<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
- ------------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At February 7, 2000 there were 17,326,321 shares of registrant's common stock
outstanding.
<PAGE> 2
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
-----------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 (Unaudited)
and March 31, 1999..................................................... 3
Unaudited Interim Consolidated Statements of Operations for the
Three and Nine Months Ended December 31, 1999 and 1998 ................ 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1999 and 1998........................... 6
Notes to Unaudited Interim Condensed Consolidated Financial
Statements............................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................. 22
Item 6. Exhibits and Reports on Form 8-K ............................................... 22
SIGNATURES ............................................................................ 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 33,693 $ 1,551
Accounts receivable, net of allowance for doubtful accounts of
$6,017 and $2,857 at December 31, 1999 and
March 31, 1999, respectively ................................. 162,825 139,864
Inventories, net ................................................. 104,443 107,918
Prepaid expenses and other current assets ........................ 4,315 4,982
Income taxes receivable .......................................... 3,217 --
Deferred tax asset ............................................... 614 137
------------ ------------
Total current assets ............................... 309,107 254,452
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ................................ 47,388 37,807
Leasehold improvements ........................................... 5,513 2,399
------------ ------------
52,901 40,206
Less - Accumulated depreciation and amortization ................. (25,511) (20,296)
------------ ------------
Net property and equipment ......................... 27,390 19,910
OTHER ASSETS ......................................................... 8,624 12,070
EMPLOYEE RECEIVABLE .................................................. 506 485
EXCESS OF COST OVER NET ASSETS ACQUIRED, net ......................... 37,502 28,962
------------ ------------
Total assets ....................................... $ 383,129 $ 315,879
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE> 4
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 69 $ 146
Trade accounts payable ........................................... 98,966 103,179
Accrued expenses ................................................. 18,094 12,363
------------ ------------
Total current liabilities .......................... 117,129 115,688
------------ ------------
LONG-TERM DEBT, less current portion ................................. 52,101 43,021
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST .................................................... 9,591 --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at December 31, 1999 and March 31, 1999; none issued
and outstanding .............................................. -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at December 31, 1999 and March 31, 1999;
17,293,542 and 17,162,382 shares issued and
outstanding at December 31, 1999 and March 31, 1999,
respectively ................................................. 173 172
Additional paid-in capital ....................................... 132,365 87,394
Retained earnings ................................................ 74,037 71,801
Deferred compensation ............................................ (160) --
Accumulated other comprehensive income ........................... (2,107) (2,197)
------------ ------------
Total shareholders' equity ......................... 204,308 157,170
------------ ------------
Total liabilities and shareholders' equity ......... $ 383,129 $ 315,879
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
4
<PAGE> 5
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 283,087 $ 225,507 $ 763,013 $ 668,247
Cost of revenues ...................................... 259,699 198,721 686,432 588,211
---------- ---------- ---------- ----------
Gross profit .................................. 23,388 26,786 76,581 80,036
Selling, general and administrative expenses .......... 25,293 17,803 68,679 51,750
Acquisition related costs ............................. -- 197 619 732
Reversal of loss on disposition of business ........... -- -- (1,000) --
---------- ---------- ---------- ----------
Income (loss) from operations ................. (1,905) 8,786 8,283 27,554
Interest expense ...................................... 1,452 617 3,222 2,258
---------- ---------- ---------- ----------
Income (loss) before income taxes ............. (3,357) 8,169 5,061 25,296
Provision for income taxes ............................ 30 3,188 3,313 9,596
---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting change ...... (3,387) 4,981 1,748 15,700
Minority interest ..................................... 488 -- 488 --
Cumulative effect of accounting change, net of tax .... -- -- -- (405)
---------- ---------- ---------- ----------
Net income (loss) ............................. $ (2,899) $ 4,981 $ 2,236 $ 15,295
========== ========== ========== ==========
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of
accounting change ............................ $ (0.17) $ 0.29 $ 0.13 $ 0.92
Cumulative effect of accounting change,
net of tax ................................... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ (0.17) $ 0.29 $ 0.13 $ 0.90
========== ========== ========== ==========
Diluted:
Income (loss) before cumulative effect of
accounting change ............................ $ (0.17) $ 0.28 $ 0.13 $ 0.88
Cumulative effect of accounting change,
net of tax ................................... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ (0.17) $ 0.28 $ 0.13 $ 0.86
========== ========== ========== ==========
Weighted average common and common share equivalents
outstanding:
Basic .......................................... 17,200 17,140 17,179 17,083
Diluted ........................................ 17,200 17,572 17,837 17,734
</TABLE>
The accompanying notes are an integral part of these interim
consolidated statements.
5
<PAGE> 6
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,236 $ 15,295
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization ...................................... 6,575 5,132
Provision for doubtful accounts .................................... 6,706 1,885
Minority interest .................................................. (488) --
Non cash compensation expense ...................................... 32 --
Deferred income tax benefit ........................................ (477) (198)
Changes in operating assets and liabilities --
Accounts receivable ............................................ (15,860) 469
Inventories, net ............................................... 16,602 (22,708)
Trade accounts payable and accrued expenses .................... (6,528) (805)
Income taxes ................................................... (3,754) (1,401)
Prepaid expenses and other current assets ...................... 1,788 (373)
------------ ------------
Net cash provided by (used in) operating activities ....... 6,832 (2,704)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (12,072) (6,053)
Acquisitions of businesses, net of cash acquired ...................... (20,448) (6,552)
Advances to employees, net ............................................ (144) (119)
(Increase) decrease in other assets ................................... 3,446 (9,393)
------------ ------------
Net cash used in investing activities ..................... (29,218) (22,117)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ........................... 8,825 27,324
Payments on capital leases and notes payable .......................... (8,511) (5,074)
Net proceeds of PFSweb initial public offering ........................ 53,014 --
Net proceeds from exercise of stock options ........................... 1,378 1,675
Distributions to former shareholders of The Tape Company .............. -- (973)
------------ ------------
Net cash provided by financing activities ................. 54,706 22,952
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS..................... (178) 281
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 32,142 (1,588)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 1,551 2,087
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 33,693 $ 499
============ ============
</TABLE>
The accompanying notes are an integral part of these interim
consolidated statements.
6
<PAGE> 7
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION:
Daisytek International Corporation ("Daisytek"), 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 PFSweb, Inc. and its subsidiaries ("PFSweb"), the Company is
also a leading provider of transaction management services to both traditional
and e-commerce companies. The Company, through its subsidiaries in the U.S.,
Canada, Australia, Mexico, Singapore and Europe, sells products and services
primarily in North America, as well as in Latin America, Australia, Singapore,
the Pacific Rim, Europe and Africa.
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. At December 31, 1999, the Company owned
approximately 80.1% of the outstanding shares of common stock of PFSweb.
Minority interest represents minority shareholders' proportionate share of the
equity of PFSweb.(See Note 2)
In the opinion of management, the Unaudited Interim Condensed Consolidated
Financial Statements of the Company include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position as of December 31, 1999, its results of operations and its
results of cash flows for the nine months ended December 31, 1999 and 1998.
Results of the Company's operations for interim periods may not be indicative of
results for the full fiscal year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission (the
"SEC").
The Unaudited Interim Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements and
accompanying notes of the Company included in the Company's Form 10-K (File
Number 0-25400) as filed with the SEC on June 29, 1999 (the "Company's Form
10-K"). Accounting policies used in the preparation of the Unaudited Interim
Condensed Consolidated Financial Statements are consistent in all material
respects with the accounting policies described in the Notes to Consolidated
Financial Statements in the Company's Form 10-K.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
2. PUBLIC OFFERING OF PFSWEB COMMON STOCK
In December 1999, PFSweb successfully completed the IPO and sold 3,565,000
shares of common stock at $17 per share. Net proceeds from the IPO aggregated
approximately $53 million and were used to repay PFSweb's intercompany payable
to Daisytek of approximately $28 million, of which approximately $22 million was
paid as of December 31, 1999, and to acquire from Daisytek all fixed assets in
its Memphis distribution facility, as well as certain assets providing
information technology services for approximately $5 million. The remaining net
proceeds are intended to be used for currently anticipated PFSweb annual capital
expenditures of $7 - $10 million, a portion of which may be financed through
capital or operating leases, the remaining PFSweb payable balance to Daisytek,
for PFSweb working capital needs, and for possible acquisitions by PFSweb. As a
result of the IPO, the Company credited additional paid-in capital for
approximately $43 million for its share of the net IPO proceeds. Daisytek,
which currently owns approximately 80.1% of the outstanding shares of PFSweb's
common stock, has announced that it plans to divest its interest in PFSweb. The
divestiture involves Daisytek distributing to holders of its common stock all of
its interest in PFSweb through a spin-off transaction in which the shares of
PFSweb would be distributed to Daisytek common shareholders on a pro-rata basis.
Daisytek has filed a ruling request with the Internal Revenue Service ("IRS")
with regard to the tax-free treatment of the distribution of its remaining
ownership of PFSweb to the Daisytek shareholders. Daisytek has announced that it
currently expects a response from the IRS within four to six months and plans to
spin-off its remaining ownership of PFSweb in calendar year 2000. The spin-off
is subject to certain conditions, and the Company cannot provide assurance as to
whether or when it will occur. As a result of the planned spin-off, Daisytek
stock options outstanding at the date of the spin-off may be converted to new
options in either Daisytek or PFSweb stock at a conversion rate that will not be
determined until the spin-off date.
7
<PAGE> 8
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest .................................... $ 3,035 $ 2,040
Income taxes ................................ $ 6,835 $ 11,305
</TABLE>
4. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) ................................ $ (2,899) $ 4,981 $ 2,236 $ 15,295
Comprehensive income adjustments:
Foreign currency translation
adjustment ............................... 92 52 90 (383)
------------ ------------ ------------ ------------
Comprehensive income (loss) ...................... $ (2,807) $ 5,033 $ 2,326 $ 14,912
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the quarter. Diluted EPS reflects the potential dilution that could occur
if dilutive securities were exercised into common stock. Stock options are
considered dilutive securities. During the three months ended December 31, 1999,
outstanding options to purchase 4,266,988 common shares were anti-dilutive and
have been excluded from the weighted average share computation.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------
NUMERATOR: 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of
accounting change ..................................... $ (2,899) $ 4,981 $ 2,236 $ 15,700
Cumulative effect of accounting change .................. -- -- -- (405)
------------ ------------ ------------ ------------
Net income (loss) ....................................... $ (2,899) $ 4,981 $ 2,236 $ 15,295
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ............................... 17,200 17,140 17,179 17,083
Effect of dilutive securities:
Employee stock options ................................ -- 432 658 651
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions .............................. 17,200 17,572 17,837 17,734
============ ============ ============ ============
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of
accounting change ............................. $ (0.17) $ 0.29 $ 0.13 $ 0.92
Cumulative effect of accounting change .............. -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (0.17) $ 0.29 $ 0.13 $ 0.90
============ ============ ============ ============
Diluted:
Income (loss) before cumulative effect of
accounting change ............................. $ (0.17) $ 0.28 $ 0.13 $ 0.88
Cumulative effect of accounting change .............. -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (0.17) $ 0.28 $ 0.13 $ 0.86
============ ============ ============ ============
</TABLE>
9
<PAGE> 10
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related information." The Company operates in
three reportable business segments: (1) Computer Supplies, (2) Professional Tape
Products, and (3) PFSweb. The Company's reportable segments are strategic
business units that offer different products and services and they are managed
separately based on the fundamental differences in their operations. PFSweb
segment revenue includes revenue earned for certain services provided to the
Computer Supplies segment, which is eliminated as part of the intersegment
elimination. In addition, PFSweb and Computer Supplies net revenues are
presented as management evaluates the businesses under its modified IBM
distributor agreements. No single customer accounted for more than 10% of the
Company's net revenues for the nine month periods ended December 31, 1999 and
1998. The following tables set forth information as to the Company's reportable
segments (in thousands):
<TABLE>
<CAPTION>
Professional
Computer Tape Intersegment
Supplies Products PFSweb Eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1999
Net revenues ............................. $ 253,363 $ 22,908 $ 10,868 $ (4,052) $ 283,087
Operating contribution ................... 4,456 1,011 (5,497) -- (30)
THREE MONTHS ENDED DECEMBER 31, 1998
Net revenues ............................. $ 198,510 $ 24,971 $ 3,094 $ (1,068) $ 225,507
Operating contribution ................... 7,956 798 229 -- 8,983
NINE MONTHS ENDED DECEMBER 31, 1999
Net revenues ............................. $ 679,271 $ 69,922 $ 20,342 $ (6,522) $ 763,013
Operating contribution ................... 19,160 4,340 (6,123) -- 17,377
NINE MONTHS ENDED DECEMBER 31, 1998
Net revenues ............................. $ 585,216 $ 78,244 $ 7,491 $ (2,704) $ 668,247
Operating contribution ................... 24,993 2,950 343 -- 28,286
ASSETS
December 31, 1999 ........................ $ 271,420 $ 44,603 $ 67,106 $ -- $ 383,129
March 31, 1999 ........................... 198,527 48,295 69,057 -- 315,879
</TABLE>
The Company's Computer Supplies segment includes certain expenses and
assets that relate to the Professional Tape Products segment but are not
allocated by management to this segment. These expenses relate primarily to the
Company's (i) centralized management information, warehouse and telephone
systems, and (ii) executive, administrative and other corporate costs. These
assets primarily relate to the Company's centralized management information,
warehouse and telephone systems and leasehold improvements on shared facilities.
In addition, prior to the PFSweb IPO, certain corporate expenses and assets that
relate to the PFSweb segment had not been allocated to this segment.
10
<PAGE> 11
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of segment operating contribution to consolidated income
before taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, Nine Months Ended Dec. 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Segment operating contribution (loss) ............ $ (30) $ 8,983 $ 17,377 $ 28,286
Acquisition related costs (a) .................... -- 197 619 732
Incremental charges (b) .......................... 1,875 -- 9,475 --
Reversal of loss on disposition of business ...... -- -- (1,000) --
Interest expense ................................. 1,452 617 3,222 2,258
------------ ------------ ------------ ------------
Consolidated income (loss) before income taxes ... $ (3,357) $ 8,169 $ 5,061 $ 25,296
============ ============ ============ ============
</TABLE>
(a) These charges relate to the Professional Tape Products segment.
(b) Incremental charges have not been allocated to the reportable segments.
These charges relate to certain repositioning and separation activities
associated with the planned spin-off of PFSweb, certain other charges as a
result of these activities, to increase allowances for bad debts, legal and
professional fees related to an unsolicited acquisition offer and other
charges effected during such periods.
7. BUSINESS COMBINATION:
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc., a privately held, specialty wholesaler of copier and
fax consumables for approximately $19.5 million in cash, resulting in goodwill
of approximately $ 8.0 million to be amortized over a period of 20 years.
8. STOCKHOLDER RIGHTS PLAN:
On October 15, 1999, the Board of Directors declared a dividend
distribution of one preferred stock purchase right (a "right") for each share of
the Company's common stock outstanding on October 25, 1999. Each right entitles
the registered shareowners to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $70.00, subject to adjustment.
The rights are not currently exercisable, but would become exercisable if
certain events occurred relating to a person or group acquiring or attempting to
acquire 15 percent or more of the outstanding shares of common stock. The rights
expire on October 25, 2009, unless redeemed or exchanged by the Company earlier.
9. DEBT:
In October 1999, the Company amended one of its unsecured revolving line of
credit agreements (the "Facility"), effective in November 1999, to increase the
maximum borrowing availability from $85 million to $105 million. This amendment
also provided for the release of PFSweb subsidiaries as guarantors of the
Facility upon (i) the effective date of the IPO of the shares of the common
stock of PFSweb, Inc. and (ii) the payment from PFSweb, Inc. to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFSweb subsidiaries have been released from their guarantee.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb following the completion of the IPO, except in the normal course of
business. The Facility has also been amended to increase the interest rate,
effective March 1, 2000, to Eurodollar rate plus 1.0% to 1.75% from Eurodollar
rate plus .625% to 1.125%. The expiration date of the Facility has also been
extended to January 1, 2001. The Company is currently in discussion with its
lenders to enter into a new, long-term line of credit agreement.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Interim Consolidated Financial Statements and related notes appearing elsewhere
in this Form 10-Q.
FORWARD-LOOKING INFORMATION
The matters discussed in this report on Form 10-Q, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's prospectus
dated March 26, 1998, and the Company's Report on Form 10-K filed on June 29,
1999, and the PFSweb prospectus dated December 2, 1999, as well as general
economic conditions, industry and e-commerce trends, the loss of key suppliers
or customers, the loss of strategic product shipping relationships, customer
demand, product availability, changes in the trend toward outsourcing, increased
competition, risks inherent in acquiring, integrating and operating new
businesses, concentrations of credit risk, distribution efficiencies, capacity
constraints, the unknown effects of possible system failures and rapid changes
in technology, exchange rate fluctuations, and the regulatory and trade
environment (both domestic and foreign). This report on Form 10-Q also contains
other forward-looking statements, including those related to the planned
spin-off of PFSweb. Consummation of the spin-off is uncertain and realization of
the anticipated results could take longer than expected and implementation
difficulties and market factors could alter anticipated results. Actual results
could differ materially from those projected in the forward-looking statements.
BUSINESS STRATEGY
During December 1999, the Company completed the first phase in its plan to
spin-off PFSweb through the completion of an initial public offering of PFSweb
stock. In connection with the second phase of this process, the Company has
filed a ruling request with the Internal Revenue Service with regard to the
tax-free treatment of the distribution of Daisytek's remaining 80% ownership of
PFSweb to the Daisytek shareholders. The Company is targeting for this
distribution to occur sometime during calendar year 2000. As a result, the
following business strategy discussion relates only to the Daisytek business,
excluding PFSweb.
Daisytek is a leading low cost distributor. The Company bases its continued
growth on the following strategies:
1) Focus on the growing computer supplies and professional tape
industries in the U.S. and international markets.
2) Seek acquisitions to supplement growth in the Company's computer
supplies business and professional tape business or to add selected
product lines.
The Company's Computer Supplies segment specializes 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 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 U.S.
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 stationer and
value-added reseller channels. The Company is also focusing on new distribution
channels such as mass merchants, grocery and convenience stores, direct mail
marketers and .com business sites.
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
12
<PAGE> 13
operates sales and distribution centers in Canada, Mexico, Australia and
Singapore and exports products into Latin America and certain other regions of
the world. The Company believes that its 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
distributor of media products to the film, entertainment and multimedia
industries. The distribution sector of this industry in the U.S. is highly
fragmented and regionally focused. The Company's acquisition strategy has been
to acquire businesses that 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. The Company believes it
is nearing the end of its acquisition activity in this industry. Acquired
businesses have been integrated to create economies of scale. The Company
believes this integration effort will allow it to maintain the strong gross
margins earned in this segment, while at the same time reducing SG&A costs as a
percentage of net revenues, 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 and
professional tape 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.
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc. ("Arlington"), a U.S. based specialty wholesaler
primarily focused on copier and fax consumable supplies.
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<PAGE> 14
PRO FORMA PRESENTATION
The following is a pro forma historical financial presentation of the
Daisytek business units, excluding PFSweb, for the current fiscal year to date
and the last fiscal year. The presentation below considers certain
reorganization activities as a result of the planned separation of Daisytek and
PFSweb, including the estimated impact of the transaction management services
agreement between Daisytek and PFSweb for all periods presented. The second
quarter ended September 30, 1999, excludes what management believes are
incremental costs of $6.4 million related to a) this planned separation, b)
increases in allowance for bad debts, and c) other charges effected during this
period. The third quarter ended December 31, 1999, excludes what management
believes are incremental costs of $1.9 million for a) the planned separation, b)
legal and professional fees related to an unsolicited acquisition offer, and c)
other charges effected during this period. The presentation below also excludes
acquisition integration costs, loss on disposition of business and cumulative
effect of accounting change.
Daisytek based the following pro forma data on available information and
certain estimates and assumptions. Daisytek believes that such assumptions
provide a reasonable basis for presenting the results of Daisytek, excluding
PFSweb, on a stand alone basis. This pro forma financial information does not
reflect what our results of operations may be in the future.
<TABLE>
<CAPTION>
Fiscal 2000
-------------------------------------------------------
June 30, Sept. 30, Dec. 31, 9 Mos.
1999 1999 1999 Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues ........................... $ 230,046 $ 242,876 $ 276,271 $ 749,193
Cost of revenues ....................... 205,464 216,238 251,255 672,957
---------- ---------- ---------- ----------
Gross profit ....................... 24,582 26,638 25,016 76,236
Selling, general and administrative 17,971 18,339 20,539 56,849
expenses................................ ---------- ---------- ---------- ----------
Income from operations ............. 6,611 8,299 4,477 19,387
Interest expense ....................... 652 871 1,316 2,839
---------- ---------- ---------- ----------
Income before income taxes ......... 5,959 7,428 3,161 16,548
Provision for income taxes ............. 2,324 2,901 1,228 6,453
---------- ---------- ---------- ----------
Net income ............................. $ 3,635 $ 4,527 $ 1,933 $ 10,095
========== ========== ========== ==========
Net income per common share:
Basic .............................. $ 0.21 $ 0.26 $ 0.11 $ 0.59
Diluted ............................ $ 0.20 $ 0.26 $ 0.11 $ 0.57
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999
----------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, FY
1998 1998 1998 1999 Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues ........................... $ 221,585 $ 218,394 $ 223,481 $ 237,622 $ 901,082
Cost of revenues ....................... 196,293 193,256 198,811 212,103 800,463
---------- ---------- ---------- ---------- ----------
Gross profit ....................... 25,292 25,138 24,670 25,519 100,619
Selling, general and administrative 17,754 17,598 17,648 18,322 71,322
expenses................................ ---------- ---------- ---------- ---------- ----------
Income from operations ............. 7,538 7,540 7,022 7,197 29,297
Interest expense ....................... 933 829 845 467 3,074
---------- ---------- ---------- ---------- ----------
Income before income taxes ......... 6,605 6,711 6,177 6,730 26,223
Provision for income taxes ............. 2,318 2,618 2,409 2,625 9,970
---------- ---------- ---------- ---------- ----------
Net income ............................. $ 4,287 $ 4,093 $ 3,768 $ 4,105 $ 16,253
========== ========== ========== ========== ==========
Net income per common share:
Basic .............................. $ 0.25 $ 0.24 $ 0.22 $ 0.24 $ 0.95
Diluted ............................ $ 0.24 $ 0.23 $ 0.21 $ 0.23 $ 0.91
</TABLE>
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 1999 AND 1998
(PROFORMA).
Net Revenues. Net revenues for the three months ended December 31, 1999
were $276.3 million as compared to $223.5 million for the three months ended
December 31, 1998, an increase of $52.8 million, or 23.6%. Net revenues for the
nine months ended December 31, 1999 were $749.2 million as compared to $663.5
million for the nine months ended December 31, 1998, an increase of $85.7
million, or 12.9%. Computer Supplies net revenues increased 27.9% in the quarter
ended December 31, 1999, compared to the same period in fiscal year 1999. The
Computer Supplies business segment includes the Company's U.S. computer supplies
operation, international computer supplies operation and IBM product sales. The
net revenue increase in the Computer Supplies business compared to the same
quarter in the prior year is
14
<PAGE> 15
primarily attributable to the Arlington acquisition, growth in the international
computer supplies business, and growth in IBM product sales. U.S. Computer
supplies net sales increased 3.2%, excluding Arlington's net revenues of
approximately $25 million, in the quarter ended December 31, 1999, compared to
the same period in the prior year. Net revenues in the international computer
supplies operations increased 17.0% in the quarter ended December 31, 1999,
compared to the same prior year period. The Company experienced strong growth in
both its Mexico and Australia subsidiaries. The Company experienced declines in
its Latin American business due to tightened credit policies and general
economic conditions. The Company's Singapore operations continued to be
challenged, which resulted in a revenue decline compared to the same period in
fiscal 1999. The Company continually evaluates the business plans and viability
of its foreign operations. Net revenues related to the Company's IBM product
sales increased due to higher sales volumes under North American distributor
agreements and the new European distributor agreements. Professional Tape
Products net revenues decreased 8.3% in the third quarter of fiscal year 2000
compared to the same period in fiscal year 1999 due primarily to price
degradation in certain product lines and the disposition of the Steadi-Systems
professional hardware business, both partially offset by the acquisition of
several professional tape businesses in the current year.
Gross Profit. The Company's gross profit as a percent of net revenues was
9.1% for the three months ended December 31, 1999 as compared to 11.0% for the
three months ended December 31, 1998. The Company's gross profit percentage was
10.2% for the nine months ended December 31, 1999 as compared to 11.3% for the
nine months ended December 31, 1998. The decrease in the Company's gross profit
as a percentage of net revenues was primarily due to the Company's previously
announced focus on the key balance sheet areas of inventory and accounts
receivable. In order to make improvements in this area, the Company avoided
certain vendor incentive programs, during the three months ended December 31,
1999, that for comparative purposes have been previously reflected in the
Company's results. During fiscal year 1999, the Company was also able to take
advantage of certain enhanced product sourcing opportunities which did not
continue in fiscal year 2000 and, thus negatively impacted the fiscal year 2000
gross profit percentage on a comparative basis. Additionally, the gross profit
percentage declined in the international computer supplies business due
primarily to growth in the international retail business, which typically
carries lower margins. Also contributing to the overall decline in gross profit
percentage was the large revenue growth in IBM product sales, which are also
typically at lower margins. The Company believes that its gross profit
percentage may improve from levels reflected during its third quarter, however,
certain of these trends are expected to continue and could potentially have a
negative impact on gross margins as compared to the prior year. In addition, the
Company expects that competitive pressures in the computer supplies operations
may negatively impact gross margins during the remainder of fiscal year 2000.
SG&A Expenses. SG&A expenses for the three months ended December 31, 1999
were $20.5 million, or 7.4% of net revenues, as compared to $17.6 million, or
7.9% of net revenues, for the three months ended December 31, 1998. SG&A
expenses for the nine months ended December 31, 1999 were $56.8 million, or 7.6%
of net revenues, as compared to $53.0 million, or 8.0% of net revenues, for the
nine months ended December 31, 1998. The increase in SG&A expense for this
quarter compared to the prior year is primarily attributable to the acquisition
of Arlington on October 1, 1999, combined with an increase in variable costs
related to higher revenue levels. The decrease in SG&A expenses as a percentage
of net revenues for both the three and nine month periods ended December 31,
1999, is primarily due to an increase in IBM product sales with lower SG&A
expense ratios. This improved percentage is partially offset by a reduction in
net sales to large office superstores, which also have lower SG&A expense
ratios.
Interest Expense. Interest expense for the three months ended December 31,
1999 was $1.3 million as compared to $0.8 million for the three months ended
December 31, 1998. Interest expense for the nine months ended December 31, 1999
was $2.8 million as compared to $2.6 million for the nine months ended December
31, 1998. Interest expense was higher for the nine months ended December 31,
1999, primarily due to higher debt balances caused by business acquisition and
higher working capital levels throughout the year, which was partially offset by
lower interest rates. The weighted average interest rate was 6.3% and 6.7%
during the nine months ended December 31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate was 38.8% and 39.0% for the
three months ended December 31, 1999 and 1998, respectively. The effective tax
rate for the nine months ended December 31, 1999 and 1998 was 39.0% and 37.7%,
respectively. The comparative increase in the first nine months of fiscal year
2000 was primarily due to the impact of the pooling of interests with The Tape
Company in the first quarter of fiscal year 1999.
15
<PAGE> 16
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 1999 AND 1998.
The following discussion relates to Daisytek, including its majority-owned
subsidiary, PFSweb. These are historical results and may not be representative
of the Company's results after the planned spin-off of PFSweb.
Net Revenues. Net revenues for the three months ended December 31, 1999
were $283.1 million as compared to $225.5 million for the three months ended
December 31, 1998, an increase of $57.6 million, or 25.5%. Net revenues for the
nine months ended December 31, 1999 were $763.0 million as compared to $668.2
million for the nine months ended December 31, 1998, an increase of $94.8
million, or 14.2%. Computer Supplies net revenues increased 27.9% in the quarter
ended December 31, 1999, compared to the same period in fiscal year 1999. The
Computer Supplies business segment includes the Company's U.S. computer supplies
operation, international computer supplies operation and IBM product sales. The
net revenue increase in the Computer Supplies business compared to the same
quarter in the prior year is primarily attributable to the Arlington
acquisition, growth in the international computer supplies business, and growth
in IBM product sales. U.S. Computer supplies net sales increased 3.2%, excluding
Arlington's net revenues of approximately $25 million, in the quarter ended
December 31, 1999, compared to the same period in the prior year. Net revenues
in the international computer supplies operations increased 17.0% in the quarter
ended December 31, 1999, compared to the same prior year period. The Company
experienced strong growth in both its Mexico and Australia subsidiaries. The
Company experienced declines in its Latin America business due to tightened
credit policies and general economic conditions. The Company's Singapore
operations continued to be challenged, which resulted in a revenue decline
compared to the same period in fiscal 1999. The Company continually evaluates
the business plans and viability of its foreign operations. Net revenues related
to the Company's IBM product sales increased due to higher sales volumes under
North American distributor agreements and the new European distributor
agreements. Professional Tape Products net revenues decreased 8.3% in the third
quarter of fiscal year 2000 compared to the same period in fiscal year 1999 due
primarily to price degradation in certain product lines and the disposition of
the Steadi-Systems professional hardware business, both partially offset by the
acquisition of several professional tape businesses in the current year. PFSweb
also experienced an increase in its service fee-based activity as a result of
new contracts and expansion of existing contracts.
Gross Profit. The Company's gross profit as a percent of net revenues was
8.3% for the three months ended December 31, 1999 as compared to 11.9% for the
three months ended December 31, 1998. The Company's gross profit for the quarter
was negatively impacted by certain incremental charges of $1.0 million. Gross
profit as a percent of net revenues was 10.0% for the nine months ended December
31, 1999 as compared to 12.0% for the nine months ended December 31, 1998.
Excluding certain incremental charges of $4.2 million, gross profit as a percent
of net revenues was 10.6% for the nine months ended December 31, 1999. The
decrease in the Company's gross profit as a percentage of net sales was
primarily due to the Company's previously announced focus on the key balance
sheet areas of inventory and accounts receivable. In order to make improvements
in this area, the Company avoided certain vendor incentive programs, during the
three months ended December 31, 1999, that for comparative purposes have been
previously reflected in the Company's results. During fiscal year 1999, the
Company was also able to take advantage of certain enhanced product sourcing
opportunities which did not continue in fiscal year 2000 and, thus, negatively
impacted the fiscal year 2000 gross profit percentage on a comparative basis.
Additionally, the gross profit percentage declined in the International Computer
Supplies business due primarily to growth in international retail business,
which typically carries lower margins. Also contributing to the overall decline
in gross profit percentage was the revenue growth in IBM product sales, which
are also typically at lower margins. On a consolidated basis, the Company's
gross profit percentage was negatively impacted by costs associated with
PFSweb's large number of new client implementations. The Company believes that
its gross profit percentage may improve from levels reflected during its third
quarter, however, certain of these trends are expected to continue and could
potentially have a negative impact on gross margins as compared to the prior
year. In addition, the Company expects that competitive pressures in the
computer supplies operations may negatively impact gross margins during the
remainder of fiscal year 2000.
16
<PAGE> 17
SG&A Expenses. SG&A expenses for the three months ended December 31, 1999
were $25.3 million, or 8.9% of net revenues, as compared to $17.8 million, or
7.9% of net revenues, for the three months ended December 31, 1998. SG&A
expenses for the nine months ended December 31, 1999 were $68.7 million, or 9.0%
of net revenues, as compared to $51.8 million, or 7.7% of net revenues, for the
nine months ended December 31, 1998, excluding acquisition related costs in each
period and the reversal of loss on disposition of business. The increase in SG&A
expenses and the related increase in SG&A as a percentage of net revenues, for
the first three quarters of fiscal year 2000, is primarily attributable to (i)
the acquisition of Arlington on October 1, 1999, (ii) the investments in
resources and technology to implement new contracts and further develop
infrastructure for PFSweb and, (iii) a reduction in net sales to large office
superstores, which typically have lower SG&A expense ratios. This impact on the
SGA percentage was partially offset by an increase in IBM product sales with
lower SG&A expense ratios. SG&A expenses for the three and nine month periods
ended December 31, 1999, included incremental charges primarily related to
certain repositioning and separation activities associated with the PFSweb
spin-off, certain other charges as a result of these activities, to increase
allowances for bad debts related primarily to issues in the Company's Latin
American accounts receivable and for legal and professional fees related to an
unsolicited acquisition offer. Over the next few quarters, the Company expects
to record additional incremental charges of $1.5 million to $2.0 million for the
remainder of these activities, and for acquisition integration expenses related
to the purchase of Arlington in October 1999.
Acquisition Related Costs. During the nine months ended December 31, 1999,
the Company recorded costs of approximately $0.6 million applicable to
transition, integration and merger activities within its Professional Tape
Division. During this same period in fiscal year 1999, Daisytek incurred various
acquisition costs of $0.7 million related to accounting, legal and other costs
applicable to the acquisition of The Tape Company.
Loss on Disposition of Business. In fiscal 1999, the Company recorded a
charge of $2.8 million related to the disposition of its professional tape
hardware business. In the second quarter of fiscal year 2000, the Company
reversed $1.0 million of this charge related to facility lease termination
costs, since management now believes it will be able to avoid some of these
costs.
Interest Expense. Interest expense for the three months ended December 31,
1999 was $1.5 million as compared to $0.6 million for the three months ended
December 31, 1998. Interest expense for the nine months ended December 31, 1999
was $3.2 million as compared to $2.3 million for the nine months ended December
31, 1998. Interest expense was higher for the nine months ended December 31,
1999, primarily due to higher debt balances caused by business acquisitions and
higher working capital levels throughout the year. This impact was partially
offset by lower interest rates and by proceeds from the PFSweb IPO which was
completed in December 1999. The weighted average interest rate was 6.3% and 6.7%
during the nine months ended December 31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate was approximately zero for
the three months ended December 31, 1999 compared to 39.0% for the three months
ended December 31, 1998. The effective tax rate for the nine months ended
December 31, 1999 and 1998 was 65.5% and 37.9%, respectively. The income tax
provision is negatively impacted for the three and nine month periods ending
December 31, 1999, due to losses generated by PFSweb for which no income tax
benefit has been recorded. Due to the Company's limited operating history in
Europe, it is uncertain whether it is "more likely than not" that the Company
will be able to utilize its cumulative tax losses and therefore no tax benefit
has been recorded related to these losses. Additionally, although PFSweb will
continue to be included in the Company's consolidated U.S. tax return through
the spin-off, for the period between the IPO and the spin-off, any loss
generated by PFSweb, in excess of established limits, may not be utilized at a
consolidated level. Accordingly, no benefit has been recorded related to
PFSweb's U.S. operating loss subsequent to the IPO. To the extent PFSweb's U.S.
entities or European subsidiary have tax losses in future quarters, prior to the
spin-off, it will continue to negatively impact the Company's consolidated
income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the nine months ended December 31, 1999, net cash of $54.7
million was provided by financing activities, compared to net cash provided by
financing activities of $23.0 million for the nine months ended December 31,
1998.
17
<PAGE> 18
In December 1999, PFSweb successfully completed its IPO and sold 3,565,000
shares of common stock at $17 per share. Net proceeds from the IPO aggregated
approximately $53 million and were used to repay PFSweb's intercompany payable
to Daisytek, approximately $28 million, of which approximately $22 million was
paid as of December 31, 1999, and to acquire from Daisytek all fixed assets in
its Memphis distribution facility as well as certain assets providing
information technology services for approximately $5.0 million. In connection
with this sale of assets, Daisytek and PFSweb have entered into a five year
agreement whereby PFSweb will provide transaction management services for
Daisytek's U.S. wholesale consumable supplies business. During the nine months
ended December 31, 1998, cash provided by financing activities was generated
primarily from proceeds from revolving lines of credit. In conjunction with the
Professional Tape Products segment's business combination, certain acquired debt
of The Tape Company was paid in full by the Company during the nine months ended
December 31, 1998. Included in cash flows from financing activities for the nine
months ended December 31, 1998 are distributions made to former shareholders of
The Tape Company relating to taxes incurred by these shareholders for earnings
of the business unit of The Tape Company, which was organized as a subchapter S
corporation. These distributions were made prior to the business combination
with the Company.
The Company's cash at December 31, 1999 is primarily related to the
remaining proceeds from the IPO, which are intended to be used for PFSweb's
anticipated capital expenditures, the remaining PFSweb payable balance to
Daisytek, future PFSweb working capital needs, and possible acquisitions by
PFSweb. Remaining IPO proceeds cannot be utilized to pay down the Company's
outstanding balance on its credit facility.
Net cash provided by operating activities for the nine months ended
December 31, 1999, was $6.8 million compared to net cash used in operating
activities of $2.7 million for the same period the prior year. Working capital
increased to $192.0 million at December 31, 1999 from $138.8 million at March
31, 1999. This increase of $53.2 million was primarily attributable to 1)
acquisition of the Arlington business, 2) remaining net PFSweb IPO proceeds; and
3) increase in accounts receivable related to growth in the existing business
units. These factors were partially offset by a decline in inventory levels
during this period. This reduction in inventory resulted from the Company's
focus on its critical balance sheet components. During the quarter ended
December 31, 1999, the Company experienced improvements in inventory turns in
all business units.
Funds used for investing activities during the nine months ended December
31, 1999 and 1998 primarily included costs to acquire businesses and capital
expenditures. During June 1999, the Company purchased assets of a regional
professional tape business for approximately $2.2 million, and in October 1999,
purchased certain assets and liabilities of a specialty wholesaler of copier and
fax consumables for approximately $19.5 million. Capital expenditures were
approximately $12.1 million and $6.1 million during the nine months ended
December 31, 1999 and 1998, respectively. These capital expenditures consisted
primarily of additions to upgrade the Company's management information systems
and expansion of its PFSweb distribution facilities, both domestic and foreign.
The Company anticipates that its total investment in upgrades and additions to
facilities for fiscal year 2000 will be approximately $14 million to $17
million. The Company's PFSweb subsidiary has a long-term contractual agreement
with one of its clients pursuant to which, as part of the services that PFSweb
provides, PFSweb finances certain of the client's inventory. This financing
agreement provided net cash flows of $3.4 million for the nine months ended
December 31, 1999, and used net cash flows of $9.4 million for the nine months
ended December 31, 1998. Subsequent to December 31, 1999 the client gave PFSweb
a preliminary indication that they might not have PFSweb finance this inventory
in the future.
At December 31, 1999, the Company's unsecured revolving lines of credit
provided for borrowings up to approximately $129 million. There were outstanding
balances on the lines of credit totaling $51.8 million at December 31, 1999,
leaving approximately $77 million available for additional borrowings.
In October 1999, the Company amended one of its unsecured revolving line of
credit agreements (the "Facility"), effective in November 1999, to increase the
maximum borrowing availability from $85 million to $105 million. This amendment
also provided for the release of PFSweb subsidiaries as guarantors of the
Facility upon (i) the effective date of the IPO of the shares of the common
stock of PFSweb, Inc. and (ii) the payment from PFSweb, Inc. to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFSweb subsidiaries have been released from their guarantee.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb, except in the normal course of business. The Facility has also been
amended to increase the interest rate, effective March 1, 2000, to Eurodollar
rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%. The
expiration date of the Facility has also been extended to January 1, 2001. The
Company is currently in discussion with its lenders to enter into a new,
long-term line of credit agreement.
18
<PAGE> 19
The Company believes that international markets represent further
opportunities for growth. The Company attempts to protect itself from foreign
currency fluctuations by denominating substantially all of its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company has
entered into various forward Canadian and Australian currency exchange contracts
in order to hedge the Company's net investment in, and its intercompany payable
applicable to, its Canadian and Australian subsidiaries. The Company has the
following forward currency exchange contracts outstanding as of December 31,
1999:
<TABLE>
<CAPTION>
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
<S> <C> <C> <C>
Canadian Dollars $8.3 million Sell Canadian Dollars May 2000
Australian Dollars $2.6 million Sell Australian Dollars February 2000
Australian Dollars $7.9 million Sell Australian Dollars April 2000
Australian Dollars $1.3 million Sell Australian Dollars April 2000
</TABLE>
As of December 31, 1999, the Company had incurred unrealized losses of
approximately $0.2 million on the outstanding forward exchange contracts. The
Company may consider entering into other forward exchange contracts in order to
hedge the Company's net investment in its Canadian, Australian, Mexican, and
Singaporean subsidiaries, although no assurance can be given that the Company
will be able to do so on acceptable terms.
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 Products segment and expand its services or
capabilities in connection with its efforts to grow its PFSweb business. The
Company currently has no binding agreements to acquire any material 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 the next twelve months, as well as business growth and planned capital
expenditures, through funds available under the Company's various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under the Company's credit facilities. Further,
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.
19
<PAGE> 20
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of the Company's financial instruments, which include
cash and cash equivalents and capital lease obligations, approximate their fair
values based on current market price and rates.
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 $51.8 million at December 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 an increase or decrease in interest expense of
approximately $259,000 annualized, based on the outstanding balances of the
revolving lines of credit at December 31, 1999.
The Company's foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars, Singapore Dollars and the
Euro. The Company's international sales and purchases are generally U.S. Dollar
based, except in Canada and Australia and, to a lesser extent, in Europe. 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 four outstanding foreign currency
forward contracts at December 31, 1999. If the foreign exchanges rates of the
Canadian and Australian currencies fluctuate 10% from the December 31, 1999
rates, gains or losses in fair value on the four outstanding contracts would be
$2.4 million.
YEAR 2000 ISSUE
The Company completed its identification, assessment and remediation of the
year 2000 compliance issue ("Y2K") in December 1999. The total expenses incurred
by the Company related to Y2K was approximately $0.8 million, of which $0.3
million was incurred during the nine months ended December 31, 1999. These
expenses included both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not reported separately. To date, the Company has not experienced any
material Y2K failures and to the best of its knowledge neither have any of its
significant customers or service providers. However, there can be no assurance
that in the future issues related to Y2K will not have a material adverse effect
on our financial condition or that of our significant customers or service
providers.
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 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.
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 PFSweb business is dependent upon the
seasonality of its clients' business and their sale of their products.
Accordingly, management must rely upon the projections of its
20
<PAGE> 21
PFSweb clients in assessing quarterly variability. We believe that as the PFSweb
business grows with consumer product clients, its business activity will be more
significant in the quarter ended December 31.
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 Statement of Financial Accounting Standards
("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.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
2.1 Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2 Initial Public Offering and Distribution Agreement
by and among Daisytek International Corporation,
Daisytek, Incorporated, and PFSweb, Inc.
2.3 Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated
and PFSweb, Inc.
2.4 Tax Indemnification and Allocation Agreement between
Daisytek International Corporation and PFSweb, Inc.
2.5 Transition Services Agreement between Daisytek,
Incorporated and PFSweb, Inc.
2.6 Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment
Services, Inc.
10.1 PFSweb, Inc. Underwriting Agreement by and among
PFSweb, Inc., Daisytek International Corporation and
the Underwriters named therein.
27.1 Financial Data Schedule for the nine months ended
December 31, 1999
27.2 Financial Data Schedule for the nine months ended
December 31, 1998
b) Reports on Form 8-K:
None.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2000
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
----------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Vice President - Finance
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2 Initial Public Offering and Distribution Agreement
by and among Daisytek International Corporation,
Daisytek, Incorporated and PFSweb, Inc.
2.3 Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated
and PFSweb, Inc.
2.4 Tax Indemnification and Allocation Agreement between
Daisytek International Corporation and PFSweb, Inc.
2.5 Transition Services Agreement between Daisytek,
Incorporated and PFSweb, Inc.
2.6 Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment
Services, Inc.
10.1 PFSweb, Inc. Underwriting Agreement by and among
PFSweb, Inc., Daisytek International Corporation and
the Underwriters named therein.
27.1 Financial Data Schedule for the nine months ended
December 31, 1999
27.2 Financial Data Schedule for the nine months ended
December 31, 1998
</TABLE>
<PAGE> 1
EXHIBIT 2.1
MASTER SEPARATION AGREEMENT
dated as of
December 7, 1999
among
DAISYTEK INTERNATIONAL CORPORATION,
DAISYTEK, INCORPORATED,
PRIORITY FULFILLMENT SERVICES, INC.
and
PFSWEB, INC.
<PAGE> 2
MASTER SEPARATION AGREEMENT
This Master Separation Agreement ("Agreement") is entered into on
December 7, 1999 among Daisytek International Corporation, a Delaware
corporation ("Daisytek International"), Daisytek, Incorporated, a Delaware
corporation ("Daisytek") and a wholly-owned subsidiary of Daisytek
International, Priority Fulfillment Services, Inc., a Delaware corporation
("PFS") and a wholly-owned subsidiary of Daisytek, and PFSweb, Inc., a Delaware
corporation ("PFSweb"). Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in Article 1 hereof.
RECITALS
WHEREAS, the Boards of Directors of Daisytek International and Daisytek
have determined that it would be appropriate and desirable to separate the PFS
Business from Daisytek; and
WHEREAS, Daisytek has caused PFSweb to be incorporated in order to
effect such separation, Daisytek currently owns all of the issued and
outstanding common stock of PFSweb, and PFSweb currently conducts no business
operations and has no significant assets or liabilities;
WHEREAS, the Boards of Directors of Daisytek and PFSweb have each
determined that it would be appropriate and desirable for Daisytek to contribute
and transfer to PFSweb, and for PFSweb to receive and assume, directly or
indirectly, substantially all of the assets and liabilities currently associated
with the PFS Business, including the stock currently held by Daisytek in PFS and
the PFS Subsidiaries, and in connection therewith, for PFSweb to (i) pay to
Daisytek the net book value of certain assets to be so transferred to it and
(ii) contribute certain assets to PFS; and
WHEREAS, Daisytek and PFSweb intend that the contribution and
assumption of assets and liabilities and payment, together with the Distribution
(defined below) will qualify as a tax-free reorganization under Section
368(a)(1)(D) of the Code; and
WHEREAS, Daisytek and PFSweb currently contemplate that, concurrently
with the contribution and assumption of assets and liabilities, PFSweb will
consummate an initial public offering (the "IPO") of an amount of its Common
Stock (the "PFSweb Common Stock") that will reduce Daisytek's ownership of
PFSweb to not less than 80%; and
WHEREAS, Daisytek plans that, as soon as practicable following the
satisfaction of applicable conditions, and in no event later than 12 months
following the IPO Closing Date, Daisytek will distribute to Daisytek
International all of the shares of PFSweb common stock owned by Daisytek, and
Daisytek International will, in turn, distribute such shares to the holders of
its common stock, $.01 par value, by means of a pro rata distribution, (the
"Distribution"); and
<PAGE> 3
WHEREAS, Daisytek, Daisytek International and PFSweb intend that the
Distribution will be tax-free to Daisytek, Daisytek International and its
stockholders under the Code; and
WHEREAS, the parties intend in this Agreement to set forth the
principal arrangements between them regarding the separation of the PFS Business
from Daisytek.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Defined Terms. The following terms, as used herein, shall
have the following meanings:
"Affiliate" of any specified Person means any other Person directly or
indirectly Controlling, Controlled by, or under common Control with, such
specified Person; provided, however, that for purposes of this Agreement, (i)
Daisytek and its subsidiaries (other than PFSweb, PFS and the PFS Subsidiaries)
shall not be considered Affiliates of PFSweb and (ii) PFSweb, PFS and the PFS
Subsidiaries shall not be considered Affiliates of Daisytek.
"Ancillary Agreements" means each of the agreements to be entered into
by and among Daisytek International, Daisytek, PFSweb and/or PFS in connection
with the Distribution, including any exhibits, schedules, attachments, tables or
other appendices thereto, and each agreement and other instrument contemplated
therein.
"Business Day " means a day other than a Saturday, a Sunday or a day on
which banking institutions located in the State of New York are authorized or
obligated by law or executive order to close.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, together with the rules and regulations promulgated thereunder.
"Commission" means the Securities and Exchange Commission.
"Confidential Information" means with respect to any party hereto, (i)
any Information concerning such party, its business or any of its Affiliates
that was obtained by another party hereto prior to the Contribution Date, (ii)
any Information concerning such party that is obtained by another party under
the provisions of this Agreement, or (iii) any other Information obtained by, or
furnished to, another party hereto prior to the Contribution Date, in each case
that (a) was marked "Proprietary" or "Company Private" or words of similar
import by the party owning such Information, or any Affiliate of such party, or
(b) the party owning such
2
<PAGE> 4
Information notified such other party in writing was confidential or secret by
the Contribution Date.
"Contribution Date" means the IPO Closing Date.
"Contribution Schedule" means the schedule identified by Daisytek and
PFSweb as the "Contribution Schedule" which sets forth (i) the assets, rights
and benefits to be transferred by Daisytek to PFSweb, (ii) the liabilities,
commitments and obligations of Daisytek to be assumed, discharged, paid or
performed by PFSweb, and (iii) the PFS Intercompany Obligation.
"Control" means the possession, direct or indirect, of the power to
direct or cause the direction of the management of the policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"controlling" and "controlled" have the corollary meanings ascribed thereto.
"Distribution" has the meaning set forth in the preamble to this
Agreement.
"Distribution Date" means any date or dates, as the case may be,
determined by Daisytek, in its sole and absolute discretion, to be a date on
which shares of PFSweb Common Stock held by Daisytek are distributed in
connection with the Distribution.
"Indemnifying Party" means any party hereto which, pursuant to the
terms hereof, is obligated to indemnify any other party hereto.
"Indemnitee" means any party hereto which, pursuant to the terms
hereof, is entitled to indemnification from any other party hereto.
"Information" means all records, books, contracts, instruments,
computer data and other data.
"IPO" has the meaning set forth in the preamble to this Agreement.
"IPO Closing Date" means the date on which the consummation of the IPO
shall occur.
"IPO Prospectus" means the Prospectus of PFSweb that forms a part of
the IPO Registration Statement, together with all amendments and supplements
thereto.
"IPO Registration Statement" means the registration statement on Form
S-1, Registration No. 333-87657 filed by PFSweb with the Commission in
connection with the IPO, together with all amendments and supplements thereto.
"Person" means an individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated association, any other entity,
or a government or any
3
<PAGE> 5
department or agency or other unit thereof.
"PFS Business" means the business conducted by PFS and the PFS
Subsidiaries at any time on or before the Contribution Date, including (i) all
business operations of PFSweb described in the IPO Prospectus, (ii) all business
operations initiated or acquired by PFS or any of the PFS Subsidiaries after the
date of the IPO Prospectus and (iii) all business operations that were conducted
at any time in the past by PFS or any of the PFS Subsidiaries or by any
predecessor thereto (including, without limitation, Working Capital of America,
Inc.) whether or not discontinued or disposed of prior to the date of the IPO
Prospectus.
"PFS Intercompany Obligation" means the intercompany obligation owing
by PFS to Daisytek as set forth in the Contribution Schedule.
"PFS Liabilities" means the liabilities, commitments and obligations of
Daisytek designated as the "PFS Liabilities" in the Contribution Schedule.
"PFS Memphis Assets" means the assets, rights and benefits designated
as the "PFS Memphis Assets" in the Contribution Schedule.
"PFS Subsidiaries" means, collectively, PFS, Priority Fulfillment
Services Europe, B.V., a Netherlands corporation; and Priority Fulfillment
Services Canada, Inc., a Canadian corporation.
"Prior Relationship" means the ownership relationship between Daisytek
and PFSweb at any time prior to the Contribution Date.
"Representatives" means directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"Subsidiary" means with respect to any specified Person, any
corporation, any limited liability company, any partnership or other legal
entity of which such Person or any of its Subsidiaries Controls or owns,
directly or indirectly, more than 50% of the stock of other equity interest
entitled to vote on the election of the members to the board of directors or
similar governing body.
"Third-Party Claim" means any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person other than any party hereto or their respective Affiliates
which gives rise to a right of indemnification hereunder.
4
<PAGE> 6
ARTICLE 2
CONTRIBUTION AND ASSUMPTION
Section 2.01. Contribution of PFS Assets.
(a) On the Contribution Date, Daisytek shall contribute and transfer to
PFSweb, all of Daisytek's right, title and interest in, to and under the
following (collectively, the "PFS Assets"): (i) the PFS Memphis Assets, (ii) all
of the issued and outstanding shares of capital stock or other equity interests
in each of the PFS Subsidiaries, whereupon each of the PFS Subsidiaries shall
become wholly-owned Subsidiaries of PFSweb and (iii) the sole outstanding
limited liability company membership interest (the "Membership Interest") in PFS
Texas, L.L.C., a Delaware limited liability company. PFSweb acknowledges and
agrees that, except as set forth herein or in any of the Ancillary Agreements,
the foregoing transfers are made "AS IS WHERE IS" and Daisytek has not made nor
will make any warranty, express or implied, including without limitation any
warranty of merchantability of fitness for a particular purpose, with respect to
any PFS Asset.
(b) Immediately following the contribution and transfer of the PFS
Assets as provided above, PFSweb shall contribute and transfer to PFS the PFS
Memphis Assets and the Membership Interest.
Section 2.02. Assumption of Liabilities; Payment to Daisytek. As part
of the Contribution, effective as of the Contribution Date, PFSweb and/or the
PFS Subsidiaries, as directed by PFSweb, shall assume and on a timely basis
shall pay, perform, satisfy and discharge in accordance with their terms the PFS
Liabilities. As part of the Contribution, on the IPO Closing Date, or as soon
thereafter as practicable, PFSweb shall pay to Daisytek the net book value of
the PFS Assets as set forth in the Contribution Schedule. As part of the
Contribution, on the IPO Closing Date, or as soon thereafter as practicable,
PFSweb shall contribute to PFS sufficient funds for PFS to repay the then
outstanding balance, both principal and interest, of the PFS Intercompany
Obligation.
Section 2.03. Methods of Transfer and Assumption.
(a) The parties intend to complete the transfer of all PFS Assets and
the assumption of all PFS Liabilities effective as of the Contribution Date;
provided, however, that to the extent any such transfers or assumptions are not
completed as of the Contribution Date, each party shall take all actions
reasonably necessary or appropriate to complete such transactions as promptly
thereafter as possible. In addition, the parties acknowledge that there may
exist (i) PFS Assets or other assets that the parties discover were, by mistake
or omission, transferred to PFSweb or retained by Daisytek, respectively, or
(ii) PFS Liabilities or other liabilities that the parties discover were, by
mistake or omission, assumed by PFSweb or not assumed by PFSweb, respectively.
The parties shall, between the Contribution Date and the Distribution Date,
5
<PAGE> 7
cooperate in good faith to effect the transfer or re-transfer of such PFS Assets
or other assets, and/or the assumption or re-assumption of such PFS Liabilities
or other liabilities, to or by the appropriate party and shall not use such
mistake or omission to alter the original intent of the parties hereto with
respect to the PFS Assets to be transferred to or PFS Liabilities to be assumed
by PFSweb. Each party shall reimburse the other or make such other financial or
other adjustments as may be equitable to remedy any mistakes or omissions
relating to any of the PFS Assets transferred hereby or any of the PFS
Liabilities assumed hereby.
(b) Each party shall execute and deliver to the relevant other party
all such documents, instruments, certificates and agreements in appropriate
form, and make all filings and recordings and take all such other actions, as
shall be necessary or reasonably requested by such other party, whether before
or after the Contribution Date, in order to give full effect to and evidence and
perfect the transfer and contribution of the PFS Assets and assumption of the
PFS Liabilities as contemplated hereby. However, the parties acknowledge and
agree that no party shall be required to comply with the provisions of any bulk
transfer law of any jurisdiction in connection with the transfer of any PFS
Asset.
(c) Any Subsidiary of PFSweb that will receive any PFS Asset or assume
any PFS Liability shall for all purposes be deemed to be a party to this
Agreement.
Section 2.04. Nonassignable Contracts. Anything contained herein to the
contrary notwithstanding, this Agreement shall not constitute an agreement to
assign any PFS Asset or PFS Liability if an assignment or attempted assignment
of the same without the consent of another Person would constitute a breach
thereof or in any way impair the rights of a party thereunder or give to any
third party any rights with respect thereto. If any such consent is not obtained
or if an attempted assignment would be ineffective or would impair such party's
rights under any such PFS Asset or PFS Liability so that the party entitled to
the benefits and responsibilities of such purported transfer (the "Intended
Transferee") would not receive all such rights and responsibilities, then (i)
the party purporting to make such transfer (the "Intended Transferor") shall use
commercially reasonable efforts to provide or cause to be provided to the
Intended Transferee, to the extent permitted by law, the benefits of any such
PFS Asset or PFS Liability and the Intended Transferor shall promptly pay or
cause to be paid to the Intended Transferee when received all moneys received by
the Intended Transferor with respect to any such PFS Asset and (ii) in
consideration thereof the Intended Transferee shall pay, perform and discharge
on behalf of the Intended Transferor all of the Intended Transferor's
liabilities thereunder in a timely manner and in accordance with the terms
thereof which it may do without breach. In addition, the Intended Transferor
shall take such other actions as may reasonably be requested by the Intended
Transferee in order to place the Intended Transferee, insofar as reasonably
possible, in the same position as if such PFS Asset had been transferred as
contemplated hereby and so all the benefits and burdens relating thereto,
including possession, use, risk of loss, potential for gain and dominion,
control and command, shall inure to the Intended Transferee. If and when such
consents and approvals are obtained, the transfer of the applicable PFS Asset
shall be effected in accordance with the terms of this Agreement. To the extent
that the PFS Liabilities include liabilities, obligations or commitments
pursuant to any
6
<PAGE> 8
contract, permit, license, franchise or other right, Daisytek shall, to the
extent such contract, permit, license, franchise or other right is not a PFS
Asset, upon request by PFSweb either assign the same to PFSweb or assert and
seek to enforce the same for the benefit of PFSweb.
ARTICLE 3
ANCILLARY AGREEMENTS
Section 3.01. Ancillary Agreements. Daisytek and PFSweb shall, and
shall take all steps reasonably necessary to cause their respective Subsidiaries
and Affiliates to, enter into and perform all Ancillary Agreements in accordance
with their terms. To the extent that any Ancillary Agreement expressly addresses
any matters addressed by this Agreement, the terms and conditions of such
Ancillary Agreement shall govern the rights and obligations of the parties with
respect to such matters.
ARTICLE 4
INDEMNIFICATION
Section 4.01. Indemnification by PFSweb. PFSweb and each Subsidiary of
PFSweb which shall receive any PFS Asset or PFS Liability transferred pursuant
to the terms of this Agreement and their respective successors-in-interest and
assigns shall jointly and severally indemnify, defend and hold harmless Daisytek
and each of its Subsidiaries and their respective successors-in-interest, and
each of their respective past and present Representatives against any loss,
claim, damage, liability or action, including any reasonable attorneys' fees or
any other expenses reasonably incurred by any of them in connection with
investigating and/or defending any such loss, claim, damage, liability or
action, resulting from, relating to or arising, out of or in connection with the
PFS Business, including without limitation, the PFS Liabilities, to the extent
that any such loss, claim, damage, liability or action shall arise from and
after the Contribution Date or shall relate to any period from and after the
Contribution Date.
Section 4.02. Indemnification by Daisytek. Daisytek and each Subsidiary
of Daisytek which shall transfer any PFS Asset or PFS Liability pursuant to the
terms of this Agreement and their respective successors-in-interest and assigns
shall jointly and severally indemnify, defend and hold harmless PFSweb and each
of its Subsidiaries and their respective successors-in-interest, and each of
their respective past and present Representatives against any loss, claim,
damage, liability or action, including any reasonable attorneys' fees or any
other expenses reasonably incurred by any of them in connection with
investigating and/or defending any such loss, claim, damage, liability or
action, resulting from, relating to or arising, out of or in connection with the
PFS Business, including without limitation, the PFS Liabilities, to the extent
that any such loss, claim, damage, liability or action shall arise prior to the
Contribution Date or shall relate to any period prior to the Contribution Date.
7
<PAGE> 9
Section 4.03. Indemnification Procedures.
(a) If any Indemnitee receives notice of the assertion of any
Third-Party Claim with respect to which an Indemnifying Party is obligated under
this Agreement to provide indemnification, such Indemnitee shall promptly give
such Indemnifying Party notice thereof (together with a copy of such Third-Party
Claim, process or other legal pleading) promptly after becoming aware of such
Third-Party Claim; provided, however, that the failure of any Indemnitee to give
notice as provided in this Section shall not relieve any Indemnifying Party of
its obligations, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice. Such notice shall describe such
Third-Party Claim in reasonable detail.
(b) An Indemnifying Party, at such Indemnifying Party's own expense and
through counsel chosen by such Indemnifying Party (which counsel shall be
reasonably acceptable to the Indemnitee), may elect to defend any Third-Party
Claim. If an Indemnifying Party elects to defend a Third-Party Claim, then,
within ten Business Days after receiving notice of such Third-Party Claim (or
sooner, if the nature of such Third Party claim so requires), such Indemnifying
Party shall notify the Indemnitee of its intent to do so, and such Indemnitee
shall cooperate in the defense of such Third-Party Claim. Such Indemnifying
Party shall pay such Indemnitee's reasonable out-of-pocket expenses incurred in
connection with such cooperation. Such Indemnifying Party shall keep the
Indemnitee reasonably informed as to the status of the defense of such
Third-Party Claim. After notice from an Indemnifying Party to an Indemnitee of
its election to assume the defense of a Third-Party Claim, such Indemnifying
Party shall not be liable to such Indemnitee under this Section for any
attorneys' fees or other expenses subsequently incurred by such Indemnitee in
connection with the defense thereof; provided, however, that such Indemnitee
shall have the right to employ one law firm as counsel ("Separate Counsel"), to
represent such Indemnitee in any action or group of related actions (which firm
or firms shall be reasonably acceptable to the Indemnifying Party) if, in such
Indemnitee's reasonable judgment at any time, either a conflict of interest
between such Indemnitee and such Indemnifying Party exists in respect of such
claim, or there may be defenses available to such Indemnitee which are
significantly different from or in addition to those available to such
Indemnifying Party and the representation of both parties by the same counsel
would, in the reasonable judgment of the Indemnitee, be inappropriate, and in
that event (i) the reasonable fees and expenses of such Separate Counsel shall
be paid by such Indemnifying Party (it being understood, however, that the
Indemnifying Party shall not be liable for the expenses of more than one
Separate Counsel with respect to any Third-Party Claim (even if against multiple
Indemnitees)) and (ii) each of such Indemnifying Party and such Indemnitee shall
have the right to conduct its own defense in respect of such claim. If an
Indemnifying Party elects not to defend against a Third-Party Claim, or fails to
notify an Indemnitee of its election as provided in this Section within the
period of ten Business Days described above, the Indemnitee may defend,
compromise, and settle such Third-Party Claim and shall be entitled to
indemnification hereunder (to the extent permitted hereunder); provided,
however, that no such Indemnitee may compromise or settle any such Third-Party
Claim without the prior written consent of the Indemnifying Party, which consent
shall not be unreasonably withheld or delayed. Notwithstanding the foregoing,
the Indemnifying Party shall not, without the prior written consent of the
Indemnitee, (i) settle or compromise any Third-Party
8
<PAGE> 10
Claim or consent to the entry of any judgment which does not include as an
unconditional term thereof the delivery by the claimant or plaintiff to the
Indemnitee of a written release from all liability in respect of such
Third-Party Claim or (ii) settle or compromise any Third-Party Claim in any
manner that would be reasonably likely to have a material adverse effect on the
Indemnitee.
Section 4.04. Certain Limitations.
(a) The amount of any indemnifiable losses or other liability for which
indemnification is provided under this Agreement shall be net of any amounts
actually recovered by the Indemnitee from third parties (including, without
limitation, amounts actually recovered under insurance policies) with respect to
such indemnifiable losses or other liability. Any Indemnifying Party hereunder
shall be subrogated to the rights of the Indemnitee upon payment in full of the
amount of the relevant indemnifiable loss. An insurer who would otherwise be
obligated to pay any claim shall not be relieved of the responsibility with
respect thereto or, solely by virtue of the indemnification provision hereof,
have any subrogation rights with respect thereto. If any Indemnitee recovers an
amount from a third party in respect of an indemnifiable loss for which
indemnification is provided in this Agreement after the full amount of such
indemnifiable loss has been paid by an Indemnifying Party or after an
Indemnifying Party has made a partial payment of such indemnifiable loss and the
amount received from the third party exceeds the remaining unpaid balance of
such indemnifiable loss, then the Indemnitee shall promptly remit to the
Indemnifying Party the excess (if any) of (i) the sum of the amount theretofore
paid by such Indemnifying Party in respect of such indemnifiable loss plus the
amount received from the third party in respect thereof, less (ii) the full
amount of such indemnifiable loss or other liability.
(b) The amount of any loss or other liability for which indemnification
is provided under this Agreement shall be (i) increased to take account of any
net tax cost incurred by the Indemnitee arising from the receipt or accrual of
an indemnification payment hereunder (grossed up for such increase) and (ii)
reduced to take account of any net tax benefit realized by the Indemnitee
arising from incurring or paying such loss or other liability. In computing the
amount of any such tax cost or tax benefit, the Indemnitee shall be deemed to
recognize all other items of income, gain, loss, deduction or credit before
recognizing any item arising from the receipt or accrual of any indemnification
payment hereunder or incurring or paying any indemnified loss. Any
indemnification payment hereunder shall initially be made without regard to this
Section and shall be increased or reduced to reflect any such net tax cost
(including gross-up) or net tax benefit only after the Indemnitee has actually
realized such cost or benefit. For purposes of this Agreement, an Indemnitee
shall be deemed to have "actually realized" a net tax cost or a net tax benefit
to the extent that, and at such time as, the amount of taxes payable by such
Indemnitee is increased above or reduced below, as the case may be, the amount
of taxes that such Indemnitee would be required to pay but for the receipt or
accrual of the indemnification payment or the incurrence or payment of such
loss, as the case may be. Following such determination, the Indemnifying Party
shall pay any underpayment to the Indemnitee and the Indemnitee shall reimburse
the Indemnifying Party for any overpayment, respectively, as may arise from the
foregoing adjustment.
9
<PAGE> 11
(c) Any indemnification payment made under this Agreement shall be
characterized for tax purposes as if such payment were made immediately prior to
the Contribution Date.
ARTICLE 5
ACCESS TO INFORMATION
Section 5.01 Restrictions on Disclosure of Information.
(a) Without limiting any rights or obligations under any other
agreement between or among the parties hereto and/or any of their respective
Affiliates relating to confidentiality, for a period of three years following
the Contribution Date, each of the parties hereto agrees that it shall not, and
shall not permit any of its Affiliates or Representatives to, disclose any
Confidential Information to any Person, other than to such Affiliates or
Representatives on a need-to-know basis in connection with the purpose for which
the Confidential Information was originally disclosed. Notwithstanding the
foregoing, each of the parties hereto and its respective Affiliates and
Representatives may disclose such Confidential Information, and such Information
shall no longer be deemed Confidential Information, to the extent that such
party can demonstrate that such Confidential Information is or was (i) available
to such party outside the context of the Prior Relationship on a nonconfidential
basis prior to its disclosure by the other party, (ii) in the public domain
other than by the breach of this Agreement or by breach of any other agreement
between or among the parties hereto and/or any of their respective Affiliates
relating to confidentiality, or (iii) lawfully acquired outside the context of
the Prior Relationship on a nonconfidential basis or independently developed by,
or on behalf of, such party by Persons who do not have access to, or
descriptions of, any such Confidential Information. Additionally,
notwithstanding anything to the contrary herein, any Information provided by
Daisytek to PFSweb or by PFSweb to Daisytek shall, except as otherwise set forth
in any of the Ancillary Agreements, not be deemed Confidential Information with
respect to the use of such Information by PFSweb in the ordinary course of the
PFS Business or by Daisytek in the ordinary course of Daisytek's business,
respectively.
(b) Each of the parties hereto shall maintain, and shall cause their
respective Affiliates to maintain, policies and procedures, and develop such
further policies and procedures as shall from time to time become necessary or
appropriate, to ensure compliance with this Section.
Section 5.02. Legally Required Disclosure of Confidential Information.
If any of the parties to this Agreement or any of their respective Affiliates or
Representatives becomes legally required to disclose any Confidential
Information, such disclosing party shall promptly notify the party owning the
Confidential Information (the "Owning Party") and shall use all commercially
reasonable efforts to cooperate with the Owning Party so that the Owning Party
may seek a protective order or other appropriate remedy and/or waive compliance
with Section 5.01. All expenses reasonably incurred by the disclosing party in
seeking a protective order or
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<PAGE> 12
other remedy shall be borne by the Owning Party. If such protective order or
other remedy is not obtained, or if the Owning Party waives compliance with
Section 5.01, the disclosing party or its Affiliate or Representative, as
applicable, shall (a) disclose only that portion of the Confidential Information
which its legal counsel advises it is compelled to disclose or else stand liable
for contempt or suffer other similar significant corporate censure or penalty,
(b) use all commercially reasonable efforts, at the Owning Party's expense, to
obtain such reliable assurance as may be reasonably requested by the Owning
Party that confidential treatment will be accorded such Confidential
Information, and (c) promptly provide the Owning Party with a copy of the
Confidential Information so disclosed, in the same form and format so disclosed,
together with a description of all Persons to whom such Confidential Information
was disclosed.
Section 5.03. Record Retention. To the extent that books and records of
Daisytek or any of its Affiliates contain information relating to the PFS
Business and the same are not included in the PFS Assets, Daisytek agrees to
cooperate with PFSweb in providing PFSweb with any such information upon
PFSweb's reasonable request to the extent that any such information exists and
is reasonably separable from Daisytek information unrelated to the PFS Business.
PFSweb shall reimburse Daisytek for all of its reasonable out-of-pocket costs
incurred in connection with any such request. PFSweb shall preserve and keep all
books and records included in the PFS Assets, whether in electronic form or
otherwise, for no less than the period of time from the Contribution Date as may
be required by any governmental authority or agency or as may be considered good
business practice (the "Retention Period"). If PFSweb wishes to dispose of any
books and records or other documents which it is obligated to retain under this
Section after the Retention Period, then PFSweb shall first provide 90 days'
written notice to Daisytek and Daisytek shall have the right, at its option and
expense, upon prior written notice within such 90-day period, to take possession
of such books or records or other documents. Written notice of intent to dispose
of such books and records shall include a description of the books and records
in detail sufficient to allow Daisytek to reasonably assess its potential need
to retain such materials. In the event PFSweb enters into an agreement with a
third party to sell a portion of the PFS Business, together with the books and
records related thereto, Daisytek shall have the right to duplicate such books
and records prior to any such disposition and, should the purchaser of the PFS
Business be a competitor of Daisytek, Daisytek shall have the right to prohibit
the transfer or disclosure to such party of that portion of the former books and
records of Daisytek which Daisytek notifies PFSweb then contains Confidential
Information.
Section 5.04. Production of Witnesses. Until the six-year anniversary
of the Contribution Date, each of the parties hereto shall use all commercially
reasonable efforts, and shall cause each of their respective Affiliates to use
all commercially reasonable efforts, to make available to each other, upon
written request, its directors, officers, employees and other Representatives as
witnesses to the extent that any such Person may reasonably be required (giving
consideration to the business demands upon such Persons) in connection with any
legal, administrative or other proceedings in which the requesting party may
from time to time be involved; provided, however, that with respect to any legal
or administrative proceedings relating to the tax liability of any of the
parties hereto or any of their respective Affiliates, each of the parties hereto
shall, and shall cause each of their respective Affiliates to, make their
directors,
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<PAGE> 13
officers, employees and other Representatives available as witnesses until such
time as the statute of limitations have expired with respect to all tax years
prior to and including the year in which the asset transfers contemplated by
this Agreement are consummated.
Section 5.05. Reimbursement. Unless otherwise provided in this Article,
each party to this Agreement providing access, information or witnesses to
another party pursuant to this Agreement shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payment for all
reasonable out-of-pocket costs and expenses (excluding allocated compensation,
salary and overhead expense) as may be reasonably incurred in providing such
information or witnesses.
ARTICLE 6
MISCELLANEOUS
Section 6.01. Entire Agreement. This Agreement, including all the
Ancillary Agreements, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with respect to the
subject matter hereof.
Section 6.02. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
Section 6.03. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 6.04. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy with answer back, by express or overnight mail delivered
by a nationally recognized air courier (delivery charges prepaid), or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their chief executive offices, or to such other address as
the party to whom notice is given may have previously furnished to the others in
writing in the manner set forth above. Any notice or communication delivered in
person shall be deemed effective on delivery. Any notice or communication sent
by telecopy or by air courier shall be deemed effective on the first Business
Day at the place at which such notice or communication is received following the
day on which such notice or communication was sent. Any notice or communication
sent by registered or certified mail shall be deemed effective on the fifth
Business Day at the place from which such notice or communication was mailed
following the day on which such notice or communication was mailed.
Section 6.05. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their legal
representatives and successors, and each
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<PAGE> 14
Subsidiary and each Affiliate of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement, except as otherwise expressly provided herein. Except as otherwise
expressly set forth herein, this Agreement may not be assigned or transferred to
any other Person without the prior written consent of each of the parties
hereto.
Section 6.06. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
Section 6.07. Dispute Resolution. Except as otherwise set forth in the
Ancillary Agreements, resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract, tort, or otherwise
(collectively, "Disputes"), shall be exclusively governed by and settled in
accordance with the provisions of this Section. The parties hereto shall use all
commercially reasonable efforts to settle all Disputes without resorting to
mediation, arbitration, litigation or other third party dispute resolution
mechanisms. If any Dispute remains unsettled, a party hereto may commence
proceedings hereunder by first delivering a written notice from a Senior Vice
President or comparable executive officer of such party (the "Demand") to the
other parties providing a reasonable description of the Dispute to the others
and expressly requesting mediation hereunder. The parties hereby agree to submit
all Disputes to non-binding mediation before a mediator reasonably acceptable to
all parties involved in such Dispute. If the parties are unable to agree upon a
mediator or if, after such mediation, the parties subject to such mediation
disagree regarding the mediator's recommendation, such Dispute shall be
submitted to arbitration under the terms hereof, which arbitration shall be
final, conclusive and binding upon the parties, their successors and assigns.
The arbitration shall be conducted in Dallas, Texas by three arbitrators acting
by majority vote (the "Panel") selected by agreement of the parties, or, failing
such agreement, appointed pursuant to the commercial arbitration rules of the
American Arbitration Association, as amended from time to time (the "AAA
Rules"). If an arbitrator so selected becomes unable to serve, his or her
successors shall be similarly selected or appointed. The arbitration shall be
conducted pursuant to the Federal Arbitration Act and such procedures as the
parties subject to such arbitration (each, a "Party") may agree, or, in the
absence of or failing such agreement, pursuant to the AAA Rules. Notwithstanding
the foregoing: (i) each Party shall have the right to inspect the books and
records of the other Party that are reasonably related to the Dispute; (ii) each
Party shall provide to the other, reasonably in advance of any hearing, copies
of all documents which a Party intends to present in such hearing; and (iii)
each Party shall be allowed to conduct reasonable discovery through written
requests for information, document requests, requests for stipulation of fact
and depositions, the nature and extent of which discovery shall be determined by
the Parties; provided that if the Parties cannot agree on the terms of such
discovery, the nature and extent thereof shall be determined by the Panel which
shall take into account the needs of the Parties and the desirability of making
discovery expeditious and cost effective. The award shall be in writing and
shall specify the factual and legal basis for the award. The Panel shall
apportion all costs and expenses of arbitration, including the Panel's fees and
expenses and fees and expenses of experts, between the prevailing and
non-prevailing Party as the Panel deems fair and reasonable. The parties hereto
agree that monetary damages may be
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<PAGE> 15
inadequate and that any party by whom this Agreement is enforceable shall be
entitled to seek specific performance of the arbitrators' decision from a court
of competent jurisdiction, in addition to any other appropriate relief or
remedy. Notwithstanding the foregoing, in no event may the Panel award
consequential, special, exemplary or punitive damages. Any arbitration award
shall be binding and enforceable against the parties hereto and judgment may be
entered thereon in any court of competent jurisdiction.
Section 6.08. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the fullest
extent possible.
Section 6.09. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
Section 6.10. Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to be bound by such change or amendment.
Section 6.11. Authority. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement and the Ancillary Agreements, (b)
the execution, delivery and performance of this Agreement and the Ancillary
Agreements by it have been duly authorized by all necessary corporate or other
action, (c) it has duly and validly executed and delivered this Agreement and
the Ancillary Agreements, and (d) this Agreement and each Ancillary Agreement is
a legal, valid and binding obligation, enforceable against it in accordance with
its terms subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equity principles.
Section 6.12. Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When a reference is made in this Agreement to
an Article or a Section, such reference shall be to an Article or Section of
this Agreement unless otherwise indicated.
[remainder of page is blank]
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<PAGE> 16
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
DAISYTEK INTERNATIONAL CORPORATION
By:
--------------------------------------
Name:
Title:
DAISYTEK, INCORPORATED
By:
--------------------------------------
Name:
Title:
PRIORITY FULFILLMENT SERVICES, INC.
By:
--------------------------------------
Name:
Title:
PFSWEB, INC.
By:
--------------------------------------
Name:
Title:
15
<PAGE> 1
EXHIBIT 2.2
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
dated as of December 7, 1999
by and among
DAISYTEK INTERNATIONAL CORPORATION,
DAISYTEK, INCORPORATED
and
PFSWEB, INC.
<PAGE> 2
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
This INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT (the
"Agreement") is made and entered into as of December 7, 1999, by and among
Daisytek International Corporation, a Delaware corporation ("Daisytek
International"), Daisytek, Incorporated, a Delaware corporation and a
wholly-owned subsidiary of Daisytek International ("Daisytek"), and PFSweb,
Inc., a Delaware corporation and a wholly-owned subsidiary of Daisytek
("PFSweb"). Certain capitalized terms used herein are defined in Section 1 of
this Agreement.
RECITALS
WHEREAS, the Boards of Directors of Daisytek International
and Daisytek have determined that it would be appropriate and desirable to
completely separate the PFS Business from Daisytek;
WHEREAS, Daisytek has caused PFSweb to be incorporated in
order to effect such separation;
WHEREAS, Daisytek and PFSweb are parties to the Separation
Agreement pursuant to which Daisytek will contribute and transfer to PFSweb,
and PFSweb will receive and assume, the assets and liabilities then associated
with the PFS Business as described therein;
WHEREAS, Daisytek and PFSweb intend that the Contribution,
together with the Distribution, qualify as a tax-free reorganization under
Section 368(a)(1)(D) of the Code;
WHEREAS, Daisytek currently owns all of the issued and
outstanding PFSweb Common Stock;
WHEREAS, the parties currently contemplate that PFSweb shall
consummate the Initial Public Offering;
WHEREAS, immediately following the consummation of the
Initial Public Offering, Daisytek shall own not less than 80% of the
outstanding shares of PFSweb Common Stock;
WHEREAS, Daisytek plans to divest itself of its entire
ownership of PFSweb by distributing all of its shares of PFSweb Common Stock to
Daisytek International, which, in turn, will distribute in the Distribution all
of such shares of PFSweb Common Stock to the holders of Daisytek Common Stock;
WHEREAS, Daisytek International, Daisytek and PFSweb intend
that the Distribution will be tax-free to Daisytek, Daisytek International and
its stockholders under Sections 355 and 368(a)(1)(D) of the Code;
<PAGE> 3
WHEREAS, the parties intend in this Agreement to set forth
the principal arrangements between them regarding the Initial Public Offering
and the Distribution; and
WHEREAS, the parties hereto have determined that in order to
accomplish the objectives of the Initial Public Offering and the Distribution
and to facilitate the consummation thereof, it is necessary and desirable to
enter into the agreements and understandings set forth herein;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements herein contained, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereby agree as follows:
1. DEFINITIONS.
"Active Trade or Business" means the active conduct of the
trade or business (as defined in Section 355(b)(2) of the Code) conducted by
PFSweb immediately prior to the Distribution Date.
"Affiliate" means a PFSweb Affiliate or a Daisytek Affiliate,
as the case may be.
"Ancillary Agreements" has the meaning ascribed to such term
in the Separation Agreement.
"Annual Financial Statements" has the meaning set forth in
Section 5.1 (a)(vi).
"Business Day" means any day other than a Saturday, a Sunday,
or a day on which banking institutions located in the State of New York are
authorized or obligated by law or executive order to close.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"Consent" means any consent of, waiver or approval from, or
notification to, any Person.
"Contribution" means the transfer of certain assets by
Daisytek to PFSweb (and the assumption by PFSweb of certain liabilities) as
contemplated by the Separation Agreement.
"Control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
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<PAGE> 4
"CPR Rules" means the Rules for Non-Administered Arbitration
of Business Disputes promulgated by the Center for Public Resources, as in
effect on the date hereof.
"D Reorganization" means a transaction qualifying as a
reorganization under Section 368(a)(1)(D) of the Code.
"Daisytek Affiliate" means a Person, other than PFSweb or a
PFSweb Affiliate, that, after giving effect to the Distribution, directly or
indirectly through one or more intermediaries, is Controlled by Daisytek
International.
"Daisytek Annual Statements" has the meaning set forth in
Section 5.1(b)(ii).
"Daisytek's Auditors" has the meaning set forth in Section
5.1(b)(ii).
"Daisytek Business" means any business or operations of
Daisytek or any Daisytek Affiliates other than the PFS Business.
"Daisytek Common Stock" means the Common Stock, par value
$.01 per share, of Daisytek International.
"Daisytek Disclosure Portions" means all material set forth
in, or incorporated by reference into, either the IPO Registration Statement or
the Distribution Registration Statement, as applicable, to the extent relating
exclusively to (i) Daisytek and the Daisytek Affiliates (excluding PFSweb and
the PFSweb Affiliates), (ii) the Daisytek Business, (iii) Daisytek's intentions
with respect to the Distribution or (iv) the terms of the Distribution,
including, without limitation, the form, structure and terms of any
transaction(s) and/or offering(s) to effect the Distribution and the timing of
and conditions to the consummation of the Distribution.
"Daisytek Option" means an option to purchase shares of
Daisytek Common Stock issued under any stock option plan of Daisytek
International.
"Daisytek Public Filings" has the meaning set forth in
Section 5.1(a)(xiii).
"Daisytek Transfer Agent" means ChaseMellon Shareholder
Services LLC, in its capacity as the transfer agent and registrar for the
Daisytek Common Stock.
"Dispute Notice" means written notice of any dispute between
Daisytek and PFSweb arising out of or relating to this Agreement, which shall
set forth, in reasonable detail, the nature of the dispute.
"Distribution" means the distribution of PFSweb Common Stock
by Daisytek to Daisytek International and thereafter by Daisytek International
in one or more transactions occurring after the Initial Public Offering that
collectively have the effect that all shares of PFSweb Common Stock held by
Daisytek are distributed to Daisytek International stockholders, whenever such
transaction(s) shall occur.
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<PAGE> 5
"Distribution Date" means any date or dates, as the case may
be, determined by Daisytek, in its sole and absolute discretion, to be a date
on which shares of PFSweb Common Stock held by Daisytek are distributed in
connection with the Distribution.
"Distribution Registration Statement" means any and all
registration statements, information statements or other documents, if any,
filed by any party with the SEC in connection with any transaction constituting
part of the Distribution, in each case as supplemented or amended from time to
time.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, together with the rules and regulations promulgated
thereunder.
"GAAP" means generally accepted accounting principles,
consistently applied.
"Indemnifying Party" means a Person that is obligated to
provide indemnification under this Agreement.
"Indemnitee" means a Person that is entitled to seek
indemnification under this Agreement.
"Indemnity Payment" means an amount that an Indemnifying
Party is required to pay to an Indemnitee under this Agreement.
"Initial Public Offering" or "IPO" means the initial public
offering by PFSweb of shares of PFSweb Common Stock as contemplated by the IPO
Registration Statement.
"Insurance Proceeds" means the payment received by an insured
from an insurance carrier or paid by an insurance carrier on behalf of the
insured, net of any applicable premium adjustment and tax effect.
"IPO Registration Statement" means the Registration Statement
on Form S-1, Registration No. 333-87657, of PFSweb, as supplemented and amended
from time to time.
"IRS" means Internal Revenue Service of the U.S. Department
of Treasury or any successor agency.
"Losses" means all losses, liabilities, claims, obligations,
demands, judgments, damages, dues, penalties, assessments, fines (civil or
criminal), costs, liens, expenses, forfeitures, settlements, or fees,
reasonable attorneys' fees and court costs, of any nature or kind, whether or
not the same would properly be reflected on a balance sheet, and "Loss" means
any of these.
"Negotiation Period" means the period of 20 Business Days
following the initial meeting of the representatives of Daisytek and PFSweb
following the receipt of a Dispute Notice.
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<PAGE> 6
"Notice" means any notice, request, claim, demand, or other
communication under this Agreement.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PFS Business" has the meaning ascribed to such term in the
Separation Agreement.
"PFSweb Affiliate" means a Person, other than Daisytek
International or a Daisytek Affiliate, that, after giving effect to the
Distribution, directly or indirectly through one or more intermediaries, is
Controlled by, or is under common Control with PFSweb.
"PFSweb Capital Stock" means all classes or series of capital
stock of PFSweb.
"PFSweb Common Stock" means the Common Stock of PFSweb.
"PFSweb Employee" means an individual employed by Daisytek or
any Daisytek Affiliate who becomes employed by PFSweb or any PFS Affiliate in
connection with the Distribution.
"PFSweb Option" means an option to purchase shares of PFSweb
Common Stock issued under a stock option plan of PFSweb.
"PFSweb Public Documents" has the meaning set forth in
Section 5.1(a)(ix).
"PFSweb Transfer Agent" means ChaseMellon Shareholder
Services LLC, in its capacity as the transfer agent and registrar for the
PFSweb Common Stock.
"PFSweb's Auditors" has the meaning set forth in Section
5.1(b)(i).
"Pre-Distribution Period" means the period of time from the
date hereof until the completion of the Distribution.
"Proposed Acquisition Transaction" means a transaction or
series of transactions as a result of which any Person or any group of related
Persons would (directly or indirectly) acquire, or have the right to acquire,
from PFSweb or one or more holders of outstanding shares of PFSweb Capital
Stock, a number of shares of PFSweb Capital Stock that would comprise 50% or
more of (i) the value of all outstanding shares of PFSweb Capital Stock as of
the date of such transaction, or in the case of a series of transactions, the
date of the last transaction of such series, or (ii) the total combined voting
power of all outstanding shares of Voting Stock of PFSweb as of the date of
such transaction, or in the case of a series of transactions, the date of the
last transaction of such series.
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<PAGE> 7
"Quarterly Financial Statements" has the meaning set forth in
Section 5.1(a)(v).
"Ratio" means the amount determined by dividing (i) the
average of the daily high and low per share prices of the Daisytek Common
Stock, as reported in The Wall Street Journal, during the three trading days
ending on the Record Date, by (ii) the average of the daily high and low per
share prices of the PFSweb Common Stock, as reported in The Wall Street
Journal, for the three trading days commencing on the first trading day
following the Record Date.
"Record Date" means the close of business on the date(s) to
be determined by the Board of Directors of Daisytek International as the record
date(s) for determining stockholders of Daisytek International entitled to
receive shares of PFSweb Common Stock in the Distribution.
"Regulation S-K" means Regulation S-K of the General Rules
and Regulations promulgated by the SEC.
"Regulation S-X" means Regulation S-X of the General Rules
and Regulations promulgated by the SEC.
"Representation Date" means any date on which PFSweb makes
any representation (i) to the IRS or to counsel selected by Daisytek for the
purpose of obtaining a Subsequent Tax Opinion/Ruling, or (ii) to Daisytek for
the purpose of any determination required to be made by Daisytek pursuant to
Section 4.2.
"Representation Letters" means any representation letters and
any other materials (including, without limitation, the ruling request and the
related supplemental submissions to the IRS) delivered or deliverable by
Daisytek and others in connection with the rendering by Tax Advisor and/or the
issuance by the IRS of the Tax Opinions/Rulings, which to the extent related to
PFSweb shall be in form and substance reasonably satisfactory to PFSweb.
"Representative" means, with respect to any Person, any of
such Person's directors, officers, employees, agents, consultants, advisors,
accountants or attorneys.
"Request" has the meaning set forth in Section 6.7.
"SEC" means the United States Securities and Exchange
Commission or any successor agency.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"Separation Agreement" means the Master Separation Agreement
by and among Daisytek International, Daisytek, Priority Fulfillment Services,
Inc. and PFSweb, as amended from time to time.
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<PAGE> 8
"Subsequent Tax Opinion/Ruling" means either (i) any opinion
of Tax Advisor selected by Daisytek, in its sole and absolute discretion,
confirming, in form and substance reasonably satisfactory to Daisytek, that, as
a consequence of the consummation of a subsequent transaction, no income, gain
or loss for U.S. federal income tax purposes will be recognized by Daisytek,
Daisytek International, the stockholders or former stockholders of Daisytek
International, or any Daisytek Affiliate with respect to the Distribution, or
(ii) an IRS private letter ruling to the same effect.
"Subsidiary" means with respect to any specified Person, any
corporation or other legal entity of which such Person or any of its
Subsidiaries Controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote with respect to the election of
members to the board of directors or similar governing body; provided, however,
that for the purposes of this Agreement, neither PFSweb nor any of the
Subsidiaries of PFSweb shall be deemed to be Subsidiaries of Daisytek or of any
of the Subsidiaries of Daisytek.
"Tax" means (i) any income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Section 59A of the Code), customs duties,
capital stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on, minimum, estimated,
or other tax, assessment, or governmental charge of any kind whatsoever imposed
by any governmental authority, including any interest, penalty, or addition
thereto, whether disputed or not; (ii) any liability for the payment of any
amounts of the type described in clause (i) above arising as a result of being
(or having been) a member of any group or being (or having been) included or
required to be included in any Tax Return related thereto; and (iii) any
liability for the payment of any amounts of the type described in clause (i)
above as a result of any express or implied obligation to indemnify or
otherwise assume or succeed to the liability of any other Person.
"Tax Advisor" means the professional accounting or law firm
designated by Daisytek as its Tax Advisor.
"Tax Agreement" means the Tax Sharing Agreement between
Daisytek and PFSweb, as amended from time to time.
"Tax Control" means, with respect to PFSweb, ownership of
PFSweb Capital Stock which constitutes at least 80% of both (i) the total
combined voting power of all outstanding shares of Voting Stock of PFSweb and
(ii) each class and series of PFSweb Capital Stock other than Voting Stock of
PFSweb.
"Tax-Free Status of the Distribution" means the
nonrecognition of taxable gain or loss for U.S. federal income tax purposes to
Daisytek International, Daisytek, Daisytek Affiliates and Daisytek
International's stockholders in connection with the Distribution.
"Tax Opinions/Rulings" means any opinions of Tax Advisor
and/or the rulings by the IRS deliverable to Daisytek in connection with the
Contribution and the Distribution.
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"Tax-Related Losses" means (i) all federal, state and local
Taxes (including interest and penalties thereon) imposed pursuant to any
settlement, final determination, judgment or otherwise; (ii) all accounting,
legal and other professional fees, and court costs incurred in connection with
such taxes; and (iii) all costs and expenses that may result from adverse tax
consequences to Daisytek, Daisytek International or its stockholders (including
all costs, expenses and damages associated with stockholder litigation or
controversies) payable by Daisytek or Daisytek Affiliates.
"Third-Party Claim" means any claim, suit, arbitration,
inquiry, proceeding or investigation by or before any court, governmental or
other regulatory or administrative agency or commission or any arbitration
tribunal asserted by a Person other than Daisytek or any Daisytek Affiliate or
PFSweb or any PFSweb Affiliate which gives rise to a right of indemnification
hereunder.
"Underwriters" means the managing underwriters for the IPO.
"Underwriting Agreement" means the Underwriting Agreement
between PFSweb and the Underwriters relating to the Initial Public Offering, as
amended from time to time.
"Value" means with respect to any trade or business (or
portion thereof), the fair market value of the assets constituting such trade
or business, less the current liabilities associated with such trade or
business, in each case determined as of the Distribution Date.
"Voting Stock" means with respect to any Person, all classes
and series of the capital stock of such Person entitled to vote generally in
the election of directors.
2. THE INITIAL PUBLIC OFFERING AND THE DISTRIBUTION.
2.1. Transactions Prior To The IPO. Subject to the
conditions hereof, Daisytek International and PFSweb shall use their reasonable
best efforts to consummate the IPO. Such actions shall include those specified
in this Section 2.1.
(a) PFSweb shall file the IPO Registration Statement,
and such amendments or supplements thereto, as may be necessary in order to
cause the same to become and remain effective as required by law or by the
Underwriters, including, but not limited to, filing such amendments to the IPO
Registration Statement as may be required by the Underwriting Agreement, the
SEC or federal, state or foreign securities laws. Daisytek International and
PFSweb shall also cooperate in preparing, filing with the SEC and causing to
become effective a registration statement registering the PFSweb Common Stock
under the Exchange Act, and any registration statements or amendments thereof
which are required to reflect the establishment of, or amendments to, any
employee benefit and other plans necessary or appropriate in connection with
the IPO, the Distribution or the other transactions contemplated by this
Agreement and the Ancillary Agreements.
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(b) PFSweb and Daisytek International shall enter
into the Underwriting Agreement, in form and substance reasonably satisfactory
to them and each shall comply with its respective obligations thereunder.
(c) Daisytek International and PFSweb shall consult
with each other and the Underwriters regarding the timing, pricing and other
material matters with respect to the IPO.
(d) PFSweb shall use its reasonable best efforts to
take all such action as may be necessary or appropriate under state securities
and blue sky laws of the United States (and any comparable laws under any
foreign jurisdictions) in connection with the IPO.
(e) PFSweb shall prepare, file and use reasonable
best efforts to seek to make effective, an application for listing of the
PFSweb Common Stock issued in the IPO on the NASDAQ National Market, subject to
official notice of issuance.
(f) PFSweb shall participate in the preparation of
materials and presentations as the Underwriters shall deem necessary or
desirable.
2.2. Proceeds of the IPO. The IPO will be a primary
offering of PFSweb Common Stock and the net proceeds of the IPO will be retained
by PFSweb, subject to the payments to be made under the Separation Agreement.
2.3. Conditions Precedent to Consummation of the IPO. The
obligations of the parties to consummate the IPO shall be conditioned on such
conditions as Daisytek International shall determine in its sole and absolute
discretion, which conditions, or any of them, may be waived by Daisytek
International in its sole and absolute discretion, including without
limitation, the following conditions, which shall be for the sole benefit of
Daisytek International and shall not give rise to or create any duty on the
part of Daisytek International or any Daisytek Affiliate or their Board of
Directors to waive or not waive any such condition:
(a) The IPO Registration Statement shall have been
filed and declared effective by the SEC, and there shall be no stop order in
effect with respect thereto.
(b) The actions and filings with regard to state
securities and blue sky laws of the United States (and any comparable laws
under any foreign jurisdictions) described in Section 2.1 shall have been taken
and, where applicable, have become effective or been accepted.
(c) The PFSweb Common Stock to be issued in the IPO
shall have been accepted for listing on the NASDAQ National Market, on official
notice of issuance.
(d) PFSweb shall have entered into the Underwriting
Agreement and all conditions to the obligations of PFSweb and the Underwriters
shall have been satisfied or waived.
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(e) Daisytek International shall be satisfied in its
sole discretion that Daisytek will own at least 80% of the voting rights
attached to the then outstanding PFSweb Common Stock immediately following the
IPO, and, to the extent deemed necessary or desirable by Daisytek International
in its sole discretion, all other matters regarding the Tax-Free Status of the
Distribution shall, to the extent applicable as of the time of the IPO, be
satisfied or can reasonably be anticipated to be satisfied and there shall be
no event or condition that is likely to cause any of such conditions not to be
satisfied as of the time of the Distribution or thereafter.
(f) No order, injunction or decree issued by any
court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the IPO or any of the other
transactions contemplated by this Agreement or any Ancillary Agreement shall be
in effect.
(g) Such other actions as the parties hereto may,
based upon the advice of counsel, reasonably request to be taken prior to the
IPO in order to assure the successful completion of the IPO and the other
transactions contemplated by this Agreement shall have been taken.
2.4. The Distribution. Daisytek and Daisytek International
pan, as soon as practicable after the satisfaction of applicable conditions,
and not later than 12 months following the consummation of the Initial Public
Offering, to complete the Distribution. PFSweb shall cooperate with Daisytek in
all respects to accomplish the Distribution and shall, at Daisytek
International's direction, promptly take any and all actions necessary or
desirable to effect the Distribution, including, without limitation, to the
extent necessary under then applicable law, the registration under the
Securities Act of PFSweb Common Stock on an appropriate registration form or
forms to be designated by Daisytek International. Daisytek International shall
select any investment banker(s) and manager(s) in connection with the
Distribution, as well as any financial printer, solicitation and/or exchange
agent and outside counsel for Daisytek International; provided that nothing
herein shall prohibit PFSweb from engaging (at its own expense) its own
financial, legal, accounting and other advisors in connection with the
Distribution.
2.5. Certain Stockholder Matters. From and after the
distribution of PFSweb Common Stock in connection with any transaction(s)
included as part of the Distribution and until such PFSweb Common Stock is duly
transferred in accordance with applicable law, PFSweb shall regard the Persons
receiving PFSweb Common Stock in such transaction(s) as record holders of
PFSweb Common Stock in accordance with the terms of such transaction(s) without
requiring any action on the part of such Persons. PFSweb agrees that, subject
to any transfers of such stock, (a) each such holder shall be entitled to
receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, the shares of PFSweb Common Stock then
held by such holder and (b) each such holder shall be entitled, without any
action on the part of such holder, to receive one or more certificates
representing, or other evidence of ownership of, the shares of PFSweb Common
Stock then held by such holder. Daisytek International and Daisytek shall
cooperate, and shall instruct the Daisytek Transfer Agent to cooperate, with
PFSweb and the PFSweb Transfer Agent, and PFSweb shall cooperate, and shall
instruct the PFSweb Transfer Agent to cooperate, with Daisytek International,
Daisytek and the
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Daisytek Transfer Agent, in connection with all aspects of the Distribution and
all other matters relating to the issuance and delivery of certificates
representing, or other evidence of ownership of, the shares of PFSweb Common
Stock distributed to the holders of Daisytek Common Stock in connection with
any transaction(s) included as part of the Distribution. Following the
Distribution, Daisytek International shall instruct the Daisytek Transfer Agent
to deliver to the PFSweb Transfer Agent true, correct and complete copies of
the stock and transfer records reflecting the holders of Daisytek Common Stock
receiving shares of PFSweb Common Stock in connection with any transaction(s)
included as part of the Distribution.
2.6. Means of Distribution. (a) Subject to Section 2.4
hereof, on or prior to the Distribution Date, Daisytek will distribute and
deliver to Daisytek International who, in turn, will deliver to the Daisytek
Transfer Agent for the benefit of holders of record of Daisytek Common Stock on
the Record Date, a single stock certificate, endorsed in blank, representing
all of the outstanding shares of PFSweb Common Stock then owned by it, which
certificate shall be reissued in sufficient manner so that the Daisytek
Transfer Agent may, and shall be instructed to, distribute on the Distribution
Date the appropriate number of such shares of PFSweb Common Stock to each such
holder of record of Daisytek Common Stock on the Record Date or designated
transferee or transferees of such holder.
(b) Subject to Section 2.4, each holder of Daisytek
Common Stock on the Record Date (or such holder's designated transferee or
transferees) will be entitled to receive in the Distribution a number of shares
of PFSweb Common Stock equal to the number of shares of Daisytek Common Stock
held by such holder on the Record Date multiplied by a fraction, the numerator
of which is the number of shares of PFSweb Common Stock beneficially owned by
Daisytek International on the Record Date and the denominator of which is the
number of shares of Daisytek Common Stock issued and outstanding on the Record
Date.
2.7. Actions Prior to the Distribution. (a) Daisytek
International and PFSweb shall prepare and mail, prior to the Distribution
Date, to the holders of Daisytek Common Stock, such information concerning
PFSweb, its business, operations and management, the Distribution and such
other matters as Daisytek International shall reasonably determine and as may
be required by law. Daisytek International and PFSweb will prepare, and PFSweb
will, to the extent required under applicable law, file with the SEC any such
documentation which Daisytek International determines are necessary or
desirable to effectuate the Distribution, and Daisytek International and PFSweb
shall each use its reasonable best efforts to obtain all necessary approvals
from the SEC with respect thereto as soon as practicable.
(b) Daisytek International and PFSweb shall take all
such action as may be necessary or appropriate under the securities or blue sky
laws of the United States (and any comparable laws under any foreign
jurisdiction) in connection with the Distribution.
(c) PFSweb shall prepare and file, and shall use its
reasonable best efforts to have approved, an application for the listing on the
NASDAQ National Market, subject to official notice of distribution of the
PFSweb Common Stock to be distributed in the
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Distribution, and the shares of PFSweb Common Stock covered by PFSweb Options to
be granted under Section 3.6 below.
2.8. Conditions To Distribution. The consummation of the
Distribution is subject to the following conditions, which conditions, or any
of them, may be waived by Daisytek in its sole and absolute discretion:
(a) The receipt by Daisytek International of either,
at its option and in its sole and absolute discretion (i) a ruling by the IRS
that, among certain other Tax consequences of the transaction, the Contribution
and Distribution will qualify as tax-free for federal income tax purposes and
will not result in the recognition of taxable gain or loss for federal income
tax purposes to Daisytek, Daisytek International or the holders of Daisytek
Common Stock or (ii) an opinion from its Tax Advisor regarding the Tax-Free
Status of the Distribution and such other matters, in form and substance
satisfactory to it, as it shall determine to be necessary or advisable in its
sole and absolute discretion;
(b) The receipt of any material Consents necessary to
consummate the Distribution, which Consents shall be in full force and effect;
(c) No order, injunction, decree or regulation issued
by any court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Distribution shall be in effect;
and
(d) No events or developments shall have occurred
subsequent to the IPO Closing Date that, in the sole judgment of Daisytek, would
result in the Distribution having a material adverse effect on Daisytek, any
Daisytek Affiliate any holder of Daisytek Common Stock, PFSweb, any PFSweb
Affiliate or any holder of PFSweb Common Stock.
The foregoing conditions are for the sole benefit of Daisytek
International and shall not give rise to or create any duty on the part of
Daisytek International or any Daisytek Affiliate or their Board of Directors to
waive or not waive any such condition.
2.9. Fractional Shares. As soon as practicable after the
Distribution Date, Daisytek International shall direct the Daisytek Transfer
Agent to determine the number of whole shares and fractional shares of PFSweb
Common Stock allocable to each holder of record or beneficial owner of Daisytek
Common Stock as of the Record Date, to aggregate all such fractional shares and
sell the whole shares obtained thereby, at the direction of Daisytek
International, to Daisytek International, PFSweb, in open market transactions
or otherwise, in each case at then prevailing trading prices, and to cause to
be distributed to each such holder or for the benefit of each such beneficial
owner to which a fractional share shall be allocable such holder's or owner's
ratable share of the proceeds of such sale, after making appropriate deductions
of the amount required to be withheld for federal income tax purposes and after
deducting an amount equal to all brokerage charges, commissions and transfer
taxes attributed to such sale. Daisytek International and the Daisytek Transfer
Agent may aggregate the shares of Daisytek
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Common Stock that may be held by any beneficial owner thereof through more than
one account in determining the fractional share allocable to such beneficial
owner.
2.10. Replacement of Daisytek Options. As of the
Distribution Date, each outstanding Daisytek Option held by a PFSweb Employee
shall be replaced with a PFSweb Option having substantially the same terms and
conditions as the Daisytek Option to be replaced thereby, including any and all
vesting requirements and conditions of exercise; provided, however, that (i) the
PFS Employee shall be credited, for vesting purposes, with the period of
employment in which the PFS Employee was employed by Daisytek or a Daisytek
Affiliate, (ii) the number of shares of PFSweb Common Stock subject to such
PFSweb Options shall be equal to the number of shares of Daisytek Common Stock
subject to the Daisytek Option multiplied by the Ratio and (iii) the per share
exercise price of the PFSweb Common Stock subject to such PFSweb Option shall be
equal to the per share exercise price of the Daisytek Common Stock subject to
the Daisytek Option divided by the Ratio. PFSweb shall take all corporate action
and make all required filings under applicable state Blue Sky laws and the
Securities Act to register or qualify the PFSweb Options and/or the underlying
shares of PFSweb Common Stock so that the shares of PFSweb Common Stock acquired
upon exercise of each PFSweb Option are freely tradable under the Securities Act
(except for shares acquired by affiliates (as defined in the Securities Act) of
PFSweb) and each applicable state's Blue Sky laws.
2.11. Further Assurances Regarding the Distribution. In
addition to the actions specifically provided for elsewhere in this Agreement,
PFSweb shall, at Daisytek International's direction, use all commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things commercially reasonably necessary, proper or
expeditious under applicable laws, regulations and agreements in order to
consummate and make effective the Distribution as promptly as reasonably
practicable. Without limiting the generality of the foregoing, PFSweb shall, at
Daisytek International's direction, cooperate with Daisytek International, and
execute and deliver, or use all commercially reasonable efforts to cause to
have executed and delivered, all instruments, including instruments of
conveyance, assignment and transfer, and to make all filings with, and to
obtain all consents, approvals or authorizations of, any domestic or foreign
governmental or regulatory authority requested by Daisytek International in
order to consummate and make effective the Distribution.
2.12. Abandonment of the Distribution. In the event that
Daisytek International so determines that one or more of the aforesaid
conditions precedent has not been satisfied and that it no longer intends to
proceed with or complete the Distribution, Daisytek International shall provide
to PFSweb a written notification of such determination (an "Abandonment
Notice"). Effective as of the date of the Abandonment Notice, (a) provided that
no Distribution Date has yet occurred, Sections 4.2 and 4.3 of this Agreement
shall terminate, become null and void and have no further force and effect and
(b) Daisytek International's rights, and PFSweb's obligations, set forth in the
Registration Rights Agreement shall immediately become effective.
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3. EXPENSES.
3.1. General. Except as otherwise provided in this
Agreement, the Separation Agreement, any of the other Ancillary Agreements or
any other agreement between the parties relating to the Contribution, the
Initial Public Offering or the Distribution, all costs and expenses of either
party hereto in connection with the Contribution, the Initial Public Offering
and the Distribution shall be paid by the party that incurs such costs and
expenses.
3.2. Expenses Relating to the Initial Public Offering.
PFSweb shall be responsible for the payment of all costs, fees and expenses
relating to the Initial Public Offering.
3.3. Expenses Relating To The Distribution. Daisytek shall
be responsible for the payment of all costs, fees and expenses relating to the
Distribution.
4. COVENANTS TO PRESERVE TAX-FREE STATUS OF THE
DISTRIBUTION AND THE QUALIFICATION OF THE CONTRIBUTION AS A D REORGANIZATION.
PFSweb and Daisytek International hereby represent and
warrant to, and covenant and agree with, each other as follows:
4.1. Representations and Warranties.
(a) PFSweb hereby represents and warrants that (i) it
has examined the Tax Opinions/Rulings and the Representation Letters, and (ii)
the facts presented and the representations made therein, to the extent
descriptive of PFSweb or the PFS Business (including, without limitation, the
business purposes for the Distribution, the representations in the
Representation Letters and Tax Opinions/Rulings to the extent that they relate
to PFSweb or the PFS Business, and the plans, proposals, intentions and policies
of PFSweb), are true, correct and complete in all material respects.
(b) Daisytek International hereby represents and
warrants that (i) it has examined the Tax Opinions/Rulings and the
Representation Letters, and (ii) the facts presented and the representations
made therein, to the extent descriptive of Daisytek or the Daisytek Business
(including, without limitation, the business purposes for the Distribution, the
representations in the Representation Letters and Tax Opinions/Rulings to the
extent that they relate to Daisytek or the Daisytek Business, and the plans,
proposals, intentions and policies of Daisytek), are true, correct and complete
in all material respects.
4.2. Restrictions on PFSweb.
(a) PFSweb shall not take any action (such action to
include, if relevant, the issuance of PFSweb Capital Stock upon the exercise by
the holders thereof of all options or convertible securities issued by PFSweb)
during the Pre-Distribution Period if, as a
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result of taking such action, PFSweb would issue a number of shares of PFSweb
Capital Stock (including by way of the exercise of stock options or the issuance
of restricted stock) that would cause Daisytek to cease to have Tax Control of
PFSweb, unless prior to the consummation of such transaction Daisytek has
determined, in its sole and absolute discretion, which discretion shall be
exercised in good faith solely to preserve the Tax-Free Status of the
Distribution, that such transaction would not jeopardize the Tax-Free Status of
the Distribution. Notwithstanding the foregoing provisions of this Section
4.2(a), PFSweb shall be permitted to issue stock options and restricted stock
awards to its employees so long as such options or restricted stock awards will
not be exercisable or vest, by their terms, prior to the Distribution Date. All
of the restrictions on PFSweb contained in this Section 4.2 shall apply to
PFSweb during the Pre-Distribution Period as well as the other periods specified
in this Section 4.2.
(b) Until the first day after the two-year
anniversary of the latest Distribution Date, PFSweb shall not enter into any
Proposed Acquisition Transaction or, to the extent PFSweb has the right to
prohibit any Proposed Acquisition Transaction, permit any Proposed Acquisition
Transaction to occur unless prior to the consummation of such Proposed
Acquisition Transaction Daisytek has determined, in its sole and absolute
discretion, which discretion shall be exercised in good faith solely to preserve
the Tax-Free Status of the Distribution, that such Proposed Acquisition
Transaction would not jeopardize the Tax-Free Status of the Distribution. The
foregoing shall not prohibit PFSweb from entering into a contract or agreement
to consummate any Proposed Acquisition Transaction if such contract or agreement
requires satisfaction of the above-described requirement prior to the
consummation of such Proposed Acquisition Transaction, such requirement to be
satisfied through the cooperation of the parties as described in Section
4.3(b)(ii).
(c) Until the first day after the two-year
anniversary of the latest Distribution Date, (i) PFSweb shall continue to
conduct the Active Trade or Business, (ii) subject to clause (iii) below, PFSweb
shall not (A) liquidate, dispose of, or otherwise discontinue the conduct of any
substantial portion of the Active Trade or Business or (B) dispose of any
business or assets that would cause PFSweb to be operated in a manner
inconsistent in any material respect with the business purposes for the
Distribution as set forth in the Representation Letters and Tax
Opinions/Rulings, in each case unless Daisytek has determined, in its sole and
absolute discretion, which discretion shall be exercised in good faith solely to
preserve the Tax-Free Status of the Distribution, that such liquidation,
disposition, or discontinuance would not jeopardize the Tax-Free Status of the
Distribution, (iii) PFSweb shall not under any circumstances liquidate, dispose
of, or otherwise discontinue the conduct of any portion of the Active Trade or
Business if such liquidation, disposition or discontinuance would breach Section
4.2(d). PFSweb shall continue the active conduct of the Active Trade or Business
primarily through officers and employees of PFSweb or its Subsidiaries (and not
primarily through independent contractors). Notwithstanding the foregoing, (A)
except with respect to any corporation or other entity the status of which as
the direct owner of an active trade or business is material to the Tax-Free
Status of the Distribution, liquidations of any of PFSweb's Subsidiaries
(including PFS - Texas LLC) into PFSweb or one or more Subsidiaries directly or
indirectly controlled by PFSweb shall not be deemed to breach this Section
4.2(c) and (B) PFSweb shall not be prohibited from liquidating, disposing of or
otherwise discontinuing the conduct of one or more trades or businesses that
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constituted an immaterial part of the Active Trade or Business, or any portion
thereof. For purposes of the preceding sentence and clause (c)(ii) above, asset
retirements, sale-leaseback arrangements and discontinuances of product lines
within a trade or business the active conduct of which is continued shall not be
deemed a liquidation, disposition or discontinuance of a trade or business or
portion thereof, and (iv) solely for purposes of this Section 4.2(c), PFSweb
shall not be treated as directly or indirectly controlling a Subsidiary unless
PFSweb owns, directly or indirectly, shares of capital stock of such Subsidiary
constituting (A) 80% or more of the total combined voting power of all
outstanding shares of Voting Stock of such Subsidiary and (B) 80% or more of the
total number of outstanding shares of each class or series of capital stock of
such Subsidiary other than Voting Stock.
(d) Until the first day after the two-year
anniversary of the latest Distribution Date, (A) PFSweb shall not voluntarily
dissolve or liquidate, and (B) except in the ordinary course of business,
neither PFSweb nor any Subsidiaries directly or indirectly controlled by PFSweb
shall sell, transfer, or otherwise dispose of or agree to dispose of assets
(including, for such purpose, any shares of capital stock of such Subsidiaries)
that, in the aggregate, constitute more than (x) 60% of the gross assets of
PFSweb or (y) 60% of the consolidated gross assets of PFSweb (including PFS -
Texas LLC) and such Subsidiaries, unless prior to the consummation of such
transaction Daisytek has determined, in its sole and absolute discretion, which
discretion shall be exercised in good faith solely to preserve the Tax-Free
Status of the Distribution, that such transaction would not jeopardize the
Tax-Free Status of the Distribution. The amount of gross assets of PFSweb and
such Subsidiaries shall be based on the fair market value of each such asset as
of the applicable Distribution Date. Sales, transfers or other dispositions by
PFSweb or any of its Subsidiaries to PFSweb or one or more Subsidiaries directly
or indirectly controlled by PFSweb shall not be included in any determinations
under this Section 4.2(d) of whether such 60% or more of the gross assets of
PFSweb or 60% of the consolidated gross assets of PFSweb and such Subsidiaries
have been sold, transferred or otherwise disposed of. Solely for purposes of
this Section 4.2(d), PFSweb shall not be treated as directly or indirectly
controlling a Subsidiary unless PFSweb owns, directly or indirectly, shares of
capital stock of such Subsidiary constituting (A) 80% or more of the total
combined voting power of all outstanding shares of Voting Stock of such
Subsidiary and (B) 80% or more of the total number of outstanding shares of each
class or series of capital stock of such Subsidiary other than Voting Stock.
(e) Prior to the first Distribution Date, PFSweb
shall fully discharge and satisfy all of the then existing indebtedness owed by
it or its Subsidiaries to Daisytek or any Daisytek Affiliate (other than
payables incurred in the ordinary course of the business). From such date until
the first day after the two-year anniversary of the latest Distribution Date,
PFSweb shall not, and shall not permit any of its Subsidiaries to, create,
incur, assume or allow to exist any such indebtedness (other than payables
incurred in the ordinary course of the business) with Daisytek or any Daisytek
Affiliate.
(f) Until the first day after the two-year
anniversary of the latest Distribution Date, PFSweb shall not take, or permit
any of its Subsidiaries to take, any other actions or enter into any transaction
or series of transactions or agree to enter into any other transactions that
would be reasonably likely to jeopardize the Tax-Free Status of the Distribution
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or the qualification of the Contribution as a D Reorganization, including any
action or transaction that would be reasonably likely to be inconsistent with
any representation made in the Representation Letters, unless prior to the
consummation of such action or transaction Daisytek has determined, in its sole
and absolute discretion, which discretion shall be exercised in good faith
solely to preserve the Tax-Free Status of the Distribution and the qualification
of the Contribution as a D Reorganization, that such action or transaction would
not jeopardize the Tax-Free Status of the Distribution or the qualification of
the Contribution as a D Reorganization. Notwithstanding the foregoing, if and to
the extent that any action or transaction is described in and permitted pursuant
to Sections 4.2(a), (b), (c), (d) or (e), such action or transaction shall not
be prohibited by this Section 4.2(f).
(g) Notwithstanding the foregoing, the provisions of
Section 4.2 shall not prohibit PFSweb from implementing any transaction upon
which the IRS has granted a favorable ruling in, or which is described in
reasonable detail in, any Tax Opinions/Rulings.
4.3. Cooperation and Other Covenants.
(a) Each of PFSweb and Daisytek International shall
furnish the other with a copy of any ruling requests or other documents
delivered to the IRS that relates to the Distribution or that could otherwise be
reasonably expected to have an impact on the Tax-Free Status of the Contribution
and Distribution or the qualification of the Contribution as a D Reorganization.
(b) (i) Each of PFSweb and Daisytek International
shall cooperate with the other and shall take (or refrain from taking) all such
actions as the other may reasonably request in connection with obtaining any
Daisytek determination referred to in Section 4.2. Such cooperation shall
include, without limitation, providing any information and/or representations
reasonably requested by the other to enable either party (or counsel for such
party) to obtain and maintain any Subsequent Tax Opinion/Ruling that would
permit any action described in Section 4.2 to be taken by PFSweb or a PFSweb
Affiliate. From and after any Representation Date in connection with obtaining
any such determination or the receipt of a Subsequent Tax Opinion/Ruling and
until the first day after the two-year anniversary of the date of such
determination or receipt, neither party shall take (nor shall it refrain from
taking) any action that would have caused such representation to be untrue
unless the other party has determined, in its sole and absolute discretion,
which discretion shall be exercised in good faith solely to preserve the
Tax-Free Status of the Distribution and the qualification of the Contribution as
a D Reorganization, that such action would not jeopardize the Tax-Free Status of
the Contribution and Distribution or the qualification of the Contribution as a
D Reorganization.
(ii) In the event that PFSweb notifies Daisytek
that it desires to take one of the actions described in Section 4.2 and Daisytek
concludes that such action might jeopardize the Tax-Free Status of the
Contribution and Distribution or the qualification of the Contribution as a D
Reorganization, Daisytek shall, at the request of PFSweb, elect either to (A)
use all commercially reasonable efforts to obtain a Subsequent Tax
Opinion/Ruling that would permit PFSweb to take the specified action, and PFSweb
shall cooperate in connection with such
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efforts, or (B) provide all reasonable cooperation to PFSweb in connection with
PFSweb obtaining such a Subsequent Tax Opinion/Ruling in form and substance
reasonably satisfactory to Daisytek; provided, however, that the reasonable
costs and expenses of obtaining any such Subsequent Tax Opinion/Ruling shall be
borne by Daisytek, unless such Subsequent Tax Opinion/Ruling shall not be
obtained as the result of a determination that the proposed action shall
jeopardize the Tax-Free Status of the Contribution and Distribution or the
qualification of the Contribution as a D Reorganization, in which case the costs
and expenses of attempting to obtain such Subsequent Tax Opinion/Ruling shall be
borne by PFSweb.
(c) (i) Until all restrictions set forth in Section
4.2 have expired, PFSweb shall give Daisytek written notice of any intention to
effect or permit an action or transaction described in Section 4.2 and which is
prohibited thereunder at such time within a period of time reasonably sufficient
to enable Daisytek (A) to make the determination referred to in Section 4.2 or
(B) to prepare and seek any Subsequent Tax Opinion/ Ruling in connection with
such proposed action or transaction. Each such notice by PFSweb shall set forth
the terms and conditions of the proposed action or transaction, including,
without limitation, as applicable, the nature of any related action proposed to
be taken by the Board of Directors of PFSweb, the approximate number of shares
of PFSweb Capital Stock proposed to be transferred or issued, the approximate
Value of PFSweb's assets (or assets of any of PFSweb's Subsidiaries) proposed to
be transferred, the proposed timetable for such action or transaction, and the
number of shares of PFSweb Capital Stock otherwise then owned by the other party
to the proposed action or transaction, all with sufficient particularity to
enable Daisytek to make any such required determination, including information
required to prepare and seek a Subsequent Tax Opinion/Ruling in connection with
such proposed action or transaction. All information provided by PFSweb to
Daisytek pursuant to this Section 4.3 shall be deemed subject to the
confidentiality obligations of the Separation Agreement.
(ii) Promptly, but in any event within 15
Business Days, after Daisytek receives such written notice from PFSweb, Daisytek
shall evaluate such information and notify PFSweb in writing of (A) such
determination or (B) Daisytek's intent to seek a Subsequent Tax Opinion/Ruling
and the proposed date for submission of the request therefor, which date shall
not be more than 45 days after the date Daisytek so notifies PFSweb of
Daisytek's intent to seek a Subsequent Tax Opinion/Ruling, provided that such
45-day period shall be appropriately extended for any period of noncompliance by
PFSweb with Section 4.3(b). If Daisytek makes a determination that an action or
transaction described in Section 4.2 would jeopardize the Tax-Free Status of the
Contribution and Distribution or the qualification of the Contribution as a D
Reorganization, such notice to PFSweb shall set forth, in reasonable detail, the
reasons therefor. Daisytek shall notify PFSweb promptly, but in any event within
two Business Days, after the receipt of a Subsequent Tax Opinion/Ruling.
4.4. Indemnification For Tax Liabilities.
(a) Notwithstanding any other provision of this
Agreement to the contrary, (i) subject to Section 4.4(b), PFSweb shall
indemnify, defend and hold harmless Daisytek International and each Daisytek
Affiliate (or any successor to any of them) against any
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and all Tax-Related Losses incurred by Daisytek International or any of them in
connection with any proposed tax assessment or tax controversy with respect to
the Distribution or the Contribution to the extent caused by any breach by
PFSweb of any of its representations, warranties or covenants made pursuant to
this Agreement and (ii) Daisytek International shall indemnify, defend and hold
harmless PFSweb and each PFSweb Affiliate (or any successor to any of them)
against any and all Tax-Related Losses incurred by PFSweb or any of them in
connection with any proposed tax assessment or tax controversy with respect to
the Distribution or the Contribution to the extent caused by any breach by
Daisytek International or Daisytek of any of its representations, warranties or
covenants made pursuant to this Agreement. All interest or penalties incurred in
connection with such Tax-Related Losses shall be computed for the time period up
to and including the date that the Indemnifying Party pays its indemnification
obligation in full.
(b) If Daisytek (i) makes a determination pursuant to
any clause of Section 4.2, on the basis of a Subsequent Tax Opinion/Ruling or
otherwise, and (ii) delivers to PFSweb written notice of such determination
pursuant to Section 4.3(c), PFSweb shall have no obligation pursuant to Section
4.4(a), except to the extent that any Tax-Related Losses so incurred resulted
from the inaccuracy, incorrectness or incompleteness of any representation
provided by PFSweb upon which such Subsequent Tax Opinion/Ruling and/or
determination was based.
(c) The Indemnifying Party shall pay any amount due
and payable to the Indemnitee pursuant to this Section 4.4 on or before the 90th
day following the earlier of agreement or determination that such amount is due
and payable to he Indemnitee. All payments pursuant to this Section 4.4 shall be
made by wire transfer to the bank account designated by the Indemnitee for such
purpose, and on the date of such wire transfer the Indemnifying Party shall give
the Indemnitee notice of the transfer.
4.5. Procedure For Indemnification For Tax Liabilities.
(a) If an Indemnitee receives notice of the assertion
of any Third-Party Claim with respect to which an Indemnifying Party may be
obligated under Section 4.4 to provide indemnification, the Indemnitee shall
give the Indemnifying Party notice thereof (together with a copy of such Third-
Party Claim, process or other legal pleading) promptly after becoming aware of
such Third-Party Claim; provided, however, that the failure of the Indemnitee to
give notice as provided in this Section shall not relieve the Indemnifying Party
of its obligations under Section 4.4, except to the extent that the Indemnifying
Party is actually prejudiced by such failure to give notice. Such notice shall
describe such Third-Party Claim in reasonable detail.
(b) (i) Daisytek and PFSweb shall jointly control the
defense of, and cooperate with each other with respect to defending, any
Third-Party Claim with respect to which either party is obligated under Section
4.4 to provide indemnification, provided that either party shall forfeit such
joint control right with respect to a particular Third-Party Claim if such party
or any Affiliate of such party makes any public statement or filing, or takes
any action (including, but not limited to, the filing of any submission or
pleading, or the giving of a
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deposition or production of documents, in any administrative or court
proceeding) in connection with such Third-Party Claim that is inconsistent in a
material respect with any representation or warranty made by such party in this
Agreement, the Tax Opinions/Rulings, or the Representation Letters.
(ii) PFSweb and Daisytek shall exercise their
rights to jointly control the defense of any such Third-Party Claim solely for
the purpose of defeating such Third-Party Claim and, unless required by
applicable law, neither PFSweb nor Daisytek shall make any statements or take
any actions that could reasonably result in the shifting of liability for any
Losses arising out of such Third-Party Claim from the party making such
statement or taking such action (or any of its Affiliates) to the other party
(or any of its Affiliates).
(iii) Statements made or actions taken by either
PFSweb or Daisytek in connection with the defense of any such Third-Party Claim
shall not prejudice the rights of such party in any subsequent action or
proceeding between the parties.
(iv) If either Daisytek or PFSweb fails to
jointly defend any such Third-Party Claim, the other party shall solely defend
such Third-Party Claim and the party failing to jointly defend shall use
commercially reasonable efforts to cooperate with the other party in its defense
of such Third-Party Claim; provided, however, that an Indemnitee may not
compromise or settle any such Third-Party Claim without the prior written
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld or delayed. All costs and expenses of either party in connection with,
and during the course of, the joint control of the defense of any such
Third-Party Claim shall be initially paid by the party that incurs such costs
and expenses. Such costs and expenses shall be reallocated and reimbursed in
accordance with the respective indemnification obligations of the parties at the
conclusion of the defense of such Third-Party Claim.
4.6. Arbitration. Any dispute between the parties arising
out of or relating to this Section 4, including the interpretation of this
Section 4, or any actual or purported breach of this Section 4, shall be
resolved only in accordance with the following provisions:
(a) Daisytek and PFSweb shall attempt in good faith
to resolve any such dispute promptly through negotiations of the parties. In the
event of any such dispute, either party may deliver a Dispute Notice to the
other party, and within 20 Business Days after the receipt of such Dispute
Notice, the appropriate representatives of Daisytek and PFSweb shall meet to
attempt to resolve such dispute. If such dispute has not been resolved within
the Negotiation Period, or if one of the parties fails or refuses to negotiate
such dispute, the issue shall be settled by arbitration pursuant to Section
4.6(b). The results of such arbitration shall be final and binding on the
parties.
(b) Either party may initiate arbitration with regard
to such dispute by giving the other party written notice either (i) at any time
following the end of the Negotiation Period, or (ii) if the parties do not meet
within 20 Business Days of the receipt of the Dispute Notice, at any time
thereafter. The arbitration shall be conducted by three arbitrators in
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accordance with the CPR Rules, except as otherwise provided in this Section 4.6.
Within 20 days following receipt of the written notice of arbitration, Daisytek
and PFSweb shall each appoint one arbitrator. The two arbitrators so appointed
shall appoint the third arbitrator. If either Daisytek or PFSweb shall fail to
appoint an arbitrator within such 20-day period, the arbitration shall be by the
sole arbitrator appointed by the other party. Whether selected by Daisytek and
PFSweb or otherwise, each arbitrator selected to resolve such dispute shall be a
tax attorney or tax accountant who is generally recognized in the tax community
as a qualified and competent tax practitioner with experience in the tax area
involved in the issue or issues to be resolved. Such arbitrators shall be
empowered to determine whether one party is required to indemnify the other
pursuant to Section 4.4 and to determine the amount of the related
indemnification payment. Each of Daisytek and PFSweb shall bear 50% of the
aggregate expenses of the arbitrators, unless the arbitrators otherwise
determine that a different allocation of responsibility for expenses is
appropriate under the circumstances. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Sections 1-14. The place of arbitration
shall be Dallas, Texas. The final decision of the arbitrators shall be rendered
no later than one year from the date of the written notice of arbitration.
4.7. Exclusive Remedies. Except for the right to pursue
equitable remedies or as otherwise set forth in an Ancillary Agreement, the
remedies provided in this Section 4 shall be deemed the sole and exclusive
remedies of the parties with respect to the subject matters of the
indemnification provisions of Section 4.4.
5. CERTAIN OTHER COVENANTS.
5.1. Financial And Other Information.
(a) PFSweb agrees that, for so long as Daisytek
International is required to consolidate PFSweb's results of operations and
financial position or to account for its investment in PFSweb under the equity
method of accounting (determined in accordance with generally accepted
accounting principles consistently applied):
(i) PFSweb shall, and shall cause each of its
Subsidiaries to, maintain a system of internal accounting controls that will
provide reasonable assurance that: (A) PFSweb's and such Subsidiaries' books,
records and accounts fairly reflect all transactions and dispositions of assets
and (B) the specific objectives of accounting control are achieved.
(ii) PFSweb shall, and shall cause each of its
Subsidiaries to, maintain a fiscal year which commences on April 1 and ends on
March 31 of each calendar year.
(iii) PFSweb shall deliver to Daisytek
International a trial balance submission, which shall include amounts relating
to each of its Subsidiaries, in such format and detail as Daisytek International
may request, as promptly as practicable following the last day of each month.
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(iv) As soon as practicable, after the end of
each of the first three fiscal quarters in each fiscal year of PFSweb and after
the end of each such fiscal year, PFSweb shall deliver to Daisytek International
a consolidated income statement and balance sheet for PFSweb and its
Subsidiaries for such fiscal quarter or year, as the case may be.
(v) As soon as practicable, and in any event no
later than three days before PFSweb intends to file its Quarterly Financial
Statements (as defined below) with the SEC, PFSweb shall deliver to Daisytek
International as final as possible drafts of (A) the consolidated financial
statements of PFSweb and its Subsidiaries (and notes thereto) for such periods
and for the period from the beginning of the current fiscal year to the end of
such quarter, setting forth in each case in comparative form for each such
fiscal quarter of PFSweb the consolidated figures (and notes thereto) for the
corresponding quarter and periods of the previous fiscal year and all in
reasonable detail and prepared in accordance with Article 10 of Regulation S-X,
and (B) a discussion and analysis by management of PFSweb's and its
Subsidiaries' financial condition and results of operations for such fiscal
period, including, without limitation, an explanation of any material adverse
change, all in reasonable detail and prepared in accordance with Item 303(b) of
Regulation S-K. The information set forth in (A) and (B) above is herein
referred to as the "Quarterly Financial Statements." If requested by Daisytek
International, together with the delivery of the Quarterly Financial Statements,
PFSweb shall deliver to Daisytek International a certificate of the chief
financial officer of PFSweb to the effect that the Quarterly Financial
Statements present fairly, in all material respects, the financial condition and
results of operations of PFSweb and its Subsidiaries as of and for the periods
presented therein; provided that PFSweb may continue to revise such Quarterly
Financial Statements prior to the filing thereof in order to make corrections
and changes which corrections and changes shall be delivered by PFSweb to
Daisytek International as soon as practicable thereafter; and, provided,
further, that Daisytek International and PFSweb financial representatives shall
actively consult with each other regarding any changes (whether or not
substantive) which PFSweb may consider making to its Quarterly Financial
Statements and related disclosures during the period prior to any anticipated
filing with the SEC, and PFSweb shall obtain Daisytek International's consent
prior to making any change to PFSweb's Quarterly Financial Statements or related
disclosures which would have an effect upon Daisytek International's financial
statements or related disclosures. In addition to the foregoing, no Quarterly
Financial Statement or any other document which refers, or contains information
with respect, to the ownership of PFSweb by Daisytek, the separation of PFSweb
from Daisytek International or the Distribution shall be filed with the SEC or
otherwise made public by PFSweb or any of its Subsidiaries without the prior
written consent of Daisytek International.
(vi) As soon as practicable, and in any event no
later than five days before PFSweb intends to file its Annual Financial
Statements (as defined below) with the SEC, PFSweb shall deliver to Daisytek
International as final as possible drafts of (A) the consolidated financial
statements of PFSweb and its Subsidiaries (and notes thereto) for such periods
and for the period from the beginning of the current fiscal year to the end of
such fiscal year, setting forth in each case in comparative form for each such
fiscal year of PFSweb the consolidated figures (and notes thereto) for the
corresponding period of the previous fiscal year and all in reasonable detail
and prepared in accordance with Article 10 of Regulation S-X, and (B)
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a discussion and analysis by management of PFSweb's and its Subsidiaries'
financial condition and results of operations for such fiscal year, including,
without limitation, an explanation of any material adverse change, all in
reasonable detail and prepared in accordance with Item 303(b) of Regulation S-K.
The information set forth in (A) and (B) above is herein referred to as the
"Annual Financial Statements." If requested by Daisytek International, together
with the delivery of the Annual Financial Statements, PFSweb shall deliver to
Daisytek International a certificate of the chief financial officer of PFSweb to
the effect that the Annual Financial Statements present fairly, in all material
respects, the financial condition and results of operations of PFSweb and its
Subsidiaries as of and for the periods presented therein; provided that PFSweb
may continue to revise such Annual Financial Statements prior to the filing
thereof in order to make corrections and changes which corrections and changes
shall be delivered by PFSweb to Daisytek International as soon as practicable
thereafter; and, provided, further, that Daisytek International and PFSweb
financial representatives shall actively consult with each other regarding any
changes (whether or not substantive) which PFSweb may consider making to its
Annual Financial Statements and related disclosures during the period prior to
any anticipated filing with the SEC, and PFSweb shall obtain Daisytek
International's consent prior to making any change to PFSweb's Annual Financial
Statements or related disclosures which would have an effect upon Daisytek
International's financial statements or related disclosures. In addition to the
foregoing, no Annual Financial Statement or any other document which refers, or
contains information with respect, to the ownership of PFSweb by Daisytek, the
separation of PFSweb from Daisytek International or the Distribution shall be
filed with the SEC or otherwise made public by PFSweb or any of its Subsidiaries
without the prior written consent of Daisytek International. In any event,
PFSweb shall deliver to Daisytek International, no later than 80 days after the
end of each fiscal year of PFSweb, the final form of the Annual Financial
Statements accompanied by an opinion thereon by PFSweb's independent certified
public accountants.
(vii) PFSweb shall deliver to Daisytek
International all Quarterly and Annual Financial Statements of each Subsidiary
of PFSweb which is itself required to file financial statements with the SEC or
otherwise make such financial statements publicly available, with such financial
statements to be provided in the same manner and detail and on the same time
schedule as those financial statements of PFSweb required to be delivered to
Daisytek International pursuant to this Section 5.1.
(viii) PFSweb and each of its Subsidiaries which
files information with the SEC shall deliver to Daisytek International: (A) as
soon as the same are prepared, substantially final drafts of: (x) all reports,
notices and proxy and information statements to be sent or made available by
PFSweb or any of its Subsidiaries to their security holders, (y) all regular,
periodic and other reports to be filed under Sections 13, 14 and 15 of the
Exchange Act (including Reports on Forms 10-K, 10-Q and 8-K and Annual Reports
to Shareholders), and (z) all registration statements and prospectuses to be
filed by PFSweb or any of its Subsidiaries with the SEC or any securities
exchange pursuant to the listed company manual (or similar requirements) of such
exchange (collectively, the documents identified in clauses (x), (y) and (z) are
referred to herein as "PFSweb Public Documents"), and (B) as soon as
practicable, but in no event later than four Business Days prior to the date the
same are printed, sent or filed, whichever is earliest, final copies of all such
PFSweb Public Documents; provided that PFSweb may
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continue to revise such PFSweb Public Documents prior to the filing thereof in
order to make corrections and changes which corrections and changes shall be
delivered by PFSweb to Daisytek International as soon as practicable thereafter;
and, provided, further, that Daisytek International and PFSweb financial
representatives shall actively consult with each other regarding any changes
(whether or not substantive) which PFSweb may consider making to any of its
PFSweb Public Documents and related disclosures prior to any anticipated filing
with the SEC, and PFSweb shall obtain Daisytek International's consent prior to
making any change to its PFSweb Public Documents or related disclosures which
would have an effect upon Daisytek International's financial statements or
related disclosures. In addition to the foregoing, no PFSweb Public Document or
any other document which refers, or contains information with respect, to the
ownership of PFSweb by Daisytek, the separation of PFSweb from Daisytek
International or the Distribution shall be filed with the SEC or otherwise made
public by PFSweb or any of its Subsidiaries without the prior written consent of
Daisytek International.
(ix) PFSweb shall, as promptly as practicable,
deliver to Daisytek International copies of all annual and other budgets and
financial projections relating to PFSweb or any of its Subsidiaries and shall
provide Daisytek International an opportunity to meet with management of PFSweb
to discuss such budgets and projections.
(x) With reasonable promptness, PFSweb shall
deliver to Daisytek International such additional financial and other
information and data with respect to PFSweb and its Subsidiaries and their
business, properties, financial positions, results of operations and prospects
as from time to time may be reasonably requested by Daisytek International.
(xi) Prior to issuance, PFSweb shall deliver to
Daisytek International copies of substantially final drafts of all press
releases and other statements to be made available by PFSweb or any of its
Subsidiaries to the public concerning material developments in the business,
properties, earnings, results of operations, financial condition or prospects of
PFSweb or any of its Subsidiaries or the relationship between (A) PFSweb or any
of its Subsidiaries and (B) Daisytek International or any of its Affiliates. In
addition, prior to the issuance of any such press release or public statement,
PFSweb shall consult with Daisytek International regarding any changes (other
than typographical or other similar minor changes) to such substantially final
drafts. Immediately following the issuance thereof, PFSweb shall deliver to
Daisytek International copies of final drafts of all press releases and other
public statements. PFSweb and Daisytek will consult with each other as to the
timing of their annual and quarterly earnings releases and will give each other
an opportunity to review the information therein relating to PFSweb and its
Subsidiaries and to comment thereon.
(xii) PFSweb shall cooperate fully, and cause its
accountants to cooperate fully, with Daisytek International to the extent
requested by Daisytek in the preparation of Daisytek International's public
earnings releases, quarterly reports on Form 10-Q, Annual Reports to
Shareholders, Annual Reports on Form 10-K, any Current Reports on Form 8-K and
any other proxy, information and registration statements, reports, notices,
prospectuses and any other filings made by Daisytek International with the SEC,
any national securities exchange or
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otherwise made publicly available (collectively, "Daisytek Public Filings").
PFSweb agrees to provide to Daisytek International all information that it
reasonably requests in connection with any Daisytek Public Filings or that, in
the judgment of Daisytek International's legal counsel, is required to be
disclosed or incorporated by reference therein under any law, rule or
regulation. Such information shall be provided by PFSweb in a timely manner on
the dates requested by Daisytek International (which may be earlier than the
dates on which PFSweb otherwise would be required hereunder to have such
information available) to enable Daisytek International to prepare, print and
release all Daisytek Public Filings on such dates as Daisytek International
shall determine. PFSweb shall use commercially reasonable efforts to cause its
accountants to consent to any reference to them as experts in any Daisytek
Public Filings required under any law, rule or regulation. If and to the extent
requested by Daisytek International, PFSweb shall diligently and promptly review
all drafts of such Daisytek Public Filings and prepare in a diligent and timely
fashion any portion of such Daisytek Public Filing pertaining to PFSweb. Prior
to any printing or public release of any Daisytek Public Filing, an appropriate
executive officer of PFSweb shall, if requested by Daisytek international,
certify that the information relating to PFSweb, any PFSweb Affiliate or the
PFSweb Business in such Daisytek Public Filing is accurate, true and correct in
all material respects. Unless required by law, rule or regulation, PFSweb shall
not publicly release any financial or other information which conflicts with the
information with respect to PFSweb, any PFSweb Affiliate or the PFSweb Business
that is included in any Daisytek Public Filing without Daisytek International's
prior written consent. Prior to the release or filing thereof, Daisytek
International shall provide PFSweb with a draft of any portion of a Daisytek
Public Filing containing information relating to PFSweb and its Subsidiaries and
shall give PFSweb an opportunity to review such information and comment thereon;
provided that Daisytek International shall determine in its sole discretion the
final form and content of all Daisytek Public Filings.
(b) PFSweb agrees that, for so long as Daisytek
International is required to consolidate PFSweb's results of operations and
financial position or to account for its investment in PFSweb under the equity
method of accounting (in accordance with generally accepted accounting
principles):
(i) PFSweb shall not select a different
accounting firm to serve as its (and its Subsidiaries') independent certified
public accountants ("PFSweb's Auditors") without Daisytek International's prior
written consent (which shall not be unreasonably withheld).
(ii) PFSweb shall use its best efforts to enable
the PFSweb Auditors to complete their audit such that they will date their
opinion on PFSweb's audited annual financial statements on the same date that
Daisytek International's independent certified public accountants ("Daisytek's
Auditors") date their opinion on Daisytek International's audited annual
financial statements (the "Daisytek Annual Statements"), and to enable Daisytek
International to meet its timetable for the printing, filing and public
dissemination of the Daisytek Annual Statements.
(iii) PFSweb shall provide to Daisytek
International on a timely basis all information that Daisytek International
reasonably requires to meet its schedule for the
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preparation, printing, filing, and public dissemination of the Daisytek Annual
Statements. Without limiting the generality of the foregoing, PFSweb will
provide all required financial information with respect to PFSweb and its
Subsidiaries to PFSweb's Auditors in a sufficient and reasonable time and in
sufficient detail to permit PFSweb's Auditors to take all steps and perform all
reviews necessary to provide sufficient assistance to Daisytek's Auditors with
respect to information to be included or contained in the Daisytek Annual
Statements.
(iv) PFSweb shall authorize PFSweb's Auditors to
make available to Daisytek's Auditors both the personnel who performed or are
performing the annual audit of PFSweb and work papers related to the annual
audit of PFSweb, in all cases within a reasonable time prior to PFSweb's
Auditors' opinion date, so that Daisytek's Auditors are able to perform the
procedures they consider necessary to take responsibility for the work of
PFSweb's Auditors as it relates to Daisytek's Auditors' report on Daisytek
International's statements, all within sufficient time to enable Daisytek
International to meet its timetable for the printing, filing and public
dissemination of the Daisytek Annual Statements.
(v) PFSweb shall provide Daisytek International's
internal auditors access to PFSweb's and its Subsidiaries, books and records so
that Daisytek International may conduct reasonable audits relating to the
financial statements provided by PFSweb pursuant hereto as well as to the
internal accounting controls and operations of PFSweb and its Subsidiaries.
(vi) PFSweb shall give Daisytek International as
much prior notice as reasonably practical of any proposed determination of, or
any significant changes in, its accounting estimates or accounting principles
from those in effect on the date hereof. PFSweb will consult with Daisytek
International and, if requested, PFSweb will consult with Daisytek
International's independent public accountants with respect thereto. PFSweb will
not make any such determination or changes without Daisytek International's
prior written consent if such a determination or a change would be sufficiently
material to be required to be disclosed in PFSweb's financial statements as
filed with the SEC or otherwise publicly disclosed therein.
(vii) Notwithstanding clause (vi) above, PFSweb
shall make any changes in its accounting estimates or accounting principles that
are requested by Daisytek International in order for PFSweb's accounting
estimates and principles to be consistent with those of Daisytek International.
Nothing in this Section 5.1 shall require PFSweb to violate
any agreement with any of its customers regarding the confidentiality of
commercially sensitive information relating to that customer or its business;
provided that in the event that PFSweb is required under this Section 5.1 to
disclose any such information, PFSweb shall use all commercially reasonable
efforts to seek to obtain such customer's consent to the disclosure of such
information.
5.2. Other Covenants. PFSweb hereby covenants and agrees
that, for so long as Daisytek beneficially owns at least 50% of the outstanding
shares of PFSweb Common Stock:
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(a) PFSweb shall not, without the prior written
consent of Daisytek International (which it may withhold in its sole and
absolute discretion), take, or cause to be taken, directly or indirectly, any
action, including making or failing to make any election under the law of any
state, which has the effect, directly or indirectly, of restricting or limiting
the ability of Daisytek to freely sell, transfer, assign, pledge or otherwise
dispose of shares of PFSweb Common Stock or would restrict or limit the rights
of any transferee of Daisytek as a holder of PFSweb Common Stock. Without
limiting the generality of the foregoing, PFSweb shall not, without the prior
written consent of Daisytek International (which it may withhold in its sole and
absolute discretion), take any action, or recommend to its stockholders any
action, which would among other things, limit the legal rights of, or deny any
benefit to, Daisytek as a PFSweb stockholder in a manner not applicable to
PFSweb stockholders generally.
(b) PFSweb shall not, without the prior written
consent of Daisytek International (which it may withhold in its sole and
absolute discretion), issue any shares of PFSweb Capital Stock or any rights,
warrants or options to acquire PFSweb Capital Stock (including, without
limitation, securities convertible or exchangeable for PFSweb Capital Stock), if
after giving effect to such issuances and considering all of the shares of
PFSweb Capital Stock acquirable pursuant to such rights, warrants and options to
be outstanding on the date of such issuance (whether or not then exercisable),
Daisytek would own less than 50% of the then outstanding shares of PFSweb Common
Stock; provided, however, the foregoing shall not restrict the issuance of any
rights, warrants or options to acquire PFSweb Capital Stock which, by its terms,
will not vest or be exercisable prior to the final Distribution Date and the
completion of the Distribution.
(c) To the extent that Daisytek or Daisytek
International is a party to any contracts or agreements that provide that
certain actions of its Subsidiaries may result in Daisytek or Daisytek
International being in breach of or in default under such agreements and
Daisytek or Daisytek International has advised PFSweb of the existence, and has
furnished PFSweb with copies, of such contracts or agreements (or the relevant
portions thereof), PFSweb shall not take any actions that reasonably could
result in Daisytek or Daisytek International being in breach of or in default
under any such contract or agreement. The parties acknowledge and agree that,
after the date hereof, Daisytek and Daisytek International may in good faith
(and not solely with the intention of imposing restrictions on PFSweb pursuant
to this covenant) enter into additional contracts or agreements that provide
that certain actions of its Subsidiaries may result in Daisytek or Daisytek
International being in breach of or in default under such agreements. PFSweb
agrees to keep confidential and not to disclose any information provided to it
pursuant to this Section 5.2(c).
6. INDEMNIFICATION.
6.1. Indemnification by PFSweb. Subject to Section 6.3,
PFSweb shall indemnify, defend and hold harmless Daisytek International, all
Daisytek Affiliates and each of their respective directors, officers and
employees (in their capacities as such), from and against:
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(a) all Losses relating to, arising out of, or due
to, directly or indirectly, any breach by PFSweb or any PFSweb Affiliate of any
of the provisions of this Agreement;
(b) all Losses relating to, arising out of, or due
to, directly or indirectly, any incorrect, inaccurate or incomplete financial
and other information provided by PFSweb or any PFSweb Affiliate to Daisytek
International pursuant to Section 5.1 of this Agreement;
(c) all Losses relating to, arising out of, or due to
any untrue statement or alleged untrue statement of a material fact contained
in, or incorporated by reference into, the IPO Registration Statement or the
omission or alleged omission to state (whether pursuant to direct statement or
incorporation by reference) in the IPO Registration Statement a material fact
required to be stated therein or necessary to make the statements therein not
misleading other than with respect to the Daisytek Disclosure Portions; and
(d) all Losses relating to, arising out of, or due to
any untrue statement or alleged untrue statement of a material fact contained
in, or incorporated by reference into, the Distribution Registration Statement
or the omission or alleged omission to state (whether pursuant to direct
statement or incorporation by reference) in the Distribution Registration
Statement a material fact required to be stated therein or necessary to make the
statements therein not misleading other than with respect to the Daisytek
Disclosure Portions.
6.2. Indemnification by Daisytek International. Subject to
Section 6.3, Daisytek International shall indemnify, defend, and hold harmless
PFSweb, all PFSweb Affiliates, and each of their respective directors, officers
and employees (in their capacities as such), from and against:
(a) all Losses relating to, arising out of, or due
to, directly or indirectly, any breach by Daisytek International or any Daisytek
Affiliate of any of the provisions of this Agreement;
(b) all Losses relating to, arising out of, or due to
any untrue statement or alleged untrue statement of a material fact contained
in, or incorporated by reference into, the Daisytek Disclosure Portions of the
IPO Registration Statement or the omission or alleged omission to state (whether
pursuant to direct statement or incorporation by reference) in the Daisytek
Disclosure Portions of the IPO Registration Statement a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and
(c) all Losses relating to, arising out of, or due to
any untrue statement or alleged untrue statement of a material fact contained
in, or incorporated by reference into, the Daisytek Disclosure Portions of the
Distribution Registration Statement or the omission or alleged omission to state
(whether pursuant to direct statement or incorporation by reference) in the
Daisytek Disclosure Portions of the Distribution Registration Statement a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
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6.3. Other Liabilities.
(a) Except as provided in Section 6.4, this Section 6
shall not be applicable to any Tax-Related Losses, which shall be governed by
Section 4 of this Agreement.
(b) This Section 6 shall not be applicable to any
Losses relating to, arising out of, or due to any breach of the provisions of
any other contract, agreement or understanding between Daisytek International or
any Daisytek Affiliate and PFSweb or any PFSweb Affiliate, including, without
limitation, the Separation Agreement and any of the other Ancillary Agreements,
which Losses shall be governed by the terms of such contract, agreement or
understanding.
6.4. Tax Effects of Indemnification.
(a) Any indemnification payment made under this
Agreement shall be characterized for tax purposes as if such payment were made
immediately prior to the latest Distribution Date, and shall therefore be
treated, to the extent permitted by law, as either (i) a distribution from
PFSweb to Daisytek or (ii) a capital contribution from Daisytek to PFSweb.
(b) The amount of any Loss or Tax-Related Losses for
which indemnification is provided under this Agreement shall be (i) increased to
take account of net Tax cost, if any, incurred by the Indemnitee arising from
the receipt or accrual of an Indemnity Payment hereunder (grossed up for such
increase) and (ii) reduced to take account of net Tax benefit, if any, realized
by the Indemnitee arising from incurring or paying such Loss or Tax-Related
Losses. In computing the amount of any such Tax cost or Tax benefit, the
Indemnitee shall be deemed to recognize all other items of income, gain, loss,
deduction or credit before recognizing any item arising from the receipt or
accrual of any Indemnity Payment hereunder or incurring or paying any
indemnified Loss or Tax-Related Losses. Any Indemnity Payment hereunder shall
initially be made without regard to this Section 6.4 and shall be increased or
reduced to reflect any such net Tax cost (including gross-up) or net Tax benefit
only after the Indemnitee has actually realized such cost or benefit. For
purposes of this Agreement, an Indemnitee shall be deemed to have "actually
realized" a net Tax cost or a net Tax benefit to the extent that, and at such
time as, the amount of Taxes payable by such Indemnitee is increased above or
reduced below, as the case may be, the amount of Taxes that such Indemnitee
would be required to pay but for the receipt or accrual of the Indemnity Payment
or the incurrence or payment of such Loss or Tax-Related Losses, as the case may
be. The amount of any increase or reduction hereunder shall be adjusted to
reflect any final determination (which shall include the execution of Form
870-AD or successor form) with respect to the Indemnitee's liability for Taxes,
and payments between Daisytek and PFSweb to reflect such adjustment shall be
made if necessary.
6.5. Effect Of Insurance upon Indemnification. The amount
which an Indemnifying Party is required to pay to any Indemnitee pursuant to
this Section 6 shall be reduced (including retroactively) by any Insurance
Proceeds and other amounts actually recovered by such Indemnitee in reduction
of the related Loss, it being understood and agreed that each of PFSweb and
Daisytek International shall use commercially reasonable efforts to collect any
such proceeds or other amounts to which it or any of its Affiliates is
entitled, without regard to
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whether it is the Indemnifying Party hereunder. No Indemnitee shall be required,
however, to collect any such proceeds or other amounts prior to being entitled
to indemnification from an Indemnifying Party hereunder. If an Indemnitee
receives an Indemnity Payment in respect of a Loss and subsequently receives
Insurance Proceeds or other amounts in respect of such Loss, then such
Indemnitee shall pay to such Indemnifying Party an amount equal to the
difference between (a) the sum of the amount of such Indemnity Payment and the
amount of such Insurance Proceeds or other amounts actually received and (b) the
amount of such Loss, in each case adjusted (at such time as appropriate
adjustment can be determined) to reflect any premium adjustment attributable to
such claim.
6.6. Procedure for Indemnification Involving Third-Party
Claims.
(a) If any Indemnitee receives notice of the
assertion of any Third-Party Claim with respect to which an Indemnifying Party
is obligated under this Agreement to provide indemnification (other than
pursuant to Section 4), such Indemnitee shall give such Indemnifying Party
notice thereof (together with a copy of such Third-Party Claim, process or other
legal pleading) promptly after becoming aware of such Third-Party Claim;
provided, however, that the failure of any Indemnitee to give notice as provided
in this Section shall not relieve any Indemnifying Party of its obligations
under this Section 6, except to the extent that such Indemnifying Party is
actually prejudiced by such failure to give notice. Such notice shall describe
such Third-Party Claim in reasonable detail.
(b) An Indemnifying Party, at such Indemnifying
Party's own expense and through counsel chosen by such Indemnifying Party (which
counsel shall be reasonably acceptable to the Indemnitee), may elect to defend
any Third-Party Claim. If an Indemnifying Party elects to defend a Third-Party
Claim, then, within ten Business Days after receiving notice of such Third-Party
Claim (or sooner, if the nature of such Third-Party Claim so requires), such
Indemnifying Party shall notify the Indemnitee of its intent to do so, and such
Indemnitee shall cooperate in the defense of such Third-Party Claim. Such
Indemnifying Party shall pay such Indemnitee's reasonable out-of-pocket expenses
incurred in connection with such cooperation. Such Indemnifying Party shall keep
the Indemnitee reasonably informed as to the status of the defense of such
Third-Party Claim. After notice from an Indemnifying Party to an Indemnitee of
its election to assume the defense of a Third-Party Claim, such Indemnifying
Party shall not be liable to such Indemnitee under this Section 6 for any legal
or other expenses subsequently incurred by such Indemnitee in connection with
the defense thereof other than those expenses referred to in the preceding
sentence; provided, however, that such Indemnitee shall have the right to employ
one law firm as counsel ("Separate Counsel"), to represent such Indemnitee in
any action or group of related actions (which firm or firms shall be reasonably
acceptable to the Indemnifying Party) if, in such Indemnitee's reasonable
judgment at any time, either a conflict of interest between such Indemnitee and
such Indemnifying Party exists in respect of such claim, or there may be
defenses available to such Indemnitee which are different from or in addition to
those available to such Indemnifying Party and the representation of both
parties by the same counsel would be inappropriate, and in that event (i) the
reasonable fees and expenses of such Separate Counsel shall be paid by such
Indemnifying Party (it being understood, however, that the Indemnifying Party
shall not be liable for the expenses of more than one Separate Counsel
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<PAGE> 32
(excluding local counsel) with respect to any Third-Party Claim (even if against
multiple Indemnitees)) and (ii) each of such Indemnifying Party and such
Indemnitee shall have the right to conduct its own defense in respect of such
claim. If an Indemnifying Party elects not to defend against a Third-Party
Claim, or fails to notify an Indemnitee of its election as provided in this
Section 6 within the period of ten Business Days described above, the Indemnitee
may defend, compromise, and settle such Third-Party Claim and shall be entitled
to indemnification hereunder (to the extent permitted hereunder); provided,
however, that no such Indemnitee may compromise or settle any such Third-Party
Claim without the prior written consent of the Indemnifying Party, which consent
shall not be unreasonably withheld or delayed. Notwithstanding the foregoing,
the Indemnifying Party shall not, without the prior written consent of the
Indemnitee, (i) settle or compromise any Third-Party Claim or consent to the
entry of any judgment which does not include as an unconditional term thereof
the delivery by the claimant or plaintiff to the Indemnitee of a written release
from all liability in respect of such Third-Party Claim or (ii) settle or
compromise any Third-Party Claim in any manner that would be reasonably likely
to have a material adverse effect on the Indemnitee.
(c) Notwithstanding the provisions of Section 6.6(b),
Daisytek International and PFSweb shall jointly control the defense of, and
cooperate with each other with respect to defending, any Third-Party Claim with
respect to which each party is claiming that it is entitled to indemnification
under Section 6.1 or 6.2. If either Daisytek International or PFSweb fails to
defend jointly any such Third-Party Claim, the other party shall solely defend
such Third-Party Claim and the party failing to defend jointly shall use all
commercially reasonable efforts to cooperate with the other party in its defense
of such Third-Party Claim; provided, however, that neither party may compromise
or settle any such Third-Party Claim without the prior written consent of the
other party, which consent shall not be unreasonably withheld or delayed. All
costs and expenses of either party in connection with, and during the course of,
the joint control of the defense of any such Third-Party Claim shall be
initially paid by the party that incurs such costs and expenses. Such costs and
expenses shall be reallocated and reimbursed in accordance with the respective
indemnification obligations of the parties at the conclusion of the defense of
such Third-Party Claim.
6.7. Procedure For Indemnification Not Involving
Third-Party Claims. If any Indemnitee desires to assert against an Indemnifying
Party any claim for indemnification under this Section 6 other than a
Third-Party Claim (a "Claim"), the Indemnitee shall deliver to the Indemnifying
Party notice of its demand for satisfaction of such Claim (a "Request"),
specifying in reasonable detail the amount of such Claim and the basis for
asserting such Claim. Within 30 days after the Indemnifying Party has been given
a Request, the Indemnifying Party shall either (i) satisfy the Claim requested
to be satisfied in such Request by delivering to the Indemnitee payment by wire
transfer or a certified or bank cashier's check payable to the Indemnified Party
in immediately available funds in an amount equal to the amount of such Claim,
or (ii) notify the Indemnitee that the Indemnifying Party contests such Claim by
delivering to the Indemnitee a Dispute Notice, stating that the Indemnifying
Party objects to such Claim and specifying in reasonable detail the basis for
contesting such Claim. Any dispute described in clause (ii) of this Section 6.7
shall be subject to the provisions of Section 7.1.
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6.8. Exclusive Remedies. Except for the right to pursue
equitable remedies, the remedies provided in this Section 6 shall be deemed the
sole and exclusive remedies of the parties with respect to the subject matters
of the indemnification provisions of this Section 6.
7. MISCELLANEOUS
7.1. Dispute Resolution. The parties shall attempt in good
faith to resolve any dispute between the parties arising out of or relating to
this Agreement promptly through negotiations of the parties prior to seeking any
other legal or equitable remedy.
7.2. Survival. The representations and warranties
contained in this Agreement shall survive the execution and delivery hereof and
the Distribution Date until the expiration of all applicable statutes of
limitations.
7.3. Complete Agreement. Except as otherwise set forth in
this Agreement, this Agreement and the exhibits hereto shall constitute the
entire agreement between the parties hereto with respect to the subject matter
hereof and shall supersede all prior agreements and understandings, whether
written or oral, between the parties with respect to such subject matter.
7.4. Authority. Each of the parties hereto represents to
the other that (a) it has the corporate power and authority to execute, deliver
and perform this Agreement, (b) the execution, delivery and performance of this
Agreement by it has been duly authorized by all necessary corporate action, (c)
it has duly and validly executed and delivered this Agreement, and (d) this
Agreement is a legal, valid and binding obligation, enforceable against it in
accordance with its terms subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and general equity principles.
7.5. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware (other than
the laws regarding conflicts of laws) as to all matters, including matters of
validity, construction, effect, performance and remedies.
7.6. Notices. All Notices shall be in writing and shall be
given and deemed received in accordance with the provisions of the Separation
Agreement.
7.7. Amendment and Modification. This Agreement may not be
amended or modified in any respect except by a written agreement signed by both
of the parties hereto.
7.8. Binding Effect; Assignment. This Agreement and all of
the provisions hereof shall be binding upon the parties hereto and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Except with respect to a merger of either party with another Person,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by either party hereto without the prior written consent of
the other party, which consent shall not be unreasonably withheld or delayed.
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7.9. Third Party Beneficiaries. The Indemnitees and their
respective successors shall be third party beneficiaries of the indemnification
provisions of Sections 4 and 6, as applicable, and shall be entitled to enforce
those provisions and in connection with such enforcement shall be subject to
Section 7.6, in each such case as fully and to the same extent as if they were
parties to this Agreement. Except as provided in the previous sentence, nothing
in this Agreement, express or implied, is intended to or shall confer upon any
Person any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement, and no Person (other than as provided in
the previous sentence) shall be deemed a third party beneficiary under or by
reason of this Agreement.
7.10. Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The Agreement may
be executed by facsimile signature.
7.11. Waiver. The observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term, but
such waiver shall be effective only if it is in writing signed by the party
against which such waiver is to be asserted. Unless otherwise expressly provided
in this Agreement, no delay or omission on the part of any party in exercising
any right or privilege under this Agreement shall operate as a waiver thereof,
nor shall any waiver on the part of any party of any right or privilege under
this Agreement operate as a waiver of any other right or privilege under this
Agreement nor shall any single or partial exercise of any right or privilege
preclude any other or further exercise thereof or the exercise of any other
right or privilege under this Agreement. No failure by either party to take any
action or assert any right or privilege hereunder shall be deemed to be a waiver
of such right or privilege in the event of the continuation or repetition of the
circumstances giving rise to such right unless expressly waived in writing by
the party against whom the existence of such waiver is asserted.
7.12. Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
7.13. Remedies. Each party shall be entitled to enforce its
rights under this Agreement specifically, to recover damages and costs
(including reasonable attorneys' fees) caused by any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. Each
party acknowledges and agrees that under certain circumstances the breach by
Daisytek or any of its Affiliates or PFSweb or any of its Affiliates of a term
or provision of this Agreement will materially and irreparably harm the other
party, that money damages will accordingly not be an adequate remedy for such
breach and that the non-defaulting party, in its sole discretion and in addition
to its rights under this Agreement and any other remedies it may have at law or
in equity, may apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any breach of the provisions of
this Agreement.
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[remainder of page is blank]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date and year first
written above.
DAISYTEK INTERNATIONAL CORPORATION
By:
--------------------------------------------
Name:
Title:
DAISYTEK, INCORPORATED
By:
--------------------------------------------
Name:
Title:
PFSWEB, INC.
By:
--------------------------------------------
Name:
Title:
35
<PAGE> 1
EXHIBIT 2.3
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of December 7, 1999, between Daisytek International Corporation, a
Delaware corporation ("Daisytek International"), Daisytek, Incorporated, a
Delaware corporation and wholly-owned subsidiary of Daisytek International
("Daisytek"), and PFSweb, Inc., a Delaware corporation and wholly-owned
subsidiary of Daisytek (the "Company").
WHEREAS, the Board of Directors of Daisytek has determined that it would be
appropriate and desirable to completely separate the Company's business from
Daisytek;
WHEREAS, Daisytek has caused the Company to be incorporated in order to
effect such separation;
WHEREAS, Daisytek, Daisytek International and the Company have entered into
a Master Separation Agreement and certain ancillary agreements, pursuant to
which Daisytek has contributed and transferred to the Company, and the Company
has received and assumed, the assets and liabilities then associated with the
Company's business as described therein;
WHEREAS, Daisytek, Daisytek International and the Company intend that this
contribution, together with the Distribution described therein, qualify as a
tax-free reorganization under Sections 355 and 368(a)(1)(D) of the Internal
Revenue Code;
WHEREAS, Daisytek currently owns all of the issued and outstanding shares
of the Company's common stock (the "Common Stock");
WHEREAS, the Company is offering and selling to the public (the "IPO") by
means of a Registration Statement (File No. 333-87657) filed with the Securities
and Exchange Commission (the "SEC") on Form S-1 (the "Registration Statement")
shares of its Common Stock;
WHEREAS, immediately following the consummation of the IPO, Daisytek shall
own not less than 80% of the outstanding shares of Common Stock;
WHEREAS, as soon as practicable following the satisfaction of applicable
conditions, and not later than 12 months following the IPO, Daisytek plans to
divest itself of its entire ownership of the Company through a tax-free
distribution to Daisytek International, to be immediately followed by a tax-free
distribution by Daisytek International to the holders of Daisytek International
common stock (the "Distribution");
WHEREAS, Daisytek, Daisytek International and the Company are entering into
an Initial Public Offering and Distribution Agreement to set forth certain
agreements with respect to the IPO and the Distribution; and
<PAGE> 2
WHEREAS, if Daisytek or Daisytek International determine not to complete
the Distribution, or the Distribution is abandoned without Daisytek or Daisytek
International divesting itself of 100% of the Common Stock it owns, the Company
desires to make certain arrangements to provide Daisytek and Daisytek
International with registration rights with respect to shares of Common Stock it
then holds;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and intending to be legally bound
hereby, the parties hereby agree as follows:
Section 1. Effectiveness of Agreement; Term.
1.1 Effective Date. This Agreement shall become effective upon the date
that Daisytek or Daisytek International provides to the Company written notice
(the "Abandonment Notice") that it no longer intends to proceed with or complete
the Distribution (the "Effective Date").
1.2 Shares Covered. This Agreement covers those shares of Common Stock that
are held by Daisytek immediately following the IPO and continue to be held by
Daisytek or Daisytek International as of the date of the Abandonment Notice
(subject to the provisions of Section 7, the "Shares"). The "Shares" shall
include any securities issued or issuable with respect to the Shares by way of a
stock dividend or a stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
Daisytek, Daisytek International and any Permitted Transferees (as defined
in Section 2.5) are each referred to herein as a "Holder" and collectively as
the "Holders" and the Holders of Shares proposed to be included in any
registration under this Agreement are each referred to herein as a "Selling
Holder" and collectively as the "Selling Holders."
Section 2. Demand Registration.
2.1 Notice. Upon the terms and subject to the conditions set forth herein,
upon written notice of any Holder requesting that the Company effect the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of any or all of the Shares held by it, which notice shall specify the
intended method or methods of disposition of such Shares (which methods may
include, without limitation, a Shelf Registration, a Convertible Registration or
an Exchange Registration (as such terms are defined in Section 2.6)), the
Company will promptly give written notice of the proposed registration to all
other Holders and will use its best efforts to effect (at the earliest
reasonable date) the registration under the Securities Act of such Shares (and
the Shares of any other Holders joining in such request as are specified in a
written notice received by the Company within 20 days after receipt of the
Company's written notice of the proposed registration) for disposition in
accordance with the intended method or methods of
2
<PAGE> 3
disposition stated in such request (each registration request pursuant to this
Section 2.1 is sometimes referred to herein as a "Demand Registration");
provided, however, that:
(a) the Company shall not be obligated to effect registration with
respect to Shares pursuant to this Section 2 within 90 days after the effective
date of a previous registration, other than a Shelf Registration, effected with
respect to Shares pursuant to this Section 2;
(b) if, while a registration request is pending pursuant to this
Section 2, the Company determines in the good faith judgment of counsel of the
Company that such registration would reasonably be expected to have a material
adverse effect on any existing proposal or plans by the Company or any of its
subsidiaries to engage in any material acquisition, merger, consolidation,
tender offer, other business combination, reorganization, securities offering or
other material transaction, the Company may postpone for up to 90 days the
filing or effectiveness of such registration; provided, however, that the
Company may delay a Demand Registration hereunder only once in any 12 month
period;
(c) except in the case of a Convertible Registration or an Exchange
Registration, the number of the Shares registered pursuant to any registration
requested pursuant to this Section 2 shall have an aggregate expected offering
price of at least $10 million; and
(d) if a Demand Registration is an underwritten offering and the
managing underwriters advise the Company in writing that in their opinion the
number of Shares requested to be included in such offering exceeds the number of
Shares which can be sold in an orderly manner in such offering within a price
range acceptable to the Holders of a majority of the Shares initially requesting
such registration or without materially adversely affecting the market for the
Common Stock, the Company shall include in such registration the number of
Shares requested to be included therein which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering and without materially adversely affecting the market for the Common
Stock, pro rata among the respective Holders thereof on the basis of the amount
of Shares owned by each Holder requesting inclusion of Shares in such
registration.
2.2 Registration Expenses. All Registration Expenses (as defined in Section
8) for any registration requested pursuant to this Section 2 (including any
registration that is delayed or withdrawn) shall be paid by the Company.
2.3 Selection of Professionals. The Holders of a majority of the Shares
included in any Demand Registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering; provided,
however, that if such Holders select an investment banker or manager that was
not one of the managers of the IPO, such investment banker or manager shall not
administer such offering if the Company reasonably objects thereto. The Holders
of a majority of the Shares included in any Demand Registration shall have the
right to select the financial printer, the solicitation and/or exchange agent
(if any) and one counsel for the Selling Holders. The Company shall select its
own outside counsel and independent auditors.
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<PAGE> 4
2.4 Third Person Shares. The Company shall have the right to cause the
registration of securities for sale for the account of any Person (including the
Company) other than the Selling Holders (the "Third Person Shares") in any
registration of the Shares requested pursuant to this Section 2 so long as the
Third Person Shares are disposed of in accordance with the intended method or
methods of disposition requested pursuant to this Section 2; provided, however,
that the Company shall not have the right to cause the registration of such
securities of such other Persons if the registration requested pursuant to this
Section 2 is a Convertible Registration or an Exchange Registration.
If a Demand Registration in which the Company proposes to include Third
Person Shares is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Shares and Third
Person Shares requested to be included in such offering exceeds the number of
Shares and Third Person Shares which can be sold in an orderly manner in such
offering within a price range acceptable to the Holders of a majority of the
Shares initially requesting such registration or without materially adversely
affecting the market for the Common Stock, the Company shall not include in such
registration any Third Person Shares unless all of the Shares initially
requested to be included therein are so included.
2.5 Permitted Transferees. As used in this Agreement, "Permitted
Transferees" shall mean any transferee, whether direct or indirect, of Shares
designated by Daisytek or Daisytek International (or a subsequent holder) in a
written notice to the Company as provided for in Section 9.7. Any Permitted
Transferees of the Shares shall be subject to and bound by all of the terms and
conditions herein applicable to Holders. The notice required by this Section 2.5
shall be signed by both the transferring Holder and the Permitted Transferees so
designated and shall include an undertaking by the Permitted Transferees to
comply with the terms and conditions of this Agreement applicable to Holders.
2.6 Shelf Registration; Convertible Registration; Exchange Registration.
With respect to any Demand Registration, the requesting Holders may request the
Company to effect a registration of the Shares (a) under a registration
statement pursuant to Rule 415 under the Securities Act (or any successor rule)
(a "Shelf Registration"); (b) in connection with such Holders' registration
under the Securities Act of securities (the "Convertible Securities")
convertible into, exercisable for or otherwise related to the Shares (a
"Convertible Registration"); or (c) in connection with such Holders' offer to
exchange the Shares for any debt or equity securities of such Holders, a
subsidiary or affiliate thereof or any other Person (an "Exchange
Registration").
2.7 SEC Form. The Company shall use its best efforts to cause Demand
Registrations to be registered on Form S-3 (or any successor form), and if the
Company is not then eligible under the Securities Act to use Form S-3, Demand
Registrations shall be registered on Form S-1 (or any successor form). If a
Demand Registration is a Convertible Registration or an Exchange Registration,
the Company shall effect such registration on the appropriate Form under the
Securities Act for such registrations. The Company shall use its best efforts to
become eligible to use Form S-3 and, after becoming eligible to use Form S-3,
shall use its best efforts to remain so eligible.
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<PAGE> 5
2.8 Other Registration Rights. The Company shall not grant to any Persons
the right to request the Company to register any equity securities of the
Company, or any securities convertible or exchangeable into or exercisable for
such securities unless such rights are consistent with the rights granted under
this Agreement.
Section 3. Piggyback Registrations.
3.1 Notice and Registration. If the Company proposes to register any of its
securities for public sale under the Securities Act (whether proposed to be
offered for sale by the Company or any other Person), on a form and in a manner
which would permit registration of the Shares for sale to the public under the
Securities Act (a "Piggyback Registration"), it will give prompt written notice
to the Holders of its intention to do so, and upon the written request of any or
all of the Holders delivered to the Company within 20 days after the giving of
any such notice (which request shall specify the Shares intended to be disposed
of by such Holders), the Company will use its best efforts to effect, in
connection with the registration of such other securities, the registration
under the Securities Act of all of the Shares which the Company has been so
requested to register by such Holders (which shall then become Selling Holders),
to the extent required to permit the disposition (in accordance with the same
method of disposition as the Company proposes to use to dispose of the other
securities) of the Shares to be so registered; provided, however, that:
(a) if, at any time after giving such written notice of its intention
to register any of its other securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register such other securities, the
Company may, at its election, give written notice of such determination to the
Selling Holders (or, if prior to delivery of the Holders' written request
described above in this Section 3.1, the Holders) and thereupon the Company
shall be relieved of its obligation to register such Shares in connection with
the registration of such other securities (but not from its obligation to pay
Registration Expenses to the extent incurred in connection therewith as provided
in Section 3.3), without prejudice, however, to the rights (if any) of any
Selling Holders immediately to request (subject to the terms and conditions of
Section 2) that such registration be effected as a registration under Section 2;
(b) the Company shall not be required to effect any registration of the
Shares under this Section 3 incidental to the registration of any of its
securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
employee benefit plans of the Company;
(c) if a Piggyback Registration is an underwritten primary registration
on behalf of the Company and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering
without materially adversely affecting the marketability of the offering or the
market for the Common Stock, the Company shall include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the Shares
requested
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to be included in such registration, pro rata among the Holders of such Shares
on the basis of the number of Shares owned by each such Holder, and (iii) third,
any other securities requested to be included in such registration; and
(d) if a Piggyback Registration is an underwritten secondary
registration on behalf of holders of the Company's securities entitled to demand
registration thereof and the managing underwriters advise the Company in writing
that in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the marketability of the offering or the market
for the Common Stock, the Company shall include in such registration (i) first,
the securities requested to be included therein by the holders requesting such
registration and the Shares requested to be included in such registration, pro
rata among the holders of such securities on the basis of the number of
securities owned by each such holder, and (ii) second, any other securities
requested to be included in such registration.
No registration of the Shares effected under this Section 3 shall relieve the
Company of its obligation to effect a registration of Shares pursuant to Section
2.
3.2 Selection of Professionals. If any Piggyback Registration is an
underwritten offering and any of the investment banker(s) or manager(s) selected
to administer the offering was not one of the managers of the IPO, such
investment banker or manager shall not administer such offering if the Holders
of a majority of the Shares included in such Piggyback Registration reasonably
object thereto. The Holders of a majority of the Shares included in any
Piggyback Registration shall have the right to select one counsel for the
Selling Holders. The Company shall select its own outside counsel and
independent auditors.
3.3 Registration Expenses. The Company will pay all of the Registration
Expenses in connection with any registration pursuant to this Section 3.
Section 4. Registration Procedures.
4.1 Registration and Qualification. If and whenever the Company is required
to use its best efforts to effect the registration of any of the Shares under
the Securities Act as provided in Sections 2 and 3, including an underwritten
offering pursuant to a Shelf Registration, the Company will as promptly as is
practicable:
(a) prepare and file with the SEC a registration statement with respect
to such Shares and use its best efforts to cause such registration statement to
become effective; provided that before filing a registration statement or
prospectus or any amendments or supplement thereto, the Company shall furnish to
the counsel selected by the Holders of a majority of the Shares covered by such
registration statement copies of all such documents proposed to be filed (which
documents shall be subject to the review and reasonable comment of such
counsel);
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(b) except in the case of a Shelf Registration, Convertible
Registration or Exchange Registration, prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all of the Shares until the earlier of (i) such
time as all of such Shares have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement or (ii) the
expiration of nine months after such registration statement becomes effective;
(c) in the case of a Shelf Registration (but not including any
Convertible Registration), prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Shares subject thereto for a period ending on the earlier of
(i) 18 months after the effective date of such registration statement and (ii)
the date on which all the Shares subject thereto have been sold pursuant to such
registration statement (the "Shelf Effective Period");
(d) in the case of a Convertible Registration or an Exchange
Registration, prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
of the Shares subject thereto until such time as the rules, regulations and
requirements of the Securities Act and the terms of the Convertible Securities
no longer require such Shares to be registered under the Securities Act (the
"Convertible Effective Period");
(e) furnish to the Selling Holders and to any underwriter of such
Shares such number of conformed copies of such registration statement and of
each such amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, such documents
incorporated by reference in such registration statement or prospectus, and such
other documents as the Selling Holders or such underwriter may reasonably
request;
(f) use its best efforts to register or qualify all of the Shares
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as the Selling Holders or any underwriter of such
Shares shall reasonably request, and do any and all other acts and things which
may be necessary or advisable to enable the Selling Holders or any underwriter
to consummate the disposition in such jurisdictions of the Shares covered by
such registration statement, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign corporation
in any jurisdiction where it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to consent to general service of process
in any such jurisdiction;
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(g) (i) furnish to the Selling Holders, addressed to them, an opinion
of counsel for the Company and (ii) use its best efforts to furnish to the
Selling Holders, addressed to them, a "cold comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in such registration statement, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such other
matters as the Selling Holders may reasonably request, in each case, in form and
substance and as of the dates reasonably satisfactory to the Selling Holders;
(h) immediately notify the Selling Holders, at any time when a
prospectus relating to a registration pursuant to Section 2 or 3 is required to
be delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and at the request of the Selling Holders prepare and furnish to the
Selling Holders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(i) permit any Selling Holder which Selling Holder, in its sole and
exclusive judgment, might be deemed to be an underwriter or a controlling person
of the Company, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material, furnished
to the Company in writing, which in the reasonable judgment of such Holder and
its counsel should be included;
(j) to make available members of management of the Company, as selected
by the Holders of a majority of the Shares included in such registration, for
assistance in the selling effort relating to the Shares covered by such
registration, including, but not limited to, the participation of such members
of the Company's management in road show presentations.
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company shall use it best efforts promptly to obtain the
withdrawal of such order; and
(l) use its best efforts to cause Shares covered by such registration
statement to be registered with or approved by such other government agencies or
authorities as may be necessary to enable the sellers thereof to consummate the
disposition of such Shares.
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The Company may require the Selling Holders to furnish the Company with
such information regarding the Selling Holders and the distribution of such
Shares as the Company may from time to time reasonably request in writing and as
shall be required by law, the SEC or any securities exchange on which any shares
of Common Stock are then listed for trading in connection with any registration.
4.2 Underwriting. If requested by the underwriters for any underwritten
offering in connection with a registration requested hereunder (including any
registration under Section 3 which involves, in whole or in part, an
underwritten offering), the Company will enter into an underwriting agreement
with such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnities and
contribution to the effect and to the extent provided in Section 6 and the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 4.1(g). The Company may require that the Shares
requested to be registered pursuant to Section 3 be included in such
underwriting on the same terms and conditions as shall be applicable to the
Other Securities being sold through underwriters under such registration;
provided, however, that no Selling Holder shall be required to make any
representations or warranties to the Company or the underwriters (other than
representations and warranties regarding such Holder and such Holder's intended
method of distribution) or to undertake any indemnification obligations to the
Company or the underwriters with respect thereto, except as otherwise provided
in Section 6 hereof. The Selling Holders shall be parties to any such
underwriting agreement, and the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Selling Holders.
4.3 Blackout Periods for Shelf Registrations.
(a) At any time when a Shelf Registration effected pursuant to Section
2 relating to the Shares is effective, upon written notice from the Company to
the Selling Holders that the Company determines in the good faith judgment of
the general counsel of the Company that the Selling Holders' sale of the Shares
pursuant to the Shelf Registration would require disclosure of material
information which the Company has a bona fide business purpose for preserving as
confidential and the disclosure of which would have a material adverse effect on
the Company or the Company is unable to comply with SEC requirements (an
"Information Blackout"), the Selling Holders shall suspend sales of the Shares
pursuant to such Shelf Registration until the earlier of (i) the date upon which
such material information is disclosed to the public or ceases to be material,
(ii) 90 days after counsel of the Company makes such good faith determination or
(iii) such time as the Company notifies the Selling Holders that sales pursuant
to such Shelf Registration may be resumed (the number of days from such
suspension of sales of the Selling Holders until the day when such sales may be
resumed hereunder is hereinafter called a "Sales Blackout Period").
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(b) If there is an Information Blackout and the Selling Holders do not
notify the Company in writing of their desire to cancel such Shelf Registration,
the period set forth in Section 4.1(c)(i) shall be extended for a number of days
equal to the number of days in the Sales Blackout Period.
4.4 Listing. In connection with the registration of any offering of the
Shares pursuant to this Agreement, the Company agrees to use its best efforts to
effect the listing of such Shares on any securities exchange on which any shares
of the Common Stock are then listed or otherwise facilitate the public trading
of such Shares.
4.5 Holdback Agreements.
(a) The Company shall not effect any public sale or distribution of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any registration statement in
connection with a Demand Registration (other than a Shelf Registration) or a
Piggyback Registration, except pursuant to registrations on Form S-8 or any
successor form or unless the underwriters managing any such public offering
otherwise agree.
(b) If the Holders of Shares notify the Company in writing that they
intend to effect an underwritten sale of Shares registered pursuant to a Shelf
Registration pursuant to Section 2 hereof, the Company shall not effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for its equity securities,
during the seven days prior to and during the 90-day period beginning on the
date such notice is received, except pursuant to registrations on Form S-8 or
any successor form or unless the underwriters managing any such public offering
otherwise agree.
(c) If the Company completes an underwritten registration with respect
to any of its securities (whether offered for sale by the Company or any other
Person) on a form and in a manner that would have permitted registration of the
Shares and no Holder requested the inclusion of any Shares in such registration,
the Holders shall not effect any public sales or distributions of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, until the termination of the holdback period
required from the Company by any underwriters in connection with such previous
registration, but in no event more than 90 days from the effective date of such
registration.
Section 5. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering the Shares
under the Securities Act and each sale of the Shares thereunder, the Company
will give the Selling Holders and the underwriters, if any, and their respective
counsel and accountants, access to its financial and other records, pertinent
corporate documents and properties of the Company and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of the Selling Holders and such underwriters or their respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.
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Section 6. Indemnification and Contribution.
(a) In the event of any registration of any of the Shares hereunder,
the Company will enter into customary indemnification arrangements to indemnify
and hold harmless each of the Selling Holders, each of their respective
directors and officers, each Person (as defined in (e) below) who participates
as an underwriter in the offering or sale of such securities, each officer and
director of each underwriter, and each Person, if any, who controls each such
Selling Holder or any such underwriter within the meaning of the Securities Act
(collectively, the "Covered Persons") against any losses, claims, damages,
liabilities and expenses, joint or several, to which such Person may be subject
under the Securities Act or otherwise insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) arise out
of are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any related registration statement filed under the
Securities Act, any preliminary prospectus or final prospectus included therein,
or any amendment or supplement thereto, or any document incorporated by
reference therein, or (ii) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse each such Covered Person,
as incurred, for any legal or any other expenses reasonably incurred by such
Covered Person in connection with investigating or defending any such loss,
claim, liability, action or proceeding; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus or final prospectus, amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by such
Selling Holder or such underwriter specifically for use in the preparation
thereof. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any such Covered Person and shall survive
the transfer of such securities by the Selling Holders. The Company also shall
agree to provide for contribution as shall reasonably be requested by the
Selling Holders or any underwriters in circumstances where such indemnity is
held unenforceable.
(b) Each of the Selling Holders, by virtue of exercising its respective
registration rights hereunder, agree and undertake to enter into customary
indemnification arrangements to indemnify and hold harmless (in the same manner
and to the same extent as set forth in clause (a) of this Section 6) the
Company, its directors and officers, each Person who participates as an
underwriter in the offering or sale of such securities, each officer and
director of each underwriter, and each Person, if any, who controls the Company
or any such underwriter within the meaning of the Securities Act, with respect
to any statement in or omission from such registration statement, any
preliminary prospectus or final prospectus included therein, or any amendment or
supplement thereto, if such statement or omission is contained in written
information furnished by such Selling Holder to the Company specifically for
inclusion in such registration statement or prospectus; provided, however, that
the obligation to indemnify shall be individual, not joint and several, for each
Selling Holder and shall be limited to the net amount of proceeds received by
such Selling Holder from the sale of Shares pursuant to such registration
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statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any such director,
officer or Person and shall survive the transfer of the registered securities by
the Selling Holders.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided, however, that the failure to give
prompt notice shall not impair any Person's rights to indemnification hereunder
to the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim shall not be obligated to
pay the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) Indemnification and contribution similar to that specified in the
preceding subdivisions of this Section 6 (with appropriate modifications) shall
be given by the Company and the Selling Holders with respect to any required
registration or other qualification of such Shares under any federal or state
law or regulation of governmental authority other than the Securities Act.
(e) "Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity, or any
department, agency or political subdivision thereof.
Section 7. Benefits and Termination of Registration Rights. The Holders may
exercise the registration rights granted hereunder in such manner and
proportions as they shall agree among themselves. The registration rights
hereunder shall cease to apply to any particular Shares and such securities
shall cease to be Shares when: (a) a registration statement with respect to the
sale of such Shares shall have become effective under the Securities Act and
such Shares shall have been disposed of in accordance with such registration
statement; (b) such Shares shall have been sold to the public pursuant to Rule
144 under the Securities Act (or any successor provision); (c) such Shares shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration or
qualification of them under the Securities Act or any similar state law then in
force; (d) such Shares shall have ceased to be outstanding and (e) in the case
of Shares held by a Permitted Transferee, when such Shares become eligible for
sale pursuant to Rule 144(k) under the Securities Act (or any successor
provision).
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Section 8. Registration Expenses. As used in this Agreement, the term
"Registration Expenses" means all expenses incident to the Company's performance
of or compliance with the registration requirements set forth in this Agreement
including, without limitation, the following: (a) all registration and filing
fees; (b) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares to be disposed of
under the Securities Act; (c) the reasonable fees, disbursements and expenses of
the Selling Holders' counsel and advisors in connection with the registration of
the Shares to be disposed of under the Securities Act; (d) all expenses in
connection with the preparation, printing and filing of the registration
statement, any preliminary prospectus or final prospectus, any other offering
document and amendments and supplements thereto and the mailing and delivering
of copies thereof to the underwriters and dealers and directly to
securityholders in the case of an Exchange Registration; (e) the cost of
printing and producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda, any selling agreements
and any amendments thereto or other documents in connection with the offering,
sale or delivery of the Shares to be disposed of; (f) all expenses in connection
with the qualification of the Shares to be disposed of for offering and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters in connection with such qualification and in connection with
any blue sky and legal investment surveys; (g) the filing fees incident to
securing any required review by any securities exchange on which the Common
Stock is then traded or listed of the terms of the sale of the Shares to be
disposed of and the trading or listing of all such Shares on each such exchange;
(h) the costs of preparing stock certificates; (i) the costs and charges of the
Company's transfer agent and registrar; and (j) the fees and disbursements of
any custodians, solicitation agents, information agents and/or exchange agents.
Registration Expenses shall not include underwriting discounts and underwriters'
commissions attributable to the Shares being registered for sale on behalf of
the Selling Holders, which shall be paid by the Selling Holders.
Section 9. Miscellaneous.
9.1 No Inconsistent Agreements. The Company shall not on or after the date
of this Agreement enter into any agreement with respect to its securities that
violates or subordinates the rights expressly granted to the Holders in this
Agreement. The Company shall not take any action, or permit any change to occur,
with respect to its securities which would adversely affect the ability of the
Holders of Shares to include such Shares in a registration undertaken pursuant
to this Agreement.
9.2 Complete Agreement. Except as otherwise set forth in this Agreement,
this Agreement shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and understandings, whether written or oral, between the parties with
respect to such subject matter.
9.3 Authority. Each of the parties hereto represents to the other that (i)
it has the corporate power and authority to execute, deliver and perform this
Agreement, (ii) the execution, delivery and performance of this Agreement by it
has been duly authorized by all
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necessary corporate action, (iii) it has duly and validly executed and delivered
this Agreement, and (iv) this Agreement is a legal, valid and binding
obligation, enforceable against it in accordance with its terms subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and general equity principles.
9.4 Assignment. This Agreement shall be binding on and inure to the benefit
of and be enforceable by the parties hereto and with respect to the Company, its
respective successors and assigns, and any Permitted Transferees.
9.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (other than the laws regarding
conflicts of laws) as to all matters of validity, construction, effect,
performance and remedies, executed in and to be performed in that State.
9.6 Severability. In the event that any part of this Agreement is declared
by a court or other judicial or administrative body to be null, void or
unenforceable, said provision shall survive to the extent it is not so declared,
and all of the other provisions of this Agreement shall remain in full force and
effect.
9.7 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given:
(i) on the date of service if served personally on the party to whom notice is
to be given; (ii) on the day of transmission if sent via facsimile transmission
to the facsimile number of the recipient's principal executive office, and
telephonic confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the day after delivery to Federal Express or similar
overnight courier or the Express Mail service maintained by the United States
Postal Service; or (iv) on the fifth day after mailing, if mailed to the party
to whom notice is to be given, by first class mail, registered or certified,
postage prepaid and properly addressed, to any party at its principal executive
office or at such other office as any party shall give by notice in accordance
with the terms hereof, and if to any other Holder, the address indicated for
such Holder in the Company's stock transfer records with a copy, so long as
Daisytek owns any Shares, to Daisytek. Any party may change its address for the
purpose of this Section 9.7 by giving the other party written notice of its new
address in the manner set forth above.
9.8 Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9.9 Remedies. Each of Daisytek, Daisytek International and the Company
shall be entitled to enforce its rights under this Agreement specifically, to
recover damages and costs (including reasonable attorneys' fees) caused by any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. Each of Daisytek, Daisytek International and the Company
acknowledges and agrees that under certain circumstances the breach by it or any
of
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its affiliates of a term or provision of this Agreement will materially and
irreparably harm the other party, that money damages will accordingly not be an
adequate remedy for such breach and that the non-defaulting party, in its sole
discretion and in addition to its rights under this Agreement and any other
remedies it may have at law or in equity, may apply to any court of law or
equity of competent jurisdiction (without posting any bond or deposit) for
specific performance and/or other injunctive relief in order to enforce or
prevent any breach of the provisions of this Agreement.
9.10 Waivers. The observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if it is in writing signed by the Company and the Holders of a
majority of the Shares. Unless otherwise expressly provided in this Agreement,
no delay or omission on the part of any party in exercising any right or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any right or privilege under this Agreement
operate as a waiver of any other right or privilege under this Agreement nor
shall any single or partial exercise of any right or privilege preclude any
other or further exercise thereof or the exercise of any other right or
privilege under this Agreement. No failure by either party to take any action or
assert any right or privilege hereunder shall be deemed to be a waiver of such
right or privilege in the event of the continuation or repetition of the
circumstances giving rise to such right unless expressly waived in writing by
the party against whom the existence of such waiver is asserted.
9.11 Amendment and Modification. This Agreement may not be amended or
modified in any respect except by a written agreement signed by the Company and
the Holders of a majority of the Shares.
9.12 Section and Paragraph Headings. The section and paragraph headings in
this Agreement are for reference purposes only, are not part of the agreement of
the parties hereto, and shall not affect the meaning or interpretation of this
Agreement. All references to days or months shall be deemed references to
calendar days or months. All references to "$" shall be deemed references to
United States dollars. Unless the context otherwise requires, any reference to a
"Section" shall be deemed to refer to a section of this Agreement. The words
"hereof," "herein" and "hereunder" and words of similar import referring to this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, unless otherwise specifically provided, they shall be
deemed to be followed by the words "without limitation." This Agreement shall be
construed without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing the document to be drafted.
9.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by facsimile signature.
[remainder of page is blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first written above.
DAISYTEK INTERNATIONAL CORPORATION
By:
-------------------------------------
Name:
Title:
DAISYTEK, INCORPORATED
By:
-------------------------------------
Name:
Title:
PFSWEB, INC.
By:
-------------------------------------
Name:
Title:
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EXHIBIT 2.4
TAX INDEMNIFICATION AND ALLOCATION AGREEMENT
THIS TAX INDEMNIFICATION AND ALLOCATION AGREEMENT ("Agreement") is
entered into as of December 7, 1999 by and between Daisytek International
Corporation, a Delaware corporation ("Distributing") and PFSweb, Inc., a
Delaware corporation("Controlled") (Distributing and Controlled are sometimes
collectively referred to herein as the "Companies"). Capitalized terms used in
this Agreement are defined in Section 1 below. Unless otherwise indicated, all
"Section" references in this Agreement are to sections of this Agreement.
PRELIMINARY STATEMENTS
A. As of the date hereof, Distributing is the common parent of an
affiliated group of corporations, including Controlled, which has elected to
file consolidated Federal income tax returns.
B. Incident to an initial public offering ("IPO") of common stock of
Controlled in connection with the separation and distribution of Controlled from
Distributing pursuant to one overall integrated plan, the Companies have entered
into a Master Separation Agreement and an Initial Public Offering and
Distribution Agreement (the "Distribution Agreement").
C. After the IPO, and before the distribution of all of Distributing's
stock of Controlled to Distributing's shareholders, Controlled and its
subsidiaries (as constituted immediately after the consummation of the IPO) will
continue to be members of the affiliated group of which Distributing is the
common parent.
D. After the stock of Controlled is distributed to Distributing's
shareholders, Controlled will no longer be a member of the affiliated group of
which Distributing is the common parent.
E. The Companies desire to provide for and agree upon the allocation
between the parties of liabilities for Taxes arising prior to, as a result of,
and subsequent to the actions contemplated by the Distribution Agreement, and to
provide for and agree upon other matters relating to Taxes.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. DEFINITION OF TERMS. For purposes of this Agreement
(including the recitals hereof), the following terms have the following
meanings:
"Accounting Firm" shall have the meaning provided in Section 15.
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"Accrued Taxes" means the sum of any liabilities for current tax
expense required to be accrued as of the IPO Date under generally accepted
accounting principles on the books of Controlled or any member of the Controlled
Group for Taxes attributable to Tax Periods or portions thereof ending on or
before the IPO Date.
"Adjustment Request" means any formal or informal claim or request
filed with any Tax Authority, or with any administrative agency or court, for
the adjustment, refund, or credit of Taxes, including (a) any amended Tax return
claiming adjustment to the Taxes as reported on the Tax Return or, if
applicable, as previously adjusted, or (b) any claim for refund or credit of
Taxes previously paid.
"Affiliate" means any entity that directly or indirectly is
"controlled" by the person or entity in question. "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person, whether through ownership
of voting securities, by contract or otherwise. Except as otherwise provided
herein, the term Affiliate shall refer to Affiliates of a person as determined
immediately after the Distribution. The term "Affiliate" includes a Subsidiary
of an entity.
"Agreement" shall mean this Tax Indemnification and Allocation
Agreement.
"Allocated Federal Tax Liability" shall have the meaning provided in
Section 5.1(b)(i).
"Carryback" means any net operating loss, net capital loss, excess tax
credit, or other similar Tax item, which may or must be carried, from one Tax
Period to an earlier Tax Period under the Code or other applicable Tax Law.
"Code" means the U.S. Internal Revenue Code of 1986, as amended, or any
successor law.
"Companies" means Distributing and Controlled, collectively, and
"Company" means any one of Distributing and Controlled
"Consolidated or Combined Income Tax" means any Income Tax computed by
reference to the assets or activities of members of more than one Group.
"Consolidated or Combined State Income Tax" means any State Income Tax
computed by reference to the assets or activities of members of more than one
Group.
"Consolidated Tax Liability" means, with respect to any Distributing
Federal Consolidated Return, the tax liability of the group as that term is used
in Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest,
additions to the tax, additional amounts. and penalties as provided in the
Code), provided that such tax liability be treated as including any alternative
minimum tax liability under Code Section 55.
"Controlled Adjustment" means any proposed adjustment by a Tax
Authority or claim for refund asserted in a Tax Contest to the extent Controlled
would be exclusively liable for any
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resulting Tax under this Agreement or exclusively entitled to receive any
resulting Tax Benefit under this Agreement.
"Controlled Group" means Controlled and its Subsidiaries and
wholly-owned limited liability companies as determined immediately after the IPO
Date.
"Controlled Group Disqualifying Event" means any event involving the
direct or indirect acquisition of shares of the capital stock of any member of
the Controlled Group after the Distribution which has the effect of
disqualifying the Distribution or any part thereof from tax-free treatment under
Code section 355, whether or not such event is the result of direct actions of,
or within the control of, the Controlled or its Subsidiaries, or which otherwise
is inconsistent with representations relating to Controlled and the ownership of
its capital stock, as set forth in the Ruling Request and the Tax Opinion.
"Controlled Group Prior Federal Tax Liability" shall have the meaning
provided in Section 2.2(b)(ii).
"Controlled Group Prior State Tax Liability" shall have the meaning
provided in Section 2.3(b)(ii)(B).
"Controlled Group Recomputed Federal Tax Liability" shall have the
meaning provided in Section 2.2(b)(i).
"Controlled Group Recomputed State Tax Liability" shall have the
meaning provided in Section 2.3(b)(ii)(A).
"Cumulative Federal Tax Payment" shall have the meaning provided in
Section 5.1 (b)(ii).
"Distributing Adjustment" means any proposed adjustment by a Tax
Authority or claim for refund asserted in a Tax Contest to the extent
Distributing would be exclusively liable for any resulting Tax under this
Agreement or exclusively entitled to receive any resulting Tax Benefit under
this Agreement.
"Distributing Federal Consolidated Return" means any United States
Federal Tax Return for the affiliated group (as that term is defined in Code
Section 1504) that includes Distributing as the common parent and any member of
the Controlled Group.
"Distributing Group" means Distributing and its Subsidiaries and wholly
owned limited liability companies, excluding any entity that is a member of the
Controlled Group.
"Distribution" means the distribution to Distributing shareholders on
the Distribution Date of all of the outstanding capital stock of Controlled
owned by Distributing
"Distribution Agreement" means the Initial Public Offering and
Distribution Agreement dated as of the date of this Agreement between
Distributing and Controlled.
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"Distribution Date" means the Distribution Date as that term is defined
in the Distribution Agreement.
"Distribution Tax" means the Taxes described in Section 2.5(a)(ii).
"Federal Income Tax" means any Tax imposed by Subtitle A or F of the
Code.
"Federal Tax Adjustment" shall have the meaning provided in Section
2.2(b).
"Final Determination" means the final resolution of liability for any
Tax for a taxable period, including any related interest or penalties, (i) by
IRS Form 870-AD (or any successor form thereto), on the date of acceptance by or
on behalf of the IRS, or by a comparable agreement form under state, local or
foreign law, except that a Form 870-AD or comparable form that reserves the
right of the taxpayer to file a claim for refund and/or the right of the taxing
authority to assert a further deficiency shall not constitute a Final
Determination with respect to the item or items so reserved; (ii) by a decision,
judgment, decree, or other order by a court of competent jurisdiction, which has
become final and unappealable; (iii) by a closing agreement or offer in
compromise under section 7121 or 7122 of the Code, or comparable agreements
under the any state, local or foreign law; (iv) by any allowance of a refund or
credit in respect of an overpayment of Tax, Including any related interest or
penalties, but only after the expiration of all periods during which such refund
may be recovered (including by way of offset) by the jurisdiction imposing the
Tax; or (v) by any other final disposition, including by reason of the
expiration of the applicable statute of limitations or pursuant to Code sections
1311 through 1313, or comparable provision of state, local, or foreign law.
"Foreign Income Tax" means any Tax imposed by any foreign country or
any possession of the United States, or by any political subdivision of any
foreign country or United States possession, which is an income tax as defined
in Treasury Regulation Section 1.901-2.
"Group" means the Distributing Group or the Controlled Group, as the
context requires.
"Income Tax" means any Federal Income Tax, State Income Tax, or Foreign
Income Tax.
"IPO Date" means the closing date of the IPO.
"Joint Adjustment" means any proposed adjustment resulting from a Tax
Contest that is not a (i) Controlled Adjustment, (ii) a Distributing Adjustment,
or (iii) any other type of adjustment that give rise to an indemnification
payment by one Company to the other Company pursuant to this Agreement.
"Payment Date" means (i) with respect to any Distributing Federal
Consolidated Return, the due date for any required installment of estimated
taxes determined under Code Section 6655, the due date (determined without
regard to extensions) for filing the return determined under Code Section 6072,
and the date the return is filed, and (ii) with respect to any Tax Return
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for any Consolidated or Combined State Income Tax, the corresponding dates
determined under the applicable Tax Law.
"Post-IPO Period" means any Tax Period beginning after the IPO Date.
"Post-Distribution Period" means any Tax Period beginning after the
Distribution Date.
"Pre-Distribution Period" means any Tax Period beginning on or before
the Distribution Date.
"Pre-IPO Period" means any Tax Period ending on or before the IPO Date.
"Prime Rate" means the base rate on corporate loans charged by Chase
Bank of Texas, N.A., from time to time, compounded daily on the basis of a year
of 365 or 366 (as applicable) days and actual days elapsed.
"Prohibited Action" shall have the meaning provided in Section 11.
"Responsible Company" means, with respect to any Tax Return, the
Company having responsibility for preparing and filing such Tax Return under
this Agreement.
"Ruling Request" means the letter to be filed by Distributing with the
Internal Revenue Service requesting a ruling from the Internal Revenue Service
regarding certain tax consequences of the Distribution (including all
attachments, exhibits, and other materials submitted with such ruling request
letter) and any amendment or supplement to such ruling request letter.
"Separate Company Tax" means any Tax computed by reference to the
assets and activities of a member or members of a single Group.
"State Income Tax" means any Tax imposed by any State of the United
States or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.
"Subsidiary" shall have the meaning set forth in Treasury Regulations
section 1.1502-1(c).
"Tax" or "Taxes" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, severance, occupation, service, sales, use, license, lease, transfer,
import, export, value added, alternative minimum, estimated or other tax of any
kind (including any fee, assessment, or other charge in the nature of or in lieu
of any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in respect
of the foregoing.
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"Tax Authority" means, with respect to any Tax, the governmental
entity, or political subdivision thereof that imposes such Tax, and the agency
(if any) charged with the collection of such Tax for such entity or subdivision.
"Tax Benefit" means any refund, credit, or other reduction in otherwise
required Tax payments (including any reduction in estimated tax payments).
"Tax Contest" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Affiliates (including any
administrative or judicial review of any claim for refund) for any
Pre-Distribution Period.
"Tax Contest Committee" shall have the meaning provided in Section 9.2.
"Tax Item," means, with respect to any Income Tax, any item of income,
gain, loss, deduction, and credit.
"Tax Law" means the law of any governmental entity or political
subdivision thereof relating to any Tax.
"Tax Opinion" means a tax opinion received from Arthur Andersen LLP on
the tax consequences of the Distribution and related events.
"Tax Period" means, with respect to any Tax, the period for which the
Tax is reported as provided under the Code or other applicable Tax Law.
"Tax Records" means Tax Returns, Tax Return workpapers, documentation
relating to any Tax Contests, and any other books of account or records required
to be maintained under the Code or other applicable Tax Laws or under any record
retention agreement with any Tax Authority.
"Tax Return" means any report of Taxes due, any claims for refund of
Taxes paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under the Code
or other Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing, and including any amendments or supplements
to any of the foregoing.
"Treasury Regulations" means the regulations promulgated from time to
time under the Code as in effect for the relevant Tax Period.
Section 2. ALLOCATION OF TAX LIABILITIES. The provisions of this
Section 2 are intended to determine each Company's liability for Taxes for
Pre-Distribution and Post-Distribution Periods. The provisions of Section
2.5(a)(ii) and (b) are intended to determine each Company's liability for
Distribution Taxes, if any, under this Agreement, even though such Taxes may
arise on or after the Distribution Date. Once the liability has been determined
under
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this Section 2, Section 5 determines the time when payment of the liability is
to be made, and whether the payment is to be made to the Tax Authority directly
or to the other Company.
2.1 General Rule
(a) Distributing Liability. Distributing shall be liable for Taxes
not specifically allocated to the Controlled under this Section 2. Distributing
shall indemnify and hold harmless the Controlled Group from and against any
liability for Taxes for which Distributing is liable under this Section 2.1 (a).
(b) Controlled Liability. Controlled shall be liable for, and shall
indemnify and hold harmless the Distributing Group from and against any
liability for, Taxes that are allocated to Controlled under this Agreement.
2.2 Allocation of United States Federal Income Tax.
Except as provided in Section 2.5:
(a) Allocation of Tax Relating to Federal Consolidated Returns.
(i) Pre-IPO Period. Distributing shall be liable for, and shall
hold Controlled Group harmless for, any Federal Income Tax relating to Federal
Consolidated Returns for all Tax Periods or portions thereof ending on or before
the IPO Date. Except as provided in Section 4.7(c), Distributing is entitled to
any refunds of Federal Income Tax for Tax Periods or portions thereof ending on
or before the IPO Date. Notwithstanding the foregoing, Controlled shall be
liable for, and shall hold the Distributing Group harmless against, the amount
of Federal Income Tax for all Tax Periods or portions thereof ending on the IPO
Date equal to the Accrued Taxes in respect of such taxes of the Controlled Group
as of the IPO Date.
(ii) Tax Periods Ending After the IPO Date. Except as provided
in clause (i) above, for all Tax Periods ending after the IPO Date (other than
Tax Periods beginning after the Distribution Date), the Consolidated Tax
Liability shall be allocated between the Groups in accordance with the method
prescribed in Treasury Regulation Section 1.1552-1(a)(1) (as in effect on the
date hereof) determined by aggregating the amounts allocable to the members of
each respective Group into a single amount for each Group. For purposes of such
allocation, the excess, if any, of (i) Consolidated Tax Liability over (ii)
Consolidated Tax Liability determined without regard to any alternative minimum
tax liability under Code Section 55, shall be allocated among the Groups in
accordance with their respective amounts of alternative minimum taxable income,
and any corresponding alternative minimum tax credit shall be allocated in
accordance with the allocation of such alternative minimum tax liability. In
addition, in order to avoid duplication of the allocation of Consolidated Tax
Liability set forth in clause (i) above, for purposes of this clause (ii), Tax
Items of the Controlled Group for the portion of any Tax Period ending on the
IPO Date shall be treated as Tax Items of the Distributing Group. Any amount so
allocated to the Controlled Group shall be a liability of Controlled to
Distributing under this Section 2. Amounts described in Code Section 1561
(relating to limitations on certain
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multiple benefits) shall be divided equally among the Distributing Group and
Controlled Group to the extent permitted by the Code.
(iii) Tax Periods Beginning After the Distribution Date. The
Distributing Group and the Controlled Group shall each be liable for, and shall
indemnify the other against, its respective liability for Federal Income Taxes
for all Post-Distribution Periods.
(b) Allocation of Federal Consolidated Return Tax Adjustments. If there
is any adjustment to the reported Tax liability with respect to any Distributing
Federal Consolidated Return, or to such Tax liability as previously adjusted,
Controlled shall be liable to Distributing for the excess (if any) of--
(i) the share of the Consolidated Tax Liability allocated to
the Controlled Group computed in accordance with paragraph (a) based on the Tax
Items of members of the Controlled Group as so adjusted (the "Controlled Group
Recomputed Federal Tax Liability"); minus
(ii) the share of the Consolidated Tax Liability allocated to
the Controlled Group computed in accordance with paragraph (a) based on the Tax
Items of such members as reported (or if applicable, as previously adjusted)
(the "Controlled Group Prior Federal Tax Liability").
If the Controlled Group Prior Federal Tax Liability exceeds the
Controlled Group Recomputed Federal Tax Liability, Distributing shall be liable
to Controlled for such excess. For purposes of the preceding sentence, if the
Controlled Group has a net operating loss or net capital loss after taking into
account the adjustments allocable to such group, the Controlled Group Recomputed
Federal Tax Liability shall be less than zero to the extent such net operating
loss or net capital loss produces a Tax Benefit for the applicable taxable year,
and the amount that Distributing shall be liable to Controlled pursuant to the
preceding sentence shall be equal to the sum of the Controlled Group Prior
Federal Tax Liability and the amount of such Tax Benefit.
(c) Compensation for Use of Tax Attributes. If, for any
Pre-Distribution Period, the Tax liability of the Distributing Group under
Section 2.2(a) is reduced by virtue of any Tax Item attributable to the
Controlled Group for Tax Periods or portions thereof beginning after the IPO
Date, Distributing will compensate Controlled for the Tax Benefit so received.
If, for any Tax Period or portion thereof beginning after the IPO Date, the Tax
liability of the Controlled Group under Section 2.2(a) is reduced by virtue of
any Tax Item attributable to the Distributing Group, Controlled will compensate
Distributing for the Tax Benefit so received. For example, the Controlled Group
will be compensated for any net operating losses generated by a member of the
Controlled Group in a Tax Period or portion thereof beginning after the IPO Date
that reduces the Consolidated Tax Liability of the Distributing Group for a Tax
Period or portion thereof beginning on or before the Distribution Date. For this
purpose, any such Tax Benefit shall be determined under the principles of Treas.
Reg. Section 1.1502-33(d)(3), using 100% as the applicable percentage.
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2.3 Allocation of State Income Taxes. Except as provided in Section
2.5, State Income Taxes shall be allocated as follows:
(a) Separate Company Taxes. In the case of any State Income Tax
which is a Separate Company Tax:
(i) Tax Periods or Portions Ending on or Before the IPO Date.
Distributing shall be liable for, and shall indemnify the Controlled Group
against, any Separate Company Tax for all Tax Periods or portions thereof ending
on or before the IPO Date. Notwithstanding the foregoing, Controlled shall be
liable for, and shall hold the Distributing Group harmless against, the amount
of Separate Company Taxes for all Tax Periods or portions thereof ending on the
IPO Date equal to the Accrued Taxes in respect of such taxes of the Controlled
Group as of the IPO Date.
(ii) Tax Periods or Portions Beginning After the IPO Date.
Controlled shall be liable for, and shall hold the Distributing Group harmless
against, any Separate Company Taxes imposed on any member of the Controlled
Group for any Tax Period or portion thereof beginning after the IPO Date.
Distributing shall be liable for, and shall hold the Controlled Group harmless
against, any Separate Company Taxes of any member of the Distributing Group for
any Tax Period or portion thereof beginning after the IPO Date.
(b) Allocation of Consolidated or Combined State Income Taxes. In
the case of any State Income Tax which is a Consolidated or Combined State
Income Tax:
(i) Pre-IPO Period. Distributing shall be liable for, and shall
hold Controlled Group harmless for, any State Income Tax, relating to State
Consolidated or Combined Returns, for all Tax Periods or portions thereof ending
on or before the IPO Date. Distributing is entitled to any refunds of Tax
attributable to Tax Periods or portions thereof ending on or before the IPO
Date. Notwithstanding the foregoing, Controlled shall be liable for, and shall
hold the Distributing Group harmless against, the amount of Consolidated or
Combined State Income Tax for all Tax Periods or Portions thereof ending on the
IPO Date equal to the Accrued Taxes in respect of such taxes of the Controlled
Group as of the IPO Date.
(ii) Tax Periods Ending After the IPO Date. Except as provided
in clause (i) above, for all Tax Periods ending after the IPO Date (other than
Tax Periods beginning after the Distribution Date), the Consolidated or Combined
State Tax Liability shall be allocated between the Groups in accordance with the
method prescribed in Treasury Regulation Section 1.1552-1(a)(1) (as in effect on
the date hereof) determined by aggregating the amounts allocable to the members
of each respective Group into a single amount for each Group, appropriately
reflecting income, apportionment, and other items of members. In addition, in
order to avoid duplication of the allocation of Consolidated Tax Liability set
forth in clause (i) above, for purposes of this clause (ii), Tax Items of the
Controlled Group for the portion of any Tax Period or portion thereof ending on
or before the IPO Date shall be treated as Tax Items of the Distributing Group.
Any amount so allocated to the Controlled Group shall be a liability of
Controlled to Distributing under this Section 2.
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(iii) Tax Periods Beginning After the Distribution Date. The
Distributing Group and the Controlled Group shall each be liable for, and shall
indemnify the other against, its respective liability for Consolidated or
Combined State Income Taxes for all Post-Distribution Periods.
(c) Allocation of State Consolidated or Combined Return Tax
Adjustments. If there is any adjustment to the amount of Consolidated or
Combined State Income Tax reported on any Tax Return (or as previously
adjusted), the liability of the Controlled Group shall be recomputed as provided
in this subparagraph. Controlled shall be liable to Distributing for the excess
(if any) of-
(i) the State Income Tax liability computed in accordance with
paragraph (b) based on the income, apportionment factors, and other items of
such members as reported (or, if applicable, as previously adjusted) (the
"Controlled Group Recomputed State Tax Liability"); minus
(ii) the State Income Tax liability computed in accordance with
paragraph (b) based on the income, apportionment factors, and other items of
such members as reported (or, if applicable, as previously adjusted) (the
"Controlled Group Prior State Tax Liability").
If the Controlled Group Prior State Tax Liability exceeds the
Controlled Group Recomputed State Tax Liability, Distributing shall be liable to
Controlled for such excess. For purposes of the preceding sentence, if the
Controlled Group has a net operating loss after taking into account the
adjustments allocable to such group, the Controlled Group Recomputed State Tax
Liability shall be less than zero to the extent such net operating loss produces
a Tax Benefit in consolidation for the applicable taxable year, and the amount
that Distributing shall be liable to Controlled pursuant to the preceding
sentence shall be equal to the sum of the Controlled Group Prior State Tax
Liability and the amount of such Tax Benefit.
(d) Compensation for Use of Tax Attributes. If, for any Tax Period
beginning on or before the Distribution Date, the Tax liability of the
Distributing Group under Section 2.3(b) is reduced by virtue of any Tax Item
attributable to the Controlled Group for Tax Periods or portions thereof
beginning after the IPO Date and ending on or before the Distribution Date,
Distributing will compensate Controlled for the Tax Benefit so received. If, for
any Tax Period or portion thereof beginning after the IPO Date, the Tax
liability of the Controlled Group under Section 2.3(b) is reduced by virtue of
any Tax Item attributable to the Distributing Group, Controlled will compensate
Distributing for the Tax Benefit so received. For example, the Controlled Group
will be compensated for any net operating losses generated by a member of the
Controlled Group in a Tax Period or portion thereof beginning after the IPO Date
that reduces the Consolidated or State Combined Tax Liability of the
Distributing Group for any Pre-Distribution Period. For this purpose, any such
Tax Benefit shall be determined under the principles of Treas. Reg. Section
1.1502-33(d)(3), using 100% as the applicable percentage.
2.4 Allocation of Other Taxes. Except as provided in Section 2.5, all
Taxes other than those specifically allocated pursuant to Section 2.3 shall be
allocated based on the legal
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entity on which the legal incidence of the Tax is imposed. As between the
parties to this Agreement, Controlled shall be liable for all Taxes imposed on
any member of the Controlled Group. The Companies believe that there is no Tax
not specifically allocated pursuant to Section 2.3 which is legally imposed on
more than one legal entity (e.g., joint and several liability); however, if
there is any such Tax, it shall be allocated in accordance with past practices
as reasonably determined by the affected Companies, or in the absence of such
practices, in accordance with any allocation method agreed upon by the affected
Companies.
2.5 Distribution and Other Taxes
(a) Distributing Liability. Except as otherwise provided in this
Section 2.5, Distributing shall be liable for, and shall indemnify and hold
harmless the Controlled Group from and against any liability for, all Taxes
resulting from the Distribution, including:
(i) Any sales and use, gross receipts, or other similar
transfer Taxes imposed on the transfers occurring pursuant to the Distribution;
and
(ii) any Federal Income Tax or State Income Tax resulting from
any income or gain recognized by any member of the Distributing Group as a
result of transferring assets to Controlled in connection with the Distribution,
or distributing the shares of Controlled and failing to qualify for tax-free
treatment pursuant to Section 355 of the Code and related provisions;
(b) Indemnity for Certain Acts. Controlled shall be liable for, and
shall indemnify and hold harmless the Distributing Group from and against any
liability for, any Distribution Tax (described in subparagraph (ii) above) to
the extent arising as a result after the Distribution Date of Controlled's
engaging in any Prohibited Action or the occurrence of a Controlled Group
Disqualifying Event. Notwithstanding anything in this paragraph (b) to the
contrary, to the extent, if any, that this paragraph (b) allocates liability
between the Companies in a manner contrary to the allocation of liability
provided in Section 4 of the Distribution Agreement, Section 4 of the
Distribution Agreement shall control.
Section 3. PRORATION OF TAXES FOR STRADDLE PERIODS
3.1 Tax Periods Straddling the IPO Date. In the case of any Tax Period
beginning on or before the IPO Date and ending after the IPO Date, Tax Items
shall be apportioned between the portion ending on the IPO Date and the portion
beginning after the IPO Date in accordance with the principles in Treas. Reg.
Section 1.1502-76(b) using a closing-of-the-books method. However, Tax Items
(other than extraordinary items within the meaning of Treas. Reg. Section
1.1502-76(b)(2)(ii)(C)) for the month including the IPO Date will be allocated
to the portion ending on the IPO Date and the portion beginning after the IPO
Date using the principles of the ratable allocation method of Treas. Reg.
Section 1.1502-76(b)(2)(iii).
3.2 Tax Periods Straddling the Distribution Date. In the case of any
Tax Period beginning on or before the Distribution Date and ending after the
Distribution Date (or between the Pre-Distribution Period ending on the
Distribution Date and the Post-Distribution Period
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beginning on the day after the Distribution Date), Tax Items shall be
apportioned between the portion ending on the Distribution Date and the portion
beginning after the Distribution Date (or between such Pre-Distribution Period
and such Post-Distribution Period) in accordance with the principles in Treas.
Reg. Section 1.1502-76(b) using a closing-of-the-books method. However, Tax
Items (other than extraordinary items within the meaning of Treas. Reg. Section
1.1502-76(b)(2)(ii)(C)) for the month including the Distribution Date will be
allocated to the portion ending on the Distribution Date and the portion
beginning after the Distribution Date using the principles of the ratable
allocation method of Treas. Reg. Section 1.1502-76(b)(2)(iii). In determining
the apportionment of Tax Items between the portion ending on the Distribution
Date and the portion beginning after the Distribution Date (or between such
Pre-Distribution Period and such Post-Distribution Period), any Tax Items
arising on the Distribution shall be treated as extraordinary items described in
Treas. Reg. Section 1.1502-76(b)(2)(ii)(C) and shall be allocated to the
pre-Distribution portion (or the Pre-Distribution Period).
Section 4. PREPARATION AND FILING OF TAX RETURNS
4.1 General. Except as otherwise provided in this Section 4, Tax
Returns shall be prepared and filed when due (including extensions) by the
person obligated to file such Tax Returns under the Code or applicable Tax Law.
The Companies shall provide, and shall cause their Affiliates to provide,
assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7.
4.2 Distributing's Responsibility. Distributing has the exclusive
obligation and right to prepare and file, or to cause to be prepared and filed:
(a) Distributing Federal Consolidated Returns for all Tax Periods;
(b) Consolidated or Combined State Income Tax Returns for all Tax
Periods; and
(c) Tax Returns for State Income Taxes (including Tax Returns with
respect to State Income Taxes that are Separate Company Taxes) for members of
the Distributing Group.
4.3 Controlled's Responsibility. Controlled shall prepare and file, or
shall cause to be prepared and filed, all Tax Returns required to be filed by or
with respect to the Controlled or members of the Controlled Group other than
those Tax Returns which Distributing is required to prepare and file under
Section 4.2.
4.4 Tax Accounting Practices.
(a) General. Except as otherwise provided in this Section 4.4, any
Tax Return for any Pre-Distribution Period, and any Tax Return for any
Post-Distribution Period to the extent Tax Items reported on such Tax Return
might reasonably affect Tax Items reported on and Tax Return for any
Pre-Distribution Period, shall be prepared in accordance with past Tax
accounting practices used with respect to the Tax Returns in question (unless
such past practices
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are no longer permissible under the Code or other applicable Tax Law). To the
extent any Tax Items are not covered by past practices (or in the event such
past practices are no longer permissible under the Code or other applicable Tax
Law), such Tax Items shall be reported in accordance with reasonable Tax
accounting practices selected by the Distributing or Controlled depending on
whose Tax Liability under Section 2 is affected thereby. If the Tax liability of
both Distributing or Controlled under Section 2 would be affected by the
reporting of the Tax Item, the parties shall negotiate in good faith to
determine the reporting of the Tax Item. Any dispute regarding the proper tax
treatment of the Tax Item shall be referred for resolution pursuant to Section
15, sufficiently in advance of the filing date of such Tax Return (including
extensions) to permit timely filing of the return.
(b) Reporting of Distribution Tax Items. The tax treatment reported
on any Tax Return of Tax Items relating to the Distribution shall be consistent
with the treatment of such item in the Ruling Request (unless such treatment is
not permissible under the Code) or Tax Opinion. To the extent there is a Tax
Item relating to the Distribution which is not covered by the Ruling Request or
the Tax Opinion, the Companies shall agree on the tax treatment of any such Tax
Item reported on any Tax Return. For this purpose, the tax treatment of such Tax
Items on a Tax Return shall be determined by the Responsible Company with
respect to such Tax Return and shall be agreed to by the other Company unless
either (i) there is no reasonable basis as defined under Section 6662 of the
Code for such tax treatment, or (ii) such tax treatment would have a material
impact on the other Company or the Ruling Request. Such Tax Return shall be
submitted for review pursuant to Section 4.6(a), and any dispute regarding such
proper tax treatment shall be referred for resolution pursuant to Section 15,
sufficiently in advance of the filing date of such Tax Return (including
extensions) to permit timely filing of the return.
4.5 Consolidated or Combined Returns. The Companies will elect and
join, and will cause their respective Affiliates to elect and join, in filing
consolidated, unitary, combined, or other similar joint Tax Return, to the
extent each entity is eligible to join in such Tax Returns, if the Companies
reasonably determine that the filing of such Tax Returns is consistent with past
reporting practices, or in the absence of applicable past practices, will result
in the minimization of the net present value of the aggregate Tax to the
entities eligible to join in such Tax Returns.
4.6 Right to Review Tax Returns
(a) General. The Responsible Company with respect to any Tax Return
shall make such Tax Return and related workpapers available for review by the
other Companies, if requested, to the extent (i) such Tax Return relates to
Taxes for which the requesting party may be liable, (ii) such Tax Return relates
to Taxes for which the requesting party may be liable in whole or in part or for
any additional Taxes owing as a result of adjustments to the amount of Taxes
reported on such Tax Return, (iii) such Tax Return relates to Taxes for which
the requesting party may have a claim for Tax Benefits under this Agreement, or
(iv) the requesting party reasonably determines that it must inspect such Tax
Return to confirm compliance with the terms of this Agreement. The Responsible
Company shall use its reasonable best efforts to make such Tax Return available
for review as required under this paragraph sufficiently in advance of the due
date for filing such Tax Returns to provide the requesting party with a
meaningful opportunity to analyze and comment on such Tax Returns and have such
Tax Returns modified
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before filing, taking into account the person responsible for payment of the tax
(if any) reported on such Tax Return and the materiality of the amount of Tax
liability with respect to such Tax Return. The Companies shall attempt in good
faith to resolve any issues arising out of the review of such Tax Returns.
Issues that cannot be resolved in the Companies shall be resolved in the manner
set forth in Section 15.
(b) Execution of Returns Prepared by Other Party. In the case of
any Tax Return which is required to be prepared and filed by one Company under
this Agreement and which is required by law to be signed by another Company (or
by its authorized representative), the Company which is legally required to sign
such Tax Return shall not be required to sign such Tax Return under this
Agreement if there is no reasonable basis for the tax treatment of any material
items reported on the Tax Return.
4.7 Claims for Refund, Carrybacks, and Self-Audit Adjustments
("Adjustment Requests")
(a) Consent Required for Adjustment Requests Related to Certain
Taxes. Except as provided in paragraph (b) below, unless the other Company
consents in writing, which consent shall not be unreasonably withheld, no
Adjustment Request with respect to any Tax for any Pre-Distribution Period shall
be filed by Distributing or Controlled if such Adjustment Request would result
in any increase of the Tax liability of the other Company under Section 2. Any
Adjustment Request which the Companies consent to make under this Section 4.7
shall be prepared and filed by the Responsible Company under Section 4.2 for the
Tax Return to be adjusted. The Company requesting the Adjustment Request shall
provide to the Responsible Company all information required for the preparation
and filing of such Adjustment Request in such form and detail as reasonably
requested by the Responsible Company. Notwithstanding anything to the contrary
in this paragraph (a), the consent of the Controlled shall not be necessary for
any Carryback by Distributing or any member of the Distributing Group provided
such Carryback constitutes a Distributing Adjustment in the year (or years) such
Carryback is absorbed.
(b) Exception for Adjustment Requests Related to Audit Adjustments.
Notwithstanding paragraph (b) above, Distributing or Controlled may, without the
consent of the other Company, make any Adjustment Request necessary to conform
the treatment of a Tax Item in a subsequent Tax Period to the treatment of such
Tax Item in a prior Tax Period that has been determined pursuant to a Final
Determination. Distributing or Controlled must, if requested by the other
Company, make any such Adjustment Request if they effect thereof is reduce such
other Company's liability for Taxes under Section 2.
(c) Carrybacks. Controlled shall be entitled, without the consent
of Distributing, to require Distributing to file an Adjustment Request for any
Pre-Distribution Period to take into account any permissible carryback of any
net operating loss, net capital loss, or credit for any Post-Distribution Period
that is attributable to any member of the Controlled Group.
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(d) Other Adjustment Requests Permitted. Nothing in this Section
4.7 shall prevent any Company or member of its Group from filing any Adjustment
Request with respect to matters for such Company or member of its Group is
liable under Section 2. Any refund or credit obtained as a result of any such
Adjustment Request (or otherwise) shall be for the account of the person liable
for the Tax under Section 2.
(d) Payment of Refunds. Any refunds or other Tax Benefits received
by any Company (or any of its Affiliates) as a result of any Adjustment Request
which are for the account of another Company (or member of such other Company's
Group) shall be paid by the Company receiving (or whose Affiliate received) such
refund or Tax Benefit to such other Company in accordance with Section 6.
Section 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS
5.1 Payment of Taxes With Respect to Distributing Federal Consolidation
Returns Filed After the IPO Date. In the case of any Distributing Federal
Consolidated Return the due date for which (including extensions) is after the
IPO Date:
(a) Computation and Payment of Tax Due. At least three business
days prior to any Payment Date, Distributing shall compute the amount of Tax
required to be paid to the Internal Revenue Service (taking into account the
requirements of Section 4.4 relating to consistent accounting practices) with
respect to such Tax Return on such Payment Date and shall pay such amount to the
Internal Revenue Service on or before such Payment Date.
(b) Computation and Payment of Controlled Liability With Respect to
Tax Due. Within 90 days following any Payment Date, Controlled will pay to
Distributing the excess (if any) of --
(i) the Consolidated Tax Liability determined as of such
Payment Date with respect to the applicable Tax Period allocable to the members
of the Controlled Group as determined by Distributing in a manner consistent
with the Section 2.2(a) and Section 3, over
(ii) the cumulative net payment with respect to such Tax Return
prior to such Payment Date by the members of the Controlled Group (the
"Cumulative Federal Tax Payment").
If the Controlled Group Cumulative Federal Tax Payment is greater
than the Controlled Group Allocated Federal Tax Liability as of any Payment
Date, then Distributing shall pay such excess to Controlled within 90 days of
Distributing's receipt of the corresponding Tax Benefit (i.e. through either a
reduction in Distributing's otherwise required Tax payment or a credit or refund
of prior tax payments).
(c) Interest on Intergroup Tax Allocation Payments. In the case of
any payments to Distributing required under paragraph (b) of this subsection
5.1, Controlled shall also pay to Distributing an amount of interest computed at
the Prime Rate on the amount of the payment required based on the number of days
from the applicable Payment Date to the date of
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payment. In the case of any payments by Distributing required under paragraph
(b) of this subsection 5.1, Distributing shall also pay to Controlled an amount
of interest computed at the Prime Rate on the amount of the payment required
based on the number of days from the date of receipt of the Tax Benefit to the
date of payment of such amount to Controlled
5.2 Payment of Federal Income Tax Related to Adjustments
(a) Adjustments Resulting in Underpayments. Distributing shall pay
to the Internal Revenue Service when due any additional Federal Income Tax
required to be paid as a result of adjustment to the Tax liability with respect
to any Distributing Federal Consolidated Return. Distributing shall compute the
amount attributable to the Controlled Group in accordance with Section 2.2(b)
and Controlled shall pay to Distributing any amount due Distributing under
Section 2.2(b) within ninety (90) days from the later of (i) the date the
additional Tax was paid by Distributing or (ii) the date of receipt by
Controlled of a written notice and demand from Distributing for payment of the
amount due, accompanied by evidence of payment and a statement detailing the
Taxes paid and describing in reasonable detail the particulars relating thereto.
Any payments required under this Section 5.2(a) shall include interest computed
at the Prime Rate based on the number of days from the date the additional Tax
was paid by Distributing to the date of the payment under this Section 5.2(a).
(b) Adjustments Resulting in Overpayments. Within ninety (90) days
of receipt by Distributing of any Tax Benefit resulting from any adjustment to
the Consolidated Tax Liability with respect to any Distributing Federal
Consolidated Return, Distributing shall pay to Controlled, or Controlled shall
pay to Distributing (as the case may be), their respective amounts due from or
to Distributing as determined by the Responsible Company in accordance with
Section 2.2(b). Any payments required under this Section 5.2(b) shall include
interest computed at the Prime Rate based on the number of days from the date
the Tax Benefit was received by Distributing to the date of payment to
Controlled under this Section 5.2(b),
5.3 Payment of State Income Tax With Respect to Returns Filed After the
Distribution Date.
(a) Computation and Payment of Tax Due. At least three business
days prior to any Payment Date for any Tax Return with respect to any State
Income Tax, the Responsible Company shall compute the amount of Tax required to
be paid to the applicable Tax Authority (taking into account the requirements of
Section 4.4 relating to consistent accounting practices) with respect to such
Tax Return on such Payment Date and -
(i) If such Tax Return is with respect to a Consolidated or
Combined State Income Tax, the Responsible Company shall, if Distributing is not
the Responsible Company with respect to such Tax Return, notify Distributing in
writing of the amount of Tax required to be paid on such Payment Date.
Distributing will pay such amount to such Tax Authority on or before such
Payment Date.
(ii) If such Tax Return is with respect to a Separate Company
Tax, the Responsible Company shall, if it is not the Company liable for the Tax
reported on such Tax
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Return under Section 2, notify the Company liable for such Tax in writing of the
amount of Tax required to be paid on such Payment Date. The Company liable for
such Tax will pay such amount to such Tax Authority on or before such Payment
Date.
(b) Computation and Payment of Controlled Liability With Respect To
Tax Due. Within ninety (90) days following the due date (including extensions)
for filing any Tax Return for any Consolidated or Combined State Income Tax
(excluding any Tax Return with respect to payment of estimated Taxes or Taxes
due with a request for extension of time to file), (i) Controlled shall pay to
Distributing the tax liability allocable to the Controlled Group as determined
by the Responsible Company under the provisions of Section 2.3(b), plus interest
computed at the Prime Rate on the amount of the payment based on the number of
days from the due date (including extensions) to the date of payment by
Controlled to Distributing, and (ii) the Responsible Company shall notify
Distributing (if Distributing is not the Responsible Company with respect to
such Tax Return).
5.4 Payment of State Income Taxes Related to Adjustments.
(a) Adjustments Resulting in Underpayments. Distributing shall pay
to the applicable Tax Authority when due any additional State Income Tax
required to be paid as a result of any adjustment to the tax liability with
respect to any Tax Return for (i) any Consolidated or Combined State Income Tax
for any Pre-Distribution Period, and (ii) any Separate Company Tax for any
Pre-Distribution Period or portion thereof ending on or before the IPO Date.
Controlled shall pay to Distributing its respective share of any such additional
Tax payment determined by the Responsible Company in accordance with Section
2.3(c) within ninety (90) days from the later of (i) the date the additional Tax
was paid by Distributing or (ii) the date of receipt by Controlled of a written
notice and demand from Distributing for payment of the amount due, accompanied
by evidence of payment and a statement detailing the Taxes paid and describing
in reasonable detail the particulars relating thereto. Controlled shall also pay
to Distributing interest on its respective share of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was paid
by Distributing to the date of its payment to Distributing under this Section
5.4(a).
(b) Adjustments Resulting in Overpayments. Within ninety (90) days
of receipt by the Distributing Group of any Tax Benefit resulting from any
adjustment to the tax liability with respect to any Tax Return for any
Consolidated or Combined State Income Tax for any Pre-Distribution Period,
Distributing shall pay to Controlled its respective share of any such Tax
Benefit determined by the Responsible Company in accordance with Section 2.3(c).
Distributing shall also pay to Controlled interest on its respective share of
such Tax Benefit computed at the Prime Rate based on the number of days from the
date the Tax Benefit was received by the Distributing Group to the date of
payment to Controlled under this Section 5.4(b). Similar rules shall apply with
respect to the receipt by the Controlled Group of any Tax Benefit resulting from
any adjustment to the tax liability with respect to any Tax Return for any Tax
Period or portion thereof ending on or before the IPO Date (except any
adjustment made pursuant to any Adjustment Request under Section 4.7(c)).
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5.5 Indemnification Payments. If any Company (the "payor") is required
to pay to a Tax Authority a Tax that is properly allocated to another Company
(the "responsible party") under this Agreement, the responsible party shall
reimburse the payor within ninety (90) days of delivery by the payor to the
responsible party of an invoice for the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. The reimbursement shall include
interest on the Tax payment computed at the Prime Rate based on the number of
days from the date of the payment to the Tax Authority to the date of
reimbursement under this Section 5.6.
Section 6. TAX BENEFITS. If a member of one Group receives any Tax
Benefit with respect to any Taxes for which a member of another Group is liable
hereunder, the Company receiving such Tax Benefit shall make a payment to the
Company who is liable for such Taxes hereunder within ninety (90) days following
receipt of the Tax Benefit in an amount equal to the Tax Benefit (including any
Tax Benefit realized as a result of the payment), plus interest on such amount
computed at the Prime Rate based on the number of days from the date of receipt
of the Tax Benefit to the date of payment of such amount under this Section 6.
Section 7. ASSISTANCE AND COOPERATION
7.1 General. After the IPO Date, each of the Companies shall cooperate
(and cause their respective Affiliates to cooperate) with each other and with
each others agents, including accounting firms and legal counsel, in connection
with Tax matters relating to the Companies and their Affiliates including (i)
preparation and filing of Tax Returns, (ii) determining the liability for and
amount of any Taxes due (including estimated Taxes) or the right to and amount
of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any
administrative or judicial proceeding in respect of Taxes assessed or proposed
to be assessed. Such cooperation shall include making all information and
documents in their possession relating to the other Company and their Affiliates
available to such other Company as provided in Section 8. Each of the Companies
shall also make available to each other, as reasonably requested and available,
personnel (including officers, directors, employees and agents of the Companies
or their respective Affiliates) responsible for preparing, maintaining, and
interpreting information and documents relevant to Taxes, and personnel
reasonably required as witnesses or for purposes of providing information or
documents in connection with any administrative or judicial proceedings relating
to Taxes. Any information or documents provided under this Section 7 shall be
kept confidential by the Company receiving the information or documents, except
as may otherwise be necessary in connection with the filing of Tax Returns or in
connection with any administrative or judicial proceedings relating to Taxes.
7.2 Income Tax Return Information. Each Company will provide to the
other Company information and documents relating to their respective Groups
required by the other Company to prepare Tax Returns. The Responsible Company
shall determine a reasonable compliance schedule for such purpose in accordance
with Distributing's past practices. Any additional information or documents the
Responsible Company requires to prepare such Tax Returns will be provided in
accordance with past practices, if any, or as the Responsible Company reasonably
requests and in sufficient time for the Responsible Company to file such Tax
Returns on a timely basis.
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Section 8. TAX RECORDS
8.1 Retention of Tax Records. Except as provided in Section 8.2, each
Company shall preserve and keep all Tax Records exclusively relating to the
assets and activities of its respective Group for Pre-Distribution Periods, and
Distributing shall preserve and keep all other Tax Records relating to Taxes of
the Groups for Pre-Distribution Periods, for so long as the contents thereof may
become material in the administration of any matter under the Code or other
applicable Tax Law, but in any event until the later of (i) the expiration of
any applicable statutes of limitation, and (ii) seven years after the
Distribution Date. If, prior to the expiration of the applicable statute of
limitation and such seven-year period, a Company reasonably determines that any
Tax Records which it is required to preserve and keep under this Section 8 are
no longer material in the administration of any matter under the Code or other
applicable Tax Law, such Company may dispose of such records upon 90 days prior
notice to the other Company. Such notice shall include a list of the records to
be disposed of describing in reasonable detail each file, book, or other records
being disposed. The notified Company shall have the opportunity, at its cost and
expense, to copy or remove, within such 90-day period, all or any part of such
Tax Records.
8.2 State Income Tax Returns. Tax Returns with respect to State Income
Taxes and workpapers prepared in connection with preparing such Tax Returns
shall be preserved and kept in accordance with the terms of Section 8.1, by the
Company having liability for the Tax.
8.3 Access to Tax Records. The Companies and their respective
Affiliates shall make available to each other for inspection and copying during
normal business hours upon reasonable notice all Tax Records in their possession
to the extent reasonably required by the other Company in connection with the
preparation of Tax Returns, audits, litigation, or the resolution of items under
this Agreement.
Section 9. TAX CONTESTS
9.1 Notice. Each of the Companies shall provide prompt notice to the
other Company of any pending or threatened Tax audit, assessment or proceeding
or other Tax Contest of which it becomes aware related to Taxes for Tax Periods
for which it is indemnified by the other Company hereunder. Such notice shall
contain factual information (to the extent known) describing any asserted Tax
liability in reasonable detail and shall be accompanied by copies of any notice
and other documents received from any Tax Authority in respect of any such
matters. If an indemnified party has knowledge of an asserted Tax liability with
respect to a matter for which it is to be indemnified hereunder and such party
fails to give the indemnifying party prompt notice of such asserted Tax
liability, then (i) if the indemnifying party is precluded from contesting the
asserted Tax liability in any forum as a result of the failure to give prompt
notice, the indemnifying party shall have no obligation to indemnify the
indemnified party for any Taxes arising out of such asserted Tax liability, and
(ii) if the indemnifying party is not precluded from contesting the asserted Tax
liability in any forum, but such failure to give prompt notice results in a
monetary detriment to the indemnifying party, then any amount which the
indemnifying
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party is otherwise required to pay the indemnified party pursuant to this
Agreement shall be reduced by the amount of such detriment.
9.2 Control of Tax Contests. Distributing shall control the defense or
prosecution of the portion of the Tax Contest directly and exclusively related
to any Distributing Adjustment, including settlement of any such Distributing
Adjustment. Controlled shall control the defense or prosecution of the portion
of the Tax Contest directly and exclusively related to any Controlled
Adjustment, including settlement of any such Controlled Adjustment. The Tax
Contest Committee shall control the defense or prosecution of Joint Adjustments,
including settlement of any such Joint Adjustment, and any and all
administrative matters not directly and exclusively related to any Distributing
Adjustment or Controlled Adjustment. The Tax Contest Committee shall be
comprised of two persons, one person selected by Distributing (as designated in
writing to Controlled) and one person selected by Controlled (as designated in
writing to Distributing). Each person serving on the Tax Contest Committee shall
continue to serve unless and until he or she is replaced by the party
designating such person. Any and all matters to be decided by the Tax Contest
Committee shall require the approval of both persons serving on the committee.
In the event the Tax Contest Committee shall be deadlocked on any matter. the
provisions of Section 15 of this Agreement shall apply. A Company shall not
agree to any Tax liability for which another Company may be liable under this
Agreement, or compromise any claim for any Tax Benefit which another Company may
be entitled under this Agreement, without such other Company's written consent
(which consent may be given or withheld at the sole discretion of the Company
from which the consent would be required). Distributing, in the case of any
examination or audit of a Distributing Federal Consolidation Return, and the
Responsible Company in the case of any examination or audit of a Consolidated or
Combined State Income Tax Return, shall be the only parties representing the
members of the Group before any Federal or State Tax Authority in connection
with the examination or audit. Notwithstanding the representation by the
Distributing or Responsible Company before such Tax Authority, the Distributing
or Responsible Company shall (a) provide the Controlled with all information
reasonably requested relating to any Controlled Adjustment or Joint Adjustment;
(b) submit to such Tax Authority any facts, legal arguments or other matters
deemed advisable by Controlled and provided by it to Distributing or the
Responsible Company; (c) not have the authority to settle or otherwise
compromise a Controlled Adjustment; and (d) not have the authority to settle or
otherwise compromise a Joint Adjustment other than through the Tax Contest
Committee procedures set forth in this Section 9.2.
Section 10. EFFECTIVE DATE. This Agreement shall be effective on the
IPO Date.
Section 11. NO INCONSISTENT ACTIONS.
11.1 Action Inconsistent with Ruling Request or Tax Opinion. Each of
the Companies covenants and agrees that it will not take any Prohibited Action,
and it will cause its Affiliates to refrain from taking any Prohibited Action
(within the meaning of Section 11.2), unless the person acting has obtained the
prior written consent of each of the other parties (which consent shall not be
unreasonably withheld). With respect to any Prohibited Action proposed by a
Company (the "Requesting Party"), the other party (the "Requested Party") shall
grant its consent to such Prohibited Action if the Requesting Party obtains a
ruling with respect to the
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Prohibited Action from the Internal Revenue Service or other applicable Tax
Authority that is reasonably satisfactory to the Requested Party.
11.2 Definition of Prohibited Action. The term "Prohibited Action"
shall mean any action prohibited under this Section 11.2.
(a) Neither Distributing, Controlled, nor any of their Affiliates
shall engage in any action which is inconsistent (or shall fail to take any
action to comply) with the Tax treatment of the Distribution as contemplated in
the Ruling Request or Tax Opinion, including but not limited to, any action that
is inconsistent with (or any failure to take any action necessary to comply
with) any representation made in connection with the Ruling request or Tax
Opinion.
(b) Prior to completion of the Distribution, Controlled will not
issue shares of its stock, and neither Distributing nor Controlled will
otherwise take or permit their Affiliates to take any action, that would result
in Distributing (or a wholly-owned subsidiary thereof) not being in control of
Controlled within the meaning of section 368(c) of the Code.
14.3 Interest Under This Agreement. Anything herein to the contrary
notwithstanding, to the extent one Company ("indemnitor") makes a payment of
interest to another Company ("Indemnitee") under this Agreement with respect to
the period from the date that the indemnitee made a payment of Tax to a Tax
Authority to the date that the indemnitor reimbursed the indemnitee for such Tax
payment, or with respect to the period from the date that the indemnitor
received a Tax Benefit to the date indemnitor paid the Tax Benefit to the
indemnitee, the interest payment shall be treated as interest expense to the
indemnitor (deductible to the extent provided by law) and as interest income by
the indemnitee (includable in income to the extent provided by law). The amount
of the payment shall not be adjusted under Section 14.2 to take into account any
associated Tax Benefit to the indemnitor or increase in Tax to the indemnitee.
Section 15. DISAGREEMENTS. If after good faith negotiations the parties
cannot agree on the application of this Agreement to any matter, then the matter
will be referred to a nationally recognized accounting firm acceptable to each
of the parties (the "Accounting Firm"). If such dispute relates to a position to
be taken on any Tax Return or in any Tax Contest that may affect the interests
of both Distributing and Controlled, the Accounting Firm shall resolve such
dispute on the basis of the result that a reasonable person owning both
Companies would reach. The Accounting Firm shall furnish written notice to the
parties of its resolution of any such disagreement as soon as practical, but in
any event no later than 45 days after its acceptance of the matter for
resolution. Any such resolution by the Accounting Firm will be conclusive and
binding on all parties to this Agreement. In accordance with Section 17, each
party shall pay its own fees and expenses (including the fees and expenses of
its representatives) incurred in connection with the referral of the matter to
the Accounting Firm. All fees and expenses of the Accounting Firm in connection
with such referral shall be shared equally by the parties affected by the
matter.
Section 16. LATE PAYMENTS. Any amount owed by one party to another
party under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus two percent, compounded semiannually, from the due date of the
payment to the date paid. To the
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extent interest required to be paid under this Section 16 duplicates interest
required to be paid under any other provision of this Agreement, interest shall
be computed at the higher of the interest rate provided under this Section 16 or
the interest rate provided under such other provision.
Section 17. EXPENSES. Except as provided in Section 15, each party and
its Affiliates shall bear their own expenses incurred in connection with
preparation of Tax Returns, Tax Contests, and other matters related to Taxes
under the provisions of this Agreement.
Section 18. GENERAL PROVISIONS
18.1 Addresses and Notices. Any notice, demand, request or report
required or permitted to be given or made to any party under this Agreement
shall be in writing and shall be deemed given or made when delivered in party or
when sent by first class mail or by other commercially reasonable means of
written communication (including delivery by an internationally recognized
courier service or by facsimile transmission) to the party at the party's
principal business address. A party may change the address for receiving notices
under this Agreement by providing written notice of the change of address to the
other parties.
18.2 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their successors and assigns.
18.3 Waiver. No failure by any party to insist upon the strict
performance of any obligation under this Agreement or to exercise any right or
remedy under this Agreement shall constitute waiver of any such obligation,
right, or remedy or any other obligation, rights, or remedies under this
Agreement.
18.4 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein shall
not be affected thereby.
18.5 Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking action as
may be necessary or appropriate to achieve the purposes of this Agreement,
including the execution and delivery to the other parties and their Affiliates
and representatives of such powers of attorney or other authorizing
documentation as is reasonably necessary or appropriate in connection with Tax
Contests (or portions thereof) under the control of such other parties in
accordance with Section 9.
18.6 Integration. This Agreement and the other agreements, including
the Distribution Agreement, being entered into concurrently herewith, constitute
the entire agreement among the parties pertaining to the subject matter hereof
and thereof and supersedes all prior agreements and understandings pertaining
thereto.
18.7 Construction. The language in all parts of this Agreement shall in
all cases be construed according to its fair meaning and shall not be strictly
construed for or against any party.
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18.8 No Double Recovery Subrogation. No provision of this Agreement
shall be construed to provide an indemnity or other recovery for any costs.
damages. or other amounts for which the damaged party has been fully compensated
under any other provision of this Agreement or under any other agreement or
action at law or equity. Unless expressly required in this Agreement. a party
shall not be required to exhaust all remedies available under other agreements
or at law or equity before recovering under the remedies provided in this
Agreement. Subject to any limitations provided in this Agreement (for example.
the limitation on filing claims for refund in Section 4.7), the indemnifying
party shall be subrogated to all rights of the indemnified party for recovery
from any third party.
18.9 Counterparts. This Agreement may be executed in two or more
counterparts. each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
18.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.
IN WITNESS WHEREOF. the parties have caused this Agreement to be
executed by their respective officers as of the date first written above.
Daisytek International Corporation
By:
-----------------------------------
Name:
Title:
PFSweb, Inc.
By:
-----------------------------------
Name:
Title:
23
<PAGE> 1
EXHIBIT 2.5
TRANSITION SERVICES AGREEMENT
This Transition Services Agreement ("Agreement") is entered into on
December 7, 1999 between, Incorporated, a Delaware corporation
("Daisytek") and PFSweb, Inc., a Delaware corporation ("PFSweb").
RECITALS
WHEREAS, Daisytek and PFSweb have entered into that certain Master
Separation Agreement (the "Separation Agreement"; terms defined therein having
the same meaning when used herein) pursuant to which the PFS Business will be
separated from Daisytek; and
WHEREAS, the PFS Business has been operated as a subsidiary of
Daisytek, and Daisytek has provided various services to the PFS Business; and
WHEREAS, Daisytek has caused PFSweb to be incorporated in order to
effect the separation of the PFS Business; and
WHEREAS, PFSweb desires to continue to obtain various services from
Daisytek and Daisytek desires to continue to provide such services;
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Defined Terms. In addition to the words and terms defined
in the Separation Agreement which shall have the same meaning when used herein,
the following terms, as used herein, shall have the following meanings:
"Transition Period" means the period commencing on the Contribution
Date and ending on the Distribution Date; provided, however, that with respect
to any Transition Service, PFSweb may, upon notice to Daisytek, either (i)
terminate the Transition Period as of any date prior to the Distribution Date or
(ii) extend the Transition Period to a date beyond the Distribution Date, but
not later than the one year anniversary date of the Contribution Date.
"Transition Services" means any services provided by Daisytek, its
Affiliates or their suppliers to the PFS Business prior to the Contribution Date
which PFSweb reasonably identifies and requests in writing that Daisytek provide
to it during the Transition Period; provided that Transition Services expressly
excludes any such services which shall be provided to PFSweb or its Affiliates
pursuant to the terms of any of the Ancillary Agreements; and provided, further
that
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Transition Services expressly excludes any such services which Daisytek
would not be legally permitted to provide to a third party.
ARTICLE 2
TRANSITION SERVICES
Section 2.01. Transition Services.
(a) During the Transition Period, Daisytek shall use its reasonable
best efforts to provide, or cause its Affiliates to use their reasonable best
efforts to provide, to PFSweb or its Affiliates all Transition Services in the
manner and at a relative level of service consistent in all material respects
with that provided by Daisytek or its Affiliates to the PFS prior to the
Contribution Date. PFSweb shall use all commercially reasonable efforts to
obtain all such Transition Services from a source other than Daisytek and its
Affiliates on or prior to the conclusion of the Transition Period; provided
that, if PFSweb cannot obtain any Transition Service from a source other than
Daisytek and its Affiliates and such Transition Service is necessary in order to
operate the PFS Business in substantially the same manner as it was conducted
immediately prior to the Contribution Date, then, subject to Section 2.01(e)
below, Daisytek (or its Affiliates) shall provide such Transition Service to
PFSweb (or its Affiliates) for an additional period not to exceed six months.
(b) In consideration of the provision of Transition Services hereunder,
PFSweb shall pay to Daisytek (i) an amount equal to the cost historically
allocated to the PFS Business as of the Contribution Date for such service,
adjusted to reflect any changes in the nature, cost or level of the services so
provided, or (ii) if no such cost has historically been allocated to the PFS
Business for any Transition Service, then an amount equal to that portion of the
total cost borne by Daisytek which Daisytek would have allocated to the PFS
Business under its internal allocation formula as of the Contribution Date, plus
any direct user charges or similar type charges resulting from PFSweb's or its
Affiliates' use of such services which are not otherwise recouped by Daisytek
hereunder, plus, without duplication, any other reasonable charges necessary to
make Daisytek whole for the provision of such services.
(c) Except as otherwise agreed, Daisytek shall invoice PFSweb on a
monthly basis for the Transition Services to be provided hereunder, and payment
shall be due 30 days after invoice date.
(d) Notwithstanding the foregoing, (i) for any Transition Services
which include payment of payroll or wages to employees of the PFS Business,
PFSweb shall pay all necessary amounts (including payroll taxes) to Daisytek
prior to the payment thereof by Daisytek and (ii) any charges to Daisytek from
outside suppliers for the provision of Transition Services shall be submitted by
Daisytek to PFSweb for payment and, except as Daisytek may otherwise agree in
connection with any individual statement of charges which has been submitted to
Daisytek, PFSweb hereby agrees to make payment therefor either to such outside
supplier in accordance with the payment terms of such outside supplier or to
Daisytek if Daisytek is required to pay such
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outside supplier, (in which event such payment shall be made on or before the
date on which Daisytek notifies PFSweb it intends to make payment, or if
Daisytek does not provide such notice, immediately after Daisytek provides
notice to PFSweb that Daisytek has made such payment).
(e) In the event PFSweb shall request Daisytek to continue to provide
any Transition Service beyond the expiration of the Transition Period, Daisytek
and PFSweb shall negotiate in good faith and at arm's length the terms of any
such extension, including fair market value pricing for all such services.
Section 2.02. Insurance Coverage.
(a) During the Transition Period, Daisytek shall, subject to insurance
market conditions and other factors beyond its control, maintain policies of
insurance, including for the benefit of PFSweb or any of its Affiliates,
directors, officers, employees or other covered parties (collectively, the
"PFSweb Covered Parties") which are comparable to those maintained generally by
Daisytek. Except as provided below, during the Transition Period, such policies
of insurance shall cover PFSweb Covered Parties for liabilities and losses
insured prior to the Contribution Date. To the extent of any self insured or
other loss retentions with respect to insurance policies in force, PFSweb shall,
during the Transition Period, be solely responsible for any losses, damages and
related expenses, not included in Daisytek insurance program expense allocations
to PFSweb, incurred by itself or PFSweb Covered Parties within such loss or
retentions and shall not seek reimbursement or indemnification thereof from
Daisytek.
(b) Daisytek will use all commercially reasonable efforts to assist
PFSweb Covered Parties in asserting claims under applicable insurance policies,
and shall adjust such policies, as necessary and practicable, to provide for
PFSweb and Daisytek recoveries consistent with their respective interests and
shall not unduly favor one insured party over another.
(c) PFSweb shall promptly pay or reimburse Daisytek, as the case may
be, for premium expenses, and PFSweb Covered Parties shall promptly pay or
reimburse Daisytek for any costs and expenses which Daisytek may incur in
connection with the insurance coverages maintained pursuant to this Section,
including any subsequent premium adjustments. All payments and reimbursements by
PFSweb and PFSweb Covered Parties to Daisytek shall be made in accordance with
the payment terms set forth in Section 2.01(c) above.
(d) To the full extent permitted by contract and law, except as
otherwise set forth herein, the control and administration of such insurance
policies, including claims against insurance policies and any modifications to
terms or conditions of insurance policies, shall remain with Daisytek (except
that any such action taken by Daisytek shall treat fairly all insured parties
and their respective claims and shall not unduly favor one insured party over
another). PFSweb and PFSweb Covered Parties shall make all reasonable efforts to
facilitate Daisytek's control and administration of such policies.
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<PAGE> 4
(e) Daisytek's insurance policies shall be applicable to PFSweb losses,
as follows: (i) with respect to any insurance policies where coverage is
provided on a "claims-made" or "occurrences reported" basis, any events, acts or
omissions which may give rise to insured losses, or damages which give rise to
claims thereunder, must have occurred and notice given to Daisytek prior to
expiration of the Transition Period; (ii) with respect to other types of
insurance policies, including those provided on an "occurrence" basis, any
events, acts or omissions giving rise to any insured losses or damages must have
occurred prior to expiration of the Transition Period; and (iii) with respect to
all claims under all insurance policies, coverage for events, acts or omissions
shall be interpreted consistent with the terms of such policies and the intent
of the foregoing clauses (i) and (ii).
(f) With respect to claims covered by the insurance policies described
herein, Daisytek and PFSweb shall control the investigation, defense and
settlement of all claims; provided, however, that PFSweb may not effect any
settlement with respect to any such claim without Daisytek's prior written
consent (which consent shall not be unreasonably withheld or delayed) unless
such settlement (i) will have no direct impact on Daisytek's future insurance
recoveries under relevant insurance policies, and (ii) will require that only
PFSweb or PFSweb Covered Parties, and not Daisytek or its insurers, assume
financial responsibility for the settlement (under applicable deductibles or
self-insured retentions), any related expenses and/or any subsequent premium
adjustments.
(g) From and after expiration of the Transition Period, except as
provided herein, PFSweb, shall be responsible for obtaining and maintaining
insurance programs for its risk of loss and such insurance arrangements shall be
separate and apart from Daisytek's insurance programs. Notwithstanding the
foregoing, (i) Daisytek, upon the request of PFSweb, shall use all commercially
reasonable efforts to assist PFSweb in the transition to its own separate
insurance programs from and after the Transition Period, and shall provide
PFSweb with any information that is in the possession of Daisytek and is
reasonably available and necessary to either obtain insurance coverages for
PFSweb or to assist PFSweb in preventing unintended self-insurance, (ii) each of
Daisytek and PFSweb, at the request of the other, shall cooperate with and use
commercially reasonable efforts to assist the other in recoveries from claims
made under any insurance policy for the benefit of any insured party; and (iii)
neither Daisytek nor PFSweb, nor any of their Affiliates, shall take any action
which would intentionally jeopardize or otherwise interfere with either party's
ability to collect any proceeds payable pursuant to any insurance policy.
Section 2.03. Records and Accounts. Daisytek shall maintain accurate
records and accounts of all transactions relating to the Transition Services
performed by it pursuant to this Agreement. Such records and accounts shall be
maintained separately from Daisytek's own records and accounts and shall reflect
such information as would normally be examined by an independent accountant in
performing a complete audit pursuant to United States generally accepted
auditing standards for the purpose of certifying financial statements, and, to
the extent required by applicable law, to permit verification thereof by
governmental agencies. PFSweb shall have the right to inspect and copy, upon
reasonable notice and at reasonable intervals during
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<PAGE> 5
Daisytek's regular office hours, the separate records and accounts maintained
by Daisytek relating to the Transition Services.
Section 2.04. Directors and Officers of PFSweb and Daisytek.
(a) Nothing contained in this Agreement shall be deemed to relieve the
officers and directors of PFSweb from the performance of their duties or limit
the exercise of their powers in accordance with PFSweb's Certificate of
Incorporation or the laws of the State of Delaware. The services of Daisytek's
officers and employees which are rendered to PFSweb under this Agreement shall
at all times be in accordance with the reasonable instructions of PFSweb's
officers and in accordance with the historical business practice of the PFS
Business.
(b) Nothing in this Agreement shall limit or restrict the right of any
of Daisytek's directors, officers or employees to engage in any other business
or devote their time and attention in part to the management or other aspects of
any other business, whether of a similar nature, or to limit or restrict the
right of Daisytek to engage in any other business or to render services of any
kind to any corporation, firm, individual, trust or association.
(c) Except as expressly provided as part of any Transition Service
hereunder, Daisytek shall have no authority pursuant to this Agreement to commit
PFSweb or any of its Affiliates to any obligation in any manner or to use
PFSweb's name or to enter into any contract or commitment on behalf of PFSweb.
Section 2.05. Limitation of Liability.
(a) Daisytek shall have no liability whatsoever to PFSweb or any of its
Affiliates for any error, act or omission in connection with the Transition
Services to be rendered by Daisytek to PFSweb hereunder unless any such error,
act or omission derives from willful misconduct or gross negligence. IN NO EVENT
SHALL DAISYTEK BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
(INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER
BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER
OR NOT DAISYTEK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE
LIABILITY OF DAISYTEK FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN
CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED,
PFSWEB'S DIRECT DAMAGES.
(b) Daisytek is an independent contractor and when its employees act
under the terms of this Agreement, they shall be deemed at all times to be under
the supervision and responsibility of Daisytek; and, notwithstanding any
reimbursement of labor costs as provided herein or otherwise, no person employed
by Daisytek and acting under the terms of this Agreement shall be deemed to be
acting as agent or employee of PFSweb or any customer of PFSweb for any purpose
whatsoever.
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ARTICLE 3
MISCELLANEOUS
Section 3.01. Entire Agreement. This Agreement, including all the
Ancillary Agreements, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with respect to the
subject matter hereof.
Section 3.02. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
Section 3.03. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 3.04. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy with answer back, by express or overnight mail delivered
by a nationally recognized air courier (delivery charges prepaid), or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their chief executive offices, or to such other address as
the party to whom notice is given may have previously furnished to the others in
writing in the manner set forth above. Any notice or communication delivered in
person shall be deemed effective on delivery. Any notice or communication sent
by telecopy or by air courier shall be deemed effective on the first Business
Day at the place at which such notice or communication is received following the
day on which such notice or communication was sent. Any notice or communication
sent by registered or certified mail shall be deemed effective on the fifth
Business Day at the place from which such notice or communication was mailed
following the day on which such notice or communication was mailed.
Section 3.05. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their legal
representatives and successors, and each Subsidiary and each Affiliate of the
parties hereto, and nothing in this Agreement, express or implied, is intended
to confer upon any other Person any rights or remedies of any nature whatsoever
under or by reason of this Agreement, except as otherwise expressly provided
herein. Except as otherwise expressly set forth herein, this Agreement may not
be assigned or transferred to any other unaffiliated Person without the prior
written consent of each of the parties hereto.
Section 3.06. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
Section 3.07. Dispute Resolution. Resolution of any and all disputes
arising from or in connection with this Agreement, whether based on contract,
tort, or otherwise (collectively,
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"Disputes"), shall be exclusively governed by and settled in accordance with
the provisions of this Section. The parties hereto shall use all commercially
reasonable efforts to settle all Disputes without resorting to mediation,
arbitration, litigation or other third party dispute resolution mechanisms. If
any Dispute remains unsettled, a party hereto may commence proceedings hereunder
by first delivering a written notice from a Senior Vice President or comparable
executive officer of such party (the "Demand") to the other parties providing a
reasonable description of the Dispute to the others and expressly requesting
mediation hereunder. The parties hereby agree to submit all Disputes to
non-binding mediation before a mediator reasonably acceptable to all parties
involved in such Dispute. If the parties are unable to agree upon a mediator or
if, after such mediation, the parties subject to such mediation disagree
regarding the mediator's recommendation, such Dispute shall be submitted to
arbitration under the terms hereof, which arbitration shall be final, conclusive
and binding upon the parties, their successors and assigns. The arbitration
shall be conducted in Dallas, Texas by three arbitrators acting by majority vote
(the "Panel") selected by agreement of the parties, or, failing such agreement,
appointed pursuant to the commercial arbitration rules of the American
Arbitration Association, as amended from time to time (the "AAA Rules"). If an
arbitrator so selected becomes unable to serve, his or her successors shall be
similarly selected or appointed. The arbitration shall be conducted pursuant to
the Federal Arbitration Act and such procedures as the parties subject to such
arbitration (each, a "Party") may agree, or, in the absence of or failing such
agreement, pursuant to the AAA Rules. Notwithstanding the foregoing: (i) each
Party shall have the right to inspect the books and records of the other Party
that are reasonably related to the Dispute; (ii) each Party shall provide to the
other, reasonably in advance of any hearing, copies of all documents which a
Party intends to present in such hearing; and (iii) each Party shall be allowed
to conduct reasonable discovery through written requests for information,
document requests, requests for stipulation of fact and depositions, the nature
and extent of which discovery shall be determined by the Parties; provided that
if the Parties cannot agree on the terms of such discovery, the nature and
extent thereof shall be determined by the Panel which shall take into account
the needs of the Parties and the desirability of making discovery expeditious
and cost effective. The award shall be in writing and shall specify the factual
and legal basis for the award. The Panel shall apportion all costs and expenses
of arbitration, including the Panel's fees and expenses and fees and expenses of
experts, between the prevailing and non-prevailing Party as the Panel deems fair
and reasonable. The parties hereto agree that monetary damages may be inadequate
and that any party by whom this Agreement is enforceable shall be entitled to
seek specific performance of the arbitrators' decision from a court of competent
jurisdiction, in addition to any other appropriate relief or remedy.
Notwithstanding the foregoing, in no event may the Panel award consequential,
special, exemplary or punitive damages. Any arbitration award shall be binding
and enforceable against the parties hereto and judgment may be entered thereon
in any court of competent jurisdiction.
Section 3.08. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an
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acceptable manner to the end that transactions contemplated hereby are
fulfilled to the fullest extent possible.
Section 3.09. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
Section 3.10. Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to be bound by such change or amendment.
Section 3.11. Authority. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it has been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
Section 3.12. Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When a reference is made in this Agreement to
an Article or a Section, such reference shall be to an Article or Section of
this Agreement unless otherwise indicated.
[remainder of page is blank]
8
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
DAISYTEK, INCORPORATED
By:
----------------------------
Name:
Title:
PFSWEB, INC.
By:
----------------------------
Name:
Title:
9
<PAGE> 1
EXHIBIT 2.6
TRANSACTION MANAGEMENT SERVICES AGREEMENT
THIS AGREEMENT is dated as of December 7, 1999 and is by and between
PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation ("PFS") having an
address at 500 North Central Expressway, Plano, Texas 75074, and DAISYTEK, INC.,
a Delaware corporation ("DZTK") having an address at 500 North Central
Expressway, Plano, Texas 75074.
PFS provides various transaction management services, including Web
order processing, inbound call handling, order entry, warehousing and
distribution, credit management and collection and information management, to
manufacturers, resellers and marketers of products.
DZTK wishes to retain PFS to provide the transaction management
services described herein.
IN CONSIDERATION of the mutual covenants contained herein, the parties
agree as follows:
1. Statement of Work; Products. During the term of this Agreement, and
subject to the terms and conditions set forth herein, PFS will provide the
transaction management services described in one or more Statement(s) of Work (a
"Statement of Work") as shall be mutually agreed from time to time. Each
Statement of Work may be amended, modified or revised by mutual agreement of the
parties from time to time during the term of this Agreement, although neither
party has any obligation to agree to any amendment, modification or revision.
PFS will provide its services with respect to various products designated by
DZTK (the "Products"), provided, however, that the type, nature, dimensions,
etc., of the Products shall be set forth in a Statement of Work. Upon mutual
agreement, the type or nature of the Products may be modified during the term of
this Agreement.
2. Distribution Center. During the term of this Agreement, and as more
fully set forth in a Statement of Work, Products will be shipped by, or on
behalf of, DZTK to, and stored by PFS at, the PFS distribution center(s)
identified in a Statement of Work (the "Distribution Center"). DZTK is
responsible for all freight, handling and importation costs in delivering the
Products to the Distribution Center. DZTK is responsible for administering and
managing the shipment and delivery of Products to the Distribution Center and
will provide PFS with prior notice and rolling projections of Product shipments
and deliveries as described in a Statement of Work. PFS will unpack and store
all Products delivered to the Distribution Center in accordance with the terms
of a Statement of Work. Except as otherwise set forth in a Statement of Work,
PFS has no liability for in-bound or out-bound freight or shipping costs.
3. Sales and Marketing. DZTK is responsible for all sales and marketing
of Products. Except as expressly set forth in the Statement of Work in
connection with the services to be provided by it hereunder, PFS shall not be
deemed an agent or representative of DZTK, nor shall PFS have any authority to
make any representation or commitment on the part of DZTK. For all purposes,
DZTK, and not PFS, shall be deemed the seller of all Products to customers. DZTK
shall retain title to all Products and PFS shall not be deemed a consignee of
any Products, nor shall PFS pledge, encumber or
<PAGE> 2
grant any security interest in or to the Products at any time. DZTK shall at all
times comply with all applicable laws, rules and regulations in respect of its
sales and marketing of Products.
4. Information; Exceptions. DZTK will provide PFS with all information
reasonably necessary for PFS to perform its obligations hereunder, including
information regarding the Products, part numbers, descriptions, costs, pricing,
documentary requirements, technical information, call center scripts, customer
and credit guidelines and limits, returns criteria and similar information,
including Product training, etc. PFS has no responsibility with respect to the
adequacy, accuracy or validity of any information, guidelines, limits or
criteria provided by DZTK to it hereunder. In performing its services hereunder,
PFS shall act in accordance with, and shall be entitled to rely upon, the
instructions and authorizations received from DZTK, including all customer,
credit, shipping, allocation, pricing and other information and instruction as
shall be provided to PFS hereunder.
5. Sales Tax. Except as set forth in the Statement of Work, PFS shall
have no liability for the payment, collection or remittance to the proper
authorities, of all sales tax, use tax or other tax arising from the sale of
Products to customers, the storage of Products in the Distribution Center or the
shipment of Products to or from any jurisdiction, and DZTK shall indemnify and
hold PFS harmless in respect thereof (including any costs incurred by PFS in
connection with any audit or inquiry of any taxing authority). DZTK is
responsible to determine the applicable taxing jurisdictions arising in
connection with the sale of Products and for providing PFS with copies of any
resale certificates or other documentation as may be required by PFS to perform
its services hereunder.
6. Insurance; Shrinkage. PFS shall provide insurance for all Products
stored in the Distribution Center. Such insurance (which may include
self-insurance) shall cover damage, destruction, theft and other risks as shall
be set forth in the Statement of Work. DZTK shall provide PFS with all
information necessary for such insurance. PFS shall provide DZTK with a
certificate of insurance and, upon request, will provide for not less than ten
days' prior notice of nonrenewal or cancellation. PFS shall perform its services
hereunder in accordance the performance standards set forth in the Statement of
Work and the ordinary level of care it provides its customers. Subject to the
applicable terms of the Statement of Work, in the event of any loss or damage to
Products arising from the failure of PFS to provide such level of care, PFS
shall, as its sole liability, reimburse DZTK for the actual cost of such lost or
damaged Products.
7. Returns. All sales of Products shall be subject to the then
prevailing return policies of DZTK. DZTK shall at all times be solely
responsible for any credits or other amounts payable to customers, and PFS shall
have no responsibility to return, rebate or refund any portion of any fee
received by it hereunder in respect thereof. All returns shall be administered
in accordance with the terms set forth in the Statement of Work. In the event
any return is the result of a misshipment or error on the part of PFS, PFS
shall, as its sole liability, be responsible for all return freight for such
Product.
8. Service Fees. DZTK shall pay to PFS the service fees and other
amounts described in the Statement of Work. All fees and other amounts shall be
payable in accordance with the payment and invoice terms set forth in the
Statement of Work.
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9. Pricing Modification. The service fees payable hereunder are based
upon the assumptions regarding the scope of work set forth in the Statement of
Work. The Statement of Work contains a list of certain key assumptions and
certain parameters regarding acceptable deviations from these assumptions. In
the event that, for any month (calculated on an annualized basis), the
operations of DZTK (and the scope of work provided by PFS in respect of such
operations) are outside these parameters, PFS shall notify DZTK of such event
and the modification of the fees payable hereunder which PFS shall propose as a
result thereof. Such fee modification proposal shall be based upon, but not
limited to, the increase or other material change in the scope of work and
services to be provided by PFS arising from the deviation from the aforesaid
assumptions. DZTK shall then have a period of 30 days (or such longer period as
shall be reasonable under the circumstances) to restore its operations to within
the aforesaid parameters. If DZTK is successful in doing so, as determined (on
an annualized basis) during the month (or such longer period as shall be
reasonable under the circumstances) following such cure period, then the
proposed fee modification shall not go into effect. If DZTK is unsuccessful in
doing so (as determined as aforesaid), then the proposed fee modification shall
go into effect for all succeeding months until DZTK shall restore its operations
to within the aforesaid parameters for two consecutive months. Notwithstanding
the foregoing, the parties agree to use their respective best efforts to
negotiate in good faith any proposed fee modification, and either party may
request that any proposed fee modification be submitted to non-binding
mediation. In addition, following the second anniversary of the date hereof, if
PFS' costs in providing its services hereunder have increased by more than 5%
(on an annual basis) from the prior year, PFS may propose, by written notice to
DZTK, a modification of the fees payable hereunder. Such fee modification
proposal shall be based upon, but not limited to, the increase or other material
change in PFS' costs and shall be accompanied by a reasonable description of
such increased costs. The parties agree to use their respective best efforts to
negotiate in good faith any proposed fee modification, and either party may
request that any proposed fee modification be submitted to non-binding
mediation. If the parties are unable to agree upon any such proposed fee
modification, and within 30 days thereafter, PFS shall elect to terminate this
Agreement without cause (as provided in Section 12 below) and shall deliver the
requisite termination notice, then, in such event, PFS shall be deemed to have
delivered such termination notice as of the date of its delivery of its proposed
fee modification.
10. Trademark. DZTK represents that it has a valid and effective
license and right to use all trademarks, tradenames and logos which appear on
the Products and to sell the Products to its customers and shall continue to
have such rights during the term of this Agreement, free of any claim of
infringement or unlawful use, and DZTK shall indemnify and hold PFS harmless in
respect of all matters arising in connection therewith.
11. Confidentiality. Each party acknowledges that in implementing and
performing this Agreement each party shall disclose and make available to the
other certain confidential and proprietary information, including without
limitation, customer and Product information. Each party agrees to utilize such
information solely for the purpose of this Agreement and to keep and maintain
all such information as confidential. The provisions of this Section shall
survive any termination or non-renewal of this Agreement. This Section shall not
apply to any information (i) which (without violation of this Section) is or
becomes generally known in the industry or (ii) which is provided by a third
party without violation by such third party of any obligation of non-disclosure.
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Each party may disclose the existence of this Agreement (but not its terms), the
identity of the parties hereto and the general nature of the Products.
12. Term. This Agreement shall be in effect for a five year term
commencing from the date of execution hereof and shall be automatically renewed
for successive one year periods thereafter unless either party shall give notice
in writing of non-renewal not less than 180 days prior to any termination date.
In the event either party shall breach any of the terms or provisions of this
Agreement, and such breach shall not be cured within 30 days after notice, the
non-breaching party shall have the right to terminate this Agreement upon ten
days written notice. In addition (i) DZTK may terminate this Agreement, without
cause, upon 180 days prior written notice, (ii) PFS may terminate this
Agreement, without cause, upon 365 days prior written notice (subject to the
provisions of Section 9 above regarding the date upon which such notice shall be
deemed to have been given in the event of a proposed fee modification) and (iii)
within 30 days following the effective date of any "Change in Control" of DZTK,
PFS may, upon 90 days prior written notice, terminate this Agreement. As used
herein, a "Change in Control" shall be deemed to occur upon (i) any sale or
transfer of all or substantially all of the assets of DZTK or (ii) the
acquisition by any party (or group of related parties) (other than a financial
institution, mutual fund or other party holding shares for investment purposes),
whether in one transaction or a series of related transactions, of 25% or more
of the issued and outstanding shares of capital stock of DZTK. Any termination
of this Agreement shall not affect any obligations of any party incurred or
arising prior to such termination. During the applicable period following the
giving of any notice of nonrenewal, or termination without cause, the parties
shall continue to fully perform all of their respective obligations hereunder
and shall cooperate with each other in order to effect an orderly winding down
and transition. DZTK is solely responsible, at its cost and expense, to remove
all Products and other DZTK property from the Distribution Center on or prior to
the effective date of termination of this Agreement. DZTK shall reimburse PFS
for all reasonable costs and expenses incurred by PFS in assisting DZTK with
such removal efforts. In addition, in the event DZTK shall terminate this
Agreement without cause, DZTK shall pay to PFS the Termination Fee set forth in
the Statement of Work.
13. Indemnification; Limitation of Liability. Each party agrees to
indemnify, defend and hold the other harmless from and against and in respect of
any and all costs, expenses (including without limitation, attorneys fees and
litigation and investigation costs), losses, damages and claims arising from, in
connection with or relating to (i) any actual or alleged infringement or
misappropriation by the indemnifying party of any patent, copyright, trademark,
service mark, tradename, trade secret or any other intellectual property right
of any other party (whether domestic or foreign), (ii) any failure by the
indemnifying party to comply with or breach of any governmental, regulatory,
judicial or municipal law, rule, regulation, decision, order, directive,
ordinance or ruling of any kind or (iii) any product liability, personal injury
or property damage claim of any kind or any negligence or misconduct on the part
of the indemnifying party; provided, however, that, notwithstanding anything
contained herein, no party shall be liable for consequential damages of any kind
(even if advised of the possibility or likelihood thereof) or any punitive
damages in connection with any claim or matter arising under or in connection
with this Agreement. Except as expressly set forth herein or in the Statement of
Work, no party makes any
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representation or warranty of any kind. The provisions of this Section shall
survive any termination or non-renewal of this Agreement.
14. Restrictive Covenant. PFS covenants and agrees that, during the
term of this Agreement, it will not, on its own behalf, engage in the business
of selling or distributing, on a wholesale basis, any Products. The foregoing
shall not apply to (i) the provision by PFS of transaction management services
to third parties who may be engaged in the business of selling or distributing,
on a wholesale basis, any Products or (ii) any existing arrangements to which
PFS may be a party on the date hereof (and any modifications, supplements or
amendments thereto arising after the date hereof).
15. Miscellaneous. Each party to this Agreement is an independent
contractor and this Agreement does not create a joint venture or partnership of
any kind, nor shall this Agreement give rise to any fiduciary duty on the part
of any party to any other party. Except as contemplated herein, no party shall
have the authority to represent, warrant or bind any other party. This
Agreement, and the rights, powers and duties set forth herein, shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns. This Agreement may not be assigned or delegated to any unaffiliated
third party. This Agreement may only be amended, modified or waived by an
instrument in writing duly executed and delivered by each of the parties hereto
to be bound by such amendment, modification or waiver. This agreement (and the
Statement of Work hereto) sets forth the entire understanding and agreement of
the parties and supersedes any prior agreement. The failure of either party to
enforce any provision of this Agreement shall not be construed as a waiver
thereof, and any waiver of any term or provision hereof shall not be construed
as a waiver of any other term or provision. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which taken
together shall be deemed one and same instrument. In the event that any one or
more of the provisions of this Agreement shall be determined to be void or
unenforceable by a court of competent jurisdiction or by law, such determination
shall not render this Agreement invalid or unenforceable and the remaining
provisions hereof shall remain in full force and effect. All notices hereunder
shall be in writing and shall be effective upon receipt at each party's address
for notice set forth herein. EACH PARTY WAIVES TRIAL BY JURY.
15. Arbitration. Any and all disputes arising hereunder shall, upon the
request of either party, be submitted to binding arbitration in Dallas, Texas,
in accordance with the rules and regulations of the American Arbitration
Association and each party agrees that (i) all notices and service of process in
respect thereof may be delivered or served at the address for notice set forth
herein, (ii) each party consents and submits to the jurisdiction of said
arbitration and to the state and federal courts of the State of Texas for the
purpose of enforcing the provisions of this Agreement and entering and judgment
in respect thereof and (iii) the foregoing shall not preclude the joinder of any
party in respect of any third party claim or the pursuit of equitable remedies.
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<PAGE> 6
IN WITNESS WHEREOF, the parties hereto, being duly authorized, have
executed and delivered this Agreement as of the day and year above written.
PRIORITY FULFILLMENT SERVICES, INC.
By:
-------------------------------------
Name:
Title:
DAISYTEK, INC.
By:
-------------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.1
PFSWEB, INC.
3,100,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
December 1, 1999
HAMBRECHT & QUIST LLC
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
Jefferies & Company, Inc.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
PFSweb, Inc., a Delaware corporation (herein called the Company),
proposes to issue and sell 3,100,000 shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the Common Stock) (said 3,100,000
shares of Common Stock being herein called the Underwritten Stock). The Company
proposes to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 465,000 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration Statement
and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
As part of the offering contemplated by this Agreement, Hambrecht &
Quist LLC has agreed to reserve out of the Stock set forth opposite its name on
Schedule I to this Agreement, up to 217,000 shares, for sale to the Company's
employees, officers, directors and associates (collectively, "Participants"), as
set forth in the Prospectus under the heading "Underwriting"
- --------
(1) Plus an option to purchase from the Company up to 465,000 additional shares
to cover over-allotments.
<PAGE> 2
(the "Directed Share Program"). The Stock to be sold by Hambrecht & Quist LLC
pursuant to the Directed Share Program (the "Directed Shares") will be sold by
Hambrecht & Quist LLC pursuant to this Agreement at the public offering price.
Any Directed Shares not orally confirmed for purchase by any Participants by the
end of the first business day after the date on which this Agreement is executed
will be offered to the public by Hambrecht & Quist LLC as set forth in the
Prospectus.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-87657), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus and has consented to the use of such copies for the
purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND DAISYTEK.
(a) Each of the Company and Daisytek International Corporation, a
Delaware Corporation and parent of the Company ("Daisytek"), hereby jointly and
severally represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and the
Prospectus and as
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being conducted, and is duly qualified as a foreign corporation and in
good standing in all jurisdictions in which the character of the
property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so
qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole). Daisytek has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation.
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any materially adverse change in the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement has been declared effective
under the Securities Act, no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement
and no stop order suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus is in
effect and no proceedings for that purpose have been instituted or are
pending or contemplated by the Commission.
(iv) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Prospectus will comply, in
all material respects, with the provisions of the Securities Act and
the rules and regulations of the Commission thereunder; on the
Effective Date, the Registration Statement did not contain any untrue
statement of a material fact and did not omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the
Prospectus did not and, on the Closing Date and any later date on which
Option Stock is to be purchased, will not contain any untrue statement
of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that
none of the representations and warranties in this subparagraph (iv)
shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(v) The authorized capital stock of the Company consists of
1,000,000 shares of Preferred Stock, $1.00 par value, of which no
shares are outstanding, and 40,000,000 shares of Common Stock, $0.001
par value, of which there are outstanding 17,405,000 shares (including
the Underwritten Stock plus the number of shares of Option Stock issued
on the date hereof) and such authorized capital stock conforms as to
legal matters
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<PAGE> 4
to the description thereof contained in the Prospectus; proper
corporate proceedings have been taken validly to authorize such
authorized capital stock; all of the outstanding shares of such capital
stock (including the Underwritten Stock and the shares of Option Stock
issued, if any) have been duly and validly issued and are fully paid
and nonassessable; any Option Stock purchased after the Closing Date,
when issued and delivered to and paid for by the Underwriters as
provided in this Agreement, will have been duly and validly issued and
be fully paid and nonassessable; and no preemptive rights of, or rights
of refusal in favor of, stockholders exist with respect to the Stock,
or the issue and sale thereof, pursuant to the Certificate of
Incorporation or Bylaws of the Company and there are no contractual
preemptive rights that have not been waived, rights of first refusal or
right of co-sale which exist with respect to the issue and sale of the
Stock. All the issued and outstanding capital stock of each of the
subsidiaries of the Company has been duly authorized and validly issued
and is fully paid and nonassessable, and is owned by the Company free
and clear of all liens, encumbrances and security interests, and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in such subsidiaries are
outstanding.
(vi) The Stock to be issued and sold by the Company is
authorized for listing by the Nasdaq National Market.
(vii) The Company is not, and upon receipt and pending
application of the net proceeds from the sale of the Stock to be sold
by the Company in the manner described in the Prospectus will not be,
an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
(viii) Each of the Master Separation Agreement, the Initial
Public Offering and Distribution Agreement, the Registration Rights
Agreement, the Tax Indemnification and Allocation Agreement, the
Transition Services Agreement, the Transaction Management Services
Agreement (collectively, the "Spin-off Agreements") and this Agreement
has been duly authorized, executed and delivered by the parties thereto
and each of the Spin-off Agreements is a valid and binding agreement of
such parties enforceable in accordance with its terms.
(ix) (1) This Agreement and the issue and sale by the Company
of the shares of Stock sold by the Company as contemplated herein and
(2) the Spin-off Agreements and the transactions contemplated therein,
in each case, do not and will not conflict with, or result in a breach
of, the Certificate of Incorporation or Bylaws of Daisytek, the Company
or any of their subsidiaries, or any agreement or instrument to which
Daisytek, the Company or any of their subsidiaries is a party or by
which any of the properties or assets of Daisytek, the Company or any
of their subsidiaries may be bound or affected, or any applicable law
or regulation, or any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality.
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<PAGE> 5
(x) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated in this Agreement, except such as have been
obtained under the Securities Act and such as may be required under
state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters, or for the consummation
of the transactions contemplated in the Spin-off Agreements.
(xi) The Company's pro forma combined financial statements and
notes forming part of the Registration Statement and the Prospectus (i)
were derived from historical financial statements appearing in the
Registration Statement and the Prospectus and (ii) are based on
assumptions that provide a reasonable basis for presenting the
significant effects of the transactions and events as described in the
Registration Statement and the Prospectus, the related pro forma
adjustments give appropriate effect to such assumptions; and the pro
forma columns reflect the proper allocation of such adjustments to the
historical financial statements.
(xii) The Company has not offered, or caused the Underwriters
to offer, Stock to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or
type of business with the Company or (ii) a trade journalist or
publication to write or publish favorable information about the Company
or its business. The Registration Statement, the Prospectus and any
Preliminary Prospectus comply, and any further amendments or
supplements thereto will comply, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
Preliminary Prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and no
authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality
or court other than such as have been obtained, is necessary under the
securities laws and regulations of foreign jurisdictions in which the
Directed Shares are offered outside the United States.
(xiii) The information required to be set forth in the
Registration Statement in answer to Items 9, 10 and 11(c) of Form S-1
is accurately and adequately set forth therein in all material respects
or no response is required with respect to such Items, and the
description of the Company's stock option plans and the options granted
and which may be granted thereunder set forth in the Prospectus
accurately and fairly presents the information required to be shown
with respect to said plans and options to the extent required by the
Securities Act and the rules and regulations of the Commission
thereunder.
(xiv) There are no franchises, contracts, leases, documents or
legal proceedings, pending or threatened, which are of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement,
which are not described and filed as required.
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<PAGE> 6
(xv) There are no holders of securities of the Company having
rights to the registration of shares of Common Stock, or other
securities, because of the filing of the Registration Statement by the
Company, that have not waived such rights, or such rights have expired
by reason of lapse of time following notification of the Company's
intent to file the Registration Statement.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
3,100,000 of the Underwritten Stock to the several Underwriters and each of the
Underwriters agrees to purchase from the Company the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and purchased by the several Underwriters shall be $17.00 per share. In making
this Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (b) and (c) of this Section 3, the agreement of
each Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
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<PAGE> 7
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 465,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Gibson, Dunn & Crutcher LLP, 1717 Main Street, Dallas, Texas
75201, at 7:00 a.m., San Francisco time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The
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<PAGE> 8
date and hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Gibson, Dunn & Crutcher LLP,
1717 Main Street, Dallas, Texas 75201, at 7:00 a.m., San Francisco time, on the
third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by wire transfer in same day funds. Such payment shall
be made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose funds shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND DAISYTEK. The Company and
Daisytek covenant and agree (and Daisytek shall cause the Company to covenant
and agree) as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which you
shall not previously have been advised and furnished with a copy or to
which you shall have reasonably objected in writing or which is not in
compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, (iii)
the institution or notice of intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt
8
<PAGE> 9
by it of notice of the initiation or threatening of any proceeding for
such purpose. The Company will make every reasonable effort to prevent
the issuance of such a stop order and, if such an order shall at any
time be issued, to obtain the withdrawal thereof at the earliest
possible moment.
(c) The Company will (i) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as
originally filed and of each amendment thereto filed prior to the time
the Registration Statement becomes effective and, promptly upon the
filing thereof, a signed copy of each post-effective amendment, if any,
to the Registration Statement (together with, in each case, all
exhibits thereto unless previously furnished to you) and will also
deliver to you, for distribution to the Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to
the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter
or dealer, likewise send to the Underwriters as many additional copies
of the Prospectus and as many copies of any supplement to the
Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated
by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is
necessary, in the opinion of counsel for the Company or of counsel for
the Underwriters, to supplement or amend the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser of the Stock, the
Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the
Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters
shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion
either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented or
amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters
and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance
with the applicable provisions of the Securities Act and the applicable
rules and regulations thereunder for such period.
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<PAGE> 10
(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any
post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended prospectus proposed to be
filed.
(f) The Company will cooperate, when and as requested by you,
in the qualification of the Stock for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate
and, during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, in keeping such qualifications
in good standing under said securities or blue sky laws; provided,
however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will,
from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for
distribution of the Stock.
(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports
furnished to stockholders of the Company and of all information,
documents and reports filed with the Commission (including the Report
on Form SR required by Rule 463 of the Commission under the Securities
Act).
(h) Not later than the 45th day following the end of the
fiscal quarter first occurring after the first anniversary of the
Effective Date, the Company will make generally available to its
security holders an earnings statement in accordance with Section 11(a)
of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident
to the performance of its obligations under this Agreement, including
all costs and expenses incident to (i) the preparation, printing and
filing with the Commission and the National Association of Securities
Dealers, Inc. of the Registration Statement, any Preliminary Prospectus
and the Prospectus, (ii) the furnishing to the Underwriters of copies
of any Preliminary Prospectus and of the several documents required by
paragraph (c) of this Section 6 to be so furnished, (iii) the printing
of this Agreement and related documents delivered to the Underwriters,
(iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this
Section 6, (v) the furnishing to you and the Underwriters of the
reports and information referred to in paragraph (g) of this Section 6
and (vi) the printing and issuance of stock certificates, including the
transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of
the several Underwriters, for blue sky fees and related disbursements
(including counsel fees and disbursements and cost of printing
memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state
securities or blue sky laws and in the review of the offering by the
NASD.
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<PAGE> 11
(k) The Company and Daisytek agree that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
neither the Company nor Daisytek will, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to
sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire
Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock
or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters
pursuant to this Agreement and (B) options to purchase Common Stock
granted under the stock option plans of the Company, all as described
in "Management -- PFSweb Stock Option and Incentive Plans -- Employee
Stock Option Plan and - Non-Employee Director Compensation; Stock
Option and Retainer Plan" in the Preliminary Prospectus.
(l) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or
event relating to or affecting the Company shall occur as a result of
which in your opinion the market price for the Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising
the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of, and disseminate a press release
or other public statement, reasonably satisfactory to you, responding
to or commenting on such rumor, publication or event.
(m) The Company agrees to use its best efforts to complete the
divestiture of the Company from Daisytek as described in the
Registration Statement and the Prospectus.
(n) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date
of the effectiveness of the Registration Statement. The Company will
direct the transfer agent to place stop transfer restrictions upon such
securities for such period of time. Furthermore, the Company will
comply with all securities and other laws, rules and regulations
applicable to it in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
(o) The Company agrees to pay, or reimburse if paid by the
Underwriters, all reasonable fees and disbursements of counsel incurred
by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred
by the Underwriters in connection with the Directed Share Program.
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<PAGE> 12
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Each of the Company and Daisytek jointly and severally agrees to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and each of the Company and Daisytek jointly and severally agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the indemnity agreements of the Company and
Daisytek contained in this paragraph shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto.
Further, each of the Company and Daisytek jointly and severally agrees
to indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act, or the common law or otherwise, and each of the Company and Daisytek
jointly and severally agrees to reimburse each such Underwriter and controlling
person for any legal or other expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
prospectus wrapper material prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed Share
Program attached to the Prospectus or any Preliminary Prospectus, or caused by
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<PAGE> 13
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable Preliminary Prospectus, not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of the shares which, immediately following the effectiveness of the
Registration Statement, were subject to a properly confirmed agreement to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program; provided, however, that, neither the Company nor
Daisytek shall be responsible under this subparagraph (iii) for any losses,
claims, damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
any Underwriter.
The indemnity agreements of each of the Company and Daisytek contained
in this section 7(a) and the representations and warranties of the Company and
Daisytek contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or any prospectus wrapper material prepared by or with the
consent of the Underwriters for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus or any
Preliminary Prospectus or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus (or any prospectus wrapper material attached
thereto) or any such amendment thereof or supplement thereto. The indemnity
agreement of each Underwriter contained in this
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<PAGE> 14
paragraph (b) shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be
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<PAGE> 15
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and Daisytek, taken together, and the Underwriters shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the Stock received by the Company and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it
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<PAGE> 16
may have hereunder or otherwise (except as specifically provided in paragraph
(c) of this Section 7).
(e) Neither the Company nor Daisytek will, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company or Daisytek to the Underwriters and no liability of the
Underwriters to the Company or Daisytek; provided, however, that in the event of
any such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and Daisytek under this Agreement, including all
costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
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<PAGE> 17
(a) The Registration Statement shall have become effective;
and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings therefor shall be pending or threatened by
the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing
the Stock, all corporate proceedings and other legal matters incident
to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Gibson,
Dunn & Crutcher LLP, counsel for the Underwriters.
(c) You shall have received from Wolff & Samson, P.A., counsel
for the Company and Daisytek, an opinion, addressed to the Underwriters
and dated the Closing Date, covering the matters set forth in Annex A
hereto, and if Option Stock is purchased at any date after the Closing
Date, an additional opinion from such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinion remain valid as of
such later date.
(d) You shall be satisfied that (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus
were true and correct and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein,
respectively, not misleading, (ii) since the Effective Date, no event
has occurred which should have been set forth in a supplement or
amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
business, properties, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of business, neither
the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained
therein, (iv) neither the Company nor any of its subsidiaries has any
material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any
pending or known threatened legal proceedings to which the Company or
any of its subsidiaries is a party or of which property of the Company
or any of its subsidiaries is the subject which are material and which
are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents
which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, (vii) the
representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to
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<PAGE> 18
make a public offering of the Stock, or a material adverse change in
market levels for securities in general (or those of companies in
particular) or financial or economic conditions which render it
inadvisable to proceed.
(e) You shall have received on the Closing Date and on any
later date on which Option Stock is purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the
President and the Chief Financial Officer of the Company, stating that
the respective signers of said certificate have carefully examined the
Registration Statement in the form in which it originally became
effective and the Prospectus contained therein and any supplements or
amendments thereto, and that the statements included in clauses (i)
through (vii) of paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Arthur Andersen LLP, a letter
or letters, addressed to the Underwriters and dated the Closing Date
and any later date on which Option Stock is purchased, confirming that
they are independent public accountants with respect to the Company
within the meaning of the Securities Act and the applicable published
rules and regulations thereunder and based upon the procedures
described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the Original Letter), but
carried out to a date not more than three business days prior to the
Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or
such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original
Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of its
subsidiaries which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Stock or the
purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from Arthur Andersen LLP a letter
stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as at March(degree)31, 1999, did not disclose any weakness
in internal controls that they considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold
by the Company shall have been duly authorized for listing by the
Nasdaq National Market upon official notice of issuance.
18
<PAGE> 19
(j) On or prior to the Closing Date, you shall have received
from all directors, officers, and beneficial holders of more than 5% of
the outstanding Common Stock agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any
short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for
or any rights to purchase or acquire Common Stock or (ii) enter into
any swap or other agreement that transfers, in whole or in part, any of
the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or
otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company or
Daisytek to the Underwriters and without liability of the Underwriters to the
Company or Daisytek; provided, however, that (i) in the event of such
termination, the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i), (j) and (o) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or Daisytek to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company or
Daisytek to the Underwriters and without liability of the Underwriters to the
Company or Daisytek; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company and Daisytek under
19
<PAGE> 20
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of Daisytek, the Company and the several Underwriters and,
with respect to the provisions of Section 7 hereof, the several parties (in
addition to Daisytek, the Company and the several Underwriters) indemnified
under the provisions of said Section 7, and their respective personal
representatives, successors and assigns. Nothing in this Agreement is intended
or shall be construed to give to any other person, firm or corporation any legal
or equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Stock from any
of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company or Daisytek, shall be
mailed, telegraphed or delivered to the Company's office, 500 North Central
Expressway, Plano, Texas 75074, Attention: Mark C. Layton. All notices given by
telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or Daisytek or their respective directors or officers, and (c)
delivery and payment for the Stock under this Agreement; provided, however, that
if this Agreement is terminated prior to the Closing Date, the provisions of
paragraph (k) of Section 6 hereof all be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
20
<PAGE> 21
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company,
Daisytek and the several Underwriters in accordance with its terms.
Very truly yours,
PFSWEB, INC.
By
-------------------------------
Name:
Title:
DAISYTEK INTERNATIONAL CORPORATION
By
-------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
Jefferies & Company, Inc.
By Hambrecht & Quist LLC
By
-----------------------------
Name
---------------------------
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE> 22
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC 1,275,000
LEAD MANAGER (1) 1,275,000
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated 701,250
Jefferies & Company, Inc. 573,750
CO-MANAGER (2) 1,275,000
Robert W. Baird & Co. Incorporated 50,000
Baldwin, Anthony, McIntyre 50,000
J. C. Bradford & Co. 50,000
First Southwest Company 50,000
McDonald Investments Inc. 50,000
The Robinson-Humphrey Company, LLC 50,000
Sanders Morris Mundy 50,000
Southwest Securities, Inc. 50,000
Stephens Inc. 50,000
Tucker Anthony Cleary Gull 50,000
B.C. Ziegler and Company 50,000
UNDERWRITER (11) 550,000
TOTAL (14) 3,100,000
</TABLE>
<PAGE> 23
ANNEX A
FORM OF OPINION OF WOLFF & SAMSON, P.A.
COUNSEL FOR THE COMPANY AND DAISYTEK
We have acted as counsel to PFSweb, Inc., a Delaware corporation (the
"Company") and Daisytek International Corporation, a Delaware corporation
("Daisytek"), in connection with the issuance and sale by the Company of
3,100,000 shares of its authorized but unissued Common Stock, $0.001 par value
(the "Common Stock") (said 3,100,000 shares of Common Stock being herein called
the "Underwritten Stock") and the to grant to the Underwriters (as hereinafter
defined) an option to purchase up to 465,000 additional shares of Common Stock
(herein called the "Option Stock" and with the Underwritten Stock herein
collectively called the "Stock") pursuant to an Underwriting Agreement dated
December 1, 1999 (the "Underwriting Agreement") by and among the Company,
Daisytek, Hambrecht & Quist LLC, Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, and Jefferies & Company, Inc., as Representatives of the
several underwriters named in Schedule A thereto (collectively, the
"Underwriters").
This opinion is being furnished to you pursuant to Sections 9(c) of the
Underwriting Agreement. Capitalized terms used and not otherwise defined herein
shall have the respective meanings set forth in the Underwriting Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Underwriting
Agreement, (ii) the Registration Statement, (iii) the Preliminary Prospectus and
the Prospectus, (iv) the Amended and Restated Certificate of Incorporation of
the Company (the "Amended and Restated Certificate"); (vi) the Amended and
Restated By-laws of the Company (the "By-laws"); (v) resolutions of the Board of
Directors of the Company and Daisytek; (vi) a specimen certificate for the
Common Stock; and (vii) such other documents as we have deemed necessary or
appropriate as a basis for the opinions set forth below. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such records of the Company and such agreements, certificates, and receipt of
public officials, certificates of officers or representatives of the Company and
others, and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to the opinions expressed herein, we have relied to the extent we deemed
appropriate upon the representations and warranties of the Company and Daisytek
contained in the Underwriting Agreement, certificates of state authorities and
public officials and statements and representations of officers of the Company
and Daisytek.
A-24
<PAGE> 24
We are authorized to practice law in the State of New Jersey and we do
not purport to be experts in, or to express any opinion hereunder concerning any
law other than the laws of the State of New Jersey, the General Corporation Law
of the State of Delaware (the "GCL") and federal law as of the date hereof. To
the extent any documents, agreements or transactions as to which we express our
opinion hereunder, or any of the parties thereto, are governed by the laws of
other jurisdictions, we have assumed, without investigation and without
expressing any opinion thereon, that the laws of such other jurisdictions are
the same as the laws of the State of New Jersey.
Our opinions are limited to the specific issues addressed herein and
are limited in all respects to existing laws and facts as of the date hereof. We
disclaim any responsibility to advise you of any change to such laws or facts
which may occur after the date hereof.
Based upon and subject to the foregoing and the limitations set forth
below, we are of the opinion or advise you that:
(i) each of the Company and its U.S. subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property requires
such qualification (except where the failure to be so qualified would not
have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole), and has full corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of
each of the U.S. subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the
Company free and clear of all liens, encumbrances and security interests,
and to the best of our knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests
in such subsidiaries are outstanding; Daisytek has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation;
(ii) the authorized capital stock of the Company consists of 1,000,000
shares of Preferred Stock, $1.00 par value, and 40,000,000 shares of Common
Stock, $0.01 par value, of which, based upon our review of the Company's
minute book, stock ledger and other applicable records, there are no shares
of Preferred Stock outstanding and there are outstanding 17,405,000 shares
of Common Stock (including the Underwritten Stock plus the number of shares
of Option Stock issued on the date hereof) and such authorized capital
stock conforms to the description thereof contained in the Prospectus;
proper corporate proceedings have been validly taken to authorize such
authorized capital stock; all of the outstanding shares of such capital
stock (including the Underwritten Stock and the shares of Option Stock
issued, if any) have been duly and validly issued and are fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting
A-25
<PAGE> 25
Agreement, will have been duly and validly issued and be fully paid and
nonassessable; and no preemptive rights of, or rights of refusal in favor
of, stockholders exist with respect to the Stock, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company and, to our knowledge , there are no contractual preemptive rights
that have not been waived, rights of first refusal or right of co-sale
which exist with respect to the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of our knowledge, no stop order suspending
the effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus is in effect and no proceedings for that purpose
have been instituted or are pending or, to our knowledge, are contemplated
by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act
and with the rules and regulations of the Commission thereunder;
(v) we have participated in conferences with officers and other
representatives of the Company and Daisytek, representatives of the
independent public accountants of the Company and Daisytek and
representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus were discussed and, although we
are not passing upon and do not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus (except as, and to the extent, expressly stated
above), on the basis of the foregoing, nothing has come to our attention
that causes us to believe that on the Effective Date the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which we express no opinion or belief) contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus (except as to the financial statements
and schedules and other financial and statistical data contained or
incorporated by reference therein, as to which we express no opinion or
belief) as of its date or at the Closing Date, contained or contains any
untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to our firm) and
11(c) of Form S-1 is, to the best of our knowledge, accurately and
adequately set forth therein in all material respects or no response is
required with respect to such Items, and the description of the Company's
stock option plans and the options granted and which may be granted
thereunder set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to said plans and options to
the extent required by the Securities Act and the rules and regulations of
the Commission thereunder;
A-26
<PAGE> 26
(vii) we are not aware of (1) any franchises, contracts, leases or
documents which in our opinion are of a character required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement, which are not described and filed as
required or (2) any legal proceedings, pending or threatened, which in our
opinion are of a character required to be described in the Registration
Statement or the Prospectus which are not described as required;
(viii) each of the Spin-off Agreements has been duly authorized,
executed and delivered by the parties thereto and each of the Spin-off
Agreements is a valid and binding agreement of the parties thereto
enforceable in accordance with its terms;
(ix) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company and Daisytek;
(x) (1) the Underwriting Agreement and the issue and sale by the
Company of the shares of Stock sold by the Company as contemplated therein
and (2) the Spin-off Agreements and the transactions contemplated therein,
in each case, do not and will not conflict with, or result in a breach of,
the Certificate of Incorporation or Bylaws of Daisytek, the Company or any
of their subsidiaries or any agreement or instrument known to us to which
Daisytek, the Company or any of their subsidiaries is a party or by which
any of the properties or assets of Daisytek, the Company or any of their
subsidiaries may be bound or affected, or any applicable law or regulation,
or so far as is known to us, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(xi) to our knowledge, there are no holders of securities of the
Company having rights to the registration of shares of Common Stock, or
other securities, because of the filing of the Registration Statement by
the Company, that have not waived such rights, or such rights have expired
by reason of lapse of time following notification of the Company's intent
to file the Registration Statement;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act (and we express no opinion as
to any necessary qualification under the securities or Blue Sky laws of the
various jurisdictions in which the Shares are being offered by the
Underwriters), or for the transactions contemplated in the Spin-off
Agreements; and
(xiii) the Stock issued and sold by the Company is duly authorized for
listing by the Nasdaq National Market.
Our opinions set forth above are subject to the following further
limitations and qualifications.
A-27
<PAGE> 27
1. Our opinion set forth in Paragraph (vii) above is subject to
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting the enforcement of creditors rights
generally and general principles of equity (regardless of whether considered in
a proceeding in equity or at law), and we express no opinion as to whether a
court would grant specific performance or any other equitable remedy with
respect to enforcement of the agreements described therein or whether a court
would grant a particular remedy sought under such agreements as opposed to
another remedy provided therein or at law or in equity. Without limiting the
foregoing, we express no opinion as to any limitations based on statute or
public policy limiting a right to indemnification or a person's right to waive
the benefits of statutory provisions or common law rights.
2. To the extent the purchase and distribution of Stock contemplated by
the Underwriting Agreement is accomplished through a book entry closing, we have
assumed, with your permission and without independent investigation, that (i)
Depository Trust Company ("DTC") is registered as a "clearing agency" under
Federal securities law, (ii) DTC, or one or more nominees designated by DTC, has
acquired possession of and control over the Stock, (iii) the Stock is registered
in the name of the DTC or one or more of its nominees or the certificates for
the Stock are in bearer form or endorsed in blank by the person specified by the
certificated security to be entitled to the security and (iv) appropriate
entries to the account of the Underwriters on the books of DTC have been made
under Section 8-320 of the New York Uniform Commercial Code.
This opinion is furnished to you solely for your benefit and the
benefit of the other Underwriters in connection with the closing under the
Underwriting Agreement occurring today and is not to be used, circulated, quoted
or otherwise referred to for any other purpose without our express written
permission.
Very truly yours,
A-28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR
NINE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 33,693
<SECURITIES> 0
<RECEIVABLES> 168,842
<ALLOWANCES> 6,017
<INVENTORY> 104,443
<CURRENT-ASSETS> 309,107
<PP&E> 52,901
<DEPRECIATION> 25,510
<TOTAL-ASSETS> 383,129
<CURRENT-LIABILITIES> 117,129
<BONDS> 52,101
0
0
<COMMON> 173
<OTHER-SE> 204,135
<TOTAL-LIABILITY-AND-EQUITY> 383,129
<SALES> 763,013
<TOTAL-REVENUES> 763,013
<CGS> 686,432
<TOTAL-COSTS> 686,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,706
<INTEREST-EXPENSE> 3,222
<INCOME-PRETAX> 5,061
<INCOME-TAX> 3,313
<INCOME-CONTINUING> 2,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,236
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</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
NINE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS HAVE BEEN RETROACTIVELY
RESTATED FOR THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 499
<SECURITIES> 0
<RECEIVABLES> 129,837
<ALLOWANCES> 2,600
<INVENTORY> 115,336
<CURRENT-ASSETS> 247,034
<PP&E> 36,810
<DEPRECIATION> 19,172
<TOTAL-ASSETS> 291,362
<CURRENT-LIABILITIES> 96,974
<BONDS> 41,178
0
0
<COMMON> 171
<OTHER-SE> 153,174
<TOTAL-LIABILITY-AND-EQUITY> 291,362
<SALES> 668,247
<TOTAL-REVENUES> 668,247
<CGS> 588,211
<TOTAL-COSTS> 588,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,885
<INTEREST-EXPENSE> 2,258
<INCOME-PRETAX> 25,296
<INCOME-TAX> 9,596
<INCOME-CONTINUING> 15,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (405)
<NET-INCOME> 15,295
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.86
</TABLE>
