13,660,370 $ 137 $ 30,827 $ 23,768
Net income (a) .................. -- -- -- 15,914
Other comprehensive income -
foreign currency translation
adjustment .................... -- -- -- --
Comprehensive income ............
Distribution of earnings to The
Tape Company shareholders ..... -- -- -- (1,416)
Net proceeds from exercise of
common stock options ......... 315,796 3 1,635 --
Issuance of common stock for
acquisition of subsidiary .... 38,562 -- 791 --
Issuance of common stock ........ 1,554 -- 30 --
---------- ----------- ----------- -----------
BALANCE,
March 31, 1997 (a) ................ 14,016,282 140 33,283 38,266
Net income (a) .................. -- -- -- 17,516
Other comprehensive income -
foreign currency translation
adjustment .................... -- -- -- --
Comprehensive income ............
Distribution of earnings to The
Tape Company shareholders ..... -- -- -- (1,791)
Repurchase of The Tape Company
shares......................... -- -- (4,394) --
Net proceeds from exercise of
common stock options ......... 616,326 7 3,932 --
Net proceeds from issuance of
common stock ................. 2,303,288 23 52,680 --
---------- ----------- ----------- -----------
BALANCE,
March 31, 1998 (a) ................ 16,935,896 170 85,501 53,991
Net income (a) .................. -- -- -- 18,783
Other comprehensive income -
foreign currency translation
adjustment .................... -- -- -- --
Comprehensive income ............
Distribution of earnings to The
Tape Company shareholders ..... -- -- -- (973)
Net proceeds from exercise of
common stock options ......... 223,953 2 1,838 --
Issuance of common stock ........ 2,533 -- 55 --
---------- ----------- ----------- -----------
BALANCE,
March 31, 1999 .................... 17,162,382 $ 172 $ 87,394 $ 71,801
========== =========== =========== ===========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL COMPREHENSIVE
INCOME EQUITY INCOME
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, ..........................
March 31, 1996 (a) ................ $ (1,012) $ 53,720
Net income (a) .................. -- 15,914 $ 15,914
Other comprehensive income -
foreign currency translation
adjustment .................... (294) (294) (294)
-----------
Comprehensive income ............ $ 15,620
===========
Distribution of earnings to The
Tape Company shareholders ..... -- (1,416)
Net proceeds from exercise of
common stock options ......... -- 1,638
Issuance of common stock for
acquisition of subsidiary .... -- 791
Issuance of common stock ........ -- 30
----------- -----------
BALANCE,
March 31, 1997 (a) ................ (1,306) 70,383
Net income (a) .................. -- 17,516 $ 17,516
Other comprehensive income -
foreign currency translation
adjustment .................... (625) (625) (625)
-----------
Comprehensive income ............ $ 16,891
===========
Distribution of earnings to The
Tape Company shareholders ..... -- (1,791)
Repurchase of The Tape Company
shares......................... -- (4,394)
Net proceeds from exercise of
common stock options ......... -- 3,939
Net proceeds from issuance of
common stock ................. -- 52,703
----------- -----------
BALANCE,
March 31, 1998 (a) ................ (1,931) 137,731
Net income (a) .................. -- 18,783 $ 18,783
Other comprehensive income -
foreign currency translation
adjustment .................... (266) (266) (266)
-----------
Comprehensive income ............ $ 18,517
===========
Distribution of earnings to The
Tape Company shareholders ..... -- (973)
Net proceeds from exercise of
common stock options ......... -- 1,840
Issuance of common stock ........ -- 55
----------- -----------
BALANCE,
March 31, 1999 .................... $ (2,197) $ 157,170
=========== ===========
</TABLE>
- -----------
(a) Restated to combine the shareholders' equity of Daisytek with The Tape
Company, which was acquired by Daisytek during June 1998 and accounted
for as a pooling of interests. (See Note 2 of these Consolidated
Financial Statements.)
The accompanying notes are an integral part of these consolidated statements.
-29-
<PAGE> 30
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------
1999 1998 (a) 1997 (a)
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 18,783 $ 17,516 $ 15,914
Adjustments to reconcile net income to net cash
provided by (used in) operating activities, net of
effects from acquisition of businesses:
Depreciation and amortization .......................... 6,048 5,011 3,980
Provision for doubtful accounts ........................ 2,863 2,016 1,660
Deferred income tax (benefit) provision ................ (1,683) 2,111 197
Changes in operating assets and liabilities
Accounts receivable ................................ (12,564) (31,773) (24,341)
Inventories, net ................................... (16,279) (21,880) (19,623)
Trade accounts payable and accrued
expenses ......................................... 17,923 12,670 14,525
Income taxes payable ............................... (884) 115 967
Prepaid expenses and other current
assets ........................................... (1,222) (2,484) 776
-------- -------- --------
Net cash provided by (used in) operating
activities .......................................... 12,985 (16,698) (5,945)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (10,523) (6,304) (6,307)
Acquisitions of businesses, net of cash acquired .............. (20,585) (6,322) (3,372)
Disposition of business ....................................... 4,736 -- --
Advances of employee receivables, net ......................... (117) (45) --
Increase in other asset ....................................... (12,070) -- (30)
-------- -------- --------
Net cash used in investing activities ................. (38,559) (12,671) (9,709)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) revolving lines of
credit, net ................................................ 28,686 (20,361) 14,660
(Payments on) proceeds from capital leases and notes payable... (4,787) (2,796) 1,317
Net proceeds from sale of stock and exercise of
stock options .............................................. 1,906 56,582 1,638
Distributions to former shareholders of The Tape Company ...... (973) (1,791) (1,416)
Payment to former shareholder of The Tape Company ............. -- (809) --
-------- -------- --------
Net cash provided by financing
activities .......................................... 24,832 30,825 16,199
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH ................................ 206 74 (192)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH ................................. (536) 1,530 353
CASH, beginning of period ....................................... 2,087 557 204
-------- -------- --------
CASH, end of period ............................................. $ 1,551 $ 2,087 $ 557
======== ======== ========
</TABLE>
- --------
(a) Restated to combine the cash flows of Daisytek with The Tape Company, which
was acquired by Daisytek during June 1998 and accounted for as a pooling of
interests. (See Note 2 of these Consolidated Financial Statements).
The accompanying notes are an integral part
of these consolidated statements
-30-
<PAGE> 31
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Business
Daisytek International Corporation (a Delaware corporation) and
subsidiaries ("the Company") is a leading wholesale distributor of non-paper
computer and office automation supplies and accessories ("computer supplies")
and professional-grade video and audio media products ("professional tape
products"). Through its Priority Fulfillment Services subsidiaries ("PFS"), the
Company is also a leading provider of end-to-end transaction management and
e-commerce logistics business solutions. The Company, through its wholly owned
subsidiaries in the U.S., Canada, Australia, Mexico and Singapore, sells
products and services primarily in North America, as well as in Latin America,
Australia, Singapore, the Pacific Rim, Europe and Africa.
The computer supplies products include laser toner, inkjet cartridges,
copier and fax supplies, printer ribbons, diskettes, optical storage products,
computer tape cartridges and accessories such as cleaning kits and media storage
files. These products are used in a broad range of computers and office
automation products including laser and inkjet printers, photocopiers, fax
machines and data storage products. The Company's computer supplies customers
include value-added resellers, computer supplies dealers, office product
dealers, contract stationers, buying groups, computer and office product
superstores and other retailers who resell the products to end-users.
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, logistic and
support services to client companies on an international basis. 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. Through the newly created PFSweb division of PFS, the Company now
offers an outsourcing solution to companies conducting sales over the Internet
by providing the infrastructure needed to support web-based activity, including
online order processing, warehousing and shipping of product. In December 1998,
PFS established a European operation with headquarters in Maastrict, The
Netherlands. PFS provides its services primarily under fee-based contracts
(where revenue is based on either the sales value of the products or service
activity volume) and, in certain limited circumstances, under master
distribution agreements (where PFS takes title and resells the product).
In January 1998, the Company expanded its product line by acquiring
Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of
professional tape products to the filmed entertainment and multimedia
industries. The Company further expanded its operations in the distribution of
pro-tape products through the acquisition of The Tape Company in June 1998 and
the purchase of the professional tape division of Videotape Products, Inc.
("VTP") in March 1999. In connection with the purchase of VTP, the Company also
sold certain assets of its professional hardware division to VTP. As part of the
agreement, both VTP and Daisytek have entered into a long-term strategic
alliance. Under this alliance, the companies will work jointly to provide a full
range of products to their combined customers. Through Steadi-Systems, The Tape
Company, and VTP, the Company distributes a wide array of professional-grade
audio and video media products to customers including production companies,
post-production operations, broadcast stations, corporate in-house production
facilities, advertising agencies, and cable television providers.
Further segment information is presented in Note 9 to these Consolidated
Financial Statements.
-31-
<PAGE> 32
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Basis of Presentation
The consolidated financial statements include the accounts of Daisytek
International Corporation and its subsidiaries and the accounts of companies
acquired in business combinations accounted for under 1) the purchase method
from their respective acquisition dates, and 2) the pooling of interests method,
giving retroactive effect for all periods presented. All significant
intercompany transactions are eliminated. The preparation of consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
Reclassifications
Certain prior year data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows.
Revenue Recognition
The Company recognizes product revenue upon shipment of product to
customers and provides for estimated returns and allowances. The Company permits
its customers to return defective products (many of which are then returned by
the Company to the manufacturer) and incorrect shipments for credit against
other purchases. The Company offers terms to its customers that it believes are
standard for its industries. PFS service fee revenues are recognized at the time
the service is provided to its client.
Inventories
Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market.
Inventories held and owned by the Company's PFS subsidiary relate to
product fulfillment and logistics services provided for third parties, and are
presented separately in the consolidated balance sheet as certain of these
distribution agreements generally allow for the third party to manage the levels
of inventory held by the Company. As a result, the levels of inventory held by
the Company under these contracts are generally 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 three to ten 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 1999, 1998 and 1997 was approximately $0.7 million, $0.3 million,
and $0.2 million, respectively. Accumulated amortization as of March 31, 1999
and 1998 was approximately $1.7 million and $0.9 million, respectively.
Other Asset
The Other Asset reflects a receivable from a client of PFS. During fiscal
1999, PFS entered into a long-term contractual agreement whereby PFS finances
certain inventory of the client. PFS warehouses this inventory and distributes
it upon the sale to third parties by the client, who controls the disposition of
this inventory. In connection with this agreement, PFS charges the client an
asset
-32-
<PAGE> 33
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
management fee.
Foreign Currency Translation and Transactions
For the Company's Canadian and Australian subsidiaries, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of shareholders' equity. In
addition, the Company periodically enters into foreign exchange contracts in
order to hedge the Company's net investment in, and its intercompany payable
balance (of a long-term investment nature) applicable to its Canadian and
Australian subsidiaries. The Company had the following forward currency exchange
contracts outstanding as of March 31, 1999:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
<S> <C> <C> <C>
Canadian Dollars $9.7 million Sell Canadian Dollars May 1999
Australian Dollars $5.8 million Sell Australian Dollars April 1999
Australian Dollars $1.3 million Sell Australian Dollars August 1999
</TABLE>
As of March 31, 1999, the Company had incurred net unrealized losses of
approximately $184,000 on these outstanding Canadian and Australian forward
exchange contracts, which are included as a component of shareholders' equity.
The Company may consider entering into other forward exchange contracts in order
to hedge the Company's net investment in its Canadian, and Australian
subsidiaries, although no assurance can be given that the Company will be able
to do so on acceptable terms.
For the Company's Mexican, Singaporean and European subsidiaries, the U.S.
dollar is the functional currency. Monetary assets and liabilities are
translated at the rates of exchange on the balance sheet date and certain assets
(notably inventory, and property and equipment) are translated at historical
rates. Income and expense items are translated at average rates of exchange for
the period except for those items of expense, which relate to assets, which are
translated at historical rates. The gains and losses from foreign currency
transactions and translation related to these subsidiaries are included in
net income and have not been material.
Cumulative Effect of Accounting Change
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP
98-5") requiring these costs to be accounted for as period expenses. The Company
has elected early adoption of this pronouncement effective April 1, 1998, and,
accordingly, recorded a cumulative effect charge to income, net of income taxes,
as of April 1, 1998, of $405,000. Excluding the cumulative effect, the change in
accounting for start-up costs did not materially affect net income for fiscal
year 1999.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average common shares outstanding for each period. Diluted net
income per share is calculated by dividing net income by the weighted average
common shares and 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 split
discussed in Note 4 has been reflected in the net income per common share
calculations for all periods presented.
-33-
<PAGE> 34
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in fiscal 1999. SFAS No. 130 requires the presentation of comprehensive income
and its components in the 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 and will have no effect on the results of operations or financial
condition of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investments in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial instruments
in other comprehensive income as a part of the cumulative translation
adjustment. The Company is currently evaluating the provisions of SFAS No. 133
and its effect on the accounting treatment of these financial instruments. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000, with
initial application as of the beginning of an entity's fiscal quarter. Early
adoption of the standard is allowed, however, the statement cannot be applied
retroactively to financial statements of prior periods.
-34-
<PAGE> 35
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. BUSINESS COMBINATIONS
Effective October 1, 1996, the Company acquired, with cash and common
stock, substantially all of the assets and liabilities of Lasercharge Pty Ltd
("Lasercharge"). Lasercharge is an Australian wholesale distributor of computer
and office automation supplies and accessories. The acquisition of Lasercharge
was accounted for using the purchase method of accounting, and, accordingly, the
purchase price has been allocated to the assets and liabilities assumed based on
fair values at the date of acquisition. This resulted in cost in excess of fair
value of approximately $3.6 million which is being amortized on a straight-line
basis over 20 years. Pro forma results of operations have not been presented
because the effects of the acquisition were not significant.
During January 1998, the Company purchased all of the common stock of
Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media
products to the filmed entertainment and multimedia industries. The acquisition
of Steadi-Systems was accounted for using the purchase method of accounting,
and, accordingly, the purchase price was allocated to the assets and liabilities
assumed based on the fair values at the date of acquisition. This resulted in
cost in excess of fair value at date of acquisition of approximately $10.4
million which is being amortized on a straight-line basis over 25 years.
Pro forma results of operations have not been presented because the effects of
the acquisition were not significant. The Company recorded a one-time
acquisition integration charge related to the completion of transition,
integration and merger activities, of about $0.7 million, or approximately $0.03
per diluted share, net of income taxes, in the Company's fourth financial
quarter ended March 31, 1998. Steadi-Systems was acquired using cash of
approximately $6.3 million during fiscal year 1998. Not included in this amount
were contingent cash payment arrangements payable if certain events occurred.
During May 1998, these events occurred and the Company incurred approximately
$2.9 million in additional costs for the acquisition of Steadi-Systems and
recorded the amount as an additional cost in excess of net assets acquired.
During June 1998, the Company completed the acquisition of The Tape Company
through a stock-for-stock merger. Under the terms of the acquisition, accounted
for as a pooling of interests, the Company exchanged 974,864 shares of Company
common stock for all of The Tape Company's common stock. The Tape Company is a
Chicago, Illinois-based independent distributor of professional grade audio and
video media products. In fiscal year 1999, the Company recorded $1.1 million, or
approximately $0.04 per diluted share, net of income taxes, in acquisition
related costs related to this transaction. Proforma data for fiscal year ended
March 31, 1999, is as follows (in thousands, except per share data):
<TABLE>
<S> <C>
Historical net income......................... $ 18,783
Proforma adjustments:
Provision for income taxes............... (291)
Acquisition related costs, net of tax.... 246
---------
Proforma net income........................... $ 18,738
=========
Proforma net income per share:
Basic.................................... $ 1.10
Diluted.................................. $ 1.05
</TABLE>
Pro forma adjustments for fiscal year 1999 include: (1) The Tape Company
included a business unit organized as a subchapter S corporation, whereby income
taxes were paid individually by the owners. The pro forma provision for income
tax adjustment is provided to reflect income tax under a corporate tax
structure. (2) Daisytek incurred various acquisition related accounting, legal
and other costs applicable to the acquisition of The Tape Company. The pro forma
adjustment for acquisition related costs, net of tax, excludes such costs from
pro forma net income.
-35-
<PAGE> 36
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Restated and previously reported revenue, net income, pro forma net income
and weighted average common share and common share equivalents outstanding are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1998
-------------------------------------------------
Daisytek -
Previously The Tape Daisytek -
Reported Company Restated
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................ $ 757,027 $ 43,085 $ 800,112
Net income............................... $ 16,160 $ 1,356 $ 17,516
Net income per common share:
Basic.............................. $ 1.19 $ 1.20
Diluted............................ $ 1.13 $ 1.14
Pro forma data:
Net income............................... $ 16,160 $ 1,356 $ 17,516
Pro forma adjustment for income taxes.... -- (431) (431)
------------ ------------ ------------
Pro forma net income..................... $ 16,160 $ 925 $ 17,085
============ ============ ============
Pro forma net income per common share:
Basic.............................. $ 1.19 $ 1.17
Diluted............................ $ 1.13 $ 1.12
Weighted average common and common
share equivalents outstanding:
Basic.............................. 13,566 14,541
Diluted............................ 14,343 15,318
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1997
-------------------------------------------------
Daisytek -
Previously The Tape Daisytek -
Reported Company Restated
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... $ 603,814 $ 35,697 $ 639,511
Net income.............................. $ 13,367 $ 2,547 $ 15,914
Net income per common share:
Basic.............................. $ 1.03 $ 1.14
Diluted............................ $ 0.97 $ 1.08
Pro forma data:
Net income.............................. $ 13,367 $ 2,547 $ 15,914
Pro forma adjustment for income taxes... -- (907) (907)
------------ ------------ ------------
Pro forma net income.................... $ 13,367 $ 1,640 $ 15,007
============ ============ ============
Pro forma net income per common share:
Basic.............................. $ 1.03 $ 1.08
Diluted............................ $ 0.97 $ 1.01
Weighted average common and common
share equivalents outstanding:
Basic.............................. 12,934 13,909
Diluted............................ 13,826 14,801
</TABLE>
-36-
<PAGE> 37
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 1998, the Company acquired accounts receivable and fixed assets
of Forex Telegistics B.V. for cash consideration of $3.7 million. The purchase
price has been allocated to the assets based on fair values at the date of
acquisition. This resulted in costs in excess of fair value of approximately
$0.1 million, which is being amortized on a straight line basis over 20 years.
In March 1999, the Company purchased the professional tape division of VTP,
a Glendale, California-based distributor of professional-grade audio and video
media and professional hardware products for approximately $13.5 million. In
addition, the Company sold certain assets of its professional hardware division
to VTP for approximately $4.7 million. The net cash consideration paid by the
Company for these transactions was approximately $8.8 million. The acquisition
of VTP was accounted for using the purchase method of accounting, and,
accordingly, the purchase price has been allocated to the assets and liabilities
assumed based on fair values at the date of acquisition. This resulted in costs
in excess of fair value of approximately $11.9 million, which is being amortized
over 25 years. Proforma results of operations have not been presented because
the effects of the acquisition and disposition were not significant. In
connection with this transaction, the Company recorded a $2.8 million one-time
charge relating to the disposition of its hardware division. The components of
the $2.8 million charge include: a) reserves for lease exit costs of
approximately $1.4 million; b) reserves for loss on realizability and
disposition of assets of $0.8 million; and c) employee and other exit costs of
approximately $0.6 million.
-37-
<PAGE> 38
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. DEBT:
Debt as of March 31, 1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revolving line of credit with commercial banks, interest (weighted average
rate of 6.1% at March 31, 1999) at the Company's option at the prime
rate of a bank (7.75% at March 31, 1999) or the Eurodollar rate plus
0.625% to 1.125% (5.8% at March 31, 1999), due December 31, 2000........... $ 29,800 $ --
Revolving line of credit with commercial bank, interest at the Australian Bank
Bill Rate plus 0.75% or the Australian bank's overnight rate plus
0.75% (5.6% at March 31, 1999), due December 31, 2000...................... 4,778 4,410
Revolving line of credit with commercial bank, interest (weighted average rate
of 6.0% at March 31, 1999) at the Canadian bank's cost of funds plus 0.65%
(6.0% at March 31, 1999) or the Canadian bank's prime rate
(6.5% at March 31, 1999), due December 31, 2000............................ 8,126 8,101
Revolving line of credit with commercial bank, interest payable monthly at the
Federal Funds rate plus 2%, due October 31, 1998, and secured by a
blanket lien on all assets of The Tape Company and affiliates.............. -- 2,161
Term loan with commercial bank, payable monthly at a rate of $25 plus interest
at 7.65%, due October 31, 2002 and secured by a blanket lien
on all assets of The Tape Company and affiliates........................... -- 1,400
Note payable to individual, payable monthly at a rate of $41 including
interest at a rate of 6.66%, due July 25, 2007............................. -- 3,413
Notes payable and obligations under capital leases for warehouse equipment,
computer equipment, office furniture, fixtures and transportation
equipment, interest at varying rates ranging from 6.5% to 8.0%, with
lease terms varying from three to five years............................... 463 441
---------- ----------
Long-term debt.......................................................... 43,167 19,926
Less: Current portion of long-term debt........................................ (146) (3,010)
---------- ----------
Long-term debt, less current portion.................................... $ 43,021 $ 16,916
========== ==========
</TABLE>
The Company has an agreement with certain banks for an unsecured revolving
line of credit facility (the "Facility") that, as amended on March 29, 1999, has
a maximum borrowing availability of $85.0 million and expires on December 31,
2000. Availability under the Facility is based upon amounts of eligible accounts
receivable and inventory, as defined. As of March 31, 1999, the Company had
borrowed $29.8 million, leaving $55.2 million available under the Facility for
additional borrowings. The Facility accrues interest, at the Company's option,
at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from
0.625% to 1.125% depending on the Company's financial performance. A commitment
fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The
Facility contains various covenants including, among other things, the
maintenance of certain financial ratios including the achievement of a minimum
fixed charge ratio and minimum level of tangible net worth, and restrictions on
certain activities of the Company, including loans and payments to related
parties, incurring additional debt, acquisitions, investments and asset sales.
This Facility is part of the Company's integrated cash management system
-38-
<PAGE> 39
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
in which accounts receivable collections are used to pay down the Facility and
disbursements are paid from the Facility. This system allows the Company to
optimize its cash flow.
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, as amended in
July 1998, expires on December 31, 2000 and allows the Company to borrow
Australian dollars up to a maximum of $7.5 million (Australian), or
approximately $4.8 million (U.S.) at March 31, 1999. The Australian Facility
accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian
bank's overnight rate plus 0.75%. A commitment fee of 0.25% is charged on the
total amount of the Australian Facility. As of March 31, 1999, there was no
unused availability under the Australian Facility.
During December 1997, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). The Canadian Facility, which expires on
December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a
maximum of $15.0 million (Canadian), or approximately $9.9 million (U.S.) at
March 31, 1999. The Company had borrowed approximately $8.1 million (U.S.),
leaving approximately $1.8 million (U.S.) available under the Canadian Facility
at March 31, 1999. The Canadian Facility accrues interest at the Company's
option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's
U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25%
is charged on the unused portion of the Canadian Facility.
In conjunction with the business combination with The Tape Company, certain
debt of The Tape Company, including the term loan with commercial bank due
October 31, 2002, and the note payable to individual due July 25, 2007, were
paid in full by the Company and were retired.
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 $436,000, net of accumulated amortization of approximately $2.1
million at March 31, 1999, and approximately $284,000 net of accumulated
amortization of approximately $2.5 million at March 31, 1998.
Annual maturities of long-term debt and capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal year ended March 31,
2000.......................................................... $ 146
2001.......................................................... 42,811
2002.......................................................... 70
2003.......................................................... 74
2004.......................................................... 66
Thereafter.................................................... --
-----------
Total................................................. $ 43,167
===========
</TABLE>
4. STOCK OPTIONS AND SHAREHOLDERS' EQUITY:
Public Offerings
During March 1998, the Company completed a secondary offering of 3,300,000
shares, consisting of 2,300,000 shares offered by the Company, and 1,000,000
shares offered by a principal and selling shareholder.
Preferred Stock
The Company has 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, 1999 and 1998.
-39-
<PAGE> 40
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Split
In February 1998, the Company's Board of Directors approved a two for one
stock split which provided each holder of common stock to receive one additional
share for each share held. The stock split was effected in the form of a stock
dividend on March 2, 1998. The consolidated financial statements and the notes
thereto have been adjusted to reflect this stock split on a retroactive basis
for all periods presented.
Stock Options
At March 31, 1999 and 1998, 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 MARCH 31,
--------------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Net income:
As reported........................................... $18,783 $17,516 $ 15,914
Pro forma............................................. $14,169 $15,992 $ 13,830
Earnings per share:
Basic:
As reported........................................ $ 1.10 $ 1.20 $ 1.14
Pro forma.......................................... $ 0.83 $ 1.10 $ 1.07
Diluted
As reported........................................ $ 1.06 $ 1.14 $ 1.08
Pro forma.......................................... $ 0.80 $ 1.04 $ 1.00
</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 1997: no dividends, expected volatility ranging between
39.25% and 39.50%; risk-free interest rate ranging between 5.9% and 6.6%; and
expected life of 6 years. The following assumptions were used for grants during
the fiscal year 1998: no dividends, expected volatility ranging between 40.97%
and 41.40%; risk-free interest rate ranging between 5.6% and 6.8%; and expected
life of 6 years. The following assumptions were used for grants during the
fiscal year 1999: no dividends, expected volatility ranging between 41.42% and
47.92%; risk-free interest rate ranging between 4.6% and 5.5%; and expected life
of 6 years.
In January 1989, the Company established an employee stock option plan (the
"Plan") in which shares of common stock are reserved for the granting of options
at an amount not less than market price, as determined by the Board of
Directors, at the date of grant. There were no options available at March 31,
1999 and 1998 to be granted under the Plan.
In 1994, the Company adopted the 1994 Stock Option Plan for Key Employees
of Daisytek International Corporation (the "1994 Plan"). The 1994 Plan
authorizes the Company to grant options to select officers and other key
employees of the Company and to non-employee directors. The 1994 Plan provides
for the granting to employees of both incentive stock options and nonqualified
stock options. The maximum number of shares of common stock for which options
may be granted is 1,450,000, subject to adjustments for certain changes in the
shares issued and outstanding as described in the 1994 Plan.
The exercise price of incentive stock options granted under the 1994 Plan
may not be less than the fair market value at the date of the grant. The
exercise price of nonqualified stock options granted under the 1994 Plan is
determined by the option committee of the Board of Directors. As of March 31,
1999 and 1998, 166,772 and 100,974 options, respectively, remain to be granted
in the future under the 1994 Plan.
-40-
<PAGE> 41
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1999 and 1998 there were 10,956 and 7,440
options, respectively, granted under the Non-Employee Director Plan.
During fiscal year 1999, the Company adopted the 1998 Amended and Restated
Stock Option Plan (the "1998 Plan"). The 1998 Plan amends, restates and replaces
the Company's 1997 Employee Stock Option Plan (the "1997 Plan") and all options
outstanding under the 1997 Plan are deemed outstanding under the 1998 Plan. The
1998 Plan authorizes the Company to grant options to select officers, directors
and other key employees of the Company. The 1998 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
4,000,000, subject to adjustments for certain changes in the shares issued and
outstanding as described in the 1998 Plan.
The exercise price of incentive stock options granted under the 1998 Plan
may not be less than the fair market value of the Company's stock at the date of
the grant. In the case of an individual then owning more than 10% of the total
combined voting power of the Company, the exercise price may not be less than
110% of the fair market value of the Company's stock at the date of the grant.
As of March 31, 1999 and 1998, 1,318,912 and 3,864,942 options, respectively,
remain to be granted in the future under the 1998 Plan.
During fiscal years 1999, 1998 and 1997, the Company granted options to
certain employees pursuant to its employee stock option plans. In addition to
the options under such plans, the Company granted options to certain key
employees, executives and directors to purchase 181,826 shares of common stock
in fiscal year 1998, and 110,000 shares of common stock in fiscal year 1997.
These options were granted at the fair market value at the date of the grant and
become exercisable over a three-year period starting on the date of the grant.
During April 1997, the Company, at the option of individual employees and
directors, canceled options issued during fiscal year 1997 and issued
replacement options, granted at the fair market value of the Company's common
stock on the date of the replacement grant. Such options also become exercisable
over a three-year period starting with the date of the replacement grant, based
on vesting percentages.
The following table summarizes stock option activity for the three years in
the period ended March 31, 1999.
<TABLE>
<CAPTION>
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, March 31, 1996................ 1,437,988 $ 0.64--$ 9.75 $ 4.58
Granted.................................. 678,228 $16.25--$ 20.00 $ 16.54
Exercised................................ (315,796) $ 0.64--$ 9.75 $ 2.45
Canceled................................. (93,482) $ 3.80--$ 16.25 $ 13.27
---------
Outstanding, March 31, 1997................ 1,706,938 $ 0.64--$ 20.00 $ 9.25
Granted.................................. 1,341,650 $12.50--$ 22.44 $ 12.91
Exercised................................ (616,326) $ 0.64--$ 16.25 $ 2.76
Canceled................................. (706,288) $ 9.75--$ 20.00 $ 15.97
---------
Outstanding, March 31, 1998................ 1,725,974 $ 0.64--$ 22.44 $ 11.66
Granted.................................. 2,773,892 $12.88--$ 22.88 $ 15.68
Exercised................................ (223,953) $ 0.64--$ 17.38 $ 7.18
Canceled................................. (291,844) $ 9.75--$ 22.88 $ 16.41
---------
Outstanding, March 31, 1999................ 3,984,069 $ 2.65--$ 22.88 $ 14.37
=========
</TABLE>
The weighted average fair values of options granted during each of the
years ended March 31, 1999, 1998 and 1997, were $7.93, $7.02 and $8.08,
respectively. As of March 31, 1999, 1998 and 1997, 413,766, 234,531 and
-41-
<PAGE> 42
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
682,543, respectively, of options outstanding were exercisable. The
remaining options will become exercisable over the next three to five years
based on vesting percentages.
The following table summarizes information about the Company's stock
options outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE
--------------- -------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.29--$ 9.14 5,793 3.0 $ 2.65 5,793 $ 2.65
$ 9.15--$11.44 276,642 6.1 $ 9.75 276,642 $ 9.75
$11.45--$13.73 2,898,704 9.1 $ 12.74 128,633 $ 12.50
$13.74--$16.01 84,000 10.0 $ 15.41 -- $ --
$16.02--$18.30 11,704 8.4 $ 17.10 1,954 $ 16.25
$18.31--$20.58 17,000 9.4 $ 19.00 -- $ --
$20.59--$22.88 690,226 9.2 $ 22.86 744 $ 22.44
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the period for:
Interest.............................. $ 2,718 $ 2,762 $ 1,830
Income taxes.......................... $ 14,607 $ 5,416 $ 6,411
Fixed assets acquired under capital
leases.............................. $ 347 $ 84 $ --
Acquisitions of businesses:
Fair value of net assets acquired..... $ 20,585 $ 6,322 $ 4,163
Stock issued.......................... -- -- (791)
-------- -------- --------
Net cash paid for acquisition....... $ 20,585 $ 6,322 $ 3,372
======== ======== ========
</TABLE>
In July 1997 (prior to the merger with the Company), The Tape Company
repurchased 100% of the stock held by one of its shareholders. The shareholder
received cash of $0.8 million and an installment note for $3.6 million payable
in over 10 years. In conjunction with the business combination with The Tape
Company, the Company paid the installment note in full.
6. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS:
The Company has made various loans to its President, and a Senior Vice
President. These loans accrue interest at the Company's effective borrowing rate
(6.0% at March 31, 1999 and 6.8% at March 31, 1998). The Company's note
receivable (including accrued interest) from its President of approximately
$485,000 and $459,000 as of March 31, 1999 and 1998, respectively, is due in one
installment on April 1, 2001 and classified as non-current assets in the
consolidated balance sheet. The Company's note receivable (including accrued
interest) from a Senior Vice President as of March 31, 1999 and 1998 of
approximately $199,000 and $186,000, respectively, is due in one installment on
March 31, 2000, and is classified as accounts receivable in the accompanying
consolidated balance sheet.
The Company's PFS Europe subsidiary entered into an agreement in May 1999
to provide services to a company for which the Company has two executive
officers serving on this company's board of directors.
7. 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
-42-
<PAGE> 43
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
purposes. A reconciliation of the difference between the expected income tax
provision, before cumulative effect of accounting change, at the U.S. Federal
statutory corporate tax rate of 35%, and the Company's effective tax rate is as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Provision computed at statutory rate........... $ 10,854 $ 9,695 $ 8,521
Impact of foreign taxation at different rate... 538 356 270
State income taxes, net of federal benefit..... 694 520 426
Expenses not deductible for tax purposes....... 346 149 104
Impact of acquired subchapter S corporation
accounted for as a pooling of interests...... (291) (431) (907)
Change in valuation reserve.................... (203) 48 (123)
Other.......................................... (115) (152) 141
-------- -------- --------
Provision for income taxes................ $ 11,823 $ 10,185 $ 8,432
======== ======== ========
</TABLE>
The consolidated income before taxes and cumulative effect of accounting
change, by domestic and foreign entities, is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic....................................... $ 24,879 $ 22,427 $ 21,390
Foreign........................................ 6,132 5,274 2,956
-------- -------- --------
Total..................................... $ 31,011 $ 27,701 $ 24,346
======== ======== ========
</TABLE>
The provision (benefit) for income taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Domestic.................................. $ 9,857 $ 5,141 $ 6,317
State..................................... 1,068 800 655
Foreign................................... 2,581 2,133 1,263
-------- -------- --------
Total current......................... 13,506 8,074 8,235
-------- -------- --------
Deferred
Domestic.................................. (1,683) 2,018 197
Foreign................................... -- 93 --
-------- -------- --------
Total deferred........................ (1,683) 2,111 197
-------- -------- --------
Total............................ $ 11,823 $ 10,185 $ 8,432
======== ======== ========
</TABLE>
-43-
<PAGE> 44
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of the deferred tax asset (liability) as of March 31, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts.......................... $ 762 $ 692
Inventory................................................ 595 434
Reserves for disposition of business..................... 875 --
Foreign net operating loss carryforwards................. 2,847 1,659
Other.................................................... 428 251
-------- --------
5,507 3,036
Less--Valuation reserve.................................. (108) (311)
-------- --------
Total deferred tax asset......................... 5,399 2,725
-------- --------
Deferred tax liability:
Property and equipment................................... (393) (413)
Accounts receivable discount............................. (1,557) (2,077)
Foreign inventory purchases.............................. (2,568) (1,257)
Other.................................................... (744) (524)
-------- --------
Total deferred liability......................... (5,262) (4,271)
-------- --------
Deferred tax asset (liability), net........................ $ 137 $ (1,546)
======== ========
</TABLE>
For financial reporting purposes, the tax benefit of cumulative temporary
differences is recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not". Foreign
net operating loss carryforwards relate primarily to taxable losses of the
Company's Mexico and Singapore subsidiaries. These loss carryforwards begin to
expire in fiscal year 2005. As of March 31, 1999 and 1998, a valuation allowance
was recorded due to uncertainties regarding the Company's utilization of its
Mexico subsidiary's net tax asset. No valuation allowance has been established
for net operating loss carryforwards that are related to the Company's Singapore
subsidiary due to projected income in future periods.
8. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease facilities, and warehouse, office,
transportation and other equipment under operating leases expiring in various
years through fiscal year 2010. In most cases, management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
Minimum future annual rental payments under non-cancelable operating leases
having original terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
2000..................................................... $ 6,379
2001..................................................... 5,792
2002..................................................... 3,730
2003..................................................... 1,698
2004..................................................... 1,547
Thereafter............................................... 5,430
---------
Total............................................ $ 24,576
=========
</TABLE>
Total rental expense under operating leases approximated $5.8 million, $4.2
million and $3.4 million for the fiscal years ended March 31, 1999, 1998 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 60%, 66% and 70% of total net sales during fiscal
years 1999, 1998 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
-44-
<PAGE> 45
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
requirements for fiscal year 2000 approximate $50 million. Additionally, many of
the Company's suppliers offer rebate programs under which, subject to the
Company purchasing certain predetermined amounts of inventory, the Company
receives rebates based on a percentage of the dollar volume of total rebate
program purchases. The Company also takes advantage of several other programs
offered by substantially all of its suppliers. These include price protection
plans under which the Company receives credits if the supplier lowers prices on
previously purchased inventory and stock rotation or stock balancing privileges
under which the Company can return slow-moving inventory in exchange for other
products. Certain of the Company's suppliers also provide the Company with
cooperative advertising programs, marketing development funds and other types of
incentives and discounts which offset the production costs of the Company's
published marketing tools and other related costs.
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.
9. SEGMENT AND GEOGRAPHIC INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related information." The Company is organized
primarily on the basis of business segments and geographic locations. The
Company operates in four reportable business segments: (1) U.S. Computer
Supplies, (2) International Computer Supplies, (3) Professional Tape Products,
and (4) PFS. The Company's reportable segments are strategic business units that
offer different products and services or have significant volume of business
conducted internationally. They are managed separately based on the fundamental
differences in their operations or geographic location. The accounting policies
of the segments are the same as those described in Note 1 other than the
presentation of PFS net sales, which is discussed below. Segment information
excludes intersegment net sales. No single customer accounted for more than 10%
of the Company's annual net sales for the fiscal years ended March 31, 1999,
1998 and 1997. Included in the International Computer Supplies segment are
operations in Canada, Mexico, Australia, Singapore and export sales from the
U.S. The following tables set forth information as to the Company's reportable
segments for fiscal year ended March 31:
<TABLE>
<CAPTION>
U.S. International Professional
Computer Computer Tape
Supplies Supplies Products PFS Total
-------- ------------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
1999
Net sales.................. $480,932 $233,728 $102,784 $12,633 $830,077
Operating contribution..... 20,657 9,088 4,383 3,591 37,719
Assets..................... 123,527 76,583 48,295 67,474 315,879
1998
Net sales.................. $526,268 $176,568 $57,040 $ 5,634 $765,510
Operating contribution..... 20,611 7,456 1,778 1,725 31,570
Assets..................... 145,968 54,508 36,864 20,505 257,845
1997
Net sales.................. $472,019 $121,303 $35,697 $ 1,674 $630,693
Operating contribution..... 17,060 5,424 2,857 852 26,193
Assets..................... 124,564 35,515 9,938 15,209 185,226
</TABLE>
The Company's U.S. Computer Supplies segment includes certain expenses and
assets that relate to other or all of the segments but are not allocated by
management to the other segments. These expenses relate primarily to the
Company's (i) centralized management information, warehouse and telephone
systems, and (ii) executive, administrative, and other corporate costs. These
assets primarily relate to the Company's centralized management information,
warehouse and telephone systems and leasehold improvements on shared facilities.
-45-
<PAGE> 46
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reconciliation of segment net sales to consolidated net sales is as
follows:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Segment net sales ............ $830,077 $765,510 $630,693
Adjustment for PFS ........... 78,553 34,602 8,818
-------- -------- --------
Consolidated net sales ....... $908,630 $800,112 $639,511
======== ======== ========
</TABLE>
In the table above, and for management purposes, PFS net sales is presented
on a fee-equivalent basis. Fee-equivalent revenue is comprised of service fees
earned for certain outsourcing services that PFS provides on a fee basis, plus
gross profits that are recognized on other PFS contracts where accounting
principles require PFS to recognize product revenue because PFS takes title to
the inventory. Adjustment for PFS represents the adjustment to PFS net sales to
recognize net sales under generally accepted accounting principles.
Reconciliation of segment operating contribution to consolidated income before
taxes is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Segment operating contribution .............. $ 37,719 $ 31,570 $ 26,193
Loss on disposition of business(a) .......... (2,800) -- --
Acquisition related costs(a) ................ (1,111) (735) --
Interest expense ............................ (2,797) (3,134) (1,847)
-------- -------- --------
Consolidated income before income taxes ..... $ 31,011 $ 27,701 $ 24,346
======== ======== ========
</TABLE>
(a) These charges relate to the Professional Tape Products segment.
<TABLE>
<CAPTION>
Geographic information Fiscal Years Ended March 31
----------------------------------
Net sales: 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States ...... $713,806 $671,670 $560,679
Canada ............. 100,192 76,623 53,235
Other .............. 94,632 51,819 25,597
-------- -------- --------
$908,630 $800,112 $639,511
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------------------------------
Long-lived assets: 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States ...... $55,937 $26,218 $14,039
Canada ............. 1,340 802 517
Other .............. 4,150 3,641 3,892
------- ------- -------
$61,427 $30,661 $18,448
======= ======= =======
</TABLE>
The Company also exports its products for sale throughout Latin America,
Europe, the Far East, Africa and Australia. Total export sales to these
geographic regions for fiscal years 1999, 1998 and 1997, included in United
States sales in the preceding table, were approximately $60.2 million, $54.3
million, and $44.8 million, respectively.
-46-
<PAGE> 47
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. EMPLOYEE SAVINGS PLAN:
The Company has a defined contribution employee savings plan under Section
401(k) of the Internal Revenue Code. Substantially all full-time and part-time
U.S. employees are eligible to participate in the plan. The Company, at its
discretion, may match employee contributions to the plan and also make an
additional matching contribution in the form of profit sharing in recognition of
Company performance. For fiscal year 1999, the Company matched 10% of employee
contributions resulting in a charge against income of approximately $88,000. For
fiscal year 1998, the Company matched 15% of employee contributions resulting in
a charge against income of approximately $79,000. For fiscal year 1997, the
Company matched 20% of employee contributions resulting in a charge against
income of approximately $78,000.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The fair values of all
non-derivative financial instruments approximate their carrying amounts in the
accompanying consolidated balance sheets.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company's derivative
financial instruments outstanding as of March 31, 1999 and 1998, consisted of
forward foreign currency exchange contracts used to hedge the Company's net
investment in, and its intercompany payable balances applicable to its Canadian
and Australian subsidiaries (See Note 1). The fair values of these contracts
based on fiscal year-end exchange rates, excluding related income taxes, were
net losses of approximately $184,000 at March 31, 1999, and net gains of
approximately $420,000 at March 31, 1998.
-47-
<PAGE> 48
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. QUARTERLY DATA (UNAUDITED):
Summarized quarterly financial data for fiscal years 1999 and 1998 are as
follows (dollars in thousands, except per share data). Financial data for the
1998 fiscal year has been restated for pooling of interests to combine the
results of operations of Daisytek and The Tape Company. See Note 2 of these
Consolidated Financial Statements. Financial data for the first three quarters
of fiscal year 1999 has been restated for the early adoption of SOP 98-5, as
discussed in Note 1 of these Consolidated Financial Statements.
<TABLE>
<CAPTION>
FISCAL YEAR 1999
---------------------------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................. $ 240,383 $ 225,507 $ 220,151 $ 222,589
Gross profit.............................. $ 28,331 $ 26,786 $ 26,723 $ 26,527
Gross profit margin.................. 11.8% 11.9% 12.1% 11.9%
SG&A expenses............................. $ 18,898 $ 17,803 $ 17,145 $ 16,802
Percent of net sales................. 7.9% 7.9% 7.8% 7.5%
Acquisition related costs................. $ 379 $ 197 $ 130 $ 405
Percent of net sales................. 0.2% 0.1% 0.1% 0.2%
Loss on disposition of business........... $ 2,800 -- -- --
Percent of net sales................. 1.2%
Income from operations.................... $ 6,254 $ 8,786 $ 9,448 $ 9,320
Operating margin..................... 2.6% 3.9% 4.3% 4.2%
Income before cumulative effect of
accounting change...................... $ 3,488 $ 4,981 $ 5,281 $ 5,438
Percent of net sales................. 1.5% 2.2% 2.4% 2.4%
Net income................................ $ 3,488 $ 4,981 $ 5,281 $ 5,033
Net margin........................... 1.5% 2.2% 2.4% 2.3%
Income before cumulative effect of accounting
change per common share:
Basic............................ $ 0.20 $ 0.29 $ 0.31 $ 0.32
Diluted.......................... $ 0.19 $ 0.28 $ 0.30 $ 0.31
Net income per common share:
Basic............................ $ 0.20 $ 0.29 $ 0.31 $ 0.30
Diluted.......................... $ 0.19 $ 0.28 $ 0.30 $ 0.28
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
---------------------------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................. $ 229,500 $ 197,775 $ 190,060 $ 182,777
Gross profit.............................. $ 26,227 $ 21,368 $ 20,326 $ 19,623
Gross profit margin.................. 11.4% 10.8% 10.7% 10.7%
SG&A expenses............................. $ 16,717 $ 13,641 $ 13,094 $ 12,522
Percent of net sales................. 7.3% 6.9% 6.9% 6.9%
Acquisition related costs................. $ 735 $ -- $ -- $ --
Percent of net sales................. 0.3% -- -- --
Income from operations.................... $ 8,775 $ 7,727 $ 7,232 $ 7,101
Operating margin..................... 3.8% 3.9% 3.8% 3.9%
Net income................................ $ 4,845 $ 4,424 $ 4,147 $ 4,100
Net margin........................... 2.1% 2.2% 2.2% 2.2%
Net income per common and
common equivalent share
Basic............................ $ 0.33 $ 0.30 $ 0.28 $ 0.29
Diluted.......................... $ 0.31 $ 0.29 $ 0.27 $ 0.27
</TABLE>
-48-
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------- ------- ----------------------------------------
<S> <C> <C>
David A. Heap.............. 55 Chairman of the Board
Mark C. Layton............. 39 President, Chief Executive Officer, Chief Operating
Officer and Director
Christopher Yates.......... 44 Senior Vice President-- Business Development and
Director
James R. Powell............ 38 Senior Vice President-- Sales and Marketing and
Director
Steven Graham.............. 47 Senior Vice President-- Information Technologies,
Chief Information Officer
Peter D. Wharf............. 40 Vice President-- International Operations
Suzanne Garrett............ 34 Vice President
Thomas J. Madden........... 37 Vice President-- Finance, Chief Financial Officer,
Chief Accounting Officer and Treasurer
John D. Kearney............ 45 Vice President-- Corporate Development
Harvey H. Achatz........... 58 Vice President-- Administration and Secretary
James R. Reilly............ 40 Director
Timothy M. Murray.......... 47 Director
Peter P. J. Vikanis........ 48 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. Since 1998, Mr. Heap has served as Chairman and
Chief Executive Officer of ISA. 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. Mr. Layton also serves as a Director of ISA and uBid, Inc., an
Internet auction company.
CHRISTOPHER YATES was appointed Senior Vice President -- Business
Development in February 1996, with primary responsibility for the PFS segment,
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, with primary responsibility for the U.S. Computer
Supplies segment. 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 24 years of experience in the
information-technology field.
-49-
<PAGE> 50
PETER D. WHARF has served as Vice President -- International Operations
since February 1996. Mr. Wharf has primary responsibility for the International
Computer Supplies segment. 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 serves as a Vice President with primary responsibilities
for the Professional Tape Products segment and has served as Vice President of
Product Management and Marketing, director of product management, marketing
manager, and new-products manager for the U.S. Computer Supplies segment. Prior
to joining the Company in 1991, Ms. Garrett served as an account executive for
United Media.
THOMAS J. MADDEN has served as Chief Financial Officer since July 1997. In
addition, Mr. Madden also 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.
JOHN D. KEARNEY joined Daisytek as Vice President -- Corporate Development
in March of 1999. From January 1998 to March 1999, he served as Vice President
of Corporate Development for F. Y. I. Incorporated. Mr. Kearney has significant
experience in investment banking, having served as Managing Director of
Corporate Finance at Rauscher Pierce Refsnes Inc. from July 1995 to December
1997, and Senior Vice President of Corporate Finance at Raymond James &
Associates from September 1991 to July 1995.
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.
JAMES F. REILLY was appointed a Director of the Company in October 1998.
Mr. Reilly has served as Managing Director of the Technology Group at Warburg
Dillon Read LLC ("Warburg Dillon Read") since April 1998. Warburg Dillon Read is
a global investment banking firm and provides financial advisory services to
Daisytek. Through Warburg Dillon Read, Mr. Reilly has been an advisor to
Daisytek since 1994. Mr. Reilly has served in various senior management
positions at Warburg Dillon Read and its predecessor companies since joining the
firm in 1983.
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 MedE America
Corporation and several privately held corporations.
PETER P. J. VIKANIS has served as a Director of the Company since 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. Mr. Vikanis presently serves as a
non-Executive Director of ISA.
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes. Each class serves three years, with the
terms of office of the respective classes expiring in successive years. Class I
consists of Messrs. Powell and Yates whose terms will expire at the annual
meeting of stockholders in 2001. Class II consists of Messrs. Murray and Layton
whose terms will expire at the annual meeting of stockholders in 1999. Messrs.
Murray and Layton have been nominated by the Board for election at the 1999
annual meeting. Class III consists of Messrs. Heap, Reilly and Vikanis whose
terms will expire at the annual meeting of stockholders in 2000.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and controlling stockholders to file initial
reports of ownership and reports of changes of ownership of the Company's Common
Stock with the Securities and Exchange Commission and the Company. To the
Company's knowledge, all reports required to be so filed were filed in
accordance with the provisions of said Section 16(a).
-50-
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company to its Chief Executive Officer and to each of the four most highly
compensated executive officers for services rendered during fiscal years ended
March 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS OPTIONS COMPENSATION (1)
- ----------------------------- ---- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
David A. Heap............... 1999 $200,000 $ 87,580 36,250 $1,332
Chairman 1998 250,000 201,897 151,554 4,951
1997 385,000 222,900 85,728 5,970
Mark C. Layton.............. 1999 337,819 175,160 412,080 18,063
President, Chief Executive 1998 319,599 269,196 122,836 9,731
and Operating Officer 1997 299,013 222,900 69,832 8,458
Christopher Yates........... 1999 263,361 57,803 222,026 9,534
Senior Vice President - 1998 248,454 88,835 84,742 6,088
Business Development 1997 232,200 73,557 41,120 5,004
Steven Graham............... 1999 200,950 57,803 186,302 9,489
Senior Vice President - 1998 189,491 88,835 60,000 37,829
Information Technologies 1997 78,268 32,439 50,000 5,610
and Chief Information
Officer
James R. Powell............. 1999 184,690 57,803 185,134 4,320
Senior Vice President - 1998 175,037 88,835 76,116 3,015
Sales and Marketing 1997 163,652 73,557 42,660 3,715
</TABLE>
- --------------------
(1) Represents compensation in respect of one or more of the following:
personal use of Company automobiles; life insurance premiums paid by the
Company for the benefit of the name executive officer; tax return
preparation services paid by the Company; personal travel expenses and
relocation costs.
-51-
<PAGE> 52
The following table sets forth information with respect to grants of stock
options during the year ended March 31, 1999 to the named executive officers
reflected in the Summary Compensation Table:
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------------
NAME GRANTED YEAR SHARE DATE (1) 5% 10%
- ----------------------- ---------- ---------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Heap.......... 36,250 1.3% $ 22.88 6-18-08 $ 521,491 $ 1,321,561
Mark C. Layton......... 360,000 13.0% 12.88 12-15-08 2,914,927 7,386,996
52,080 1.9% 22.88 6-18-08 749,221 1,898,673
Christopher Yates...... 180,000 6.5% 12.88 12-15-08 1,457,463 3,693,498
42,026 1.5% 22.88 6-18-08 604,585 1,532,136
Steven Graham.......... 150,000 5.4% 12.88 12-15-08 1,214,553 3,077,915
36,302 1.3% 22.88 6-18-08 522,239 1,323,457
James R. Powell........ 150,000 5.4% 12.88 12-15-08 1,214,553 3,077,915
35,134 1.3% 22.88 6-18-08 505,436 1,280,875
</TABLE>
- ------------------
(1) Options expiring in June 2008 are subject to a three year cumulative
vesting schedule and options expiring in December 2008 are subject to a
four or five year cumulative vesting schedule.
(2) These are hypothetical values using assumed annual rates of stock price
appreciation as prescribed by the rules of the Securities and Exchange
Commission.
The following table sets forth information concerning the aggregate stock
option exercises during the fiscal year ended March 31, 1999 and stock option
values as of the end of fiscal year 1999 for unexercised stock options held by
each of the named executive officers:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END (1)
ON VALUE --------------------------- -----------------------------
NAME EXERCISE RECEIVED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Heap.......... -- $ -- 98,399 165,071 $ 613,977 $ 531,387
Mark C. Layton......... -- -- 66,060 516,490 403,491 1,780,691
Christopher Yates...... -- -- 52,987 294,057 329,330 972,128
Steven Graham.......... -- -- 9,000 237,302 37,125 772,875
James R. Powell ....... 25,421 315,650 -- 249,833 -- 829,383
</TABLE>
- ------------------
(1) Calculated by determining the difference between $16 5/8 (the last sale
price of the Common Stock on March 31, 1999 as reported by the Nasdaq
National Market) and the exercise price of the shares of Common Stock
underlying the options.
(2) Calculated by determining the difference between the last sale price of the
Common Stock on the date of exercise as reported by the Nasdaq National
Market and the exercise price.
COMPENSATION OF DIRECTORS
Each non-employee director receives an annual director's fee of $20,000 for
each year in which he or she serves as a director. Non-employee directors do not
receive additional Board or Committee meeting fees. The Company has also adopted
a Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee
Director Plan")
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<PAGE> 53
pursuant to which each non-employee director (i) may elect to receive payment of
the director's fees in shares of Common Stock in lieu of cash, and (ii) is
entitled to receive certain grants of options in accordance with the formula,
and subject to the conditions precedent, set forth therein.
The Non-Employee Director Plan is a formula grant plan pursuant to which
each non-employee director receives options to purchase shares of Common Stock
as of the date of each annual meeting of stockholders. The number of options to
be issued under the Non-Employee Director Plan will increase each year based on
the percentage increase, if any, in the Company's earnings before taxes ("EBT")
for such fiscal year over the Company's previously reported EBT for the
immediately preceding fiscal year. No options will be issued, however, under the
Non-Employee Director Plan with respect to any fiscal year in which the
company's EBT does not equal or exceed the Company's projected EBT for such
year, nor will any options be issued to any non-employee director who does not
attend at least 75% of all Board (and committee) meetings held during such
fiscal year. Under the terms of the Non-Employee Director Plan, during fiscal
year 1999 and related to fiscal year 1998 performance, each of the Company's
non-employee directors received options to purchase 2,998 shares of Common Stock
at an exercise price of $21 1/8 (the fair market value on the date of grant) as
of the date of the 1999 Annual Meeting. Under the terms of the Non-Employee
Director Plan, no options will be issued in respect of fiscal 1999.
All options issued under the Non-Employee Director Plan are non-qualified
options for federal income tax purposes and have an exercise price equal to the
fair market value of a share of common stock as of the date of the annual
meeting upon which such option is granted. All options are subject to a three
year cumulative vesting schedule.
Directors who are employees of the Company or any of its subsidiaries do
not receive additional compensation for service on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Company's Board of
Directors are Timothy M. Murray and James R. Reilly who are non-employee
directors.
-53-
<PAGE> 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 11, 1999, certain information
regarding the beneficial ownership of the Common Stock by (i) each person who is
known to the Company to beneficially own more than 5% of the Common Stock, (ii)
each of the Directors and executive officers of the Company individually, (iii)
the Directors and executive officers of the Company as a group and (iv) the
Selling Stockholder. The information contained in this table reflects
"beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Unless otherwise indicated, the
stockholders identified in this table have sole voting and investment power with
respect to the shares owned of record by them.
<TABLE>
<CAPTION>
NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT (1)
------------------------------------- ------------- -------------
<S> <C> <C>
David A. Heap(2).......................... 2,259,072 13.2%
500 North Central Expressway
Plano, Texas 75074
Amvescap Plc (3).......................... 1,816,529 10.6%
11 Devonshire Square
London, England EC2M 4YR
Robert Fleming Inc. (4)................... 1,323,707 7.7%
320 Park Avenue, 11th & 12th Floors
New York, New York 10022
T Rowe Price Associates, Inc. (5)......... 1,000,100 5.8%
100 East Pratt Street
Baltimore, MD 21202
Mark C. Layton (6)........................ 325,226 1.9%
Christopher Yates (7)..................... 83,647 *
Harvey H. Achatz (8)...................... 63,109 *
James R. Powell (9)....................... 29,150 *
Steven Graham (10)........................ 33,000 *
Thomas J. Madden (11)..................... 82,757 *
James F. Reilly........................... 6,765 *
Timothy M. Murray (12).................... 82,605 *
Peter P.J. Vikanis (13)................... 8,551 *
Suzanne Garrett (14)...................... 24,305 *
Peter D. Wharf (15)....................... 37,541 *
John D. Kearney (16)...................... -- --
All directors and executive officers
as a group (13 persons) (17)............ 3,035,728 17.7%
</TABLE>
- ----------
* Represents less than 1%
(1) This table is based on 17,166,814 shares of Common Stock outstanding
on June 11, 1999.
(2) Includes outstanding options to purchase 151,443 shares of Common
Stock, which are fully vested and exercisable. Does not include 1,800
shares held by Mr. Heap's spouse as custodian for minor children as to
which beneficial ownership is disclaimed, and options to purchase
112,027 shares of Common Stock which are not vested or exercisable. Of
the shares owned of record by Mr. Heap, 2,068,491 are pledged to a
financial institution to secure indebtedness owing by Mr. Heap to such
institution.
(3) Based upon a Schedule 13G/A dated March 10, 1999 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, 1998.
(4) Based upon a Schedule 13G/A dated February 10, 1999 filed by Robert
Fleming Inc. reporting beneficial ownership and shared voting and
dispositive power as of December 31, 1998.
-54-
<PAGE> 55
(5) Based upon a Schedule 13-G dated February 12, 1999, these shares are
owned as of December 31, 1998, by various individual and institutional
investors, including T. Rowe Price New Horizons Fund, which T. Rowe
Price Associates, Inc. ("Price Associates") serves as investment
adviser with power to direct investments and/or sole power to vote the
securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates
expressly disclaims that it is, in fact, the beneficial owner of such
securities.
(6) Includes outstanding options to purchase 109,052 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 473,498 shares of Common Stock, which
are not vested or exercisable.
(7) Includes outstanding options to purchase 82,647 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 264,397 shares of Common Stock, which
are not vested or exercisable.
(8) Includes outstanding options to purchase 7,331 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 12,533 shares of Common Stock, which are not
vested or exercisable.
(9) Includes outstanding options to purchase 29,150 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 220,683 shares of Common Stock, which
are not vested or exercisable.
(10) Includes outstanding options to purchase 30,000 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 216,302 shares of Common Stock, which
are not vested or exercisable.
(11) Includes outstanding options to purchase 59,581 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 216,155 shares of Common Stock, which
are not vested or exercisable.
(12) Includes outstanding options to purchase 2,240 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 5,238 shares of Common Stock, which are not vested
or exercisable.
(13) Includes outstanding options to purchase 2,240 shares of Common Stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 5,238 shares of Common Stock, which are not vested
or exercisable.
(14) Includes outstanding options to purchase 24,305 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 128,153 shares of Common Stock, which
are not vested or exercisable.
(15) Includes outstanding options to purchase 37,341 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 205,636 shares of Common Stock, which
are not vested or exercisable.
(16) Does not include outstanding options to purchase 40,000 shares of
common stock which are not vested or exercisable.
(17) Includes outstanding options to purchase 535,330 shares of Common
Stock, which are fully vested and exercisable. Does not include
outstanding options to purchase 1,899,860 shares of Common Stock which
are not vested or exercisable.
-55-
<PAGE> 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
During fiscal year 1999, the Company had loans outstanding in varying
amounts to Messrs. Layton and Powell in order to provide such persons with the
funds necessary to satisfy various personal obligations and for other purposes.
The largest amount owing by such persons during fiscal year 1999 was $485,476
and $198,881, respectively. As of March 31, 1999, Messrs. Layton and Powell
were indebted to the Company in the amounts of $485,476 and $198,881,
respectively. The indebtedness owing by Messrs. Layton and Powell accrues
interest at the rate charged to the Company for working capital borrowings.
Messrs. Layton's and Powell's indebtedness is due and payable in one
installment on April 1, 2001 and March 31, 2000, respectively.
During fiscal year 1999, Warburg Dillon Read LLC, an investment banking
firm of which Mr. Reilly is a Managing Director, performed financial advisory
and investment banking services for the Company, and the Company presently
expects that such firm may continue to provide such services in the current
fiscal year.
-56-
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Income for the Fiscal Years Ended March 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statements Schedules
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
3.1(5) - Amended and Restated Certificate of Incorporation of Daisytek International
Corporation.
3.1.1(5) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.2(1) - Amended and Restated By-laws of Daisytek International Corporation.
3.3(12) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Daisytek International Corporation
10.1(2) - 1994 Stock Option Plan of Daisytek International Corporation.
10.2(5) - Non-Employee Director Stock Option and Retainer Plan.
10.3(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as Borrower, Daisytek
International Corporation and Borrower's Subsidiaries, as Guarantors, Texas Commerce
Bank National Association, as Agent, and Texas Commerce Bank National Association and
State Street Bank and Trust Company, as Lenders.
10.4(6) - First Amendment to Credit Agreement dated April 15, 1996 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and Texas Commerce Bank National Association and State
Street Bank and Trust Company, as Lenders.
10.5(7) - Second Amendment to Credit Agreement dated November 14, 1996 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and Texas Commerce Bank National Association, NBD Bank,
and State Street Bank and Trust Company, as Lenders.
10.6(2) - Industrial Lease Agreement between Industrial Developments International, Inc. and
Daisytek, Incorporated, as amended.
10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings Association and
Daisytek, Incorporated, as amended.
10.8(8) - U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard Company and
Daisytek, Incorporated, with Addendum.
</TABLE>
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<PAGE> 58
<TABLE>
<S> <C>
10.9(2) - Marketing Advantage Program Enrollment Agreement dated November 11, 1994 between
Federal Express Corporation and Daisytek, Incorporated.
10.10(4) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek
International Corporation and David A. Heap.
10.11(4) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek
International Corporation and Mark C. Layton.
10.12(4) - Second Amendment to Industrial Lease Agreement between New York Life Insurance Company
and Daisytek, Incorporated.
10.13(4) - Sixth Modification to Lease Agreement dated November 30, 1995 between Atrium
Association, L.P. and Daisytek, Incorporated.
10.14(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek
International Corporation and David A. Heap.
10.15(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek
International Corporation and Steve Graham.
10.16(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek
International Corporation and Peter Vikanis.
10.17(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek
International Corporation and Timothy Murray.
10.18(9) - Third Amendment to Credit Agreement dated June 30, 1997 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First
National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders.
10.19(10) - Committed Credit Facility Agreement dated October 22, 1997 between Daisytek Australia
PTY LTD, as Borrower, Daisytek International Corporation and Daisytek, Inc., as
Guarantors, and The First National Bank of Chicago, as Lender.
10.20(10) - Fourth Amendment to Credit Agreement dated December 11, 1997 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First
National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders.
10.21(10) - Revolving Credit and Foreign Exchange Facility Agreement dated December 31, 1997
between Daisytek (Canada) Inc., as Borrower, Daisytek, Inc., as Guarantor, and First
Chicago NBD Bank, Canada, as Lender.
10.22(13) - Stock Purchase Agreement by and among the Stockholders of Steadi-Systems, Ltd.,
Daisytek, Incorporated and Daisytek International Corporation dated January 5, 1998.
10.23(13) - Fifth Amendment to Credit Agreement dated February 13, 1998 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First
National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders.
10.24(11) - Agreement and Plan of Merger Among Daisytek International Corporation, Daisytek,
Incorporated, TC Illinois Acquisition Corp., TC Michigan Acquisition Corp., TC
Georgia Acquisition Corp., TC Ohio Acquisition Corp., TC Pennsylvania Acquisition
Corp., TC Texas Acquisition Corp., And TC Minnesota Acquisition Corp., The Tape
Company, Inc., An Illinois Corporation, The Tape Company, Inc., A Michigan
Corporation, The Tape Company, Inc., A Georgia Corporation, The Tape Company, Inc., An
Ohio Corporation, Tape Distributors, Inc., A Pennsylvania Corporation, Tape
Distributors Of Texas, Inc., A Texas Corporation, Tape Distributors Of Minnesota,
Inc., A Minnesota Corporation, Michael Cullen and Robert Daly.
10.25(11) - Registration Rights Agreement by and among Daisytek International Corporation, a
Delaware corporation, Michael Cullen and Robert Daly, dated June 1, 1998.
10.26(12) - 1998 Amended and Restated Stock Option Plan of Daisytek International Corporation
10.27(12) - Daisytek International Corporation 1998 Employee Stock Purchase Plan
10.28(*) - Sixth Amendment to Credit Agreement dated March 29, 1999 between Daisytek,
Incorporated, as Borrower, Daisytek International Corporation and Borrower's
Subsidiaries, as Guarantors, and State Street Bank and Trust Company,
The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders.
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C>
10.29(*) - Asset Purchase Agreement between Steadi-Systems, Ltd. and Videotape Products, Inc.
dated March 26, 1999
21(*) - Subsidiaries of the Registrant.
23(*) - Consents.
27.1(*) - Financial Data Schedule for fiscal year ended March 31, 1999.
27.2 (*) - Financial Data Schedule for fiscal year ended March 31, 1998.
27.3 (*) - Financial Data Schedule for fiscal year ended March 31, 1997.
</TABLE>
- -------------------------------
(*) Filed herewith.
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(2) Incorporated by reference from Registration Statement on Form S-1 No.
33-86926.
(3) Incorporated by reference from Current Report on Form 8-K dated May 22,
1995.
(4) Incorporated by reference from Registration Statement on Form S-1 No.
33-99796.
(5) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1996 dated June 26, 1996.
(6) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1996 dated August 13, 1996.
(7) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1996 dated February 13, 1997.
(8) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1997 dated June 27, 1997.
(9) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1997 dated August 14, 1997.
(10) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1997 dated February 17, 1998.
(11) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 1998 dated August 14, 1998.
(12) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998.
(13) Incorporated by reference from Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1998 dated May 29, 1998.
(b) Reports on Form 8-K
1. On May 5, 1998, the Company filed a Current Report on Form 8-K to
report under Item 5 the Company's press release dated May 5, 1998
announcing results for the fourth quarter and year ended March
31, 1998 results.
2. On August 4, 1998, the Company filed a Current Report on Form 8-K
to report under Item 5 the Company's press release dated July 29,
1998 announcing results for the first quarter of fiscal year
1999.
3. On November 4, 1998, the Company filed a Current Report on Form
8-K to report under Item 5 the Company's press release dated
October 28, 1998 announcing results for the second quarter of
fiscal year 1999.
4. On February 11, 1999, the Company filed a Current Report on Form
8-K to report under Item 5 the Company's press release dated
February 11, 1999 announcing results for the third quarter of
fiscal year 1999.
-59-
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Daisytek International
Corporation (a Delaware corporation) and subsidiaries included in this Form 10-K
and have issued our report thereon dated May 5, 1999. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedule II of this Form 10-K is the responsibility of the
company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 5, 1999
-60-
<PAGE> 61
SCHEDULE II
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1997 (a):
Allowance for doubtful accounts............. $ 1,758 1,660 -- (993) $ 2,425
Income tax valuation allowance.............. $ 386 -- -- (123) $ 263
Fiscal Year Ended March 31, 1998 (a):
Allowance for doubtful accounts............. $ 2,425 2,016 -- (1,676) $ 2,765
Income tax valuation allowance.............. $ 263 48 -- -- $ 311
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts............. $ 2,765 2,863 -- (2,771) $ 2,857
Income tax valuation allowance.............. $ 311 -- -- (203) $ 108
Reserves for disposition
of business............................... $ -- 2,800 -- -- $ 2,800
</TABLE>
- --------------------
(a) Retroactively restated to combine the results of operations of Daisytek
with The Tape Company, which was acquired by Daisytek during June 1998 and
accounted for as a pooling of interests. (See Note 2 of Notes to
Consolidated Financial Statements).
-61-
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
Thomas J. Madden, Chief Financial Officer
and Vice President - Finance
June 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David A. Heap Chairman of the Board June 29, 1999
------------------------
David A. Heap
/s/ Mark C. Layton Chief Executive and Operating June 29, 1999
------------------------ Officer, President and Director
Mark C. Layton (principal executive officer)
/s/ Thomas J. Madden Chief Financial Officer, Vice June 29, 1999
------------------------ President - Finance
Thomas J. Madden (principal financial and
accounting officer)
/s/ Christopher Yates Director June 29, 1999
------------------------
Christopher Yates
/s/ James R. Powell Director June 29, 1999
------------------------
James R. Powell
/s/ Timothy M. Murray Director June 29, 1999
------------------------
Timothy M. Murray
/s/ James F. Reilly Director June 29, 1999
------------------------
James F. Reilly
/s/ Peter P. J. Vikanis Director June 29, 1999
------------------------
Peter P. J. Vikanis
</TABLE>
-62-
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.28(*) - Sixth Amendment to Credit Agreement dated March 29, 1999 between
Daisytek, Incorporated, as Borrower, Daisytek International
Corporation and Borrower's Subsidiaries, as Guarantors, and State
Street Bank and Trust Company, The First National Bank of
Chicago, and Chase Bank of Texas, N.A., as Lenders.
10.29(*) - Asset Purchase Agreement between Steadi-Systems, Ltd. and
Videotape Products, Inc. dated March 26, 1999
21(*) - Subsidiaries of the Registrant.
23(*) - Consents.
27.1(*) - Financial Data Schedule for fiscal year ended March 31, 1999.
27.2 (*) - Financial Data Schedule for fiscal year ended March 31, 1998.
27.3 (*) - Financial Data Schedule for fiscal year ended March 31, 1997.
</TABLE>
<PAGE> 1
EXHIBIT 10.28
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of March 29, 1999 and effective as of March 30, 1999, is among DAISYTEK,
INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL
CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's
Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the
signature pages of this Amendment or that, pursuant to Section 8.1(n) of the
Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor"
(individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary
Guarantors"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust ("State
Street"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association
("First Chicago"), and CHASE BANK OF TEXAS, N.A., a national banking association
formerly named Texas Commerce Bank National Association ("Chase"), as a lender
and as administrative agent for itself, State Street and First Chicago (State
Street, First Chicago, Chase and any assignee lender pursuant to Section 11.4A
of the Credit Agreement being referred to, collectively, as "Lenders"). All
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Credit Agreement.
RECITALS
WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State
Street, First Chicago (as assignee, effective June 30, 1997, of NBD Bank, a
Michigan banking corporation) and Chase are parties to that certain Credit
Agreement dated as of May 22, 1995, as amended by that certain First Amendment
to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to
Credit Agreement dated as of November 14, 1996 and effective as of November 18,
1996, that certain Third Amendment to Credit Agreement dated and effective as of
June 30, 1997, that certain Fourth Amendment to Credit Agreement dated and
effective as of December 11, 1997, and that certain Fifth Amendment to Credit
Agreement dated as of February 13, 1998 (as so amended, the "Credit Agreement"),
establishing a revolving credit facility in the aggregate maximum principal
amount of $65,000,000;
WHEREAS, the parties desire to increase the maximum principal amount of
the revolving credit facility from $65,000,000 to $85,000,000, to add certain
inventory amounts to the Borrowing Base, to provide for the release foreign
Subsidiary Guarantors from their Guaranty obligations, and to provide for the
pledge of the capital stock of such foreign Subsidiary Guarantors; and
WHEREAS, Chase will serve as administrative agent, syndication agent
and arranger under the Credit Agreement and First Chicago will serve as
documentation agent under the Credit Agreement.
NOW, THEREFORE, in consideration of the recitals set forth above, the
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor,
Subsidiary Guarantors and Lenders hereby agree as follows:
<PAGE> 2
1. Amended Definitions. The following definitions in Section 1.1 of the
Credit Agreement are amended to read in their entireties as follows:
""Borrowing Base" means a sum equal to (a) eighty percent
(80%) of the amount of Net Outstanding Consolidated Eligible
Receivables plus (b) an amount, not to exceed clause (a) above, equal
to fifty percent (50%) of the amount of Consolidated Eligible
Inventory, in each case as determined pursuant to the most recent
Borrowing Base Certificate (in the form of Exhibit F) delivered by
Borrower to Agent pursuant to Section 8.1(b)."
""Committed Sum" means, with respect to the Loan Commitment,
Thirty Million Dollars ($30,000,000) with respect to Chase, Thirty
Million Dollars ($30,000,000) with respect to First Chicago, and
Twenty-Five Million Dollars ($25,000,000) with respect to State
Street."
""Consolidated Eligible Inventory" means all Consolidated
owned inventory of Guarantor that strictly complies with all of the
Daisytek Corporations' representations, warranties and covenants
contained in the Loan Documents with respect thereto; provided,
however, that the following shall not be included: (a) work-in-process,
(b) damaged, returned, or obsolete inventory, (c) inventory that for
any other reason is not readily saleable in the ordinary course of
business, (d) inventory subject to consignment (or other ownership
interest in favor of a Person other than a Daisytek Corporation), (e)
inventory located other than at a regular place of business of a
Daisytek Corporation, and (f) inventory located outside of the United
States of America or Canada."
""Loan Commitment" means Eighty-Five Million Dollars
($85,000,000)."
2. New Definition. The following definition is added to Section 1.1 of
the Credit Agreement, to read in their entireties as follows:
""Sixth Amendment Closing Date" means March 30, 1999, being
the effective date of the Sixth Amendment to Credit Agreement among
Borrower, Guarantor, Subsidiary Guarantors, Lenders and Agent."
3. Amendment of Section 2.2. The first sentence of Section 2.2 of the
Credit Agreement is amended to read in its entirety as follows:
"The Loan made by Lenders pursuant to this Article II shall be
evidenced by the Notes dated as of the Sixth Amendment Closing Date and
substantially in the form of Exhibit A."
4. Amendment of Section 8.1(n). Section 8.1(n) of the Credit Agreement
is amended to read in it entirety as follows:
"(n) Additional Subsidiary Guarantors. Each Daisytek
Corporation will take such action, and will cause each of its
Subsidiaries to take such action, from time to time as shall be
necessary to ensure that all Subsidiaries of Guarantor become
"Subsidiary Guarantors" hereunder (but excluding from such requirement
any Subsidiary that would, as a result of
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 2
<PAGE> 3
becoming a "Subsidiary Guarantor" hereunder, also become a controlled
foreign corporation as defined in Subpart F of the Internal Revenue
Code of 1986, as amended). Any Subsidiary so excluded is hereinafter
sometimes referred to as a "Subsidiary Non-Guarantor." Without limiting
the generality of the foregoing, if a Daisytek Corporation shall form
or acquire any new Subsidiary (other than a Subsidiary Non-Guarantor),
then as soon thereafter as is reasonable practical, such corporation
will cause such new Subsidiary to (i) become a "Subsidiary Guarantor"
hereunder, and (ii) deliver to Lenders such proof of corporate or other
organizational action, incumbency of officers, opinions of counsel and
other documents as is consistent with those delivered by the then
existing Daisytek Corporations pursuant to Section 6.1, or as Agent
shall request."
5. New Section 8.1(o). A new Section 8.1(o) is added to the Credit
Agreement, to read in its entirety as follows:
"(o) Subsidiary Stock Pledges. Each Daisytek Corporation will
take such action, and will cause each of its Subsidiaries to take such
action, from time to time as shall be necessary to ensure that all
stockholders (or other equity holders) of each Subsidiary Non-Guarantor
execute and deliver to Agent a stock pledge agreement, or similar
agreement (in either case in form and substance reasonably satisfactory
to Agent), and to take such other actions and execute such other
related documents, as is necessary to cause the legal, valid and
binding pledge to Agent, for the benefit of Lenders, of sixty-five
percent (65%) of the capital stock (or other similar equity interest)
of such Subsidiary Non-Guarantor, to secure the Obligations."
6. Amendment of Exhibits. Exhibits A and F to the Credit Agreement are
amended in their entirety to be in the forms of Exhibit A and F, respectively,
attached to this Amendment.
7. Release of Foreign Subsidiary Guarantors. Upon the satisfaction by
Guarantor and Borrower of all their obligations set forth in Section 8 below
(and upon such satisfaction, with effect from May 22, 1995), each of the
following Subsidiary Guarantors shall be released from its obligations under its
Guaranties: Daisytek de Mexico Services, S.A. de C.V., Daisytek (Canada) Inc.,
Daisytek Australia Pty. Limited (ACN 075 675 795), Priority Fulfillment Services
of Canada, Inc., Daisytek de Mexico, S.A. de C.V., Priority Fulfillment Services
of Australia Pty. Limited (ACN 077 906 462), Daisytek Asia Pte. Ltd, and
Priority Fulfillment Services de Mexico, S.A. de C.V. (collectively, the
"Foreign Daisytek Corporations"). Also upon such satisfaction, each Foreign
Daisytek Corporation shall not be a "Subsidiary Guarantor," as defined, but
shall remain a "Daisytek Corporation," as defined.
8. Stock Pledge Agreement. Guarantor and Borrower agree to cause
Borrower and each other Daisytek Corporation of which a Foreign Daisytek
Corporation is a direct Subsidiary to execute and deliver to Agent a stock
pledge agreement, or similar agreement (in either in case form and substance
reasonably satisfactory to Agent), and to take such other actions and execute
such other related documents, as is necessary to cause the legal, valid and
binding pledge to Agent, for the benefit of Lenders, of sixty-five percent (65%)
of the capital stock (or other similar equity interest) of such Foreign Daisytek
Corporation, to secure the Obligations. Guarantor and Borrower further covenant
and agree to cause such capital stock pledges to be effected as soon as
commercially feasible.
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 3
<PAGE> 4
9. Conditions to Effectiveness. The effectiveness of this Amendment is
conditioned upon the prior receipt by Agent of the documentation and fee set
forth below:
(a) Certificates. A certificate of the Secretary of each
Daisytek Corporation, dated as of the Sixth Amendment Closing Date, to
the effect that, except for an increase in the number of authorized
shares of common stock of Guarantor, no changes have occurred to the
certificates of incorporation (and other equivalent charter documents)
and by-laws of the Daisytek Corporations, and no changes have occurred
in the incumbency of officers of the Daisytek Corporations authorized
to execute or attest any of the Loan Documents, in each case since May
22, 1995, except as expressly described in such certificate;
(b) Resolutions. Copies of resolutions of the Board of
Directors of each Daisytek Corporation, satisfactory to Lenders,
approving the execution and delivery of this Amendment and such of the
other Loan Documents to which such corporation is a party and
authorizing the performance of the obligations of such corporation
contemplated in this Amendment and in such other Loan Documents,
accompanied by a certificate of the Secretary of such corporation,
dated as of the Sixth Amendment Closing Date, that such copies are
complete and correct copies of resolutions duly adopted at a meeting of
such Board of Directors, and that such resolutions have not been
amended, modified or revoked in any respect, and are in full force and
effect as of the Sixth Amendment Closing Date;
(c) Other Certificates. Certificates of each Daisytek
Corporation's existence, good standing and qualification to do
business, issued by appropriate officials in any state in which such
corporation is incorporated, owns property or otherwise qualified, or
required to qualify, to do business;
(d) Notes. The Notes, duly executed;
(e) Opinion of Counsel. An executed opinion of Wolff & Samson,
P.C., Roseland, New Jersey, counsel to the Daisytek Corporations, dated
as of the Sixth Amendment Closing Date and in form and substance
satisfactory to Lenders and their counsel;
(f) Other Documents. Any and all other documents or
certificates reasonably requested by a Lender in connection with the
execution of this Amendment; and
(g) Fee. The fee referred to in Borrower's letter to the
Lenders of even date herewith.
10. Guaranties. Each of Guarantor and each Subsidiary Guarantor hereby
acknowledges, consents and agrees to this Amendment and (a) acknowledges that
its obligations under that certain Guaranty executed by it, in favor of a
Lender, includes a guaranty of all of the obligations, indebtedness and
liabilities of Borrower under the Credit Agreement as amended by this Amendment
(specifically including, without limitation, the obligations, indebtedness and
liabilities resulting from the increase in the maximum principal amount of the
revolving credit facility established by the Credit Agreement from $65,000,000
to $85,000,000, and specifically
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 4
<PAGE> 5
acknowledging the prospective release of the Foreign Daisytek Corporations from
their obligations under their Guaranties), (b) represents to each Lender that
such Guaranty remains in full force and effect and shall continue to be its
legal, valid and binding obligation, enforceable against it in accordance with
its terms, and (c) agrees that this Amendment and all documents executed in
connection herewith do not operate to reduce or discharge its obligations under
such Guaranty.
11. Other Documents. Borrower shall provide such other documents
incidental and appropriate to this Amendment as Agent or Agent's counsel may
reasonably request, all such documents to be in form and substance reasonably
satisfactory to Agent.
12. Terms of Agreement. Except as expressly amended by this Amendment,
the Credit Agreement is and shall be unchanged.
13. Effect of Amendment. The Credit Agreement and any and all other
documents heretofore, now or hereafter executed and delivered pursuant to the
terms of the Credit Agreement are hereby amended so that any reference to the
Credit Agreement in the Credit Agreement or the other documents shall mean a
reference to the Credit Agreement as amended hereby.
Lenders agree to undertake reasonable efforts among themselves such
that, as of the Sixth Amendment Closing Date, amounts outstanding under the Loan
shall, as to each Lender, be held Pro Rata (as Pro Rata is modified by the
amendment, in this Amendment, of the term "Committed Sum.").
14. Reaffirmation; No Default. Each Daisytek Corporation hereby
represents and warrants to Lenders that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed and
delivered in connection herewith have been authorized by all requisite corporate
action on the part of such Daisytek Corporation and will not violate the
certificate of incorporation (or other charter documents) or bylaws of any
Daisytek Corporation, (b) the representations and warranties contained in the
Credit Agreement, as amended by this Amendment, and any other Loan Document are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (c) no Event of Default has occurred and is continuing and no event
or condition has occurred that with the giving of notice or lapse of time or
both would be an Event of Default, and (d) each Daisytek Corporation is in full
compliance with all covenants and agreements contained in the Credit Agreement,
as amended hereby.
15. Enforceability. Each Daisytek Corporation hereby represents and
warrants that, as of the date of this Amendment, the Credit Agreement and all
documents and instruments executed in connection therewith are in full force and
effect and that there are no claims, counterclaims, offsets or defenses to any
of such documents or instruments.
16. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. PURSUANT TO
SECTION 346.004 OF THE TEXAS FINANCE CODE, CHAPTER 346 OF THE TEXAS FINANCE CODE
SHALL NOT APPLY TO THE CREDIT AGREEMENT,
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 5
<PAGE> 6
AS AMENDED BY THIS AMENDMENT, THE NOTES, OR ANY ADVANCE OR LOAN EVIDENCED BY THE
NOTES.
17. Maximum Interest Rate. Regardless of any provisions contained in
this Amendment or in any other Loan Documents, Lenders shall never be deemed to
have contracted for or be entitled to receive, collect or apply as interest on
the Notes or otherwise any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and if Lenders ever receive, collect
or apply as interest any such excess, or if acceleration of the maturity of the
Notes or if any prepayment by Borrower results in Borrower having paid any
interest in excess of the maximum rate, such amount which would be excessive
interest shall be applied to the reduction of the unpaid principal balance of
the Notes for which such excess was received, collected or applied, and, if the
principal balances of Notes are paid in full, any remaining excess shall
forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for
the use, forbearance or detention of the indebtedness evidenced by the Notes
and/or the Credit Agreement, as amended by this Amendment, shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
maximum lawful rate permitted under applicable law. In determining whether or
not the interest paid or payable under any specific contingency exceeds the
maximum rate of interest permitted by law, Borrower and Lenders shall, to the
maximum extent permitted under applicable law, (i) characterize any
non-principal payment as an expense, fee or premium, rather than as interest;
and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare
the total amount of interest contracted for, charged or received with the total
amount of interest which could be contracted for, charged or received throughout
the entire contemplated term of the Notes at the maximum lawful rate under
applicable law.
18. Counterparts. This Amendment may be separately executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Amendment.
19. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY AND
ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR
OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS
AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK
CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL
INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN
DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS
WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH
LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH
ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE
FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 6
<PAGE> 7
20. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION HEREBY
WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER
PROTECTION ACT (TEX. BUS. & COM. CODE SECTION 17.41 ET SEQ.), A LAW THAT GIVES
CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO EACH
LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND
BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE MERITS AND RISKS
OF THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT, (B) IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C) IS REPRESENTED BY LEGAL
COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS.
21. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS
AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE
PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING
TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS
AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES.
[The balance of this page is intentionally left blank.]
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 7
<PAGE> 8
THIS AMENDMENT is executed and effective as of the date first written
above.
BORROWER:
DAISYTEK, INCORPORATED
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
GUARANTOR:
DAISYTEK INTERNATIONAL
CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SUBSIDIARY GUARANTORS: DAISYTEK (CANADA) INC., a Canadian
corporation
DAISYTEK ASIA PTE LTD, a Singapore
corporation
By:
-------------------------------
By: Name:
------------------------------- -----------------------------
Name: Title:
----------------------------- ----------------------------
Title:
----------------------------
DAISYTEK DE MEXICO, S.A. DE C.V.,
DAISYTEK AUSTRALIA PTY. LTD. a Mexican corporation
(ACN 075 675 795), an Australian
corporation
By:
-------------------------------
By: Name:
------------------------------- -----------------------------
Name: Title:
----------------------------- ----------------------------
Title:
----------------------------
DAISYTEK DE MEXICO SERVICES,
S.A. DE C.V., a Mexican corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 8
<PAGE> 9
DAISYTEK LATIN AMERICA, INC., a PRIORITY FULFILLMENT SERVICES
Florida corporation OF CANADA, INC., a Canadian
corporation
By:
------------------------------- By:
Name: -------------------------------
----------------------------- Name:
Title: -----------------------------
---------------------------- Title:
----------------------------
HOME TECH DEPOT, INC., a Delaware
corporation STEADI-SYSTEMS, LTD.,
a California corporation
By:
-------------------------------
Name: By:
----------------------------- -------------------------------
Title: Name:
---------------------------- -----------------------------
Title:
----------------------------
PRIORITY FULFILLMENT SERVICES
DE MEXICO, S.A. DE C.V., a Mexican
corporation STEADI SYSTEMS MIAMI, INC.,
a Florida corporation
By:
-------------------------------
Name: By:
----------------------------- -------------------------------
Title: Name:
---------------------------- -----------------------------
Title:
----------------------------
PRIORITY FULFILLMENT SERVICES,
INC., a Delaware corporation STEADI SYSTEMS NEW YORK, INC.,
a New York corporation
By:
-------------------------------
Name: By:
----------------------------- -------------------------------
Title: Name:
---------------------------- -----------------------------
Title:
----------------------------
PRIORITY FULFILLMENT SERVICES
OF AUSTRALIA PTY. LIMITED, (ACN
077 906 462), an Australian SUPPLIES EXPRESS, INC., a Delaware
corporation corporation
By: By:
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 9
<PAGE> 10
WORKING CAPITAL OF AMERICA, THE TAPE COMPANY, INC., an Ohio
INC., a Delaware corporation corporation
By: By:
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
THE TAPE COMPANY, INC., an Illinois THE TAPE COMPANY, INC., a
corporation Minnesota corporation
By: By:
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
THE TAPE COMPANY, INC., a Georgia TAPE DISTRIBUTORS OF TEXAS,
corporation INC., a Texas corporation
By: By:
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
THE TAPE COMPANY, INC., a
Pennsylvania corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
AGENT:
CHASE BANK OF TEXAS, N.A.,
a national banking association
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 10
<PAGE> 11
LENDERS:
CHASE BANK OF TEXAS, N.A.
a national banking association
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust
By:
------------------------------
Michael St. Jean,
Vice President
THE FIRST NATIONAL BANK OF
CHICAGO, a national banking
association
By:
------------------------------
Cory M. Olson,
Authorized Agent
SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 11
<PAGE> 1
EXHIBIT 10.29
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated as of March 26, 1999 (this
"AGREEMENT") and is by and among Steadi-Systems, Ltd., a California corporation
("STEADI"), Daisytek, Inc., a Delaware corporation ("DAISYTEK"), Videotape
Products, Inc., a California corporation ("VTP"), John Palazzola and Richard
Marzec (collectively, the "STOCKHOLDERS").
VTP is engaged in the business of, among other things, the sale and
distribution of professional video and audio recording tape, data storage media
products and related products. Steadi is engaged in the business of, among other
things, the sale, distribution and rental of professional video and audio
hardware products. VTP and Steadi have each agreed to purchase and acquire
certain assets, and assume certain liabilities, of the other. Accordingly, in
consideration of the mutual representations, warranties and covenants contained
herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1. CERTAIN DEFINED TERMS. As used in this Agreement, (i) terms defined
in the Preamble or elsewhere in this Agreement shall have the meaning set forth
therein and (ii) the following terms shall have the following meanings:
"ACTION" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation, in each case, by or before any Governmental
Authority.
"AFFILIATE" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
"CONSIGNMENT AGREEMENTS" means the Inventory Consignment Agreement
dated October 30, 1998 between VTP and CIN Services, Inc. and the Inventory
Consignment Agreement dated March 15, 1997 between VTP and CineFilm Laboratory,
Inc.
"CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH"), with respect to the relationship between or among two or more
Persons, means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, as trustee or
executor or by contract, including, without limitation, the ownership, directly
or indirectly, of securities having the power to elect a majority of the board
of directors or similar body governing the affairs of such Person.
"ENCUMBRANCE" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential
<PAGE> 2
arrangement, or restriction of any kind, including, without limitation, any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.
"ENVIRONMENT" means surface waters, groundwaters, soil, subsurface
strata and ambient air.
"ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or
judicial actions, suits, demand letters, claims, liens, notices of noncompliance
or violation, investigations, proceedings, consent orders or consent agreements
relating in any way to any Environmental Law or any Environmental Permit
(hereinafter "Claims"), including without limitation (a) any and all Claims by
Governmental Authorities for enforcement, cleanup, removal, response, remedial
or other actions or damages pursuant to any applicable Environmental Law and (b)
any and all Claims by any Person seeking damages, contribution, indemnification,
cost recovery, compensation or injunctive relief resulting from Hazardous
Materials or arising from alleged injury or threat of injury to health, safety
or the environment.
"ENVIRONMENTAL LAWS" means any federal, state or local law or any
foreign law, including any statute, rule, regulation, ordinance, code or rule of
common law, now or hereafter in effect and in each case as amended, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials, including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, and the rules and regulations promulgated thereunder;
the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the
Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the
Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control
Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401
et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the
Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; and the Federal Insecticide,
Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq.
"ENVIRONMENTAL PERMITS" means all permits, written approvals, U.S.
Environmental Protection Agency or state generator numbers, licenses and other
authorizations from applicable Governmental Authorities required under any
applicable Environmental Law.
"GOVERNMENTAL AUTHORITY" means any United States federal, state, local,
possession or foreign governmental, regulatory or administrative authority,
agency or commission, or any political subdivision thereof, or any court,
tribunal or arbitral body.
"GOVERNMENTAL ORDER" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"HARDWARE BUSINESS" means the sale, distribution, rental and service of
professional video and audio hardware products (excluding video and audio tape
products, data storage media products and film) conducted by Steadi and its
subsidiaries, taken as a whole (excluding the logistics, fulfillment,
distribution and transaction management services outsourcing business conducted
by Priority Fulfillment Services, Inc., a Daisytek subsidiary, and its
Affiliates).
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<PAGE> 3
"HAZARDOUS MATERIALS" means (a) petroleum and petroleum fuels,
lubricants and cleaning agents, radioactive materials, friable asbestos material
as defined under 40 C.F.R. 61.141, urea formaldehyde foam insulation,
transformers or other equipment that contain polychlorinated biphenyls in
concentrations of 50 ppm, and radon gas; (b) any other chemicals, materials or
substances defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials" or "extremely hazardous wastes"; and
(c) any other chemical, material or substance exposure to which is regulated
pursuant to any applicable Environmental Law.
"INDEMNIFIED PARTY" means any Person having a right to indemnification
from an Indemnifying Party under the terms and provisions of Article VIII
hereof.
"INDEMNIFYING PARTY" means any Person responsible or obligated to
provide indemnification to an Indemnified Party under the terms and provisions
of Article VIII hereof.
"LIABILITIES" means any and all debts, liabilities and obligations,
whether accrued or fixed, absolute or contingent, matured or unmatured or
determined or determinable, including, without limitation, those arising under
any law (including, without limitation, any Environmental Law), rule,
regulation, Action or Governmental Order and those arising under any contract,
agreement, arrangement, commitment or undertaking, including all indemnification
obligations under any charter document, any indemnity agreement or as permitted
under applicable law.
"MATERIAL ADVERSE EFFECT" means any circumstance, change in, or effect
on, (i) for purposes of the representations of VTP and the Stockholders
hereunder, the Tape Business or (ii) for purposes of the representations of
Steadi hereunder, the Hardware Business, in each case, that, individually or in
the aggregate with any other circumstances, changes in, or effects on, the Tape
Business or the Hardware Business, as the case may be, is, or would be,
materially adverse to the operations, assets or liabilities (including, without
limitation, contingent liabilities), customer or supplier relationships,
prospects, results of operations or the condition (financial or otherwise) of
the Tape Business or the Hardware Business, as the case may be.
"PERSON" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
"STRATEGIC ALLIANCE AGREEMENT" means the Strategic Alliance Agreement
of even date herewith to be executed and delivered by VTP, Steadi, Daisytek and
the Stockholders concurrently with the Closing hereunder.
"TAPE BUSINESS" means the sale and distribution of professional video
and audio recording tape, data storage media products, film and related products
(excluding hardware and equipment) as conducted by VTP.
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<PAGE> 4
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
of even date herewith to be executed and delivered by VTP and Steadi
concurrently with the Closing hereunder.
ARTICLE II
SALE AND PURCHASE OF TAPE ASSETS
2.1. SALE AND PURCHASE OF TAPE ASSETS. Subject to the terms and
conditions of this Agreement and on the basis of and in reliance upon the
representations, warranties, obligations and agreements set forth herein, VTP
does hereby validly sell, assign, transfer, convey and deliver to Steadi, and
Steadi does hereby purchase and acquire from VTP, all of the right, title and
interest of VTP in, to and under all of the following assets to the extent they
relate to, or are used by VTP in connection with or are necessary for the
operation of, the Tape Business (collectively, the "TAPE ASSETS"):
(a) all customer lists, telephone lists, prospect lists,
customer information (including all information relating to customer credit
history, purchasing information, contact names, addresses and phone numbers and
all other customer information), all advertising materials, catalogs, price
lists, mailing lists, distribution lists, sales and promotional materials,
customer and sales order, files and records, all rights (but not obligations)
under all unfilled customer purchase orders and the Consignment Agreements,
customer commitments and obligations relating to future purchases, all trade
secrets and confidential information, all rights to enforce all confidentiality
and non-disclosure agreements with respect to the Tape Business, all
transferable licenses, franchises, rights and authorizations, those certain
telephone and fax numbers set forth on Schedule 2.1(a) hereto and all goodwill
of every kind and nature relating to or associated with the Tape Business
(collectively, the "TAPE GOODWILL ASSETS"); and
(b) all Tape Business finished goods inventory, consisting of
the products set forth on Schedule 2.1(b) hereto, including all transferable
rights of return to the supplier thereof, if any, and all other rights, benefits
and privileges associated therewith or related thereto; (collectively, the "TAPE
INVENTORY"), excluding, however, all inventory which is (i) visibly damaged or
defective, (ii) as to certain products so identified on Schedule 2.1(b) hereto,
in excess of the maximum amount therefor set forth therein or (iii) physically
segregated from the Tape Inventory and to be shipped in fulfillment of customer
orders received prior to the Closing or returned to the manufacturer
(collectively, the "EXCLUDED TAPE INVENTORY").
Except for the Tape Assets, and except as otherwise described in the Transition
Services Agreement, VTP is not selling or transferring to Steadi, and Steadi is
not purchasing or acquiring from VTP, any assets or other property relating to
the Tape Business, including all accounts receivable and the name "Videotape
Products".
2.2. NO ASSUMED TAPE LIABILITIES. Notwithstanding the purchase of the
Tape Assets, Steadi does not assume or agree to discharge or perform any debts,
liabilities or obligations of VTP or any predecessor or affiliate thereto, it
being expressly agreed and understood that Steadi does not agree to assume, nor
shall have any responsibility, liability or obligation for any
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<PAGE> 5
Liabilities of VTP or the Stockholders, including the following (collectively,
the "RETAINED TAPE LIABILITIES"):
(i) any liability or obligation of VTP based upon, arising out
of or otherwise in respect of the negotiation and preparation of this Agreement
or any of the Schedules or Exhibits hereto, or the consummation of the
transactions contemplated hereby, including without limitation, any tax
liability so arising;
(ii) any liability or obligation based upon, arising out of or
otherwise in respect of, any accounts payable, trade payables, employee wages,
employee benefits, product liability, product warranty, or any agreement or
contract to which VTP is a party;
(iii) any liability or obligation of VTP, or any consolidated
group of which VTP is or has been a member, for any federal, state, county or
local taxes, or any interest, additions to and/or penalties thereon, accrued
for, applicable to or arising during any period whether prior to or following
the date hereof;
(iv) any liability or obligation of VTP for any cause of
action, claim, demand, breach or violation of any kind or description, whether
arising under any contract, agreement, law, rule or regulation, or otherwise,
including without limitation, any claim for personal injury, malpractice,
negligence, fraud, discrimination, sexual harassment, wrongful termination,
property damage or any environmental claim or remedial claim; and
(v) any liability or obligation arising under any collective
bargaining agreement, union contract, employment agreement or other agreement or
understanding of any kind relating to employment of any employee or group of
employees.
2.3. TAPE PURCHASE PRICE. In consideration of the sale, assignment,
transfer, conveyance and delivery of the Tape Assets by VTP to Steadi and the
execution and delivery of the Strategic Alliance Agreement and the Transition
Services Agreement, Steadi shall pay to VTP the amounts set forth below
(collectively, the "TAPE PURCHASE PRICE") subject to, and in accordance with,
the following:
(a) The sum of $ 11,100,000 which shall be allocated as the
purchase price for the Tape Goodwill Assets; and
(b) The purchase price for the Tape Inventory shall be
determined as follows. As promptly as practicable following the Closing, VTP and
Steadi shall jointly conduct a physical inventory count of all Tape Inventory
located at the locations set forth on Schedule 2.3(b). Upon completion of such
physical inventory count, VTP and Steadi shall jointly determine the purchase
price for the Tape Inventory which shall be based upon the product prices (net
of vendor rebates) set forth on Schedule 2.1(b). Steadi shall be responsible
for, and shall promptly thereafter arrange for, the shipping and delivery of the
Tape Inventory to the Steadi warehouse(s) (except for the Tape Inventory located
in the Tape Premises (as defined in the Transition Services Agreement) or
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<PAGE> 6
held by the consignees under the Consignment Agreements which shall remain in
such locations). All shipping and delivery costs (and all risk of loss in
transit) shall be borne by Steadi.
ARTICLE III
SALE AND PURCHASE OF HARDWARE ASSETS
3.1. SALE AND PURCHASE OF HARDWARE ASSETS. Subject to the terms and
conditions of this Agreement and on the basis of and in reliance upon the
representations, warranties, obligations and agreements set forth herein, Steadi
does hereby validly sell, assign, transfer, convey and deliver to VTP, and VTP
does hereby purchase and acquire from Steadi, all of the right, title and
interest of Steadi in, to and under all of the following assets to the extent
they relate to, or are used by Steadi in connection with or are necessary for
the operation of, the Hardware Business (collectively, the "HARDWARE ASSETS"):
(a) all customer lists, telephone lists, prospect lists,
customer information (including all information relating to customer credit
history, purchasing information, contact names, addresses and phone numbers and
all other customer information), all advertising materials, catalogs, price
lists, mailing lists, distribution lists, sales and promotional materials,
customer and sales order files and records, all rights (including the deposits)
under the unfilled customer purchase orders set forth on Schedule 3.1(a),
customer commitments and obligations relating to future purchases, all trade
secrets and confidential information, all rights to enforce all confidentiality
and non-disclosure agreements with respect to the Hardware Business, all
transferable licenses, franchises, rights and authorizations, those certain
telephone and fax numbers set forth on Schedule 2.1(a) hereto and all goodwill
of every kind and nature relating to or associated with the Hardware Business
(collectively, the "HARDWARE GOODWILL ASSETS");
(b) all rental agreements which are in effect as of the
Closing (collectively, the "HARDWARE EQUIPMENT LEASES") and all hardware and
equipment which is subject thereto (collectively, the "LEASED HARDWARE
EQUIPMENT") and all credit card authorization slips and insurance certificates
received by Steadi in connection therewith; and
(c) all Hardware Business finished goods inventory (including
all inventory designated on Steadi's records as new, used, rental, demo,
defective and service parts) consisting of the products set forth on Schedule
3.1(c) hereto, including all transferable rights of return to the supplier
thereof, if any, and all other rights, benefits and privileges associated
therewith or related thereto (the "HARDWARE INVENTORY"), excluding, however, all
inventory which is physically segregated from the Hardware Inventory and to be
shipped in fulfillment of customer orders received prior to the Closing or
returned to the manufacturer (the "EXCLUDED HARDWARE INVENTORY");
Except for the Hardware Assets, and except as otherwise described in the
Transition Services Agreement, Steadi is not selling or transferring to VTP, and
VTP is not purchasing or acquiring from Steadi, any assets or other property
relating to the Hardware Business, including all accounts receivable and the
name "Steadi Systems".
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<PAGE> 7
3.2. ASSUMED HARDWARE LIABILITIES. Subject to the terms and conditions
contained herein, VTP does hereby assume and agree to discharge and perform all
liabilities and obligations arising under (i) the Hardware Equipment Leases with
respect to the remaining terms thereof from and after the date hereof (ii) the
unfilled customer orders set forth on Schedule 3.1(a) (collectively, the
"ASSUMED HARDWARE LIABILITIES").
Except for the Assumed Hardware Liabilities, VTP does not assume or
agree to discharge or perform any debts, liabilities or obligations of Steadi or
any predecessor or affiliate thereto, it being expressly agreed and understood
that VTP does not agree to assume, nor shall have any responsibility, liability
or obligation for any Liabilities of Steadi, including the following
(collectively, the "RETAINED HARDWARE LIABILITIES"):
(i) any liability or obligation of Steadi based upon, arising
out of or otherwise in respect of the negotiation and preparation of this
Agreement or any of the Schedules or Exhibits hereto, or the consummation of the
transactions contemplated hereby, including without limitation, any tax
liability so arising;
(ii) any liability or obligation based upon, arising out of or
otherwise in respect of, any accounts payable, trade payables, employee wages,
employee benefits, product liability, product warranty, or any agreement or
contract to which Steadi is a party;
(iii) any liability or obligation of Steadi, or any
consolidated group of which Steadi is or has been a member, for any federal,
state, county or local taxes, or any interest, additions to and/or penalties
thereon, accrued for, applicable to or arising during any period whether prior
to or following the date hereof;
(iv) any liability or obligation of Steadi for any cause of
action, claim, demand, breach or violation of any kind or description, whether
arising under any contract, agreement, law, rule or regulation, or otherwise,
including without limitation, any claim for personal injury, malpractice,
negligence, fraud, discrimination, sexual harassment, wrongful termination,
property damage or any environmental claim or remedial claim; and
(v) any liability or obligation arising under any collective
bargaining agreement, union contract, employment agreement or other agreement or
understanding of any kind relating to employment of any employee or group of
employees.
3.3. HARDWARE PURCHASE PRICE. In consideration of the sale, assignment,
transfer, conveyance and delivery of the Hardware Assets by Steadi to VTP and
the execution and delivery of the Strategic Alliance Agreement and the
Transition Services Agreement, VTP shall assume the Assumed Hardware Liabilities
and shall pay to Steadi the amounts set forth below (collectively, the "HARDWARE
PURCHASE PRICE") subject to, and in accordance with, the following:
(a) The sum of One Dollar ($1.00) which shall be allocated as
the purchase price for the Hardware Goodwill Assets and the Hardware Equipment
Leases;
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<PAGE> 8
(b) The purchase price for the Hardware Inventory and the
Leased Hardware Equipment shall be determined as follows. As promptly as
practicable following the Closing, VTP and Steadi shall jointly conduct a
physical inventory count of all Hardware Inventory located at the locations set
forth on Schedule 3.3(b) and a listing of the Hardware Equipment Leases and the
Leased Hardware Equipment. Upon completion of such physical inventory count and
listing, Steadi and VTP shall jointly determine the purchase price for the
Hardware Inventory and the Leased Hardware Equipment which shall be based upon
the product prices set forth on Schedule 3.1(c). Steadi shall deliver to VTP the
Hardware Equipment Leases, and VTP shall be responsible for, and shall promptly
thereafter arrange for, the shipping and delivery of the Hardware Inventory to
the VTP warehouse(s) (except for the Hardware Inventory located in the Hardware
Premises (as defined in the Transition Services Agreement) which shall remain in
such locations). All shipping and delivery costs (and all risk of loss in
transit) shall be borne by VTP.
ARTICLE IV
CLOSING OF TAPE TRANSACTION AND HARDWARE TRANSACTION
4.1. CLOSING. The closing ("CLOSING") of the sale and purchase of the
Tape Assets as described herein (the "TAPE TRANSACTION") and the sale and
purchase of the Hardware Assets as described herein (the "HARDWARE TRANSACTION")
shall occur concurrently with each other and immediately following the execution
and delivery of this Agreement on the date hereof (the "CLOSING DATE"). The
Closing shall be held at the offices of Hahn & Hahn, Pasadena, California or at
such other time and place as the parties shall mutually agree. Subject to the
terms set forth herein, the Closing of the Tape Transaction and the Hardware
Transaction shall be deemed effective for all purposes immediately following the
close of business (Pacific time) on the Closing Date.
4.2. PAYMENT OF THE NET PURCHASE PRICE. At the Closing, Steadi shall
pay to VTP the sum of $5,500,000 (the "INITIAL PAYMENT") in cash by wire
transfer to an account designated in writing by VTP (the "VTP ACCOUNT"). Within
three business days following the determination of the Tape Inventory Purchase
Price and the Hardware Inventory Purchase Price, (a) Steadi and VTP shall
execute and deliver a Closing Statement setting forth the Tape Purchase Price
and the Hardware Purchase Price, as finally determined, and each of the
respective components thereof as provided above, and (b) VTP shall deliver to
Steadi reasonably satisfactory evidence that the holders of all Encumbrances
upon the Tape Assets have released such Encumbrances, whereupon Steadi shall
thereafter pay to VTP, by wire transfer to the VTP Account, the amount (the "NET
PAYMENT") by which (i) the Tape Purchase Price minus the Initial Payment exceeds
(ii) the Hardware Purchase Price. The Net Payment shall be adjusted, at such
time or times as may be necessary, whether as of the Closing or following the
Closing, to reflect and equitably account for (i) any liabilities of a party
hereto accrued prior to the Closing Date which the other party hereto agrees to
pay (or does pay) for the mutual convenience of the parties and in order to
effect an orderly transition of the business being purchased hereunder, (ii) the
transfer of the deposits under the unfilled customer orders set forth on
Schedule 3.1(a) and (iii) the transfer of the Hardware Equipment Leases and any
amounts received by VTP in payment of amounts owing under the Hardware Equipment
Leases which relate to the period prior to the Closing. Any adjustment to
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<PAGE> 9
the Net Payment shall be paid within three business days following the
determination thereof, in cash by wire transfer to the account designated by the
receiving party.
4.3. ACTIONS TAKEN AT CLOSING. The following actions shall be taken at
the Closing, and all such actions shall be deemed to have occurred concurrently
with each other.
(a) ANCILLARY AGREEMENTS. The parties shall execute and
deliver the Strategic Alliance Agreement and the Transition Services Agreement.
(b) BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT. The
parties shall execute and deliver a Bill of Sale and Assignment and Assumption
Agreement to evidence the purchase and sale of the Tape Assets and the Hardware
Assets hereunder and the assignment and assumption of the Hardware Equipment
Leases and the Assumed Hardware Liabilities.
(c) RESOLUTIONS. Each party shall deliver a true and complete
copy, certified by its Secretary or Assistant Secretary, of the resolutions duly
adopted by its Board of Directors evidencing its authorization of the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby.
(d) INITIAL PAYMENT. Steadi shall pay the Initial Payment to
VTP in accordance with the terms set forth herein.
(e) ELECTRONIC TRANSMISSION. The Tape Goodwill Assets and the
Hardware Goodwill Assets shall be transferred by electronic transmission in such
manner as the parties shall mutually agree.
4.4. OFFER OF EMPLOYMENT. VTP agrees not to interfere with the ability
of Steadi to offer employment to the employees listed on Schedule 4.4(i) hereto
(the "TAPE EMPLOYEES") and Steadi agrees not to interfere with the ability of
VTP to offer employment to the employees listed on Schedule 4.4(ii) hereto (the
"HARDWARE EMPLOYEES"). This Section shall not be construed as a promise of
employment, nor shall any Tape Employee or Hardware Employee be deemed a
third-party beneficiary hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF VTP
VTP and the Stockholders hereby, jointly and severally, make the
following representations and warranties to Steadi:
5.1. ORGANIZATION AND QUALIFICATION. VTP is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
California with full corporate power and authority to own its properties and to
carry on the Tape Business as now conducted.
5.2. CAPITALIZATION. The Stockholders are the lawful record and
beneficial owners of all of the issued and outstanding shares of capital stock
of VTP. VTP has no other shares or other
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securities which are authorized, issued and/or outstanding other than the shares
of capital stock owned by the Stockholders.
5.3. AUTHORITY; BINDING OBLIGATION. The Stockholders and VTP have all
requisite power and authority to execute, deliver and perform their respective
obligations under this Agreement and the Strategic Alliance Agreement and the
Transition Services Agreement and consummate the transactions contemplated
herein and therein. The execution and delivery of this Agreement and the
Strategic Alliance Agreement and the Transition Services Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors and stockholders of VTP, and no other
action on the part of VTP or Stockholders is necessary to consummate the
transactions contemplated hereby or thereby. This Agreement and the Strategic
Alliance Agreement and the Transition Services Agreement have been duly executed
and delivered by the Stockholders and VTP and constitute the legal, valid and
binding obligation of the Stockholders and VTP enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditor's rights' generally and to
general equitable principles.
5.4. NO VIOLATIONS. The execution, delivery and performance of this
Agreement and the Strategic Alliance Agreement and the Transition Services
Agreement and the consummation of the transactions contemplated herein and
therein by the Stockholders and VTP do not and will not, with or without the
giving of notice or passage of time or both (a) violate, conflict with or result
in the breach of any term or provision of, or require any notice, filing or
consent under (i) the certificate or articles of incorporation, by-laws or other
charter documents of VTP, (ii) any statutes, laws, rules, regulations,
ordinances or permits of any Governmental Authority applicable to the
Stockholders or VTP or (iii) any Governmental Order binding upon VTP or the
Stockholders or any of their respective properties or assets; (b) conflict with
or result in the breach of any term or provision of, require any notice or
consent under, give rise to a right of termination of, constitute a default
under, result in the acceleration of, or give rise to a right to accelerate any
obligation under, any loan agreement, mortgage, indenture, financing agreement,
lease or any other contract, agreement or instrument to which VTP or any
Stockholder is a party or by which any of their respective properties or assets
are bound; or (c) result in any Encumbrance on any of the properties or assets
of any Stockholder or VTP.
5.5. FINANCIAL STATEMENTS. VTP has furnished to Steadi certain
financial information regarding the Tape Business which is described on Schedule
5.5 hereto (the "TAPE FINANCIAL STATEMENTS"). The Tape Financial Statements (i)
were prepared in all material respects in accordance with the books of account
and other financial records of VTP and (ii) fairly present the financial
condition and results of operations for the Tape Business as of the dates and
for the periods covered thereby.
5.6. BOOKS OF ACCOUNTS. The books of account and other financial
records of the Tape Business maintained by VTP and made available to Steadi (i)
reflect all items of income and expense and all assets and liabilities required
to be reflected therein in accordance with good accounting practice, (ii) are in
all material respects complete and correct and do not contain or reflect any
material inaccuracies or discrepancies and (iii) have been maintained in
accordance with good business and accounting practices.
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5.7. INVENTORY. The Tape Inventory is in the physical possession of VTP
and stored at the locations set forth on Schedule 2.3(c) (except for the Tape
Inventory held by the consignees under the Consignment Agreements). Subject to
amounts reserved therefor, the value at which the Tape Inventory is carried in
the Tape Financial Statements reflect the historical inventory valuation policy
of VTP of stating such inventory at the lower of their cost or market value. VTP
has, and is conveying to Steadi hereby, good and marketable title to all of the
Tape Inventory, free and clear of all Encumbrances. The Tape Inventory does not
include any items held by VTP on consignment for others.
5.8. ASSETS. VTP has, and is conveying to Steadi hereby, good and
marketable title to all of the other Tape Assets, free and clear of all
Encumbrances.
5.9. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES.
(a) Since the date of the most recent balance sheet included
in the Tape Financial Statements (the "BALANCE SHEET DATE"), there has not been
any change in the assets, customer or supplier relations, operations, results of
operations, prospects or condition (financial or otherwise) of the Tape
Business, including, without limitation, any damage or destruction of property
by fire or other casualty, which change would have a Material Adverse Effect.
(b) Since the Balance Sheet Date, the Tape Business has
been conducted in all material respects in the ordinary course and consistent
with past practice.
5.10. LITIGATION. There are no Actions pending or, to VTP's or the
Stockholders' knowledge, threatened, against any VTP and which relate to the
Tape Business. Neither VTP, nor any of its assets or properties, is subject to
any Governmental Order (nor, to the knowledge of VTP or the Stockholders, are
there any such Governmental Orders threatened to be imposed by any Governmental
Authority) which has had or would have a Material Adverse Effect.
5.11. COMPLIANCE WITH LAWS. To the best of VTP's and the Stockholders'
knowledge, VTP has conducted the Tape Business in all material respects in
accordance with all applicable laws, ordinances, statutes, rules, regulations
and Governmental Orders applicable to it or any of its properties or assets, and
VTP is not in violation of any such law, ordinance, statute, rule, regulation or
Governmental Order. In conducting the Tape Business, neither VTP nor any
officer, director, employee, agent or representative of VTP has violated or is
currently in violation of the Foreign Corrupt Practices Act of 1977, as amended.
5.12. ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS.
(a) To the best of VTP's and the Stockholder's knowledge, VTP
currently holds all health and safety and other permits, licenses,
authorizations, certificates, exemptions and approvals of Governmental
Authorities (collectively, "PERMITS"), including, without limitation,
Environmental Permits, necessary or proper for the current operation or conduct
of the Tape Business, and all such Permits and Environmental Permits are in full
force and effect. VTP has not received any notice from any Governmental
Authority revoking, canceling, rescinding, materially modifying or refusing to
renew any such Permit or providing written notice of violations under
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any Environmental Law. To the best of VTP's and the Stockholders' knowledge, VTP
is in all material respects in compliance with all applicable Permits, all
applicable Environmental Laws and the requirements of all applicable
Environmental Permits.
(b) To the best of VTP's and the Stockholders' knowledge, in
conducting the Tape Business (i) Hazardous Materials have not been generated,
used, treated, handled or stored on, or transported to or from, or released (as
"release" is defined under any applicable Environmental Law) on any real
property owned, leased or occupied by VTP; (ii) VTP has disposed of all wastes,
including those containing Hazardous Materials, in compliance with all
applicable Environmental Laws and Environmental Permits; and (iii) there are no
past, pending or threatened Environmental Claims, nor any basis for asserting
the same, against any VTP.
5.13. MATERIAL TAPE CONTRACTS.
Schedule 5.13 lists each of the following contracts and
agreements to which VTP is a party and which relate to the Tape Business (such
contracts and agreements being collectively referred to herein as the "MATERIAL
TAPE CONTRACTS"):
(i) all contracts, agreements and other arrangements,
whether oral or written, with any customer or supplier for the purchase or sale
of inventory, other than open purchase or sale orders arising in the ordinary
course of the Tape Business consistent with past practice;
(ii) except for ordinary vendor contracts for the
purchase of inventory, all broker, distributor, dealer, manufacturer's
representative, franchise, agency, sales promotion, market research, marketing
and advertising contracts, management contracts and consulting contracts to
which VTP is a party and which involve payments, or the provision of goods or
services having a value in excess of $50,000;
(iii) all contracts and agreements with any
Governmental Authority to which VTP is a party;
(iv) all contracts and agreements with manufacturers
under which VTP is designated as an exclusive distributor;
(v) all contracts and agreements that limit the
ability of VTP to compete in any line of business or with any Person or entity
or in any geographic area or during any period of time;
(vi) except for ordinary vendor contracts for the
purchase of inventory, all other contracts, agreements and other arrangements,
whether or not made in the ordinary course of the Tape Business, which if
terminated by the other party thereto (with or without notice and with or
without cause) would cause a Material Adverse Effect upon the Tape Business as
presently conducted; and
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(vii) the Consignment Agreements and all other
agreements pursuant to which any other party holds any Tape Inventory on
consignment or on a sale or return basis or similar arrangement.
5.14. CUSTOMERS. VTP has delivered to Steadi a true, correct and
complete list of the names of the top 20 customers of the Tape Business (by
revenue) during the twelve (12) month period ended October 31, 1998 and the four
months ended February 28, 1999. Except as set forth on Schedule 5.14, to the
best of VTP's and the Stockholders' knowledge, VTP has not received any oral or
written notice that any of such customers has ceased, or will cease, to use the
products, equipment, goods or services of VTP, or has substantially reduced, or
will substantially reduce, the use of such products, equipment, goods or
services following the Closing Date.
5.15. SUPPLIERS. VTP has delivered to Steadi a true, correct and
complete list of the names and addresses of the top ten suppliers of the Tape
Business (by purchase order dollar amount) during the twelve (12) month period
ended October 31, 1998.
5.16. BROKERS. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of VTP or the Stockholders.
5.17. FULL DISCLOSURE. Neither VTP nor the Stockholders have knowledge
of any facts pertaining to VTP or the Tape Business which would have a Material
Adverse Effect and which have not been disclosed in this Agreement or any of the
Schedules hereto (except for general economic conditions or factors affecting
the industry as a whole in which the Tape Business operates). No representation
or warranty of VTP or the Stockholders in this Agreement, or any Schedules
hereto, or any certificate furnished to Steadi pursuant to this Agreement,
contains any untrue statement of a material fact, or omits to state a material
fact necessary to make the statements contained herein or therein not
misleading.
5.18. PURCHASE FOR RESALE. VTP is purchasing the Hardware Inventory for
resale and will provide to Steadi a resale certificate upon request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF STEADI
Steadi and Daisytek hereby, jointly and severally, represent and
warrant to VTP and the Stockholders as follows:
6.1. ORGANIZATION AND QUALIFICATION. Steadi is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
California with full corporate power and authority to own its properties and to
carry on the Hardware Business as now conducted.
6.2. CAPITALIZATION. Steadi is a wholly owned subsidiary of Daisytek.
Except for Steadi and its subsidiaries and Affiliates, neither Daisytek nor any
other subsidiary or affiliate of Daisytek is engaged in the Hardware Business.
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6.3. AUTHORITY; BINDING OBLIGATION. Steadi and Daisytek have all
requisite power and authority to execute, deliver and perform its respective
obligations under this Agreement and the Strategic Alliance Agreement and the
Transition Services Agreement and consummate the transactions contemplated
herein and therein. The execution and delivery of this Agreement and the
Strategic Alliance Agreement and the Transition Services Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors and stockholder of Steadi and Daisytek, and
no other action on the part of Steadi or Daisytek is necessary to consummate the
transactions contemplated hereby or thereby. This Agreement and the Strategic
Alliance Agreement and the Transition Services Agreement have been duly executed
and delivered by Steadi and Daisytek and constitute the legal, valid and binding
obligation of Steadi and Daisytek enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditor's rights' generally and to general equitable
principles.
6.4. NO VIOLATIONS. The execution, delivery and performance of this
Agreement and the Strategic Alliance Agreement and the Transition Services
Agreement and the consummation of the transactions contemplated herein and
therein by Steadi and Daisytek do not and will not, with or without the giving
of notice or passage of time or both (a) violate, conflict with or result in the
breach of any term or provision of, or require any notice, filing or consent
under (i) the certificate or articles of incorporation, by-laws or other charter
documents of Steadi and Daisytek, (ii) any statutes, laws, rules, regulations,
ordinances or permits of any Governmental Authority applicable to Steadi and
Daisytek or (iii) any Governmental Order binding upon Steadi and Daisytek or any
of its properties or assets; (b) conflict with or result in the breach of any
term or provision of, require any notice or consent under, give rise to a right
of termination of, constitute a default under, result in the acceleration of, or
give rise to a right to accelerate any obligation under, any loan agreement,
mortgage, indenture, financing agreement, lease or any other contract, agreement
or instrument to which Steadi and Daisytek is a party or by which any of its
properties or assets are bound; or (c) result in any Encumbrance on any of the
properties or assets of Steadi and Daisytek.
6.5. INVENTORY. The Hardware Inventory is in the physical possession of
Steadi and stored at the locations set forth on Schedule 3.2(b). Steadi has, and
is conveying to VTP hereby, good and marketable title to all of the Hardware
Inventory, free and clear of all Encumbrances. The Hardware Inventory does not
include any items held by Steadi on consignment for others.
6.6. ASSETS. Steadi has, and is conveying to VTP hereby, good and
marketable title to all of the other Hardware Assets, free and clear of all
Encumbrances.
6.7. HARDWARE EQUIPMENT LEASES. Together with the physical inventory
count, Steadi will deliver to VTP true, correct and complete copies of all
Hardware Equipment Leases and all amendments, modifications, supplements and
addendums thereto. Each Hardware Equipment Lease: (i) is valid and binding on
Steadi and, to the best of Steadi's knowledge, on the other parties thereto and
is in full force and effect, and (ii) upon consummation of the transactions
contemplated by this Agreement shall continue in full force and effect without
penalty or other adverse consequence and unaffected by such transactions. Except
for the credit card authorization slips, Steadi has neither accepted nor
received any deposits, prepayments or advance payments under the Hardware
Equipment Leases from any lessee thereunder. Steadi is not in material
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breach or default under the terms of any Hardware Equipment Lease, and to the
best of Steadi's knowledge, no other party to any Hardware Equipment Lease is in
material breach or default thereunder.
6.8. BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Steadi.
6.9. FULL DISCLOSURE. No representation or warranty of Steadi in this
Agreement, or any Schedules hereto, or any certificate furnished to VTP pursuant
to this Agreement, contains any untrue statement of a material fact, or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading.
6.10. PURCHASE FOR RESALE. Steadi is purchasing the Tape Inventory for
resale and will provide to VTP a resale certificate upon request.
6.11. LITIGATION. There are no Actions pending or, to Steadi's
knowledge, threatened, against Steadi and which relate to the Hardware Business.
Neither Steadi, nor any of its assets or properties, is subject to any
Governmental Order (nor, to the knowledge of Steadi, are there any such
Governmental Orders threatened to be imposed by any Governmental Authority)
which has had or would have a Material Adverse Effect. For purposes of this
Article VI, the phrase "to the best of Steadi's knowledge" and similar terms
shall mean the actual knowledge of Tom Madden and Suzanne Garrette.
6.12. COMPLIANCE WITH LAWS. To the best of Steadi's knowledge, Steadi
has conducted the Hardware Business in all material respects in accordance with
all applicable laws, ordinances, statutes, rules, regulations and Governmental
Orders applicable to it or any of its properties or assets, and Steadi is not in
violation of any such law, ordinance, statute, rule, regulation or Governmental
Order. In conducting the Hardware Business, neither Steadi nor any officer,
director, employee, agent or representative of Steadi has violated or is
currently in violation of the Foreign Corrupt Practices Act of 1977, as amended.
6.13. CUSTOMERS. Steadi has delivered to VTP a true, correct and
complete list of the names of the top 20 customers of the Hardware Business (by
revenue) during the period from March 1, 1998 to March 18, 1999. Except as set
forth on Schedule 6.13, to the best of Steadi's knowledge, Steadi has not
received any oral or written notice that any of such customers has ceased, or
will cease, to use the products, equipment, goods or services of Steadi, or has
substantially reduced, or will substantially reduce, the use of such products,
equipment, goods or services following the Closing Date.
ARTICLE VII
ACTIONS TO BE TAKEN POST-CLOSING
7.1. COLLECTION OF ACCOUNTS RECEIVABLE. Each party shall (i) be
permitted to retain copies of current customer files and records for the sole
purpose of collecting all accounts
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receivable owing from such customers and (ii) during the 90 day period following
the Closing, provide reasonable cooperation and assistance to the other party in
collecting such accounts receivable.
7.2. INVENTORY RETURNS. During the 90 day period following the Closing:
(a) Steadi shall purchase from VTP all Tape Inventory which is
(i) approved by Steadi for return and purchase hereunder, (ii) returned by VTP
customers to VTP during such period, (iii) not visibly damaged or defective,
(iv) not in excess of the amounts set forth for certain products as set forth on
Schedule 2.1(b) and (v) included in the list of products set forth on Schedule
2.1(b). The purchase price for such inventory shall be based upon the product
prices (net of vendor rebates) set forth on Schedule 2.1(b) and shall be paid
within ten (10) days following the delivery thereof to the Steadi location to be
designated by Steadi. All shipping and delivery costs (and all risk of loss in
transit) shall be borne by Steadi.
(b) VTP shall purchase from Steadi all Hardware Inventory
which is (i) approved by VTP for return and purchase hereunder, (ii) returned by
Steadi customers to Steadi during such period, (iii) not visibly damaged or
defective and (iv) included in the list of products set forth on Schedule
3.1(c). The purchase price for such inventory shall be based upon the product
prices set forth in Schedule 3.1(c) and shall be paid within ten (10) days
following the delivery thereof to the VTP location to the designated by VTP. All
shipping and delivery costs (and all risk of loss in transit) shall be borne by
VTP.
(c) All credits and refunds to customers (i) in respect of the
returned Tape Inventory shall be the responsibility of VTP and (ii) in respect
of the returned Hardware Inventory shall be the responsibility of Steadi.
(d) Steadi and VTP will cooperate with each other and use good
faith efforts to reach a mutually satisfactory agreement regarding the Excluded
Tape Inventory which is to be returned to the manufacturer.
ARTICLE VIII
INDEMNIFICATION
8.1. INDEMNIFICATION BY VTP AND THE STOCKHOLDERS. From and after the
Closing, VTP and the Stockholders shall, jointly and severally, but subject to
the limitations hereof, reimburse, indemnify and hold harmless Steadi and its
officers, directors, employees, agents, representatives and successors and
assigns from and against and in respect of each of the following:
(a) any and all damages, losses, deficiencies, liabilities,
claims, demands, charges, costs and expenses of every nature and character
whatsoever, including, without limitation, reasonable attorneys' fees and costs
(collectively, the "LOSSES") that result from, relate to or arise out of (i) the
Retained Tape Liabilities, (ii) any failure by VTP to pay or discharge when due
the Assumed Hardware Liabilities or (iii) any misrepresentation or breach of
warranty or covenant of VTP or the Stockholders in this Agreement, or any of the
Schedules provided by VTP hereunder or any agreement, document, statement, list,
certificate or instrument furnished by or on behalf of VTP or the Stockholder or
any of
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them in connection with the negotiation, execution or performance of this
Agreement and the transactions contemplated herein; and
(b) any and all actions, suits, claims, proceedings,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses incident to any of the foregoing or to the successful enforcement of
this Section.
8.2. INDEMNIFICATION OF VTP AND THE STOCKHOLDERS. From and after the
Closing, Steadi and Daisytek, jointly and severally, shall, subject to the
limitations hereof, reimburse, indemnify and hold harmless VTP and the
Stockholders and each of their respective officers, directors, employees,
agents, representatives and heirs, estate, successors and assigns from and
against and in respect of each of the following:
(a) any and all Losses that result from, relate to or arise
out of (i) the Retained Hardware Liabilities or (ii) any misrepresentation or
breach of warranty or covenant of Steadi in this Agreement or any of the
Schedules provided by Steadi hereunder or any agreement, document, statement,
list, certificate or instrument furnished by or on behalf of Steadi in
connection with the negotiation, execution or performance of this Agreement and
the transactions contemplated herein; and
(b) any and all actions, suits, claims, proceedings,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses incident to any of the foregoing or to the successful enforcement of
this Section.
8.3. LIMITATIONS ON LOSSES.
(a) In case any event shall occur that would otherwise entitle
any party to assert a claim for indemnification hereunder, no Losses shall be
deemed to have been sustained by such party to the extent of (i) any actual tax
savings realized by such party with respect thereto or (ii) any proceeds (net of
deductibles, taxes and collection costs) received by such party from any
insurance policies maintained by or on behalf of such party with respect to such
Losses. The parties agree to submit a claim under such insurance policies prior
to or promptly following making a request for indemnification hereunder.
(b) The aggregate liability of VTP and the Stockholders shall
not exceed the Tape Purchase Price and the aggregate liability of Steadi and
Daisytek shall not exceed the Hardware Purchase Price.
(c) The sum of all Losses incurred by an Indemnified Party
must exceed $25,000 before such party shall be entitled to indemnification
hereunder; provided, however, once such Losses exceed $25,000, such party shall
be entitled to indemnification for all Losses, including the first $25,000.
(d) No party shall have any liability hereunder in respect of
claims (excluding Third Party Claims, as defined below) asserted against any
Indemnified Party on or after one year from the Closing Date; provided, however,
the representations and warranties of each party relating to title to the assets
being sold by it hereunder shall survive indefinitely. The limitation set forth
in this paragraph shall not apply to any claim asserted in writing on or before
such one year anniversary.
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(e) The limitations set forth herein shall not apply in the
case of a fraudulent or intentional misrepresentation or breach by any party.
8.4. NOTICE.
(a) Promptly after receipt by an Indemnified Party of notice
of the assertion of any claim by a Person not a party to this Agreement (a
"THIRD PARTY CLAIM") with respect to which such Indemnified Party expects to
make a request for indemnification hereunder, such Indemnified Party shall give
the Indemnifying Party written notice describing such claim in reasonable
detail. The Indemnifying Party shall, upon receipt of such notice, be entitled
to participate in or, at the Indemnifying Party's option, assume the defense,
appeal or settlement of, such claim with respect to which such indemnity has
been invoked with counsel selected by it and approved by the Indemnified Party
(such approval not to be unreasonably withheld), and the Indemnified Party will
fully cooperate with the Indemnifying Party in connection therewith; provided,
that the Indemnified Party shall be entitled to employ separate counsel (at the
expense of the Indemnifying Party) to represent such Indemnified Party if
counsel selected by the Indemnifying Party cannot, by reason of any actual or
deemed conflict of interest, adequately represent the interests of the
Indemnified Party. In the event that the Indemnifying Party fails to assume the
defense, appeal or settlement of such claim within 20 days after receipt of
notice thereof from the Indemnified Party, the Indemnified Party shall have the
right to undertake the defense or appeal of, or settle or compromise, such claim
on behalf of and for the account and risk of the Indemnifying Party. The
Indemnifying Party shall not settle or compromise any such claim without the
Indemnified Party's prior written consent, unless the terms of such settlement
or compromise release the Indemnified Party from any and all liabilities with
respect to such Third Party Claim.
(b) Any indemnifiable claim that is not a Third Party Claim
shall be asserted by written notice to the Indemnifying Party. If the
Indemnifying Party does not respond to such notice within 30 days, it shall have
no further right to contest the validity of such claim.
8.5. SURVIVAL; EXCLUSIVE REMEDY. Notwithstanding any right of any party
to fully investigate the affairs of the other party and notwithstanding any
knowledge of facts determined or determinable by such party pursuant to such
investigation or right of investigation, each party has the right to rely fully
upon the representations, warranties, covenants and agreements of each other
party in this Agreement or in any certificate, financial statement or other
document delivered by any party pursuant hereto. All such representations,
warranties, covenants and agreements shall survive the execution and delivery
hereof and the Closing hereunder, subject to the limitations set forth herein.
No person shall have a right to recovery against any party (or any officer,
director, employee or agent of a party) other than through the exercise of the
indemnification rights set forth herein, which shall constitute the sole and
exclusive remedy after the Closing for any breach by a party of any
representation, warranty or covenant contained herein or in any certificate or
other instrument delivered pursuant hereto, other than a fraudulent or
intentional breach, as to which each party shall have all rights and remedies
available at law or in equity.
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ARTICLE IX
MISCELLANEOUS
9.1. COVENANT OF FURTHER ASSURANCES. The parties hereto covenant and
agree to execute and deliver any and all additional writings, instruments and
other documents and take such further actions as shall be reasonably required or
requested to effectuate the terms and conditions of this Agreement.
9.2. ENTIRE AGREEMENT. This Agreement and the Strategic Alliance
Agreement and the other agreements and instruments described herein represent
the entire agreements between the parties hereto and thereto with respect to the
subject matter hereof and thereof, and supersede all prior agreements and
communications with respect thereto.
9.3. ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor any
rights or obligations hereunder may be assigned by any party hereto without the
express written consent of the others and any attempted assignment in violation
thereof shall be null and void; provided, however, that the rights of Steadi
hereunder may be assigned to any Affiliate of Daisytek. In addition, title to
any or all of the Tape Assets may be taken in the name of any Affiliate of
Daisytek. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing in
this Agreement, express or implied, is intended to confer on any Person other
than the parties hereto or their respective successors or permitted assigns or
the Indemnified Parties (who shall be deemed third party beneficiaries hereof)
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
9.4. AMENDMENT OR MODIFICATION. This Agreement may not be waived,
amended, modified or supplemented by the parties hereto in any manner, except by
an instrument in writing signed by VTP and Steadi.
9.5. SEVERABILITY. If any provision of this Agreement shall be
determined by a court of competent jurisdiction to be invalid or unenforceable,
such determination shall not affect the remaining provisions of this Agreement,
all of which shall remain in full force and effect, nor shall it affect their
validity or enforceability in any other jurisdiction. To the extent permitted by
law, each party hereto waives any provision of law which renders any provision
hereof unenforceable in any respect.
9.6. NOTICES. All notices, requests, demands or other communications
under or with respect to this Agreement shall be in writing and shall be given
by hand, by telecopy with request for acknowledgment or confirmation of receipt,
by Federal Express or other nationally recognized overnight delivery service
providing for receipt against delivery (delivery charges prepaid) or by
certified or registered U.S. Mail, postage prepaid, return receipt requested,
and shall be deemed to have been duly given and effective upon the earlier of
(i) its actual receipt (or acknowledgment or confirmation of receipt), (ii) the
next business day after having been sent by Federal Express or similar
nationally recognized overnight delivery service providing for receipt against
delivery, delivery charges prepaid, or (iii) three days after having been sent
by certified or registered U.S. mail, return receipt requested, postage prepaid,
addressed as follows:
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If to VTP:
Videotape Products, Inc.
900 Allen Avenue
Glendale, California 91201
Attn: John Palazzola
Telecopier: 323-660-2856
- with a copy to -
Hahn & Hahn
301 E. Colorado Blvd.
Pasadena, California 91101
Attn: Scott Jenkins, Esq.
Telecopier: 626-449-7357
If to Steadi:
Steadi Systems, Ltd.
c/o Daisytek Incorporated
500 North Central Expressway
Plano, TX 75074
Attention: Tom Madden
Telecopier: 972-423-1108
- with a copy to -
Wolff & Samson, P.A.
5 Becker Farm Road
Roseland, New Jersey 07068
Attention: Morris Bienenfeld, Esq.
Telecopier: 973-740-1407
Any such Person by written notice to each of the others listed in this Section
in accordance herewith may change the address to which notices may be directed,
but such notice shall be deemed duly given and effective only upon actual
receipt thereof.
9.7. WAIVERS AND EXTENSIONS. Any waiver by any party hereto of any
provision or condition of this Agreement or breach thereof or any extension of
time granted by any party under this Agreement shall not be construed or deemed
to be a waiver of any other provision or condition of this Agreement or breach
thereof or extension of time with respect thereto or a waiver of a subsequent
breach of or subsequent extension of time with respect to same provision or
condition.
9.8. GOVERNING LAW. This Agreement shall be governed by, and be
construed in accordance with, the laws of the State of California without regard
to the conflicts of laws principles thereof.
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9.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Agreement but
all of which taken together shall constitute one and the same instrument.
9.10. CAPTIONS AND HEADINGS. The captions, section and other headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
9.11. EXHIBITS AND SCHEDULES. All Exhibits annexed hereto, and all
Schedules referred to herein, are hereby incorporated in and made a part of this
Agreement as if set forth herein.
9.12. CONSTRUCTION. The parties hereto hereby acknowledge and agree
that they and their respective counsel have independently reviewed and made
amendments to this Agreement and that the normal rule of construction, whereby
ambiguities are to be resolved against the drafting party, shall be inapplicable
to this Agreement.
9.13. PUBLICITY. Except as otherwise required by applicable laws or
regulations, no party hereto nor any Affiliate thereof, shall issue any press
release or make any other public statement regarding the transactions described
in this Agreement without obtaining the prior approval of the
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other parties hereto to the contents and the manner of presentation and
publication thereof, such consent not to be unreasonably delayed or withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
STEADI-SYSTEMS, LTD.
By: /s/ Tom Madden
-----------------------------------
Name: Tom Madden
Title: Vice President-Finance
DAISYTEK, INC.
By: /s/ Tom Madden
-----------------------------------
Name: Tom Madden
Title: Vice President-Finance
VIDEOTAPE PRODUCTS, INC.
By: /s/ John Palazzola
-----------------------------------
Name: John Palazzola
Title: President
STOCKHOLDERS:
/s/ John Palazzola
--------------------------------------
JOHN PALAZZOLA
/s/ Richard Marzec
--------------------------------------
RICHARD MARZEC
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SCHEDULES TO ASSET PURCHASE AGREEMENT
Schedule 2.1(a) - list of telephone and fax numbers to be transferred
Schedule 2.1(b) - list of VTP inventory by product (with maximum amounts)
Schedule 2.3(b) - list of Tape inventory locations
Schedule 3.1(a) - list of Steadi unfilled customer orders and deposits
Schedule 3.1(c) - list of Hardware inventory by product
Schedule 3.3(b) - list of Hardware inventory locations
Schedule 4.4(i) - list of Tape Employees
Schedule 4.4(ii) - list of Hardware Employees
Schedule 5.5 - list of Tape financial statements
Schedule 5.13 - list of Material Tape Contracts
Schedule 5.14 - list of non-continuing Tape customers
Schedule 6.13 - list of non-continuing Hardware customers
23
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- ----------------
<S> <C>
Daisytek, Incorporated Delaware
Subsidiaries of Daisytek, Incorporated:
Daisytek (Canada) Inc. Canada
Working Capital of America, Inc. Delaware
Home Tech Depot, Inc. Delaware
Daisytek De Mexico S.A. de C.V. Mexico
Daisytek Latin America, Inc. Florida
Supplies Express, Inc. Delaware
Priority Fulfillment Services, Inc. Delaware
Priority Fulfillment Services of Canada, Inc. Canada
Daisytek De Mexico Services, S.A. de C.V Mexico
Priority Fulfillment Services de Mexico, S.A. de C.V. Mexico
Daisytek Australia PTY. LTD. Australia
Priority Fulfillment Services Australia PTY LTD Australia
Daisytek Asia PTY LTD Singapore
Steadi-Systems, Ltd. (Including 6 wholly-owned U.S. subsidiaries operating as California
distributors of professional-grade audio and video media products)
Steadi-Systems de Mexico S.A. de C.V. Mexico
Steadi-Systems Canada Inc. Canada
The Tape Company, Inc. Georgia
The Tape Company, Inc. Illinois
The Tape Company, Inc. Michigan
The Tape Company, Inc. Minnesota
The Tape Company, Inc. Pennsylvania
The Tape Company, Inc. Ohio
The Tape Distributors of Texas, Inc. Texas
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-53505.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,551
<SECURITIES> 0
<RECEIVABLES> 142,721
<ALLOWANCES> 2,857
<INVENTORY> 107,918
<CURRENT-ASSETS> 254,452
<PP&E> 40,206
<DEPRECIATION> 20,296
<TOTAL-ASSETS> 315,879
<CURRENT-LIABILITIES> 115,688
<BONDS> 43,167
0
0
<COMMON> 172
<OTHER-SE> 156,998
<TOTAL-LIABILITY-AND-EQUITY> 315,879
<SALES> 908,630
<TOTAL-REVENUES> 908,630
<CGS> 800,263
<TOTAL-COSTS> 800,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,863
<INTEREST-EXPENSE> 2,797
<INCOME-PRETAX> 31,011
<INCOME-TAX> 11,823
<INCOME-CONTINUING> 19,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (405)
<NET-INCOME> 18,783
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RESTATED TO COMBINE THE
ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE TAPE COMPANY, INC.,
WHICH WAS ACQUIRED BY DAISYTEK IN JUNE 1998 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,087
<SECURITIES> 0
<RECEIVABLES> 130,328
<ALLOWANCES> 2,765
<INVENTORY> 93,590
<CURRENT-ASSETS> 227,184
<PP&E> 30,298
<DEPRECIATION> 15,025
<TOTAL-ASSETS> 257,845
<CURRENT-LIABILITIES> 103,198
<BONDS> 19,926
0
0
<COMMON> 169
<OTHER-SE> 137,562
<TOTAL-LIABILITY-AND-EQUITY> 257,845
<SALES> 800,112
<TOTAL-REVENUES> 800,112
<CGS> 712,568
<TOTAL-COSTS> 712,568
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,016
<INTEREST-EXPENSE> 3,134
<INCOME-PRETAX> 27,701
<INCOME-TAX> 10,185
<INCOME-CONTINUING> 17,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,516
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RESTATED TO COMBINE THE
ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE TAPE COMPANY, INC.,
WHICH WAS ACQUIRED BY DAISYTEK IN JUNE 1998 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 557
<SECURITIES> 0
<RECEIVABLES> 97,730
<ALLOWANCES> 2,425
<INVENTORY> 68,860
<CURRENT-ASSETS> 166,778
<PP&E> 22,923
<DEPRECIATION> 10,412
<TOTAL-ASSETS> 185,226
<CURRENT-LIABILITIES> 84,389
<BONDS> 34,574
0
0
<COMMON> 140
<OTHER-SE> 70,243
<TOTAL-LIABILITY-AND-EQUITY> 185,226
<SALES> 639,511
<TOTAL-REVENUES> 639,511
<CGS> 571,448
<TOTAL-COSTS> 571,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,660
<INTEREST-EXPENSE> 1,847
<INCOME-PRETAX> 24,346
<INCOME-TAX> 8,432
<INCOME-CONTINUING> 15,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,914
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.08
</TABLE>
