-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BCHy4dH3wAjwZ2q22gfgoEtq8mSan+gbydwR4OkORe2TJW33ixH9F1/GaHrkbXPw wlcXMz29JuIJZV5bfwb+0w== 0000950134-99-010179.txt : 19991117 0000950134-99-010179.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010179 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAISYTEK INTERNATIONAL CORPORATION /DE/ CENTRAL INDEX KEY: 0000887403 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752421746 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25400 FILM NUMBER: 99755221 BUSINESS ADDRESS: STREET 1: 500 N CENTRAL EXPRWY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9728814700 MAIL ADDRESS: STREET 1: 500 N CENTRAL EXPWY CITY: PLANO STATE: TX ZIP: 75074 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 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 September 30, 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 November 8, 1999 there were 17,173,952 shares of registrant's common stock outstanding. 2 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 1999 INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 1999 (unaudited) and March 31, 1999.................................................. 3 Unaudited Interim Consolidated Statements of Income for the Three and Six Months Ended September 30, 1999 and 1998 ............. 5 Unaudited Interim Consolidated Statements of Cash Flows for the Six Months Ended September 30, 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.......................... 21 Item 6. Exhibits and Reports on Form 8-K ............................................ 21 SIGNATURES ............................................................................. 23
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
September 30, March 31, 1999 1999 ------------ ------------ (unaudited) CURRENT ASSETS: Cash ............................................................. $ 2,590 $ 1,551 Accounts receivable, net of allowance for doubtful accounts of $6,949 and $2,857 at September 30, 1999 and March 31, 1999, respectively ................................. 149,800 139,864 Inventories, net ................................................. 120,867 107,918 Prepaid expenses and other current assets ........................ 5,768 4,982 Deferred tax asset ............................................... 2,087 137 ------------ ------------ Total current assets ............................... 281,112 254,452 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment ................................ 42,070 37,807 Leasehold improvements ........................................... 4,959 2,399 ------------ ------------ 47,029 40,206 Less - Accumulated depreciation and amortization ................. (23,515) (20,296) ------------ ------------ Net property and equipment ......................... 23,514 19,910 OTHER ASSETS ......................................................... 12,414 12,070 EMPLOYEE RECEIVABLE .................................................. 501 485 EXCESS OF COST OVER NET ASSETS ACQUIRED, net ......................... 30,097 28,962 ------------ ------------ Total assets ....................................... $ 347,638 $ 315,879 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 3 4 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, March 31, 1999 1999 ------------ ------------ (unaudited) CURRENT LIABILITIES: Current portion of long-term debt ................................ $ 82 $ 146 Trade accounts payable ........................................... 100,905 103,179 Accrued expenses ................................................. 13,113 12,363 ------------ ------------ Total current liabilities .......................... 114,100 115,688 ------------ ------------ LONG-TERM DEBT, less current portion ................................. 71,103 43,021 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at September 30, 1999 and March 31, 1999; none issued and outstanding .............................................. -- -- Common stock, $0.01 par value; 30,000,000 shares authorized at September 30, 1999 and March 31, 1999; 17,171,452 and 17,162,382 shares issued and outstanding at September 30, 1999 and March 31, 1999, respectively ................................................. 172 172 Additional paid-in capital ....................................... 87,702 87,394 Retained earnings ................................................ 76,936 71,801 Deferred compensation ............................................ (176) -- Other comprehensive income ....................................... (2,199) (2,197) ------------ ------------ Total shareholders' equity ......................... 162,435 157,170 ------------ ------------ Total liabilities and shareholders' equity ......... $ 347,638 $ 315,879 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 4 5 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended September 30, September 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales ....................................................... $ 246,689 $ 220,151 $ 479,926 $ 442,740 Cost of sales ................................................... 220,762 193,428 426,733 389,490 ------------ ------------ ------------ ------------ Gross profit ............................................ 25,927 26,723 53,193 53,250 Selling, general and administrative expenses .................... 24,098 17,145 43,386 33,947 Acquisition related costs ....................................... 249 130 619 535 Reversal of loss on disposition of business ..................... (1,000) -- (1,000) -- ------------ ------------ ------------ ------------ Income from operations .................................. 2,580 9,448 10,188 18,768 Interest expense ................................................ 1,020 789 1,770 1,641 ------------ ------------ ------------ ------------ Income before income taxes .............................. 1,560 8,659 8,418 17,127 Provision for income taxes ...................................... 608 3,378 3,283 6,408 ------------ ------------ ------------ ------------ Income before cumulative effect of accounting change .... 952 5,281 5,135 10,719 Cumulative effect of accounting change, net of tax .............. -- -- -- (405) ------------ ------------ ------------ ------------ Net income .............................................. $ 952 $ 5,281 $ 5,135 $ 10,314 ============ ============ ============ ============ Net income per common share: Basic: Income before cumulative effect of accounting change ..... $ 0.06 $ 0.31 $ 0.30 $ 0.62 Cumulative effect of accounting change, net of tax ....... -- -- -- (0.02) ------------ ------------ ------------ ------------ Net income ............................................... $ 0.06 $ 0.31 $ 0.30 $ 0.60 ============ ============ ============ ============ Diluted: Income before cumulative effect of accounting change ..... $ 0.05 $ 0.30 $ 0.29 $ 0.60 Cumulative effect of accounting change, net of tax ....... -- -- -- (0.02) ------------ ------------ ------------ ------------ Net income ............................................... $ 0.05 $ 0.30 $ 0.29 $ 0.58 ============ ============ ============ ============ Weighted average common and common share equivalents outstanding: Basic .................................................... 17,171 17,105 17,168 17,055 Diluted .................................................. 17,365 17,723 17,581 17,769
The accompanying notes are an integral part of these interim consolidated statements. 5 6 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Six Months Ended September 30, ---------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................. $ 5,135 $ 10,314 Adjustments to reconcile net income to net cash used in operating activities -- Depreciation and amortization ............................ 4,020 3,176 Provision for doubtful accounts .......................... 5,354 1,073 Deferred stock compensation .............................. 16 -- Deferred income tax benefit .............................. (1,950) (82) Changes in operating assets and liabilities -- Accounts receivable .................................. (14,625) 1,810 Inventories, net ..................................... (11,844) (14,624) Trade accounts payable and accrued expenses .......... (1,579) (15,248) Income taxes payable ................................. (809) (920) Prepaid expenses and other current assets ............ (435) (1,300) ------------ ------------ Net cash used in operating activities ........... (16,717) (15,801) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ......................... (6,887) (3,607) Acquisitions of businesses, net of cash acquired ............ (2,325) (2,886) Advances to employees, net .................................. (79) (54) Increase in other assets .................................... (344) (3,302) ------------ ------------ Net cash used in investing activities ........... (9,635) (9,849) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit, net ................. 27,723 28,311 Payments on capital leases and notes payable ................ (112) (5,022) Net proceeds from exercise of stock options ................. 116 1,829 Distributions to former shareholders of The Tape Company .... -- (973) ------------ ------------ Net cash provided by financing activities ....... 27,727 24,145 ------------ ------------ EFFECT OF EXCHANGE RATES ON CASH ................................ (336) 579 ------------ ------------ NET INCREASE (DECREASE) IN CASH ................................. 1,039 (926) CASH, beginning of period ....................................... 1,551 2,087 ------------ ------------ CASH, end of period ............................................. $ 2,590 $ 1,161 ============ ============
The accompanying notes are an integral part of these interim consolidated statements. 6 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 its Priority Fulfillment Services subsidiaries ("PFSweb"), the Company is also a leading provider of transaction management services and e-commerce logistics business solutions. The Company, through its wholly owned 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 the opinion of management, the Interim Unaudited Condensed Consolidated Financial Statements of the Company include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company's financial position as of September 30, 1999, its results of operations and its results of cash flows for the six months ended September 30, 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 Interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes of the Company included in the Company's Form 10-K (File Number 0-25400) as filed with the SEC on June 29, 1999 (the "Company's Form 10-K"). Accounting policies used in the preparation of the Interim Unaudited Condensed Consolidated Financial Statements are consistent in all material respects with the accounting policies described in the Notes to Consolidated Financial Statements in the Company's Form 10-K. Certain prior period data has been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income, shareholders' equity or cash flows. 2. PUBLIC OFFERING OF PFSWEB COMMON STOCK On September 23, 1999, PFSweb, Inc. filed a registration statement for an initial public offering ("IPO") of 3,100,000 shares of common stock. PFSweb also granted to the underwriters an option to purchase 465,000 additional common shares to cover over-allotments. The net proceeds after IPO expenses are intended to be used for the repayment of PFSweb Inc.'s intercompany payable to Daisytek ($22.3 million at September 30, 1999), acquisition of certain assets from Daisytek for approximately $5.4 million, and to finance future capital expenditures and working capital needs of PFSweb. The Company will use the proceeds from the repayment of the intercompany balance and the transfer of assets to PFSweb to pay down its revolving line of credit facility. Upon completion of the IPO, the Company will own approximately 82.2% of the capital stock of PFSweb, or approximately 80.1% if the underwriters exercise their over-allotment option in full. Subject to certain conditions, the Company intends to separate PFSweb by distributing its ownership in PFSweb common stock to Daisytek shareholders through a tax-free spin-off. There can be no assurances that the planned IPO or spin-off will be consummated. PSFweb, Inc. has authorized 6,000,000 shares of PFSweb, Inc. common stock for issuance under two 1999 stock option plans (the "Option Plans"). The Option Plans, which are currently administered by the Compensation Committee of the Board of Directors of PFSweb, Inc., provide for the granting of incentive awards in the form of stock options to directors, executive management, key employees, and outside consultants of PFSweb, Inc. and its subsidiaries. The right to purchase shares under the stock option agreements typically vest over a three year period. Stock options must be exercised within 10 years from the date of grant. Stock options are issued at fair market value. In July 1999, PFSweb., Inc. issued options to purchase 1,344,250 common shares at $10.45. In August 1999, PFSweb, Inc. issued options to purchase 32,250 common shares at $13.00. All of these options are subject to a three year 7 8 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) vesting schedule under which no options vest for three years, subject to acceleration, in part, upon completion of the spin-off of PFSweb, Inc. from Daisytek. 3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Six Months Ended September 30, ------------------------- 1999 1998 ---------- ---------- Cash paid during the period for: Interest .......................... $ 1,374 $ 1,460 Income taxes ...................... $ 5,624 $ 7,413
4. COMPREHENSIVE INCOME (IN THOUSANDS):
Three months ended Six months ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net income ............................... $ 952 $ 5,281 $ 5,135 $ 10,314 Comprehensive income adjustments: Cumulative translation adjustment ... (322) (308) (2) (435) -------- -------- -------- -------- Comprehensive income ..................... $ 630 $ 4,973 $ 5,133 $ 9,879 ======== ======== ======== ========
8 9 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. NET INCOME 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. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- NUMERATOR: Income before cumulative effect of accounting change ....................... $ 952 $ 5,281 $ 5,135 $ 10,719 Cumulative effect of accounting change ........ -- -- -- (405) ---------- ---------- ---------- ---------- Net income .................................... $ 952 $ 5,281 $ 5,135 $ 10,314 ========== ========== ========== ========== DENOMINATOR: Denominator for basic earnings per share - Weighted average shares ..................... 17,171 17,105 17,168 17,055 Effect of dilutive securities: Employee stock options ...................... 194 618 413 714 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - Adjusted weighted average shares and assumed conversions ....................... 17,365 17,723 17,581 17,769 ========== ========== ========== ========== Net income per common share: Basic: Income before cumulative effect of accounting change ................... $ 0.06 $ 0.31 $ 0.30 $ 0.62 Cumulative effect of accounting change .... -- -- -- (0.02) ---------- ---------- ---------- ---------- Net income ................................ $ 0.06 $ 0.31 $ 0.30 $ 0.60 ========== ========== ========== ========== Diluted: Income before cumulative effect of accounting change ................... $ 0.05 $ 0.30 $ 0.29 $ 0.60 Cumulative effect of accounting change .... -- -- -- (0.02) ---------- ---------- ---------- ---------- Net income ................................ $ 0.05 $ 0.30 $ 0.29 $ 0.58 ========== ========== ========== ==========
9 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. Segment information excludes intersegment net sales. No single customer accounted for more than 10% of the Company's net sales for the six month periods ended September 30, 1999 and 1998. The following tables set forth information as to the Company's reportable segments (in thousands):
Professional Computer Tape Supplies Products PFSweb Total ---------- ---------- ---------- ---------- Three Months Ended September 30, 1999 Net sales ...................................... $ 197,943 $ 24,454 $ 5,132 $ 227,529 Operating contribution ......................... 7,694 1,650 85 9,429 Three Months Ended September 30, 1998 Net sales ...................................... $ 175,242 $ 26,797 $ 2,696 $ 204,735 Operating contribution ......................... 8,292 521 765 9,578 Six Months ended September 30, 1999 Net sales ...................................... $ 376,019 $ 47,015 $ 10,137 $ 433,171 Operating contribution ......................... 13,335 3,329 743 17,407 Six Months ended September 30, 1998 Net sales ...................................... $ 353,045 $ 53,272 $ 4,620 $ 410,937 Operating contribution ......................... 15,875 2,152 1,276 19,303 Assets September 30, 1999 ............................. $ 266,739 $ 50,911 $ 29,988 $ 347,638 March 31, 1999 ................................. 198,527 48,295 69,057 315,879
The Company's Computer Supplies segment includes certain expenses and assets that relate to other or all of the segments but are not allocated by management to the other segments. These expenses relate primarily to the Company's (i) centralized management information, warehouse and telephone systems, and (ii) executive, administrative and other corporate costs. These assets primarily relate to the Company's centralized management information, warehouse and telephone systems and leasehold improvements on shared facilities. The Company's segments are presented on the same basis as the Company's management reviews the results of operations. The PFSweb segment information presented differs from the financial statements of PFSweb, Inc., which were prepared on a carve-out basis and include an allocation of certain Daisytek corporate expenses and infrastructure. 10 11 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the table above, and for management purposes, PFSweb net sales are presented on a fee-equivalent basis. Fee-equivalent revenue is comprised of service fees earned for certain outsourcing services that PFSweb provides on a fee basis, plus gross profits that are recognized on other PFSweb contracts where accounting principles require PFSweb to recognize product revenue because PFSweb takes title to the inventory. Adjustment for PFSweb represents the adjustment to PFSweb net sales to recognize net sales under generally accepted accounting principles. Reconciliation of segment net sales to consolidated net sales is as follows (in thousands):
Three Months ended Sept. 30, Six Months ended Sept. 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Segment net sales ............ $ 227,529 $ 204,735 $ 433,171 $ 410,937 Adjustment for PFSweb ........ 19,160 15,416 46,755 31,803 ------------ ------------ ------------ ------------ Consolidated net sales ....... $ 246,689 $ 220,151 $ 479,926 $ 442,740 ============ ============ ============ ============
Reconciliation of segment operating contribution to consolidated income before taxes is as follows (in thousands):
Three Months ended Sept. 30, Six Months ended Sept. 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Segment operating contribution ................... $ 9,429 $ 9,578 $ 17,407 $ 19,303 Acquisition related costs (a) .................... 249 130 619 535 Incremental charges (b) .......................... 7,600 -- 7,600 -- Reversal of loss on disposition of business ...... (1,000) -- (1,000) -- Interest expense ................................. 1,020 789 1,770 1,641 ------------ ------------ ------------ ------------ Consolidated income before income taxes .......... $ 1,560 $ 8,659 $ 8,418 $ 17,127 ============ ============ ============ ============
(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 PFSweb, Inc. planned initial public offering, certain other charges as a result of these activities, to increase allowances for bad debts and other charges. 7. SUBSEQUENT EVENTS: 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 $27.4 million in cash and the assumption of liabilities of approximately $7.0 million. 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. On October 29, 1999, the Company amended one of its unsecured revolving line of credit agreements (the "Facility"), effective November 1, 1999, to increase the maximum borrowing availability from $85 million to $105 million. This amendment also provides for the release of PFSweb, Inc. and its 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. Additionally, this amendment also prohibits Daisytek from advancing funds to PFSweb, Inc. following the completion of the IPO. 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%. 11 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 matters set forth in the Company's Report on Form 10-K filed on June 29, 1999, which are incorporated by reference herein, as well as general economic conditions, industry trends, the loss of key suppliers or customers, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), risks inherent in acquiring, integrating and operating new businesses, concentrations of credit risk, distribution efficiencies, capacity constraints, technological difficulties, exchange rate fluctuations, and the regulatory and trade environment (both domestic and foreign). This report on Form 10-Q also contains other forward-looking statements, including those related to an anticipated initial public offering and spin-off. Consummation of the transactions 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 Daisytek is a low cost distributor and outsourcing services provider. The Company bases its continued growth on the following strategies: 1) Capitalize on e-commerce and outsourcing trends through expansion of its PFSweb operations. 2) Focus on the growing computer supplies and professional tape industries in the U.S. and international markets. 3) Seek acquisitions to supplement growth in the Company's computer supplies business, professional tape business, and fulfillment service business or to add selected product lines. Through its PFSweb business, the Company utilizes its core strengths in distribution and telemarketing to provide clients with transaction management services and e-commerce logistics solutions on an international basis. Services include order management, customer care services, billing services, information management and distribution services. The Company offers e-commerce outsourcing solutions for companies to conduct sales over the Internet by providing the infrastructure needed to support web-based activity. The PFSweb segment of the Company's business strategy offers the Company the potential for higher margins because it is primarily service fee-based. In June 1999, Daisytek created a separate wholly-owned subsidiary named PFSweb, Inc., to become a holding company for PFSweb upon completion of an initial public offering (the "IPO"). Daisytek plans to divest PFSweb, Inc. in two stages. The first stage involves the sale and issuance of common stock of PFSweb, Inc. in an IPO. The second stage, planned to occur in the year 2000, involves Daisytek distributing to holders of its common stock all of its remaining interest in PFSweb, Inc. through a tax free spin-off transaction in which the shares of PFSweb, Inc. would be distributed to Daisytek common stockholders on a pro-rata basis. 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 12 13 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 and direct mail marketers. The Company continues to research new markets to expand its international computer supplies business. Many international markets are emerging markets that have exponentially higher growth opportunities for consumable computer supplies compared with the United States. Presently, the Company operates sales and distribution centers in Canada, Mexico, Australia and Singapore and exports products into Latin America and throughout much of the rest of the world. The Company 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 the SG&A costs as a percentage of sales, and, thus, increasing profit margins. The Company plans to enhance growth by seeking acquisition opportunities to supplement growth in the Company's computer consumables business, professional tape business, and fulfillment service business or to add selected product lines that can capitalize on Daisytek's expertise in distribution and call-center management and offer the Company an opportunity to expand its product line and increase profit margins. On October 1, 1999, the Company acquired certain assets and liabilities Arlington Industries, a U.S. based wholesaler primarily focused on copier and fax consumable supplies. RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1999 AND 1998. Net Sales. Net sales for the three months ended September 30, 1999 were $246.7 million as compared to $220.2 million for the three months ended September 30, 1998, an increase of $26.5 million, or 12.1%. Net sales for the six months ended September 30, 1999 were $479.9 million as compared to $442.7 million for the six months ended September 30, 1998, an increase of $37.2 million, or 8.4%. Computer Supplies net sales increased 13.0% in the quarter ended September 30, 1999, compared to the same period in fiscal year 1999. Sales in the international computer supplies operations increased 23.8% in the quarter ended September 30, 1999, compared to the same prior year period. All international regions grew strongly, in excess of 20% or more over last year, except for the Latin American business, which was negatively impacted by tightening credit policies. For the first time in several quarters, net sales in the U.S. computer supplies operations also showed slight year on year growth. PFSweb net sales increased during the second quarter of fiscal year 2000 compared to the same period in fiscal year 1999 as a result of higher sales volumes of products under master distribution outsourcing contracts. PFSweb also experienced increases in its service fee-based activity as a result of new contracts and expansion of existing contracts. Professional Tape Products sales decreased 8.7% in the second 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. Gross Profit. The Company's gross profit as a percent of net sales was 10.5% for the three months ended September 30, 1999 as compared to 12.1% for the three months ended September 30, 1998. The Company's gross profit for the quarter was negatively impacted by certain incremental charges of $3.2 million. These charges were partially offset by incremental monies earned under vendor incentive programs. Management currently expects that the Company's profit derived from these vendor programs will be lower during the third quarter of fiscal 2000 compared to the second quarter of fiscal 2000. Gross profit as a percent of net sales was 11.1% for the six months ended September 30, 1999 as compared to 12.0% for the six months ended September 30, 1998. Excluding certain incremental charges of $3.2 million, gross profit as a percent of net sales was 13 14 11.8% for the six months ended September 30, 1999. The decrease in the Company's gross profit as a percentage of net sales was primarily due to competitive pressure in the U.S., including the incremental charges previously discussed, a lower overall gross profit percentage in the international computer supplies business partially offset by a reduction in lower gross margin U.S. superstore business and increased PFSweb service fee business, which generates higher gross margins. The decline in the international computer supplies business gross margin percentage was caused by large revenue growth in Hewlett Packard commodity line products and new international retail business, both of which typically carry lower margins. The Company believes that these trends may continue and could potentially have a negative impact on gross margins during the remainder of fiscal year 2000. In addition, the Company expects that competitive pressures in the U.S. 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 September 30, 1999 were $24.1 million, or 9.8% of net sales, as compared to $17.1 million, or 7.8% of net sales, for the three months ended September 30, 1998, excluding acquisition related costs in each period and the reversal of loss on disposition of business. SG&A expenses for the six months ended September 30, 1999 were $43.4 million, or 9.0% of net sales, as compared to $33.9 million, or 7.7% of net sales, for the six months ended September 30, 1998, excluding acquisition related costs in each period and the reversal of loss on disposition of business. The increase in SG&A expenses as a percentage of net sales for the first half of fiscal year 2000 was due primarily to (i) a reduction in net sales with lower SG&A expense ratios to large office superstores, and (ii) the investments in resources and technology to further develop the PFSweb Division. SG&A expenses for the quarter ended September 30, 1999, included incremental charges of $4.4 million. These charges are primarily related to certain repositioning and separation activities associated with the PFSweb, Inc. planned initial public offering, certain other charges as a result of these activities, and to increase allowances for bad debts related primarily to issues in the Company's Latin American accounts receivable. Over the next few quarters, the Company expects to record additional incremental charges of $1.5 million to $3.5 million for the remainder of these activities, as well as for legal and professional expenses related to an unsolicited acquisition offer, and for acquisition expenses related to the purchase of Arlington Industries on October 1, 1999. Acquisition Related Costs. During the quarter ended September 30, 1999, the Company recorded costs of approximately $0.2 million applicable to transition, integration and merger activities within its Professional Tape Division. During this same quarter in fiscal year 1999, Daisytek incurred various acquisition costs of $0.1 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 quarter ended September 30, 1999, 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 September 30, 1999 was $1.0 million as compared to $0.8 million for the three months ended September 30, 1998. Interest expense for the six months ended September 30, 1999 was $1.8 million as compared to $1.6 million for the six months ended September 30, 1998. Interest expense was higher during the first half of fiscal year 2000 primarily due to higher debt balances offset by lower interest rates. Higher debt balances are a result of business acquisitions and higher working capital levels. The weighted average interest rate was 6.2% and 6.8% during the six months ended September 30, 1999 and 1998, respectively. Income Taxes. The Company's effective tax rate was 39.0% for the three months ended September 30, 1999 and 1998. The effective tax rate for the six months ended September 30, 1999 and 1998 was 39.0% and 37.4%, respectively. The increase in the first half 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. PRO FORMA PRESENTATION The following is a pro forma historical financial presentation of the Daisytek International business units, excluding PFSweb, Inc., 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, Inc. and excludes incremental costs of $7.6 million related to a) this planned separation, b) increases in allowance for bad debts, and c) other charges. The presentation below also excludes acquisition integration costs, loss on disposition of business and cumulative effect of accounting change. 14 15 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 International, 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.
Fiscal 2000 ---------------------------------------------- June 30, Sept. 30, 6 Mos. 1999 1999 Total ------------ ------------ ------------ Net sales ........................................ $ 230,046 $ 242,876 $ 472,922 Cost of sales .................................... 205,464 216,238 421,702 ------------ ------------ ------------ Gross profit ................................. 24,582 26,638 51,220 Selling, general and administrative expenses ..... 17,971 18,339 36,310 ------------ ------------ ------------ Income from operations ....................... 6,611 8,299 14,910 Interest expense ................................. 652 871 1,523 ------------ ------------ ------------ Income before income taxes ................... 5,959 7,428 13,387 Provision for income taxes ....................... 2,324 2,901 5,225 ------------ ------------ ------------ Net income ....................................... $ 3,635 $ 4,527 $ 8,162 ============ ============ ============ Net income per common share: Basic ........................................ $ 0.21 $ 0.26 $ 0.48 Diluted ...................................... $ 0.20 $ 0.26 $ 0.46
Fiscal 1999 ------------------------------------------------ June 30, Sept. 30, Dec. 31, March 31, FY 1998 1998 1998 1999 Total -------- -------- -------- -------- -------- Net sales ........................................ $221,585 $218,394 $223,481 $237,622 $901,082 Cost of sales .................................... 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 expenses ..... 17,754 17,598 17,648 18,322 71,322 -------- -------- -------- -------- -------- 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
LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been from financing activities. During the six months ended September 30, 1999, net cash of $27.7 million was provided by financing activities, compared to net cash provided by financing activities of $24.1 million for the six months ended September 30, 1998. Cash provided by financing activities was generated primarily from proceeds from revolving lines of credit during the six months ended September 30, 1999 and 1998. 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 six months ended September 30, 1998. Included in cash flows from financing activities for the six months ended September 30, 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. Financing activities should provide the Company's primary source of cash during the remainder of fiscal year 2000, primarily to support the Company's growth. Net cash used in operating activities for the six months ended September 30, 1999 and 1998, was $16.7 million and $15.8 million, respectively. Working capital increased to $167.0 million at September 30, 1999 from $138.8 million at March 31, 1999. This increase of $28.2 million was primarily attributable to 1) growth in the Computer Supples and PFSweb business units, requiring working capital, 2) product sourcing in the Computers Supplies segment becoming increasingly impacted by suppliers' programs, which provide increased incentives to purchase higher levels of inventory; and 3) increased days sales outstanding in accounts receivable due to continued customer consolidation with large national accounts, which has led to slower than previously experienced pay characteristics. 15 16 Funds used for investing activities during the six months ended September 30, 1999 and 1998 included primarily costs to acquire professional tape products businesses and capital expenditures. During June 1999, the Company purchased assets of a regional professional tape business for approximately $2.2 million. Capital expenditures were approximately $6.9 million and $3.6 million during the six months ended September 30, 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 $12 million to $15 million. At September 30, 1999, the Company's unsecured revolving lines of credit provided for borrowings up to approximately $109 million. There were outstanding balances on the lines of credit totaling $70.8 million at September 30, 1999, leaving approximately $38 million available for additional borrowings. In addition, the Company has a promissory note agreement with a bank, which allows the Company to borrow up to a maximum of $10.0 million. The Company has no borrowings outstanding under this promissory note agreement at September 30, 1999. On October 29, 1999, the Company amended one of its unsecured revolving line of credit agreements (the "Facility"), effective November 1, 1999, to increase the maximum borrowing availability from $85 million to $105 million. This amendment also provides for the release of PFSweb, Inc. and its subsidiaries as guarantors of the Facility upon (i) the effective date of the IPO of the shares of the common stock of PFSweb, Inc. and (ii) the payment from PFSweb, Inc. to Daisytek in settlement of the outstanding payable to Daisytek. Additionally, this amendment also prohibits Daisytek from advancing funds to PFSweb, Inc. following the completion of the IPO. The Facility has also been amended to increase the interest rate, effective March 1, 2000, to Eurodollar rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%. The Company believes that international markets represent further opportunities for growth. The Company attempts to protect itself from foreign currency fluctuations by denominating substantially all of its non-Canadian and non-Australian international sales in U.S. dollars. In addition, the Company has entered into various forward Canadian and Australian currency exchange contracts in order to hedge the Company's net investment in, and its intercompany payable applicable to, its Canadian and Australian subsidiaries. The Company has the following forward currency exchange contracts outstanding as of September 30, 1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------- ------------------- ------------- ---------- Canadian Dollars $12.3 million Sell Canadian Dollars November 1999 Australian Dollars $ 2.6 million Sell Australian Dollars February 2000 Australian Dollars $ 6.5 million Sell Australian Dollars October 1999
As of September 30, 1999, the Company had incurred unrealized losses of approximately $0.1 million on the outstanding Australian forward exchange contracts and an unrealized gain of $0.1 million on the outstanding Canadian forward exchange contract. 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 such businesses. Should the Company be successful in acquiring other businesses, the Company may require additional financing to consummate such a transaction. Acquisitions involve certain risks and uncertainties, therefore, the Company can give no assurance with respect to whether it will be successful in identifying such a business to acquire, whether it will be able to obtain financing to complete such an acquisition, or whether the Company will be successful in operating the acquired business. The Company believes it will be able to satisfy its working capital needs for fiscal year 2000, as well as business growth and planned capital expenditures, through funds available under the Company's various line of credit facilities, trade credit, lease financing, internally generated funds and by increasing the amount available under the Company's credit facilities. In addition, if the planned IPO of PFSweb, Inc. is completed, it will generate net proceeds of approximately $35 million. Daisytek will receive proceeds from PFSweb, Inc. for repayment of its intercompany payable ($22.3 million at September 30, 1999) and 16 17 acquisition of certain assets for approximately $5.4 million. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is subject to market risk associated with changes in interest rates and foreign currency exchange rates. Interest rate exposure is limited to the Company's outstanding balances on its revolving lines of credit, which amounted to $70.8 million at September 30, 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 $354,000 annualized, based on the outstanding balances of the revolving lines of credit at September 30, 1999. The Company's foreign currency exchange rate risk is primarily limited to Mexican Pesos, Canadian Dollars, Australian Dollars, and Singapore Dollars. The Company's international sales and purchases are generally U.S. Dollar based, except in Canada and Australia. In the future, the Company's foreign currency exchange risk will include the Euro. In order to mitigate foreign currency rate risk, the Company periodically enters into foreign currency forward contracts to hedge the net investments and long-term intercompany payable balances applicable to its Canadian and Australian subsidiaries. The Company had three outstanding foreign currency forward contracts at September 30, 1999. If the foreign exchanges rates of the Canadian and Australian currencies fluctuate 10% from the September 30, 1999 rates, gains or losses in fair value on the three outstanding contracts would be $2.4 million. 17 18 YEAR 2000 ISSUE The Company utilizes a significant number of computer software programs and information systems in its operations ("IT systems"). The mission-critical IT systems include the Company's operating, web hosting, accounting and telecommunications systems, such as IT software applications that allow the Company to maintain inventory and customer information and to communicate with its suppliers and customers. The Company also makes use of a variety of machinery and equipment in its business which are operated by or reliant upon non-information technology systems ("non-IT systems"), such as equipment or mechanical systems which contain embedded technology such as micro-controllers. To the extent that the source code of the software applications of these IT systems or the embedded technologies of these non-IT systems are unable to appropriately interpret and process the upcoming calendar year 2000, some level of modification or possible replacement of such applications would be necessary for proper continuous performance. Without such modification or replacement, the normal course of the Company's business could be disrupted or otherwise adversely impacted. This potential problem is commonly referred to as the year 2000 compliance issue ("Y2K"). In fiscal 1997, the Company began to address Y2K. The Company has formed a Y2K task force under its Chief Information Officer to coordinate and implement measures designed to prevent disruption in its business operations related to Y2K. The Company has completed the remediation of its mission-critical IT applications software and is scheduled to complete remediation of its non-mission critical applications software by November 1999. The Company is assessing the effect of Y2K on its non-IT systems and intends to modify or replace non-IT systems as necessary to insure Y2K readiness by November 1999. The Company believes that it has completed approximately 95% of the initiatives necessary to fully address potential Y2K issues relating to its systems and operations. The projects comprising the remaining 5% of the initiatives are in process and expected to be completed by December 15, 1999. The Company believes that other projects not related to the Y2K issue have not been delayed or negatively affected by the initiatives addressing the Y2K issue. The following table represents the schedule and status of the Company's Y2K initiatives:
YEAR 2000 INITIATIVES TIME FRAME % COMPLETE - --------------------- ---------- ---------- Initial IT systems identification and assessment ............................ 4/97 - 6/97 100% Remediation and testing regarding core distribution systems ................. 7/97 - 11/98 100% Remediation and testing regarding purchased software systems ................ 7/97 - 10/99 100% Upgrades to telecommunications systems ...................................... 9/97 - 4/99 100% Desktop systems identification and remediation .............................. 7/97 - 11/99 95% Remediation and testing for automated warehouse equipment systems ........... 7/99 - 12/99 80% Service provider assessment ................................................. 1/99 - 8/99 100%
The Company has initiated communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate Y2K. The Company is satisfied that its major suppliers and large customers are either appropriately prepared for the Y2K issue or that the Company's engagement with them will not be adversely affected by the Y2K issue. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely or properly converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company continues to grow through business acquisitions. All acquisitions of the Company have been converted to the Company's operating system, except Arlington Industries. The Company believes the Arlington Industries system is Y2K ready based primarily on assertions by the vendors of the system. The Company conducts electronic data interchange (EDI) with its customers. Most of these customers have converted their EDI transaction sets to Y2K compliant versions. The Company believes that it will be able to conduct business with these clients regardless of whether or not they convert to Y2K compliant versions. The Company believes that the EDI transactions it uses with certain PFSweb clients are not significantly dependent on Y2K compliance and that it will be able to accept transactions from, as well as send transactions to, these clients regardless of whether they are Y2K compliant or not. 18 19 The Company utilizes a significant amount of automation technology in its distribution centers. In order to strengthen the reliability of certain components of the automation network, the Company has under taken an upgrade project in its Memphis distribution facility. The Company anticipates completion of this project by December 15, 1999. This project will also make this network Y2K compliant. The Company's service providers have certified all of the other distribution automation used by the Company as Y2K compliant. The Company has initiated formal communications with its significant service providers to determine the extent to which it is vulnerable to those third parties' failure to remediate Y2K. However, there can be no guarantee that the systems of these service providers on which the Company's operations rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's operations, would not have a material adverse effect on its business. The Company is developing contingency plans to address the risks created by third parties' failure to re-mediate Y2K. These plans include procuring alternative sources of services such as telecommunications and transportation when the Company is able to conclude that an existing supplier of services will not be Y2K ready. The Company is scheduled to complete these contingency plans by November 1999. During the six months ended September 30, 1999, the Company incurred approximately $0.2 million of expenses related to Y2K. In total, the Company has incurred, through September 30, 1999, approximately $0.7 million of expenses related to Y2K. The Company's budget for the assessment and remediation of Y2K is approximately $0.8 million, which includes both external costs, such as outside consultants, software and hardware applications, as well as internal costs, primarily payroll related, which are not separately tracked. Under the most reasonably likely worst case scenario, the Company does not anticipate more than isolated, temporary disruptions of its operations caused by Y2K failures affecting either its operations or those of its major customers. The Company expects that its technically trained personnel, working in cooperation with major customers and key service providers, should be able to address Y2K system issues that may arise. To the extent that the Company's systems or those of its key providers are unable to provide services due to Y2K issues, the Company believes that it may have to use one or more of its contingency plans that would, in the short-term, involve numerous operational inconveniences and inefficiencies that would increase costs and divert management's time and attention from its ordinary business activities. Many risks, however, such as the failure to perform by public utilities, telecommunications providers, and financial institutions, and the impact of the Y2K issue on the economy as a whole, are outside our control and could adversely affect the Company and its ability to conduct business. While the Company believes that it has made a significant effort to address all anticipated risks within its control, this is an event without precedent; consequently, there can be no assurance that the Y2K issue will not have a material adverse impact on the Company's financial condition, operating results, or business. There can be no assurance that Y2K remediation by the Company or third parties will be properly and timely completed and failure to do so could have a material adverse effect on the Company's financial condition. The Company cannot predict the actual effects of Y2K, which depends on numerous uncertainties such as: (1) whether major third parties address this issue properly and timely and (2) whether broad-based or systemic economic failures may occur. The Company is currently unaware of any events, trends, or conditions regarding this issue that may have a material effect on the Company's results of operations, liquidity, and financial position. If Y2K is not resolved by January 1, 2000, the Company's results of operations or financial condition could be materially adversely affected. INVENTORY MANAGEMENT The Company manages its inventories held for sale in its wholesale distribution business by maintaining sufficient quantities of product to achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory balances will fluctuate as the Company adds new product lines and makes large purchases from suppliers to take advantage of attractive terms. To reduce the risk of loss to the Company due to supplier price reductions and slow moving inventory, the Company's purchasing agreements with many of its suppliers, including 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. 19 20 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 PFSweb clients in assessing quarterly variability. The Company believes that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. INFLATION Management believes that inflation has not had a material effect on the Company's operations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be used to hedge certain types of transactions, including foreign currency exposures of a net investment in a foreign operation. The Company presently utilizes derivative financial instruments only to hedge its net investments in certain of its foreign operations. SFAS No. 133 requires gains or losses on these financial instruments in other comprehensive income as a part of the cumulative translation adjustment. The Company is currently evaluating the provisions of SFAS No. 133 and its effect on the accounting treatment of these financial instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with initial application as of the beginning of an entity's fiscal quarter. Early adoption of the standard is allowed, however, the statement cannot be applied retroactively to financial statements of prior periods. 20 21 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 20, 1999 the Company held its Annual Meeting of Stockholders. The following matters were acted upon and votes cast or withheld: 1. Election of two Class II directors: Mark C. Layton: For: 12,907,570 Withheld: 888,693 Timothy M. Murray: For: 12,908,184 Withheld: 888,079 2. Appointment of Arthur Andersen LLP as auditors for the 2000 fiscal year: For: 13,778,503 Against: 1,760 Abstained: 16,000 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: EXHIBIT NO. DESCRIPTION OF EXHIBITS ---------------- ---------------------------------------------------- 3 Amendments to the Bylaws of the Company, adopted on October 15, 1999 (incorporated by reference from Form 8-K filed on October 19, 1999). 4 Rights Agreement, dated as of October 15, 1999, between the Company and ChaseMellon Shareholder Services, LLC, which includes the Certificate of Designations in respect of the Series A Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Stock as Exhibit C. Pursuant to the Rights Agreement, Right Certificates will not be mailed until after the Separation Date (as defined therein) (incorporated by reference from Form 8-K filed on October 19, 1999). 10.1 Seventh Agreement to Credit Agreement dated September 10, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, Bank One, N.A., and Chase Bank of Texas, N.A., as Lenders 10.2 Eighth Agreement to Credit Agreement dated September 30, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, Bank One, N.A., and Chase Bank of Texas, N.A., as Lenders 10.3 Ninth Agreement to Credit Agreement dated October 29, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Citizens Bank of Massachusetts, Bank One, N.A., IBM Credit Corporation, and Chase Bank of Texas, N.A., as Lenders 10.4 Asset Purchase Agreement dated September 30, 1999, by and among Arlington Industries, Inc., Craig Funk, Arlington Acquisition Corp., and Daisytek, Incorporated. 10.5 Form of Change in Control Severance Agreement dated October 15, 1999 between Daisytek International Corporation and each of its executive officers. 10.6 Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment Services, Inc. 10.7 Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. 10.8 Commitment Letter dated September 9, 1999 between The Bank of Nova Scotia and Daisytek (Canada) Inc. 27.1 Financial Data Schedule for the six months ended September 30, 1999 27.2 Financial Data Schedule for the six months ended September 30, 1998 b) Reports on Form 8-K: Form 8-K filed on October 4, 1999 reporting Item 5, the Company's press release announcing that its subsidiary, PFSweb, Inc., filed a preliminary registration statement on Form S-1. Form 8-K filed on October 19, 1999 reporting Item 5, the Company's Board of Directors declared a dividend of one preferred share purchase right on each outstanding share of common stock to shareholders of record on October 25, 1999. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 15, 1999 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Thomas J. Madden ------------------------------------- Thomas J. Madden Chief Financial Officer, Chief Accounting Officer, Vice President - Finance 22 23 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3 Amendments to the Bylaws of the Company, adopted on October 15, 1999 (incorporated by reference from Form 8-K filed on October 19, 1999). 4 Rights Agreement, dated as of October 15, 1999, between the Company and ChaseMellon Shareholder Services, LLC, which includes the Certificate of Designations in respect of the Series A Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Stock as Exhibit C. Pursuant to the Rights Agreement, Right Certificates will not be mailed until after the Separation Date (as defined therein) (incorporated by reference from Form 8-K filed on October 19, 1999). 10.1 Seventh Agreement to Credit Agreement dated September 10, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, Bank One, N.A., and Chase Bank of Texas, N.A., as Lenders 10.2 Eighth Agreement to Credit Agreement dated September 30, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, Bank One, N.A., and Chase Bank of Texas, N.A., as Lenders 10.3 Ninth Agreement to Credit Agreement dated October 29, 1999 between Daisytek Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Citizens Bank of Massachusetts, Bank One, N.A., IBM Credit Corporation, and Chase Bank of Texas, N.A., as Lenders 10.4 Asset Purchase Agreement dated September 30, 1999, by and among Arlington Industries, Inc., Craig Funk, Arlington Acquisition Corp., and Daisytek, Incorporated. 10.5 Form of Change in Control Severance Agreement dated October 15, 1999 between Daisytek International Corporation and each of its executive officers. 10.6 Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment Services, Inc. 10.7 Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. 10.8 Commitment Letter dated September 9, 1999 between The Bank of Nova Scotia and Daisytek (Canada) Inc. 27.1 Financial Data Schedule for the six months ended September 30, 1999 27.2 Financial Data Schedule for the six months ended September 30, 1998
EX-10.1 2 7TH AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.1 SEVENTH AMENDMENT TO CREDIT AGREEMENT THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated and effective as of September ___, 1999, is among DAISYTEK, INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary Guarantors"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust ("State Street"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), and CHASE BANK OF TEXAS, N.A., a national banking association ("Chase"), as a lender and as administrative agent for itself, State Street and First Chicago (State Street, First Chicago, Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement being referred to, collectively, as "Lenders"). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State Street, First Chicago (as assignee, effective June 30, 1997, of NBD Bank, a Michigan banking corporation) and Chase are parties to that certain Credit Agreement dated as of May 22, 1995, as amended by that certain First Amendment to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to Credit Agreement dated as of November 14, 1996 and effective as of November 18, 1996, that certain Third Amendment to Credit Agreement dated and effective as of June 30, 1997, that certain Fourth Amendment to Credit Agreement dated and effective as of December 11, 1997, that certain Fifth Amendment to Credit Agreement dated as of February 13, 1998 and that certain Sixth Amendment to Credit Agreement dated as of March 29, 1999 and effective as of March 30, 1999 (as so amended, the "Credit Agreement"), establishing a revolving credit facility in the aggregate maximum principal amount of $85,000,000; and WHEREAS, the parties desire to increase the maximum aggregate amount of permitted unsecured Funded Debt pursuant to section 8.2(m) of the Credit Agreement from $18,000,000 to $35,000,000. NOW, THEREFORE, in consideration of the recitals set forth above, the agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor, Subsidiary Guarantors and Lenders hereby agree as follows: 1. Amendment of Section 8.2(m). Section 8.2(m) of the Credit Agreement is amended to read in its entirety as follows: "(m) Limitations on Funded Debt. No Daisytek Corporation shall permit, as of any date, the creation, incurrence, assumption or sufferance to exist of Funded Debt of such corporation, other than (i) the Obligations, (ii) Funded Debt existing on the Closing Date and fully described in the Initial Financial Statements (other than the Funded Debt referred 2 to in Footnote 2 to the Consolidated financial statements of Guarantor included in the Prospectus as the revolving line of credit agreement with commercial banks), (iii) Funded Debt secured as permitted by Section 8.2(a), (iv) unsecured Funded Debt of up to Ten Million Dollars ($10,000,000) to a Lender incurred under a money market line of credit, and (v) unsecured Funded Debt of such Daisytek Corporation which, together with the Funded Debt pursuant to this clause (v) of all other Daisytek Corporations, does not exceed Thirty-Five Million Dollars ($35,000,000)." 2. Other Documents. Borrower shall provide such other documents incidental and appropriate to this Amendment as Agent or Agent's counsel may reasonably request, all such documents being in form and substance reasonably satisfactory to Agent. 3. Terms of Agreement. Except as expressly amended by this Amendment, the Credit Agreement is and shall be unchanged. 4. Effect of Amendment. The Credit Agreement and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement in the Credit Agreement or the other documents shall mean a reference to the Credit Agreement as amended hereby. 5. Reaffirmation; No Default. Each Daisytek Corporation hereby represents and warrants to Lenders that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and delivered in connection herewith have been authorized by all requisite corporate action on the part of such Daisytek Corporation and will not violate the certificate of incorporation (or other charter documents) or bylaws of any Daisytek Corporation, (b) the representations and warranties contained in the Credit Agreement, as amended by this Amendment, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (d) each Daisytek Corporation is in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby. 6. Enforceability. Each Daisytek Corporation hereby represents and warrants that, as of the date of this Amendment, the Credit Agreement and all documents and instruments executed in connection therewith are in full force and effect and that there are no claims, counterclaims, offsets or defenses to any of such documents or instruments. 7. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. PURSUANT TO SECTION 346.004 OF THE TEXAS FINANCE CODE, CHAPTER 346 OF THE TEXAS FINANCE CODE SHALL NOT APPLY TO THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, THE NOTES, OR ANY ADVANCE OR LOAN EVIDENCED BY THE NOTES. SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 2 3 8. Maximum Interest Rate. Regardless of any provisions contained in this Amendment or in any other Loan Documents, Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes or otherwise any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and if Lenders ever receive, collect or apply as interest any such excess, or if acceleration of the maturity of the Notes or if any prepayment by Borrower results in Borrower having paid any interest in excess of the maximum rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balances of Notes are paid in full, any remaining excess shall forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or the Credit Agreement, as amended by this Amendment, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum lawful rate permitted under applicable law. In determining whether or not the interest paid or payable under any specific contingency exceeds the maximum rate of interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Notes at the maximum lawful rate under applicable law. 9. Counterparts. This Amendment may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 10. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION HEREBY WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE SECTION 17.41 ET SEQ.), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 3 4 AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO EACH LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT, (B) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C) IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS. 12. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES. [The balance of this page is intentionally left blank.] SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 4 5 THIS AMENDMENT is executed and effective as of the date first written above. BORROWER: DAISYTEK, INCORPORATED By: --------------------------------- Name: ------------------------------- Title: ------------------------------ GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION By: --------------------------------- Name: ------------------------------- Title: ------------------------------ SUBSIDIARY GUARANTORS: DAISYTEK (CANADA) INC., a Canadian corporation DAISYTEK ASIA PTE LTD, a Singapore corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ DAISYTEK DE MEXICO, S.A. DE C.V., a Mexican corporation DAISYTEK AUSTRALIA PTY. LTD. (ACN 075 675 795), an Australian corporation By: --------------------------------- By: Name: --------------------------------- ------------------------------- Name: Title: ------------------------------- ------------------------------ Title: ------------------------------ DAISYTEK DE MEXICO SERVICES, S.A. DE C.V., a Mexican corporation By: --------------------------------- Name: ------------------------------- Title: ------------------------------ SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 5 6 DAISYTEK LATIN AMERICA, INC., PRIORITY FULFILLMENT SERVICES a Florida corporation OF CANADA, INC., a Canadian corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ HOME TECH DEPOT, INC., a STEADI-SYSTEMS, LTD., Delaware corporation a California corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ PRIORITY FULFILLMENT SERVICES STEADI SYSTEMS MIAMI, INC., DE MEXICO, S.A. DE C.V., a a Florida corporation Mexican corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ PRIORITY FULFILLMENT SERVICES, STEADI SYSTEMS NEW YORK, INC., INC., a Delaware corporation a New York corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ PRIORITY FULFILLMENT SERVICES OF SUPPLIES EXPRESS, INC., a AUSTRALIA PTY. LIMITED, Delaware corporation (ACN 077 906 462), an Australian corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 6 7 WORKING CAPITAL OF AMERICA, THE TAPE COMPANY, INC., INC., a Delaware corporation an Ohio corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ THE TAPE COMPANY, INC., THE TAPE COMPANY, INC., an Illinois corporation a Minnesota corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ THE TAPE COMPANY, INC., TAPE DISTRIBUTORS OF TEXAS, INC., a Georgia corporation a Texas corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ THE TAPE COMPANY, INC., BUSINESS SUPPLIES DISTRIBUTORS, a Pennsylvania corporation INC., a Delaware corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 7 8 PFSWEB, INC., a Delaware BUSINESS SUPPLIES DISTRIBUTOR corporation EUROPE B.V., a Dutch corporation By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ BSD DISTRIBUTORS, (CANADA) AGENT: INC., a Canadian corporation CHASE BANK OF TEXAS, N.A., a national banking association By: --------------------------------- Name: By: ------------------------------- --------------------------------- Title: Name: ------------------------------ ------------------------------- Title: ------------------------------ LENDERS: CHASE BANK OF TEXAS, N.A. a national banking association By: --------------------------------- Name: ------------------------------- Title: ------------------------------ STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust By: --------------------------------- Michael St. Jean, Vice President THE FIRST NATIONAL BANK OF CHICAGO, a national banking association By: --------------------------------- Kathy Turner, Authorized Agent SEVENTH AMENDMENT TO CREDIT AGREEMENT - Page 8 EX-10.2 3 8TH AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.2 EIGHTH AMENDMENT TO CREDIT AGREEMENT THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated and effective as of September 30, 1999, is among DAISYTEK, INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary Guarantors"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust ("State Street"), BANK ONE, NA, (Main Office Chicago), a national banking association formerly named The First National Bank of Chicago ("Bank One"), and CHASE BANK OF TEXAS, N.A., a national banking association ("Chase"), as a lender and as administrative agent for itself, State Street and Bank One (State Street, Bank One, Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement being referred to, collectively, as "Lenders"). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State Street, Bank One (as assignee, effective June 30, 1997, of NBD Bank, a Michigan banking corporation) and Chase are parties to that certain Credit Agreement dated as of May 22, 1995, as amended by that certain First Amendment to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to Credit Agreement dated as of November 14, 1996 and effective as of November 18, 1996, that certain Third Amendment to Credit Agreement dated and effective as of June 30, 1997, that certain Fourth Amendment to Credit Agreement dated and effective as of December 11, 1997, that certain Fifth Amendment to Credit Agreement dated as of February 13, 1998, that certain Sixth Amendment to Credit Agreement dated as of March 29, 1999 and effective as of March 30, 1999 and that certain Seventh Amendment to Credit Agreement dated as of September 10, 1999 (as so amended, the "Credit Agreement"), establishing a revolving credit facility in the aggregate maximum principal amount of $85,000,000; and WHEREAS, the parties desire to amend certain provisions of the Credit Agreement. NOW, THEREFORE, in consideration of the recitals set forth above, the agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor, Subsidiary Guarantors and Lenders hereby agree as follows: 1. Amended Definitions. If a new credit facility is not entered into between the Borrower, Guarantor and the Lenders by February 29, 2000, then effective March 1, 2000 the definition of "Adjusted Eurodollar Rate" set forth in Section 1.1 of the Credit Agreement shall be amended to read in its entirety as set forth below (for purposes of this paragraph an amendment to the Credit Agreement shall not constitute a new credit agreement). In addition, the definition of EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 1 2 "Loan Commitment" set forth in Section 1.1 of the Credit Agreement shall be amended to read in its entirety as set forth below upon the execution of this Amendment: "Adjusted Eurodollar Rate" means, at any time, a rate of interest per annum determined by reference to the Interest Rate Adjustment Ratio in effect on the date such interest rate is determined according to the following table:
Adjustment Ratio (%) Rate -------------------- ---- Less than 65 Eurodollar Rate plus 1.0% 65 to Less than 85 Eurodollar Rate plus 1.075% Equal to or Greater than 85 to Less than 105 Eurodollar Rate plus 1.15% Equal to or Greater than 105 to Less than 130 Eurodollar Rate plus 1.25% Equal to or Greater than 130 Eurodollar Rate plus 1.75%"
"Loan Commitment" means, Eighty-Five Million Dollars ($85,000,000). Provided, however, that if (a) after the effective date of the Eighth Amendment to Credit Agreement Borrower identifies to Agent, in writing, a prospective lender that desires to become a Lender hereunder (and pursuant to all of the applicable terms and conditions of this Agreement) with a Committed Sum of up to Twenty Million Dollars ($20,000,000), (b) Agent consents to such prospective lender becoming a Lender hereunder with such a Committed Sum (which shall not be unreasonably withheld) and (c) such prospective lender thereafter becomes a Lender with such a Committed Sum, pursuant to documentation in form and substance satisfactory to Agent, then "Loan Commitment" shall instead mean up to One Hundred and Five Million Dollars ($105,000,000). In this connection, in the event that Agent assists in identifying a prospective lender Agent shall be paid a market based fee for its services." 2. Amendment of Section 10.1(n). Section 10.1(n) of the Credit Agreement is amended to read in its entirety as follows: "(n) Management. Mark C. Layton shall, for any reason, cease to be the Chairman of Daisytek Corporation (and a Person with equivalent knowledge and experience in the business of wholesale distribution of non-paper computer and office automation supplies and accessories, reasonably acceptable to Lenders, is not appointed to replace Mr. Layton within sixty (60) days thereof)." 3. Other Documents. Borrower shall provide such other documents incidental and appropriate to this Amendment as Agent or Agent's counsel may reasonably request, all such documents being in form and substance reasonably satisfactory to Agent. 4. Terms of Agreement. Except as expressly amended by this Amendment, the Credit Agreement is and shall be unchanged. 5. Effect of Amendment. The Credit Agreement and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 2 3 are hereby amended so that any reference to the Credit Agreement in the Credit Agreement or the other documents shall mean a reference to the Credit Agreement as amended hereby. 6. Reaffirmation; No Default. Each Daisytek Corporation hereby represents and warrants to Lenders that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and delivered in connection herewith have been authorized by all requisite corporate action on the part of such Daisytek Corporation and will not violate the certificate of incorporation (or other charter documents) or bylaws of any Daisytek Corporation, (b) the representations and warranties contained in the Credit Agreement, as amended by this Amendment, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (d) each Daisytek Corporation is in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby. 7. Enforceability. Each Daisytek Corporation hereby represents and warrants that, as of the date of this Amendment, the Credit Agreement and all documents and instruments executed in connection therewith are in full force and effect and that there are no claims, counterclaims, offsets or defenses to any of such documents or instruments. 8. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. PURSUANT TO SECTION 346.004 OF THE TEXAS FINANCE CODE, CHAPTER 346 OF THE TEXAS FINANCE CODE SHALL NOT APPLY TO THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, THE NOTES, OR ANY ADVANCE OR LOAN EVIDENCED BY THE NOTES. 9. Maximum Interest Rate. Regardless of any provisions contained in this Amendment or in any other Loan Documents, Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes or otherwise any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and if Lenders ever receive, collect or apply as interest any such excess, or if acceleration of the maturity of the Notes or if any prepayment by Borrower results in Borrower having paid any interest in excess of the maximum rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balances of Notes are paid in full, any remaining excess shall forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or the Credit Agreement, as amended by this Amendment, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum lawful rate permitted under applicable law. In determining whether or not the interest paid or payable under any specific EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 3 4 contingency exceeds the maximum rate of interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Notes at the maximum lawful rate under applicable law. 10. Counterparts. This Amendment may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 11. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 12. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION HEREBY WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE SECTION 17.41 ET SEQ.), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO EACH LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT, (B) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C) IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS. 13. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 4 5 AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES. EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 5 6 THIS AMENDMENT is executed and effective as of the date first written above.
BORROWER: DAISYTEK, INCORPORATED By: ------------------------------------------------ Name: ------------------------------------------------ Title: ------------------------------------------------ GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION By: ------------------------------------------------ Name: ------------------------------------------------ Title: ------------------------------------------------ SUBSIDIARY GUARANTORS: DAISYTEK ASIA PTE LTD, a Singapore corporation DAISYTEK (CANADA) INC., a Canadian corporation By: By: --------------------------------------------------- ---------------------------------------------- Name: Name: --------------------------------------------------- ---------------------------------------------- Title: Title: --------------------------------------------------- ---------------------------------------------- DAISYTEK AUSTRALIA PTY. LTD. (ACN 075 675 795), DAISYTEK DE MEXICO, S.A. DE C.V., a Mexican corporation an Australian corporation By: By: --------------------------------------------------- ----------------------------------------------- Name: Name: --------------------------------------------------- ----------------------------------------------- Title: Title: --------------------------------------------------- -----------------------------------------------
EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 6 7
DAISYTEK DE MEXICO SERVICES, PRIORITY FULFILLMENT SERVICES OF S.A. DE C.V., a Mexican corporation AUSTRALIA PTY. LIMITED, (ACN 077 906 462), an Australian corporation By: ------------------------------------- Name: ------------------------------------- By: Title: ------------------------------------- ------------------------------------- Name: ------------------------------------- Title: DAISYTEK LATIN AMERICA, INC., ------------------------------------- a Florida corporation PRIORITY FULFILLMENT SERVICES OF CANADA, INC., a Canadian corporation By: ------------------------------------- Name: ------------------------------------- Title: By: ------------------------------------- ------------------------------------- Name: ------------------------------------- HOME TECH DEPOT, INC., Title: a Delaware corporation ------------------------------------- STEADI-SYSTEMS, LTD., By: a California corporation ------------------------------------- Name: ------------------------------------- Title: By: ------------------------------------- ------------------------------------- Name: ------------------------------------- PRIORITY FULFILLMENT SERVICES DE MEXICO, Title: S.A. DE C.V., a Mexican corporation ------------------------------------- By: STEADI SYSTEMS MIAMI, INC., ------------------------------------- a Florida corporation Name: ------------------------------------- Title: ------------------------------------- By: ------------------------------------- PRIORITY FULFILLMENT SERVICES, INC., Name: a Delaware corporation ------------------------------------- Title: ------------------------------------- By: ------------------------------------- STEADI SYSTEMS NEW YORK, INC., Name: a New York corporation ------------------------------------- Title: ------------------------------------- By: ------------------------------------- Name: ------------------------------------- Title: -------------------------------------
EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 7 8
SUPPLIES EXPRESS, INC., THE TAPE COMPANY, INC., a Delaware corporation an Ohio corporation By: ----------------------------- By: Name: ----------------------------- ----------------------------- Name: Title: ----------------------------- ----------------------------- Title: ----------------------------- WORKING CAPITAL OF AMERICA, INC., a Delaware corporation THE TAPE COMPANY, INC., a Minnesota corporation By: ----------------------------- By: Name: ----------------------------- ----------------------------- Name: Title: ----------------------------- ----------------------------- Title: ----------------------------- THE TAPE COMPANY, INC., an Illinois corporation TAPE DISTRIBUTORS OF TEXAS, INC., a Texas corporation By: ----------------------------- Name: By: ----------------------------- ----------------------------- Title: Name: ----------------------------- ----------------------------- Title: ----------------------------- THE TAPE COMPANY, INC., a Georgia corporation BUSINESS SUPPLIES DISTRIBUTORS, INC., a Delaware corporation By: ----------------------------- Name: By: ----------------------------- ----------------------------- Title: Name: ----------------------------- ----------------------------- Title: ----------------------------- THE TAPE COMPANY, INC., a Pennsylvania corporation By: ----------------------------- Name: ----------------------------- Title: -----------------------------
EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 8 9 PFSWEB, INC., a Delaware BUSINESS SUPPLIES DISTRIBUTOR corporation EUROPE B.V., a Dutch corporation By: By: ---------------------------- ---------------------------- Name: Name: ---------------------------- ---------------------------- Title: Title: ---------------------------- ---------------------------- BSD DISTRIBUTORS, (CANADA) INC., a Canadian corporation AGENT: CHASE BANK OF TEXAS, N.A., By: a national banking association ---------------------------- Name: ---------------------------- Title: By: ---------------------------- --------------------------------- Name: ---------------------------- Title: ---------------------------- LENDERS: CHASE BANK OF TEXAS, N.A. a national banking association By: --------------------------------- Name: --------------------------- Title: --------------------------- STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust By: --------------------------------- Michael St. Jean, Vice President BANK ONE, NA, (Main Office Chicago), a national banking association By: --------------------------------- Kathy Turner, Authorized Agent
EIGHTH AMENDMENT TO CREDIT AGREEMENT - Page 9 EX-10.3 4 9TH AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.3 NINTH AMENDMENT TO CREDIT AGREEMENT THIS NINTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of October 29, 1999 and effective as of November 1, 1999, is among DAISYTEK, INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary Guarantors"), CITIZENS BANK OF MASSACHUSETTS, a Massachusetts stock savings bank, by assignment from State Street Bank and Trust Company, a Massachusetts trust ("Citizens"), BANK ONE, NA (Main Office Chicago), a national banking association formerly named The First National Bank of Chicago ("Bank One"), IBM CREDIT CORPORATION, a Delaware corporation ("IBM Credit"), and CHASE BANK OF TEXAS, N.A., a national banking association ("Chase"), as a lender and as administrative agent for itself, Citizens, Bank One and IBM Credit (Citizens, Bank One, IBM Credit, Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement being referred to, collectively, as "Lenders"). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, Citizens, Bank One (as assignee, effective June 30, 1997, of NBD Bank, a Michigan banking corporation) and Chase are parties to that certain Credit Agreement dated as of May 22, 1995, as amended by that certain First Amendment to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to Credit Agreement dated as of November 14, 1996 and effective as of November 18, 1996, that certain Third Amendment to Credit Agreement dated and effective as of June 30, 1997, that certain Fourth Amendment to Credit Agreement dated and effective as of December 11, 1997, that certain Fifth Amendment to Credit Agreement dated as of February 13, 1998, that certain Sixth Amendment to Credit Agreement dated as of March 29, 1999 and effective as of March 30, 1999 that certain Seventh Amendment to Credit Agreement dated as of September 10, 1999 and that certain Eighth Amendment to Credit Agreement dated as of September 30, 1999 (as so amended, the "Credit Agreement"), establishing a revolving credit facility in the aggregate maximum principal amount of $85,000,000; and WHEREAS, the parties desire to amend the Credit Agreement to increase the aggregate maximum principal amount under such revolving credit facility from $85,000,000 to $105,000,000, with funding commitments thereunder to be shared $25,000,000 by Citizens, $30,000,000 by Bank One, $20,000,000 by IBM Credit and $30,000,000 by Chase. NOW, THEREFORE, in consideration of the recitals set forth above, the agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor, Subsidiary Guarantors and Lenders hereby agree as follows: NINTH AMENDMENT TO CREDIT AGREEMENT - Page 1 2 EXHIBIT 10.3 1. Amended Definitions. The following definitions in Section 1.1 of the Credit Agreement are amended to read in their entireties as follows: ""Committed Sum" means, with respect to the Loan Commitment, Thirty Million Dollars ($30,000,000) with respect to Chase, Thirty Million Dollars ($30,000,000) with respect to Bank One, Twenty-Five Million Dollars ($25,000,000) with respect to Citizens and Twenty Million Dollars ($20,000,000) with respect to IBM Credit." ""Lender" or "Lenders" means, collectively, Chase Bank of Texas, N.A., a national banking association, Citizens Bank of Massachusetts, a Massachusetts stock savings bank, Bank One, NA (Main Office Chicago), a national banking association, IBM Credit Corporation, a Delaware corporation, and any assignee lender pursuant to Section 11.4A of this Credit Agreement. Notwithstanding such collective definition, the phrases "a Lender," "any of Lenders," "each of Lenders" and similar phrases shall be singular references and not collective references." ""Loan Commitment" means One Hundred and Five Million Dollars ($105,000,000)." ""Loan Documents" mean this Agreement, the Notes, the Guaranty, all amendments and other modifications thereto and all other amendments, agreements, certificates, legal opinions and other documents, instruments and writings (other than term sheets, commitment letters, or similar documents used in the negotiations hereof) heretofore or hereafter delivered in connection herewith or therewith." 2. New Definitions. The following definitions are added to Section 1.1 of the Credit Agreement, to read in their entireties as follows: ""IBM Credit" means IBM Credit Corporation, a Delaware corporation." ""Ninth Amendment Closing Date" means November 1, 1999, being the effective date of the Ninth Amendment to Credit Agreement among Borrower, Guarantor, Subsidiary Guarantors, Lenders and Agent." ""Required Lenders" means, at any time, Lenders having at least sixty percent (60%) of the aggregate amount of the Committed Sum at such time." 3. Amendment of Section 2.2. The first sentence of Section 2.2 of the Credit Agreement is amended to read in its entirety as follows: "The Loan made by Citizens, Bank One and Chase pursuant to this Article II shall be evidenced by the Notes dated as of the Sixth Amendment Closing Date and the Loan made by IBM Credit pursuant to this Article II shall be evidenced by the Note dated as of the Ninth Amendment Closing Date, all substantially in the form of Exhibit A." NINTH AMENDMENT TO CREDIT AGREEMENT - Page 2 3 EXHIBIT 10.3 4. Amendment of Section 3.1. Section 3.1 of the Credit Agreement is amended to read in its entirety as follows: "Section 3.1 Commitment to Issue Letters of Credit. Subject to the terms and conditions of this Agreement, including, without limitation, Section 3.2, Lenders (acting through any Lender or Lenders (other than IBM Credit) designated by Borrower from time to time, as issuer) agree to issue, at such times as Borrower may request from the Closing Date to the Loan Maturity Date, commercial and standby letters of credit for the account of any Daisytek Corporation; provided, however, that (a) the aggregate amount of the Letters of Credit issued by Lenders at any one time outstanding shall not exceed $2,000,000, and (b) the aggregate amount of the Letters of Credit, plus the principal amount of the Loan, at any one time outstanding, shall not exceed the lesser of (x) the Borrowing Base and (y) the Loan Commitment. IBM Credit shall not have any obligation to issue a letter of credit; however, IBM Credit shall, subject to the terms and conditions hereof, participate in all letters of credit issued by the other Lenders pursuant to this Agreement. If a Letter of Credit hereunder is issued other than by Chase, then the issuing Lender shall promptly (and in any event within one Business Day) notify Agent thereof and include with such notice Borrower's application for such Letter of Credit, a photocopy of the issued Letter of Credit and a statement signed by such issuing Lender acknowledging that such Letter of Credit was issued hereunder. The obligation of Lenders (acting through any Lender or Lenders (other than IBM Credit) designated by Borrower from time to time, as issuer) to issue Letters of Credit hereunder shall expire at Agent's close of business in Dallas, Texas on the Loan Maturity Date. Each Letter of Credit, as the same may be amended or extended from time to time, shall expire no later than the Loan Maturity Date. All Letters of Credit issued hereunder shall be in the issuing Lender's standard form or in such other form as is mutually agreed upon by Borrower and Lenders." 5. Amendment of Section 7.2. Section 7.2 of the Credit Agreement is amended to read in its entirety as follows: "Section 7.2 Lenders' Representations and Warranties. Lenders hereby represent and warrant that they will acquire the Notes for their own account in the ordinary course of their commercial banking business (or, in the case of IBM Credit, in the ordinary course of its commercial lending business); however, the disposition of a Lender's property shall at all times be and remain within its control and in particular and without limitation, this Section 7.2 does not prohibit a Lender's sale, hereby authorized, of the Notes or of any participation in the Notes to any bank, pension plan, investment fund, financial institution or similar purchaser. Lenders will exercise their best efforts to notify Borrower prior to, and in any event will notify Borrower promptly after, any such sale. No such sale shall relieve a Lender of its obligation to make Advances hereunder." 6. Amendment of Section 8.1(d). Section 8.1(d) of the Credit Agreement is amended to read in its entirety as follows: "(d) Other Information and Inspections. On and after the Closing Date, each NINTH AMENDMENT TO CREDIT AGREEMENT - Page 3 4 EXHIBIT 10.3 Daisytek Corporation will furnish to Agent, and will cause each of its Subsidiaries to furnish, (i) any information that any of Lenders may from time to time reasonably request concerning any covenant, provision or condition of the Loan Documents or any matter in connection with such corporation's businesses and operations and (ii) all evidence which any of Lenders may from time to time reasonably request as to the accuracy and validity of or compliance with all representations, warranties and covenants made by such corporation in the Loan Documents, the satisfaction of all conditions contained therein, and all other matters pertaining thereto. Upon reasonable prior notice and at reasonable times, each Daisytek Corporation will permit, and shall cause its Subsidiaries to permit, representatives appointed by Lenders, including independent accountants, auditors (including internal auditors), agents, attorneys, appraisers and any other persons, to visit and inspect any of such Person's property, including its books of account, other books and records, and any facilities or other business assets, and to make extra copies therefrom and photocopies and photographs thereof, and to write down and record any information such representatives obtain, and such corporation shall permit, and shall cause its Subsidiaries to permit, Lenders or their representatives to investigate and verify the accuracy of the information furnished to Lenders in connection with the Loan Documents and to discuss all such matters with its officers, employees and representatives; provided, however, that prior to the occurrence and continuance of an Event of Default, this sentence shall not be construed as permitting Lenders or their representatives to contact customers or suppliers of the Daisytek Corporations in connection with the transactions contemplated by the Loan Documents, without the consent of Borrower. Each Lender agrees that, except in connection with its enforcement of its rights under the Loan Documents, it will take all reasonable steps to keep confidential (in accordance with the normal practices of commercial banks (or, in the case of IBM Credit, in accordance with the normal practices of commercial lending)) any information given to it by a Daisytek Corporation; provided, however, that this restriction shall not apply to information that (A) has at the time in question entered the public domain as a result of actions taken by Persons other than Lenders, (B) is required to be disclosed by Law or by any order, rule or regulation (whether valid or invalid) of any Tribunal, (iii) is disclosed to another Lender, or to the Affiliates, auditors, attorneys, or agents of Lenders, or (iv) is furnished to purchasers or prospective purchasers of the Notes or of participations or other interests in the Loans or the Notes who agree to abide by the confidentiality restrictions of this subsection. Lenders shall use reasonable efforts to minimize the cost and inconvenience to the Daisytek Corporations associated with compliance with this Section 8.1(d)." 7. Amendment of Section 9.5. Section 9.5 of the Credit Agreement is amended to read in its entirety as follows: "Section 9.5 Notice of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Potential Event of Default hereunder unless Agent has received written notice from a Lender or Borrower, describing such Event of Default or Potential Event of Default and stating that such notice is a "notice of default." If Agent receives such a notice, Agent shall give notice thereof to all Lenders. Agent shall take such action with respect to such Event of Default or Potential Event of Default as shall be reasonably directed by the Required Lenders; provided, however, that unless and until Agent shall have received such NINTH AMENDMENT TO CREDIT AGREEMENT - Page 4 5 EXHIBIT 10.3 directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Potential Event of Default as it shall deem advisable in the best interests of all Lenders. Notwithstanding anything in this Section 9.5 or elsewhere in this Agreement to the contrary, upon the occurrence of an event or circumstance contemplated by Sections 10.1(a), (h), (i) or (j), then Agent may, and at the request of the Required Lenders shall, take such action (including, without limitation, the exercise of the remedies set forth in Section 10.2) or refrain from taking such action as it shall deem advisable in its sole discretion in the best interests of all Lenders." 8. Amendment of Section 9.14. Section 9.14 of the Credit Agreement is amended to read in its entirety as follows: "Section 9.14 Representation of Lenders. Each Lender severally represents that it will be taking the Note issued to it hereunder for its own account to evidence loans made in the ordinary course of its commercial banking business (or, in the case of IBM Credit, in the ordinary course of its commercial lending business), and not with a view to the distribution of such Note; provided, however, that the assets of each Lender shall always remain within the control of such Lender." 9. Amendment of Section 9.17. Section 9.17 of the Credit Agreement is amended to read in its entirety as follows: "Section 9.17 Priority of Liens. Notwithstanding anything contained herein to the contrary or in any other instrument or document executed and delivered in connection with this Agreement, or otherwise, including, without limitation, any prior perfection of a Lien under the provisions of the Uniform Commercial Code or any other Law of any jurisdiction that is applicable or in which such filing has been or will be made, or any other recordation or filing of any document, as between Lenders, any security interest (including any and all purchase money security interests) and Lien that each of Lenders may acquire in assets of a Daisytek Corporation will rank equally in priority with the security interest (including any and all purchase money security interests) and Lien of each other of Lenders in the same assets, except that Lenders (other than IBM Credit) will not claim a Lien in any equipment leased by IBM Credit to a Daisytek Corporation." 10. Amendment of Section 9.18. Section 9.18 of the Credit Agreement is amended to read in its entirety as follows: "Section 9.18 Required Consent. Notwithstanding Section 11.1, actions undertaken by Lenders with respect to this Agreement, such as entering into an amendment or supplement to this Agreement or granting a temporary waiver from a provision of this Agreement, require the consent of Lenders holding at least fifty-one percent (51%) of the total Committed Sum; provided, however, that (a) no modification, supplement or waiver shall, unless by an instrument signed by all Lenders or by Agent acting with the consent of all Lenders: (i) increase, or extend the term of any of, the Loan Commitment, or extend the time or waive any requirements for the reduction or termination of any of the Loan Commitment, or amend Section 3.1, (ii) extend the date fixed for the payment of principal NINTH AMENDMENT TO CREDIT AGREEMENT - Page 5 6 EXHIBIT 10.3 of or interest on the Loan (or any portion thereof) or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of Borrower to prepay the Loan (or any portion thereof), (vi) alter the terms of this Section 9.18, (vii) amend the definition of Required Lenders or otherwise modify in any other manner the number or percentage of Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof, (viii) waive any of the conditions precedent set forth in Section 6.2., or (ix) release Guarantor or any Subsidiary Guarantor from its Guaranty (except that Agent is authorized to release the Guaranty of any Subsidiary Guarantor being sold in a transaction consented to by Lenders holding at least fifty-one percent (51%) of the total Committed Sum), and (b) any modification or supplement of this Article IX shall require Agent's prior written consent. The immediately foregoing sentence is subject to (a) Agent's powers and rights specifically delegated or granted to it in this Agreement (and such powers as are reasonably incidental thereto) and (b) Section 9.5 (in respect of a Potential Event of Default or an Event of Default)." 11. Amendment of Section 10.2(a). Section 10.2(a) of the Credit Agreement is amended to read in its entirety as follows: "(a) Upon the occurrence of an event or circumstance contemplated by Sections 10.1(h), (i) or (j), unless a written waiver has been given by the Required Lenders, Lenders simultaneously and automatically (without notice, lapse of time or intervention of any action on the part of Lenders) shall be deemed at such time to have accelerated the payment of the Obligations as provided for in subsection (b)(i) below of this Section 10.2 and to have terminated the Loan Commitment as provided for in paragraph (b)(ii) below of this Section 10.2, and Agent may, and at the request of the Required Lenders shall, exercise all other remedies provided for in Section 10.2(b)." 12. Amendment of Section 10.2(b). The first paragraph of Section 10.2(b) of the Credit Agreement is amended to read in its entirety as follows: "(b) If an Event of Default exists because any other event or circumstance shall have occurred (and, in any case in which notice or grace period is provided with respect thereto under Section 10.1, such grace period shall have expired and all required notices shall be given so that an Event of Default exists), then Agent may, and at the request of the Required Lenders shall, do any one or more of the following:" 13. Amendment of Section 11.3. Lenders' addresses as set forth in Section 11.3 of the Credit Agreement are amended to read in their entirety as follows: "Chase Bank of Texas, N.A. 2200 Ross Avenue, Third Floor Dallas, Texas 75201 Attention: Allen King Telecopy: 214-965-2044 NINTH AMENDMENT TO CREDIT AGREEMENT - Page 6 7 EXHIBIT 10.3 Citizens Bank of Massachusetts 28 State Street Boston, Massachusetts 02109 Attention: Michael St. Jean Telecopy: 617-338-4041 Bank One, NA (Main Office Chicago) 1717 Main Street, Third Floor Dallas, Texas 75201 Attention: Kathy Turner Telecopy: 214-290-2305 IBM Credit Corporation 5000 Execution Parkway, Suite 450 San Ramon, California, 94583 Attention: Region Manager West Telecopy: 925-277-5675 As to any Lender who becomes such pursuant to Section 11.4A, to such Lender at is address given to Agent." In addition, all references to "The First National Bank of Chicago" are hereby amended to be references to "Bank One, NA (Main Office Chicago)," all references to "First Chicago" are hereby amended to be references to "Bank One," all references to "State Street Bank and Trust Company" are hereby amended to be references to "Citizens Bank of Massachusetts" and all references to "State Street" are hereby amended to be references to "Citizens." 14. Amendment of Exhibit. Exhibit F to the Credit Agreement is amended in its entirety to be in the form of Exhibit F attached to this Amendment. 15. New Exhibit H. There is hereby added a new Exhibit H to the Credit Agreement, to provide in its entirety as provided in the Exhibit H attached to this Amendment. 16. Release of Certain Subsidiary Guarantors; Initial Public Offering of PFSweb, Inc. Upon the effective date of the initial public offering (the "IPO") of shares of common stock of PFSweb, Inc. ("PFSweb") described in the Registration Statement on Form S-1 (as amended from time to time, the "Registration Statement") filed by PFSweb with the Securities and Exchange Commission, each of the following Subsidiary Guarantors shall be released from its obligations under all Guaranties executed by it: PFSweb, Priority Fulfillment Services, Inc., Priority Fulfillment Services of Canada, Inc., Priority Fulfillment Services Europe B.V. and Working Capital of America, Inc. (collectively, the "Released Daisytek Corporations"); provided, that it is a condition subsequent to the effectiveness of such release that the IPO closes (and if the IPO does not close then such release is not effective) and that Borrower receives from PFSweb cash in the amount of the lesser of (x) the outstanding inter-company payables then owing to Borrower by the Released Daisytek Corporations or (y) $18,000,000. In addition, as of such NINTH AMENDMENT TO CREDIT AGREEMENT - Page 7 8 EXHIBIT 10.3 effective date, and provided the IPO closes and Borrower receives the aforesaid cash amount upon the closing of the IPO, the following provisions shall apply: (1) The Released Daisytek Corporations shall not be (i) "Consolidated" with any Daisytek Corporation (including for purposes of Section 8.2(d) and (e)) (except for the purposes of Section 8.1(b)(i) and (ii), for which they shall be Consolidated), (ii) deemed "Daisytek Corporations" (except for the purposes of Section 8.2 (k)), (iii) deemed "Subsidiaries" and (iv) not be deemed "Subsidiary Guarantors" or "Subsidiary Non-Guarantors." (2) The Borrower will not (i) loan or make advances to, or investments in, any of the Released Daisytek Corporations, (ii) create, assume or permit to exist any Lien upon any of the shares of common stock of PFSweb or (iii) sell, transfer, assign or otherwise dispose of any of the shares of common stock of PFSweb owned by it (other than pursuant to a sale or distribution to the public). (3) The provisions of Section 8.1(o) of the Credit Agreement shall be waived to the extent that such section requires the delivery of a stock pledge of any Released Daisytek Corporation. (4) No Released Daisytek Corporation shall be entitled to receive any proceeds, either directly or indirectly, of the Credit Agreement. (5) All financial statements delivered by a Daisytek Corporation pursuant to the terms of the Credit Agreement shall be accompanied by a completed Compliance Certificate, the form of which is attached to this Amendment as Exhibit H. 17. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon the prior receipt by Agent of the documentation set forth below: (a) Certificates. A certificate of the Secretary of each Daisytek Corporation, dated as of the Ninth Amendment Closing Date, to the effect that, except for an increase in the number of authorized shares of common stock of Guarantor, no changes have occurred to the certificates of incorporation (and other equivalent charter documents) and by-laws of the Daisytek Corporations, and no changes have occurred in the incumbency of officers of the Daisytek Corporations authorized to execute or attest any of the Loan Documents, in each case since May 22, 1995, except as expressly described in such certificate; (b) Resolutions. Copies of resolutions of the Board of Directors of each Daisytek Corporation, satisfactory to Lenders, approving the execution and delivery of this Amendment and such of the other Loan Documents to which such corporation is a party and authorizing the performance of the obligations of such corporation contemplated in this Amendment and in such other Loan Documents, accompanied by a certificate of the Secretary of such corporation, dated as of the Ninth Amendment Closing Date, that such copies are complete and correct copies of resolutions duly adopted at a meeting of such Board of Directors, and that such resolutions have not been amended, modified or revoked in any respect, and are in full force and effect as of the Ninth Amendment Closing Date; NINTH AMENDMENT TO CREDIT AGREEMENT - Page 8 9 EXHIBIT 10.3 (c) Other Certificates. Certificates of each Daisytek Corporation's existence, good standing and qualification to do business, issued by appropriate officials in any state in which such corporation is incorporated, owns property or otherwise qualified, or required to qualify, to do business; (d) Note. The Note, duly executed, in favor of IBM Credit; (e) Opinion of Counsel. An executed opinion of Wolff & Samson, P.C., Roseland, New Jersey, counsel to the Daisytek Corporations, dated as of the Ninth Amendment Closing Date and in form and substance satisfactory to Lenders and their counsel; and (f) Other Documents. Any and all other documents or certificates reasonably requested by a Lender in connection with the execution of this Amendment, including the Guaranty. 18. Guaranties. Each of Guarantor and each Subsidiary Guarantor hereby acknowledges, consents and agrees to this Amendment and (a) acknowledges that its obligations under that certain Guaranty executed by it, in favor of a Lender (or Agent for the benefit of Lenders) as the case may be, includes a guaranty of all of the obligations, indebtedness and liabilities of Borrower under the Credit Agreement as amended by this Amendment (specifically including, without limitation, the obligations, indebtedness and liabilities resulting from the increase in the maximum principal amount of the revolving credit facility established by the Credit Agreement from $85,000,000 to $105,000,000), (b) represents to each Lender that such Guaranty remains in full force and effect and shall continue to be its legal, valid and binding obligation, enforceable against it in accordance with its terms, and (c) agrees that this Amendment and all documents executed in connection herewith do not operate to reduce or discharge its obligations under such Guaranty. 19. Other Documents. Borrower shall provide such other documents incidental and appropriate to this Amendment as Agent or Agent's counsel may reasonably request, all such documents to be in form and substance reasonably satisfactory to Agent. 20. Terms of Agreement. Except as expressly amended by this Amendment, the Credit Agreement is and shall be unchanged. 21. Effect of Amendment. The Credit Agreement and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement in the Credit Agreement or the other documents shall mean a reference to the Credit Agreement as amended hereby. 22. Assignment. Each of Chase, Citizens and Bank One (each, the "Assignor") hereby sells and assigns to IBM Credit, and IBM Credit hereby purchases and assumes, the percentage interest set forth on Schedule I in and to all of the Assignor's rights and obligations under the Credit Agreement (including, without limitation, such percentage interest in such Lender's Loan NINTH AMENDMENT TO CREDIT AGREEMENT - Page 9 10 EXHIBIT 10.3 Commitment, outstanding Letters of Credit and the Loans owing to such Lender). As of the Ninth Amendment Closing Date, amounts outstanding under the Loan and the Letters of Credit shall, as to each Lender, be held Pro Rata (as Pro Rata is modified by the amendment, in this Amendment, of the term "Committed Sum."). 23. Reaffirmation; No Default. Each Daisytek Corporation hereby represents and warrants to Lenders that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and delivered in connection herewith have been authorized by all requisite corporate action on the part of such Daisytek Corporation and will not violate the certificate of incorporation (or other charter documents) or bylaws of any Daisytek Corporation, (b) the representations and warranties contained in the Credit Agreement, as amended by this Amendment, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (d) each Daisytek Corporation is in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby. 24. Enforceability. Each Daisytek Corporation hereby represents and warrants that, as of the date of this Amendment, the Credit Agreement and all documents and instruments executed in connection therewith are in full force and effect and that there are no claims, counterclaims, offsets or defenses to any of such documents or instruments. 25. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. PURSUANT TO SECTION 346.004 OF THE TEXAS FINANCE CODE, CHAPTER 346 OF THE TEXAS FINANCE CODE SHALL NOT APPLY TO THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, THE NOTES, OR ANY ADVANCE OR LOAN EVIDENCED BY THE NOTES. 26. Maximum Interest Rate. Regardless of any provisions contained in this Amendment or in any other Loan Documents, Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes or otherwise any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and if Lenders ever receive, collect or apply as interest any such excess, or if acceleration of the maturity of the Notes or if any prepayment by Borrower results in Borrower having paid any interest in excess of the maximum rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balances of Notes are paid in full, any remaining excess shall forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or the Credit Agreement, as amended by this Amendment, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum lawful rate permitted under NINTH AMENDMENT TO CREDIT AGREEMENT - Page 10 11 EXHIBIT 10.3 applicable law. In determining whether or not the interest paid or payable under any specific contingency exceeds the maximum rate of interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Notes at the maximum lawful rate under applicable law. 27. Counterparts. This Amendment may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 28. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 29. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION HEREBY WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE SECTION 17.41 ET SEQ.), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO EACH LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT, (B) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C) IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS. 30. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS NINTH AMENDMENT TO CREDIT AGREEMENT - Page 11 12 EXHIBIT 10.3 AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES. NINTH AMENDMENT TO CREDIT AGREEMENT - Page 12 13 EXHIBIT 10.3 THIS AMENDMENT is executed and effective as of the date first written above. BORROWER: DAISYTEK, INCORPORATED By: --------------------------------- Name: ------------------------------- Title: ------------------------------ GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION By: -------------------------------- Name: ------------------------------- Title: ------------------------------ SUBSIDIARY GUARANTORS: DAISYTEK ASIA PTY LTD, a Singapore corporation By: ----------------------------------------- Name: -------------------------------------- Title: -------------------------------------- DAISYTEK AUSTRALIA PTY. LTD. (ACN 075 675 795), an Australian corporation By: ----------------------------------------- Name: -------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 13 14 DAISYTEK (CANADA) INC., a Canadian corporation By: ----------------------------------------- Name: -------------------------------------- Title: -------------------------------------- DAISYTEK DE MEXICO, S.A. DE C.V., a Mexican corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- DAISYTEK DE MEXICO SERVICES, S.A. DE C.V., a Mexican corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- DAISYTEK LATIN AMERICA, INC., a Florida corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- HOME TECH DEPOT, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 14 15 PRIORITY FULFILLMENT SERVICES DE MEXICO, S.A. DE C.V., a Mexican corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- PRIORITY FULFILLMENT SERVICES OF AUSTRALIA PTY. LIMITED, (ACN 077 906 462), an Australian corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- PRIORITY FULFILLMENT SERVICES OF CANADA, INC., a Canadian corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- STEADI-SYSTEMS, LTD., a California corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 15 16 STEADI SYSTEMS MIAMI, INC., a Florida corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- STEADI SYSTEMS NEW YORK, INC., a New York corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- STEADI SYSTEMS CANADA, INC., a Canadian corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- STEADI SYSTEMS DE MEXICO, S.A. DE C.V., a Mexican corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- SUPPLIES EXPRESS, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 16 17 WORKING CAPITAL OF AMERICA, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE TAPE COMPANY, INC., an Illinois corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE TAPE COMPANY, INC., a Georgia corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE TAPE COMPANY, INC., a Pennsylvania corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 17 18 THE TAPE COMPANY, INC., an Ohio corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE TAPE COMPANY, INC., a Minnesota corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- TAPE DISTRIBUTORS OF TEXAS, INC., a Texas corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- BUSINESS SUPPLIES DISTRIBUTORS, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 18 19 PFSWEB, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- BSD DISTRIBUTORS, (CANADA) INC., a Canadian corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- BUSINESS SUPPLIES DISTRIBUTOR EUROPE B.V., a Dutch corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 19 20 AGENT: CHASE BANK OF TEXAS, N.A., a national banking association By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- LENDERS: CHASE BANK OF TEXAS, N.A. a national banking association By: -------------------------------- Name: ------------------------------ Title: ----------------------------- CITIZENS BANK OF MASSACHUSETTS, a Massachusetts stock savings bank By: -------------------------------- Michael St. Jean, Vice President BANK ONE, NA (Main Office Chicago), a national banking association By: -------------------------------- Kathy Turner, Authorized Agent IBM CREDIT CORPORATION, a Delaware corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- NINTH AMENDMENT TO CREDIT AGREEMENT - Page 20 EX-10.4 5 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.4 ASSET PURCHASE AGREEMENT dated as of September 30, 1999 by and among ARLINGTON INDUSTRIES, INC., CRAIG FUNK, ARLINGTON ACQUISITION CORP. AND DAISYTEK, INCORPORATED 2 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS.......................................................................................................1 ARTICLE II PURCHASE AND SALE.................................................................................................9 2.1 Purchase and Sale of Assets.....................................................................9 2.2 Transfer and Conveyance........................................................................10 2.3 Assumption of Certain Obligations..............................................................10 ARTICLE III PURCHASE PRICE...................................................................................................11 3.1 Purchase Price.................................................................................11 3.2 Method of Payment of Purchase Price; Other Amounts Payable at the Closing......................11 3.3 Pre-Closing Balance Sheet......................................................................12 3.4 Closing Balance Sheet..........................................................................12 3.5 Resolution of Accounting Disputes..............................................................12 3.6 Adjustment of Closing Payment..................................................................13 3.7 Allocation of Purchase Price...................................................................13 3.8 Earnouts.......................................................................................13 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER AND FUNK................................................................15 4.1 Due Organization and Qualification; Title to Stock; No Subsidiaries............................15 4.2 Corporate Power and Authority..................................................................16 4.3 Real Property..................................................................................16 4.4 Personal Property; Title to Property...........................................................18 4.5 Intellectual Property; Year 2000...............................................................18 4.6 Permits........................................................................................19 4.7 Compliance with Laws...........................................................................19 4.8 Contracts......................................................................................19 4.9 Contract Defaults..............................................................................20 4.10 Litigation.....................................................................................20 4.11 Inventory......................................................................................20 4.12 Financial Condition and Results of Operations..................................................20 4.13 Employee Benefits..............................................................................20 4.14 Employees; Employee Relations..................................................................21 4.15 Consents.......................................................................................22 4.16 Insurance......................................................................................22 4.17 Taxes..........................................................................................22
i 3 4.18 Environmental Laws and Regulations.............................................................23 4.19 Absence of Certain Changes or Events...........................................................23 4.20 Accounts Receivable; Evidences of Indebtedness................................................23 4.21 Customers......................................................................................24 4.22 Suppliers......................................................................................24 4.23 Accounts, Lockboxes; Safe Deposit Boxes; Powers of Attorney....................................24 4.24 True, Correct and Complete Information.........................................................24 4.25 Broker's and Finder's Fees.....................................................................25 4.26 Disclaimer of Other Representations and Warranties.............................................25 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PARENT...........................................................25 5.1 Organization and Authority.....................................................................25 5.2 Consents.......................................................................................26 5.3 Litigation.....................................................................................26 5.4 Broker's and Finder's Fees.....................................................................26 5.5 Purchase for Resale............................................................................26 5.6 Disclaimer of Other Representations and Warranties.............................................26 ARTICLE VI COVENANTS OF SELLER AND FUNK.....................................................................................26 6.1 Affirmative Covenants..........................................................................26 6.2 Negative Covenants.............................................................................27 6.3 Access to Properties and Records...............................................................27 6.4 Notice of Developments.........................................................................28 6.5 Employees of Seller............................................................................28 6.6 Approvals of Third Parties.....................................................................28 6.7 Notices........................................................................................28 6.8 Access to Books and Records....................................................................28 6.9 No Solicitation of Offers......................................................................29 6.10 Receivables Guaranteed.........................................................................29 6.11 Prepaid Revenue................................................................................29 6.12 Release of Financing Statements................................................................29 6.13 Release of Seller Under Guaranty...............................................................30 ARTICLE VII COVENANTS OF PURCHASER AND PARENT................................................................................30 7.1 Furnishing of Information......................................................................30 7.2 Approvals of Third Parties.....................................................................30 7.3 Access to Books and Records....................................................................30 7.4 Discharge of Assumed Liabilities...............................................................30 7.5 Tax Notification...............................................................................30 7.6 Employees and Agents of Seller.................................................................31 7.7 Bank Debt......................................................................................31
ii 4 ARTICLE VIII CONDITIONS TO OBLIGATIONS OF PURCHASER AND PARENT................................................................32 8.1 Representations and Warranties of Seller and Funk..............................................32 8.2 Covenants of Seller and Funk...................................................................32 8.3 Seller's Certificate...........................................................................32 8.4 Noncompetition and Employment Agreements.......................................................32 8.5 Escrow Agreement...............................................................................32 8.6 No Casualty Losses.............................................................................32 8.7 Certificates of Authorities....................................................................32 8.8 Litigation.....................................................................................33 8.9 Satisfactory to Purchaser's Counsel............................................................33 8.10 Opinion of Seller's Counsel....................................................................33 8.11 No Material Adverse Effect.....................................................................33 8.12 Consents.......................................................................................33 8.13 Satisfactory Pre-Closing Balance Sheet.........................................................33 8.14 Bank Debt and Indebtedness to Vendors..........................................................33 8.15 Guaranty Documents.............................................................................34 8.16 Due Diligence..................................................................................34 8.17 Pre-Closing Balance Sheet......................................................................34 8.18 Further Assurances.............................................................................34 ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER AND FUNK.....................................................................34 9.1 Representations and Warranties of Purchaser and Parent.........................................34 9.2 Covenants of Purchaser and Parent..............................................................34 9.3 Purchaser's/Parent's Certificate...............................................................34 9.4 Assumption Agreement...........................................................................34 9.5 Noncompetition and Employment Agreements.......................................................35 9.6 Escrow Agreement...............................................................................35 9.7 Certificates of Authorities....................................................................35 9.8 Satisfactory to Seller's Counsel...............................................................35 9.9 Opinion of Counsel to Parent and Purchaser.....................................................35 9.10 Pre-Closing Balance Sheet......................................................................35 9.11 Bank Debt......................................................................................35 9.12 Resale Certificate.............................................................................35 ARTICLE X DATE AND PLACE OF CLOSING........................................................................................35 10.1 Date and Place of Closing......................................................................35 10.2 Effective Date.................................................................................35
iii 5 ARTICLE XI CLOSING..........................................................................................................36 11.1 Performance by Seller and Funk.................................................................36 11.2 Performance by Purchaser and Parent............................................................37 11.3 Other Instruments..............................................................................37 ARTICLE XII SURVIVAL AND INDEMNIFICATION.....................................................................................38 12.1 Survival of Covenants, Agreements, Representations and Warranties..............................38 12.2 Purchaser's Losses.............................................................................38 12.3 Employee Compensation and Benefits.............................................................39 12.4 Seller's Losses................................................................................39 12.5 Limitations on Losses..........................................................................40 12.6 Notice of Loss.................................................................................40 12.7 Right to Defend................................................................................40 12.8 Cooperation....................................................................................41 12.9 Payment Through Escrow.........................................................................41 12.10 Exclusive Remedy...............................................................................42 ARTICLE XIII TERMINATION......................................................................................................42 13.1 Termination....................................................................................42 13.2 No Further Force or Effect.....................................................................42 ARTICLE XIV MISCELLANEOUS....................................................................................................43 14.1 Expenses.......................................................................................43 14.2 Entire Agreement...............................................................................43 14.3 Publicity......................................................................................43 14.4 Successors and Assigns.........................................................................43 14.5 Counterparts...................................................................................43 14.6 Headings.......................................................................................43 14.7 Use of Certain Terms...........................................................................43 14.8 Modification and Waiver........................................................................43 14.9 Notices........................................................................................44 14.10 GOVERNING LAW..................................................................................45 14.11 Time...........................................................................................45 14.12 Reformation and Severability...................................................................45
iv 6 SCHEDULES 1.1 GAAP Exceptions 2.1A Excluded Assets 2.3(d) Contracts, Leases, Arrangements, and Commitments 2.3(e) Executory Vendor Purchase Orders 3.7 Allocation of Purchase Price 3.8(a) Standards for Determining PBT 3.8(b) Calculation of 1998 Adjusted PBT 3.8(f) Exceptions to Business Practices 4.1(a) Jurisdictions where Seller is Qualified or Licensed to do Business 4.1(b) Encumbrances on Stock 4.2 Modifications of Licenses, Franchises, Permits and Other Authorizations 4.3 Leased Real Property 4.4 Personal Property 4.5 Intellectual Property 4.6 Material Permits 4.8 Contracts 4.10 Litigation 4.11 Inventory Locations 4.13 Employee Benefit Plans 4.14 Employees, Collective Bargaining Agreements and Labor Relations 4.15 Seller's Consents 4.16 Insurance 4.18 Environmental Laws and Regulations 4.19 Certain Changes or Events 4.20 Accounts Receivable 4.21 Customers 4.22 Suppliers 4.23 Bank Accounts 5.2 Purchaser's Consents 7.6 Employees and Agents of Seller EXHIBITS Exhibit A--Bill of Sale and Assignment Exhibit B--Assumption Agreement Exhibit C--Escrow Agreement Exhibit D--Noncompetition Agreement Exhibit E--Employment Agreement 7 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the 30th day of September, 1999, by and among ARLINGTON INDUSTRIES, INC., an Illinois corporation with its principal offices at 1001 Technology Way, Libertyville, Illinois 60048 ("Seller"), CRAIG FUNK, the sole stockholder of Seller ("Funk"), having an address of 1001 Technology Way, Libertyville, Illinois 60048, ARLINGTON ACQUISITION CORP., a Delaware corporation with its principal offices at 500 North Central Expressway, Suite 500, Plano, Texas 75074 ("Purchaser"), and DAISYTEK, INCORPORATED, a Delaware corporation with its principal offices at 500 North Central Expressway, Suite 500, Plano, Texas 75074 ("Parent"). WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to buy from Seller, substantially all of the assets of the wholesale computer and office equipment, supplies and consumables distribution business conducted by Seller (the "Business"); and WHEREAS, Purchaser is a wholly-owned subsidiary of Parent, and Parent will benefit from Purchaser's purchase of substantially all of Seller's assets; and WHEREAS, in connection with the purchase by Purchaser from Seller of the assets described herein, (i) Purchaser and Seller and Funk will enter into a noncompetition agreement (the "Noncompetition Agreement"), and (ii) Funk will enter into an employment agreement with Purchaser (the "Employment Agreement"). NOW, THEREFORE, for and in consideration of the mutual representations, warranties, covenants and agreements hereinafter set forth and other good and valuable consideration, and upon the terms and subject to the conditions hereinafter set forth, the parties do hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accounts Receivable" has the meaning specified in Section 6.10. "Acquisition Proposal" has the meaning specified in Section 6.8. "Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Action" means any claim, action, suit, arbitration, or other proceeding, in each case, by or before any Governmental Authority. 8 "Additional Documents" means the Escrow Agreement, the Employment Agreement, and the Noncompetition Agreement. "Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Allocation Modifications" has the meaning specified in Section 3.4. "Assets" has the meaning specified in Section 2.1(h). "Assumed Liabilities" has the meaning specified in Section 2.3. "Bank Debt" means the Indebtedness owing by Seller to American National Bank and Trust Company of Chicago ("ANB") under that certain Loan and Security Agreement dated May 2, 1997, as the same may have been amended, modified or supplemented, including the Indebtedness evidenced by that certain Promissory Note (Secured) dated June 1, 1999 (the "Revolving Note"), issued by Seller and payable to the order of ANB, in a maximum principal amount of $14,000,000, and that certain Installment Business Loan Note dated February 29, 1996 (the "Term Note"), issued by Seller and payable to the order of NBD Bank (of which ANB is the successor lender), in the original principal amount of $325,000. "Business" has the meaning specified in the recitals to this Agreement. "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in The City of New York. "Cash Payment" has the meaning specified in Section 3.2(a). "CAP" means, with respect to the Seller, GAAP applied consistently by Seller throughout the periods involved, with only such exceptions to GAAP principles and practices as are set forth in Schedule 1.1. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations promulgated thereunder. "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System. "Claim" has the meaning specified in Section 12.9. "Closing" and "Closing Date" have the meanings specified in Section 10.1. 2 9 "Closing Balance Sheet" has the meaning specified in Section 3.4. "Code" means the Internal Revenue Code of 1986, as amended. "Contracts" has the meaning specified in Section 4.8. "Control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor or by contract, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Director" has the meaning specified in Section 7.5. "Earnout Accounting Firm" has the meaning specified in Section 3.8(c). "Effective Date" has the meaning specified in Section 10.2. "Employee Claims" has the meaning specified in Section 12.3. "Employment Agreement" has the meaning specified in the recitals to this Agreement. "Encumbrance" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge or encumbrance, other than (a) mechanic's, materialmen's, and similar liens or (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings and as to which the Company has provided adequate reserves in its Pre-Closing Balance Sheet. "Environmental Laws" means any federal, state or local law or any foreign law, including any statute, rule, regulation, ordinance, code or rule of common law, now or hereafter in effect and in each case as amended, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including, without limitation, CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300 et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq. "Environmental Permits" means all permits, written approvals, U.S. Environmental Protection Agency or state generator numbers, licenses and other authorizations from applicable 3 10 Governmental Authorities required under any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Escrow Agreement" has the meaning specified in Section 3.2(b). "Excluded Assets" has the meaning specified in Section 2.1. "Excluded Consents" has the meaning specified in Section 2.2. "Financial Statements" has the meaning specified in Section 4.12. "Fiscal 2000" means the 12-month period commencing on the Effective Date. "Fiscal 2001" means the 12-month period commencing on the first anniversary of the Effective Date. "GAAP" means generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved. "Governmental Authority" means any United States federal, state, local, possession or foreign governmental, regulatory or administrative authority, agency or commission, or any political subdivision thereof, or any court, tribunal or arbitral body. "Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "Growth Earnout Payment" has the meaning specified in Section 3.8(a). "Growth Earnout Payment Statement" has the meaning specified in Section 3.8(b). "Guaranty Documents" has the meaning specified in Section 6.13. "Hazardous Materials" means (a) petroleum and petroleum fuels, lubricants and cleaning agents, radioactive materials, friable asbestos material as defined under 40 C.F.R. 61.141, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls in concentrations of 50 ppm, and radon gas; (b) any other chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials" or "extremely hazardous wastes"; and (c) any other chemical, material or substance exposure to which is regulated pursuant to any applicable Environmental Law. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. 4 11 "Income Taxes" means any and all income taxes (together with any and all interest, penalties, and additional amounts imposed with respect thereto) imposed by any Governmental Authority or other taxing authority. "Incremental Earnout Multiple" has the meaning specified in Section 3.8(a). "Indebtedness" means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money; (b) all obligations of such Person for the deferred purchase price of property or services; (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments; (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (e) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as capital leases; (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (h) all Indebtedness of others referred to in clauses (a) through (g) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (iv) otherwise to assure a creditor against loss; and (i) all Indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Intellectual Property" means (a) inventions, whether patentable or not and whether or not yet made the subject of a pending patent application or applications; (b) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications; (c) statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations and continuations-in-part) and all improvements to the inventions covered in each such registration, patent or application; (d) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the Trademark Offices of the States and Territories of the United States of America, and the Trademark Offices of other nations throughout the world; (e) copyrights (registered or otherwise) and registrations and applications 5 12 for registration thereof; (f) computer software and programs, data and documentation; (g) trade secrets and confidential business information (including ideas, formulas, compositions, inventions, and conceptions of inventions, whether patentable or unpatentable and whether or not reduced to practice), technology (including know-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data and copyrightable works; (h) copies and tangible embodiments of all of the foregoing, in whatever form or medium; (i) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights; and (j) all rights to sue for present and past infringement of any of the intellectual property rights hereinabove set out. "Inventories" and "Inventory" mean all inventory, merchandise, goods, raw materials, finished goods, packaging and supplies, including, but not limited to, those related to the Business, maintained, held (including, without limitation, on consignment) or stored by or for Seller and any prepaid deposits for any of the same. "IRS" means the Internal Revenue Service. "Knowledge" (including the terms "to the knowledge of" or "to the best knowledge of") means, with respect to Seller and Funk, the actual personal knowledge of one or more of Seller's officers or directors (including without limitation Funk) at the time when the applicable statement is made. "Leased Real Property" means the real property leased by Seller, as landlord or tenant, together with, to the extent leased by such entity, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures attached or appurtenant thereto, and all easements, licenses, rights and appurtenances relating to the foregoing, all to the extent of Seller's rights therein. "Losses" has the meaning specified in Section 12.4. "Maintenance Earnout Payment" has the meaning specified in Section 3.8(g). "Material Adverse Effect" means any circumstance, change in, or effect on, the Business that individually, or in the aggregate with any other circumstances, changes in, or effects on, the Business, taken as a whole: (a) would have a material adverse effect on the financial condition of the Business as taken as a whole or (b) would materially adversely affect the ability of Purchaser to operate or conduct the Business in the manner in which it is currently operated or conducted by Seller. "Material Permits" has the meaning specified in Section 4.6. "Most Recent Balance Sheet" has the meaning specified in Section 4.12. "Net Worth" means, as of any date of determination, the difference between the Assets 6 13 and Assumed Liabilities and Bank Debt, as determined in accordance with CAP. "Net Worth Deficit" shall mean, as of any date of determination, the amount, if any, by which the Net Worth of Seller is less than $13,000,000. "Noncompetition Agreement" has the meaning specified in the recitals to this Agreement. "Overpayment" has the meaning specified in Section 3.6. "PBGC" means the Pension Benefit Guaranty Corporation. "PBT" has the meaning specified in Section 3.8(a). "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act. "Plan" has the meaning specified in Section 4.13. "Pre-Closing Balance Sheet" has the meaning specified in Section 3.3. "Pre-Closing Balance Sheet Date" means August 31, 1999, or such later date as the parties hereto shall mutually agree. "Purchase Price" has the meaning specified in Section 3.1. "Purchase Price Bank Account" means the account to be designated by the Seller in a written notice to Purchaser prior to the Closing. "Purchaser's Losses" has the meaning specified in Section 12.2. "Purchase Price Accounting Firm" has the meaning specified in Section 3.5(c). "Receivables" means all Accounts Receivable, promissory notes, contract rights, commercial paper, debt securities and other rights to receive money as of any applicable date of determination, all as determined in accordance with CAP. "Receivable Writeback Amount" has the meaning specified in Section 6.10. "Receivable Writeback Date" has the meaning specified in Section 6.10. "Remedial Action" means all action required under any applicable Environmental Law or Environmental Permit and all action required by a Governmental Authority to (i) clean up, remove, treat or handle in any other way Hazardous Materials in the environment; (ii) prevent the release of Hazardous Materials so that they do not migrate, endanger or threaten to endanger 7 14 public health or the environment; or (iii) perform remedial investigations, feasibility studies, corrective actions, closures, and postremedial or postclosure studies, investigations, operations, maintenance and monitoring on, about or in any real property, including, without limitation, Seller's Leased Real Property. "Seller's Losses" has the meaning specified in Section 12.4. "Seller's Report" has the meaning specified in Section 3.5(a). "Seller's Notice" has the meaning specified in Section 3.8(c). "Subject Property" has the meaning specified in Section 4.19(b). "Tax" or "Taxes" means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs' duties, tariffs, and similar charges. "Vendor Debt" has the meaning specified in Section 8.15. "Working Capital" shall mean, as of any date of determination, Seller's current assets less the Assumed Liabilities which are current liabilities, each determined in accordance with CAP. "Working Capital Deficit" shall mean, as of any date of determination, the amount, if any, by which the Working Capital is less than $13,000,000. "Work Papers" has the meaning specified in Section 3.5(b). ARTICLE II PURCHASE AND SALE 2.1 Purchase and Sale of Assets. Seller will sell, convey, transfer, assign and deliver to Purchaser, and Purchaser will acquire and accept from Seller, at the Closing all of Seller's right, title and interest in and to the following assets and properties, free and clear of any and all Encumbrances, except as set forth on Schedule 4.4: (a) All of the leases relating to the Leased Real Property of Seller described on Schedule 4.3, including, without limitation, Seller's leasehold rights in and to the buildings, 8 15 improvements, rights-of-way, easements, rights, liberties, privileges, hereditaments and appurtenances thereto or located thereon; (b) All of the personal property of Seller located on the Leased Real Property described on Schedule 4.3 and all other tangible assets and properties of Seller, wherever located and whether or not described or referred to herein, including, without limitation, all equipment, machinery, tools, vehicles, Inventories, prepaid accounts and prepaid expenses, furniture, fixtures, fixed assets, books, reports and records (including customer lists); (c) Seller's customer accounts, contracts, leases, franchises, arrangements and commitments; (d) All intangible properties and rights (other than contracts, leases, arrangements and commitments), wherever located and whether or not described or referred to herein, including, without limitation, all know-how, trade secrets, technology, all patents and patent applications and rights and licenses thereunder, trade names, trademark registrations and applications, common law trademarks, service marks, copyrights and copyright registrations and applications and any other forms of Intellectual Property; (e) The name "Arlington Industries" and "Arlington Sales," and all derivations thereof, including without limitation any and all Internet domain names relating thereto; (f) All licenses, permits, certificates and authorizations relating to the business operations of Seller; (g) All cash, deposits, bank accounts, prepaid expenses, certificates of deposit, securities, accounts receivable, evidences of indebtedness and choses-in-action of Seller; (h) Any other property or right, tangible or intangible, of Seller (the items in (a) through (h) hereof hereinafter collectively referred to as the "Assets"); provided, however, that "Assets" shall not include and Seller will not sell, convey, transfer, assign or delivery to Purchaser, and Purchaser will not acquire from Seller, (i) the corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance and existence of the Seller as a corporation, (ii) any of the rights of the Seller under this Agreement (or under any Additional Documents or other agreements between the Seller on the one hand and the Purchaser and/or Parent on the other hand entered into on or after the date of this Agreement), (iii) claims (and benefits to the extent they arise therefrom) which relate to Seller's liabilities other than the Assumed Liabilities, and (iv) the items listed on Schedule 2.1A (collectively, the "Excluded Assets"). 9 16 2.2 Transfer and Conveyance. Seller shall execute and deliver to Purchaser at the Closing a Bill of Sale and Assignment in substantially the form attached hereto as Exhibit A, and all such other assignments, endorsements and instruments of transfer as shall be necessary or appropriate to carry out the intent of this Agreement and as shall be sufficient to vest in Purchaser title to all of the Assets and all right, title and interest of Seller thereto and to evidence Purchaser's assumption of the Assumed Liabilities; provided, that the parties have agreed that Seller need not obtain the required consents described in Schedule 4.15 (the "Excluded Consents") as of the Closing Date. Seller and Funk shall use their respective best efforts (which shall not include litigation) to obtain the Excluded Consents following the Closing Date (unless the Purchaser and Seller hereafter agree that such consent is unnecessary or undesirable) until December 31, 1999; provided, however, that neither Seller nor Funk shall have any liability to Purchaser or Parent in connection with not obtaining such Excluded Consents. Following the Closing Date, if Purchaser is unable to (i) operate under any Contract which has been transferred to Purchaser and for which a consent has not been obtained, or (ii) obtain substantially similar products and services as to those which could be obtained under such Contracts, on terms and conditions reasonably equivalent to those under such Contracts, then during the period from the Closing Date through December 31, 1999, Seller shall, to the extent possible, purchase goods under such Contracts on behalf of and for the account of Purchaser; provided, however, that neither Seller nor Funk shall have any liability to Purchaser or Parent due to Seller's inability to purchase such goods under such Contracts. Purchaser acknowledges and agrees that Purchaser shall be solely responsible for the payment of all such purchases and further agrees to pay for such purchases in accordance with their terms. Purchaser and Parent, jointly and severally, agree to indemnify and hold harmless Seller and Funk from, against, for and in respect of any and all damages (of any nature whatsoever), obligations, claims, costs and expenses including, without limitation, reasonable attorneys fees and costs, suffered, sustained, incurred or required to be paid by Seller or Funk by reason of such purchases. Seller shall not be entitled to a commission or other compensation (other than the foregoing indemnification payments) for its services in connection herewith. In addition, Seller shall file, within three Business Days after the Closing Date, an amendment to its Articles of Incorporation so as to change its name to a name which shall not include the words "Arlington Industries" or any derivation thereof, and to file in the State of Florida all documents necessary to relinquish its right to use the assumed name "Arlington Sales" in the State of Florida. 2.3 Assumption of Certain Obligations. Effective at the Closing and subject to the terms set forth herein, Purchaser shall assume and be liable solely for the following liabilities and obligations of Seller (collectively, the "Assumed Liabilities"): (a) the accounts payable set forth on the Pre-Closing Balance Sheet and those incurred in the ordinary course of business consistent with past practice thereafter through the Closing Date (to the extent not paid or otherwise satisfied on or before the Closing Date); (b) the accrued expenses of Seller set forth on the Pre-Closing Balance Sheet and those incurred in the ordinary course of business consistent with past practice thereafter through the Closing Date (to the extent not paid or otherwise satisfied or before the Closing Date), including, without limitation, accrued payroll, payroll taxes, bonuses, commissions, 10 17 401K/profit sharing (but not the plans themselves), and all other accrued expenses in respect of Seller's employees set forth on the Pre-Closing Balance Sheet and those incurred in the ordinary course of business consistent with past practice thereafter through the Closing Date (to the extent not paid or otherwise satisfied or before the Closing Date); (c) the cash deficit of Seller set forth on the Pre-Closing Balance Sheet and changes therein occurring in the ordinary course of business thereafter through the Closing Date (to the extent not paid or otherwise satisfied on or before the Closing Date); (d) the liabilities and obligations of Seller set forth in the contracts, leases, arrangements and commitments listed on Schedule 2.3(d), the performance of which shall be due following the Closing Date (but not for any obligation for performance by Seller prior to the Closing Date or obligation or liability of Seller due under said contracts, leases, arrangements or commitments prior to the Closing Date (other than accruals which are otherwise Assumed Liabilities under this Section 2.3), or obligation or liability of Seller for default or nonperformance under said contracts, leases, arrangements and commitments arising prior to the Closing Date), but specifically excluding any and all liabilities and obligations of Seller in any contract, arrangement or commitment with any of its employees with respect to the distribution of any Growth Earnout Payment, Maintenance Earnout Payment or other amount under Section 3.8; and (e) obligations of continued performance under executory vendor purchase orders for the purchase of supplies, Inventory, equipment or services to the extent accrued on the Pre-Closing Balance Sheet and those incurred in the ordinary course of business consistent with past practice thereafter (to the extent not paid or otherwise satisfied on or before the Closing Date), including without limitation those (i) specifically set forth on Schedule 2.3(e), or (ii) as to which the supplies, Inventory, equipment or services subject thereto have not been received by the Seller prior to the Closing Date, but not including any obligation or liability for any breach occurring with respect thereto prior to the Closing Date. Purchaser will not assume and will not be liable for any other debts, contracts, leases, liabilities, arrangements, commitments, obligations, restrictions, disabilities or duties of Seller, other than the Assumed Liabilities. ARTICLE III PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Assets shall be the sum of (i) $19,000,000, less the greater of the Net Worth Deficit, if any, as of the Closing Balance Sheet Date, or the Working Capital Deficit, if any, as of the Closing Balance Sheet Date, plus (ii) the Growth Earnout Payment plus (iii) the Maintenance Earnout Payment, plus (iv) the assumption by Purchaser of the Assumed Liabilities (collectively, the "Purchase Price"). 11 18 3.2 Method of Payment of Purchase Price; Other Amounts Payable at the Closing. The Purchase Price for the Assets shall be payable by Purchaser to Seller as follows: (a) At the Closing, Purchaser shall deliver to Seller by wire transfer of immediately available funds to the Purchase Price Bank Account the amount of $16,000,000, less the greater of the Net Worth Deficit, if any, as of the Pre-Closing Balance Sheet Date, or the Working Capital Deficit, if any, as of the Pre- Closing Balance Sheet Date (the "Cash Payment"). (b) At the Closing, $3,000,000 of the Purchase Price in immediately available funds shall be held in escrow in accordance with the escrow agreement attached hereto as Exhibit C (the "Escrow Agreement") for an initial period of one year and one day from the Closing Date as security and as an offset for any breach of the representations, warranties, covenants and agreements of Seller and Funk and for Seller's and Funk's indemnification obligations, each as set forth herein, following which time such Payment Shares shall be delivered to Seller in accordance with the terms of the Escrow Agreement. (c) The Growth Earnout Payment and the Maintenance Earnout Payment, if any, shall be payable as provided in Section 3.8. (d) Purchaser shall execute and deliver to Seller and Funk an Assumption Agreement in substantially the form attached hereto as Exhibit B. 3.3 Pre-Closing Balance Sheet. As soon as reasonably practicable, but in no event later than five days prior to the Closing Date, Purchaser and Seller shall jointly prepare (a) an unaudited balance sheet of Seller, including, without limitation, accruals and prepaid items (the "Pre-Closing Balance Sheet"), dated as of the Pre-Closing Balance Sheet Date, prepared in accordance with CAP, and (b) a statement setting forth the Net Worth Deficit and the Working Capital Deficit, all determined as of the Pre-Closing Balance Sheet Date. It shall be a condition to Closing that the parties to this Agreement agree upon the Pre-Closing Balance Sheet, the Net Worth Deficit and the Working Capital Deficit (each as of the Pre-Closing Balance Sheet Date). 3.4 Closing Balance Sheet. As soon as practicable following the Closing Date, but in no event later than 90 days thereafter, Purchaser shall cause to be prepared and delivered to Seller (a) an unaudited consolidated balance sheet of Seller (the "Closing Balance Sheet") as of the close of business on the Closing Date prepared in accordance with CAP consistently applied with the Pre-Closing Balance Sheet, (b) a statement setting forth the Net Worth Deficit and the Working Capital Deficit, all determined as of the Closing Date, and the calculation of the Purchase Price based thereon and (c) any modifications to the allocation of the Purchase Price among the Seller's assets which had been prepared pursuant to Section 3.7 hereof (the "Allocation Modifications"). 3.5 Resolution of Accounting Disputes. (a) Within 45 days after the later of Seller's receipt of (i) the Closing Balance Sheet or (ii) if Seller shall have requested the Work Papers in accordance with Section 3.5(b) hereof, receipt of the Work Papers, Seller may deliver to Purchaser a written report (the "Seller's 12 19 Report") setting forth any disagreement of Seller with the determination of the Net Worth Deficit, the Working Capital Deficit, the Purchase Price based thereon or the Allocation Modifications. If Seller does not submit a Seller's Report within such period, the Net Worth Deficit, the Working Capital Deficit, the Purchase Price based thereon and the Allocation Modifications, all determined pursuant to Section 3.4 hereof, shall be final and binding on the parties hereto for the purposes hereof. (b) Upon the written request of the Seller made within 15 Business Days following Seller's receipt of the Closing Balance Sheet, Purchaser shall provide to the Seller the work papers and related documents as are necessary in Seller's reasonable judgment to enable Seller to review the calculation of the Net Worth Deficit, the Working Capital Deficit, the Purchase Price based thereon and the Allocation Modifications (collectively, the "Work Papers"). (c) If the Seller's Report is delivered to Purchaser in a timely fashion and the parties are unable to resolve any disagreement set forth therein within 30 days of Purchaser's receipt of the Seller's Report, either party may elect to have such dispute submitted to an independent accounting firm of recognized national standing (the "Purchase Price Accounting Firm"). If the Purchaser and Seller are unable to agree on the choice of the Purchase Price Accounting Firm, then the Purchase Price Accounting Firm shall be a "Big 5" accounting firm selected by lot (after the Purchaser and the Seller each eliminate one such firm). The Purchaser and the Seller shall request that the Purchase Price Accounting Firm render a determination as to each unresolved matter within 30 days after its retention, and the Purchaser and the Seller shall cooperate fully with the Purchase Price Accounting Firm so as to enable it to make such determination as quickly as practicable. The Purchase Price Accounting Firm's determination as to each dispute submitted to it shall be in writing, shall conform with this Section 3.5, and shall be conclusive and binding upon all parties hereto and the Net Worth Deficit, Working Capital Deficit, the Purchase Price based thereon and the Allocation Modifications shall be adjusted if necessary to reflect such determination. The Purchase Price Accounting Firm shall allocate its costs and expenses between the Purchaser and the Seller based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. 3.6 Adjustment of Closing Payment. If the Purchase Price paid at Closing is greater than the Purchase Price as finally determined in accordance with Section 3.4 or 3.5 hereof (such excess being hereinafter referred to as the "Overpayment"), then, within 10 days after such determination, the Escrow Agent shall deliver to Purchaser cash being held by it pursuant to the Escrow Agreement equal to the Overpayment. 3.7 Allocation of Purchase Price. Subject to adjustment as set forth in Section 3.4 hereof, the Purchase Price shall be allocated among the Assets as set forth on Schedule 3.7. Purchaser and Seller shall report the allocation on Internal Revenue Service Form 8594 in a manner consistent with the allocation provided in Schedule 3.7 subject to the adjustments set forth herein. 13 20 3.8 Earnouts. (a) Seller shall be paid a growth earnout ("Growth Earnout Payment"), if any, in accordance with this Section 3.8, upon attainment by Purchaser of varying targeted levels of annual growth in operating the Business of profits before taxes, but after interest, depreciation and amortization (other than amortization of any goodwill relating to the acquisition of the Business), all as determined in accordance with GAAP and the standards set forth on Schedule 3.8(a) ("PBT"), for each of Fiscal 2000 and Fiscal 2001. The Growth Earnout Payment for each of Fiscal 2000 and Fiscal 2001 shall equal the product of (i) $6,500,000 and (ii) the applicable incremental earnout multiple ("Incremental Earnout Multiple") for Fiscal 2000 and Fiscal 2001 as determined in accordance with the following table; provided, however, that Seller shall not be entitled to a Growth Earnout Payment for Fiscal 2001 unless the PBT for Fiscal 2001 exceeds the PBT for Fiscal 2000 by more than 10%; and provided, further, that any Growth Earnout Payment for Fiscal 2001 shall be reduced by the amount of any Growth Earnout Payment theretofore paid to Seller for Fiscal 2000.
Fiscal Year 2000 Fiscal Year 2001 - ---------------------------- Incremental Earnout ------------------------- Incremental Earnout Target PBT Range Multiple Target PBT Range Multiple - ---------------------------- ------------------- ------------------------- ------------------- less than $6,756,250 -- less than $7,769,687.50 -- $6,756,250 to $7,050,000 .25 $7,769,687.50 to $8,460,000 .5 $7,050,000 to $7,343,750 .50 $8,460,000 to $9,179.687.50 1.0 greater than $7,343,750 .75 greater than $9,179.687.50 1.5
(b) Within sixty (60) days of the end of the applicable 12-month period, Purchaser shall deliver to Seller a statement (the "Growth Earnout Payment Statement") of Purchaser's chief financial officer setting forth for such 12-month period the calculations of the (i) PBT and (ii) Growth Earnout Payment. Seller and its representatives and agents shall have the right to review and inspect, and shall be afforded the opportunity to examine and make copies of, all work papers and supporting books, records and other documentation reasonably requested to verify the accuracy of the Growth Earnout Payment Statement. (c) Seller shall have the right to dispute any amount set forth in the Growth Earnout Payment Statement, provided, however, Seller shall notify (the "Seller's Notice") Purchaser in writing of the nature and basis of such dispute within 45 days of the Purchaser's delivery of the Growth Earnout Payment Statement. Purchaser and Seller shall attempt to resolve all disputes set forth in Seller's Notice. If Purchaser and Seller shall be unable to resolve any dispute within 20 days of the Purchaser's receipt of Seller's Notice, such dispute shall be submitted to an independent accounting firm of recognized national standing (the "Earnout Accounting Firm"). If the Purchaser and Seller are unable to agree on the choice of the Earnout Accounting Firm, then the Earnout Accounting Firm shall be a "Big 5" accounting firm selected 14 21 by lot (after the Purchaser and the Seller each eliminate one such firm). The Purchaser and the Seller shall request that the Earnout Accounting Firm render a determination as to each unresolved matter within 30 days after its retention, and the Purchaser and the Seller shall cooperate fully with the Earnout Accounting Firm so as to enable it to make such determination as quickly as practicable. The Earnout Accounting Firm's determination as to each dispute submitted to it shall be in writing, shall conform with this Section 3.8, and shall be conclusive and binding upon all parties hereto and the Growth Earnout Payment Statement for such period shall be adjusted if necessary to reflect such determination. The Earnout Accounting Firm shall allocate its costs and expenses between the Purchaser and the Seller based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. (d) Within two Business Days following the earlier of (i) the acceptance by Seller of the Growth Earnout Payment Statement (which, if not otherwise set forth in writing by Seller, shall be deemed to occur on the 46th day following Purchaser's delivery of the Growth Earnout Payment Statement; unless Seller shall deliver Seller's Notice prior thereto) or (ii) the final Growth Earnout Payment Statement adjusted to reflect the resolution of all disputes as provided in the preceding paragraph, Purchaser and Seller shall execute the agreed upon Growth Earnout Payment Statement. (e) Within 10 Business Days following the execution and delivery of the Growth Earnout Payment Statement, but in no event later than 120 days following the end of Fiscal 2000 or Fiscal 2001, as the case may be (or such longer period of time as may be reasonably required by the Accounting Firm to resolve all disputes under Section 3.8(c)), the Purchaser shall wire transfer in immediately available funds to the Purchase Price Bank Account (or such other account as Seller shall designate in writing) the applicable Growth Earnout Payment. (f) Purchaser agrees that during Fiscal 2000 and Fiscal 2001, the Business shall be conducted substantially in accordance with Seller's present practices, except as otherwise set forth in Schedule 3.8(f). (g) Purchaser shall be paid by wire transfer of immediately available funds to the Purchase Price Bank Account (or such other account as Seller shall designate in writing) an additional earnout of $1,000,000 (the "Maintenance Earnout Payment") on or before the date which is two years and four months from the Effective Date, but solely if (i) the Employment Agreement shall not have been terminated during the Initial Term (as defined therein) by Purchaser for Cause (as defined therein), or by Funk other than for Good Reason (as defined therein) and (ii) PBT for each of Fiscal 2000 and Fiscal 2001 (as determined on the same basis as for the Growth Earnout Payment) shall be not less than $5,875,000 in each such year. Any disputes under this Section 3.8(g) shall be resolved in the same manner as set forth in Section 3.8(c). 15 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER AND FUNK Each of Seller and Funk, jointly and severally, represents and warrants to Purchaser as follows: 4.1 Due Organization and Qualification; Title to Stock; No Subsidiaries. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois, and has all requisite corporate power and authority to own, lease or operate its properties and to carry on its business as it is presently being operated and in the place where such properties are owned, leased or operated and such business is conducted. Seller is duly qualified or licensed and has all permits necessary to transact business, and is in good standing as a foreign corporation in each of the jurisdictions set forth in Schedule 4.1(a), which are the only jurisdictions wherein either the nature of the business conducted by Seller or its ownership or use of the properties owned or used by it requires it to be so qualified or licensed. Funk is the sole stockholder of Seller and owns all shares of capital stock of Seller free and clear of any and all Encumbrances, except as set forth on Schedule 4.1(b). (b) Seller has no direct or indirect subsidiaries and has no ownership or equity interest, or right to acquire any ownership or equity interest, whether by conversion, option exercise, or otherwise, in any corporation, partnership, association, business trust, limited liability company, or any other entity. 4.2 Corporate Power and Authority. The execution, delivery and performance of this Agreement and the Additional Documents by Seller and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action and no further action or approval is required to permit Seller or Funk to consummate the transactions contemplated hereby and thereby. This Agreement and the Additional Documents when executed and delivered in accordance with the terms thereof, will constitute, the legal, valid and binding obligations of Seller and Funk, enforceable in accordance with their terms. Each of Seller and Funk has full power, authority and legal right to enter into this Agreement and the Additional Documents, and to consummate the transactions contemplated hereby and thereby. Except as set forth in Schedule 4.2, the making and performance of this Agreement and the Additional Documents and the consummation of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof will not (a) conflict with the Articles of Incorporation or the Bylaws of Seller, (b) result in any breach or termination of, or constitute a default under, or constitute an event that with notice or lapse of time, or both, would become a default under, or result in the creation of any Encumbrance upon any of the Assets under, or create any rights of termination, cancellation or acceleration in any person under, any Contract, or violate any order, writ, injunction or decree, to which Seller or Funk is a party, by which any of the Assets, business or operations of Seller or Funk may be bound or affected or under which any of the Assets, business or operations of Seller receive benefits, (c) result in the loss or adverse modification of any license, franchise, permit or other 16 23 authorization granted to or otherwise held by Seller and required for its present business operations or (d) result in the violation of any provisions of law applicable to Seller or Funk, the violation of which could have an adverse effect upon the Assets, Business or operations of Seller. 4.3 Real Property. (a) Seller does not currently own and has never owned any real property. (b) Schedule 4.3 lists: (i) the address of each parcel of Leased Real Property, (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Leased Real Property and (iii) the term pertaining to each such parcel of Leased Real Property. (c) Except as described in Schedule 4.3, (i) there is no material violation of any law, regulation or ordinance relating to the Leased Real Property and (ii) Seller has not received any written notice of any material violation of any law, regulation or ordinance relating to any of the Leased Real Property. Seller has made available to Purchaser true and correct copies of, if any, all certificates of occupancy, environmental reports and appraisals which it possesses in respect of the Leased Real Property. Seller, as the lessee of each parcel of Leased Real Property, is in peaceful and undisturbed possession of such parcel of Leased Real Property, and there are no contractual or legal restrictions which preclude or restrict the ability to use the subject premises for the purposes for which they are currently being used. All existing utilities required for the use, occupancy, operation and maintenance of the Leased Real Property are adequate for the conduct of the Business as presently conducted. There are no material adverse physical conditions or, to Seller's or Funk's Knowledge, material latent defects affecting the Leased Real Property, other than ordinary wear and tear. Except as set forth in Schedule 4.3, Seller has not leased or subleased any parcel of Leased Real Property to any other Person, nor has Seller assigned its interest under any lease or sublease set forth in Schedule 4.3 to any third party. (d) Seller has delivered to Purchaser correct and complete copies of all leases and subleases set forth in Schedule 4.3 and any and all amendments. With respect to each of these leases and subleases: (i) such lease or sublease, as amended, is legal, valid, binding, enforceable and in full force and effect with respect to Seller, and, to the Knowledge of Seller, with respect to all other parties thereto and is the entire agreement between the parties thereto with respect to such property; (ii) except as otherwise set forth in Schedule 4.3, such lease or sublease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated hereby constitute a breach or default under such lease or sublease or otherwise give the landlord a right to terminate, recapture or modify such lease or sublease; 17 24 (iii) except as otherwise disclosed in Schedule 4.3, with respect to each such lease or sublease: (A) Seller has not received any notice of cancellation or termination under such lease or sublease and, no lessor has any right of termination or cancellation under such lease or sublease except in connection with the default of Seller thereunder, (B) Seller has not received any notice of a breach or default by Seller under such lease or sublease, and (C) Seller has not granted to any other Person any material rights, adverse or otherwise, under such lease or sublease; and (iv) except as set forth in Schedule 4.3, neither Seller nor (to the Knowledge of Seller) any other party to such lease or sublease is in breach or default in any material respect, and no event has occurred which, with notice or lapse of time, would constitute such a material breach or default by Seller or (to Seller's Knowledge) any other party to such lease or sublease or permit termination under or acceleration of such lease or sublease. (e) There are no condemnation proceedings or eminent domain proceedings of any kind pending or, to the Knowledge of Seller, threatened against the Leased Real Property. (f) Except as set forth in Schedule 4.3, to the extent required by applicable law, all the Leased Real Property is occupied under a valid and current certificate of occupancy or similar permit, the transactions contemplated by this Agreement will not require the issuance of any new or amended certificate of occupancy and there are no facts which would prevent the Leased Real Property from being occupied after the Closing Date in the same manner as before. (g) All improvements on the Leased Real Property constructed by or on behalf of Seller were constructed in compliance with all applicable federal, state and local statutes, laws, ordinances, regulations, rules, codes, orders or requirements (including, but not limited to, any building or zoning laws or codes) affecting such Leased Real Property. 4.4 Personal Property; Title to Property. (a) Set forth on Schedule 4.4 is a list of (i) all vehicles owned or leased by Seller and included among the Assets (showing motor vehicle identification numbers and whether owned or leased), (ii) all production and warehouse machinery and equipment owned or leased by Seller and included among the Assets with an original purchase price of $50,000 or greater, and (iii) all physical properties (other than the types of properties referred to in (i) and (ii) above), real, personal or mixed, owned by or leased to Seller and included among the Assets with an original purchase price per Asset of $50,000 or greater. All such properties are in good operating condition, reasonable wear and tear excepted, exclusive of Inventory. Seller enjoys peaceable possession of all properties owned or leased by it. (b) Seller has, and upon conveyance of the Assets to Purchaser by Seller at the 18 25 Closing, Purchaser will acquire and hold good title to all of the Assets, whether real, personal or mixed, described in Schedule 4.4 as owned by it, free and clear of any and all Encumbrances except as set forth on Schedule 4.4. 4.5 Intellectual Property; Year 2000. (a) Seller has no registered patents, trademarks or copyrights. Unless otherwise indicated on Schedule 4.5, Seller has the right to use and license the Intellectual Property with an original purchase price of $5,000 or more and to transfer and convey the Intellectual Property. Except as stated on Schedule 4.5, there are no pending proceedings or adverse claims made or, to Seller's or Funk's Knowledge, threatened against Seller with respect to the Intellectual Property; there has been no litigation commenced or, to Seller's or Funk's Knowledge, threatened against Seller within the past five years with respect to the Intellectual Property or the rights of Seller therein; and to Seller's or Funk's Knowledge, the Intellectual Property or the use thereof by Seller does not conflict with any trade names, trademarks, service marks, trademark or service mark registrations or applications of others. (b) Except as set forth on Schedule 4.5, based upon internal and external reviews (furnished to Purchaser), Seller has no reason to believe that the material computer equipment and software used by Seller will not function properly with respect to dates in 2000 and thereafter or calculations which accommodate same century and multicentury formulas and date values. 4.6 Permits. Seller owns and holds all licenses, franchises, permits, titles and other governmental authorizations (including, without limitation, motor vehicle titles and current registrations), fuel permits, Environmental Permits, licenses, and franchises necessary to the conduct of Seller's Business in the manner and jurisdictions in which it presently conducts business (the "Material Permits"). An accurate list and summary description of all such Material Permits is set forth on Schedule 4.6 hereto. Except as set forth in Schedule 4.6 and except for the Excluded Assets, the Material Permits are valid and may be transferred to Purchaser at the Closing, and Seller has not received any notice that any governmental authority intends to cancel, terminate or not renew any such Material Permit. Seller has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in the applicable Material Permits and is not in violation of any of the foregoing except where such noncompliance or violation would not have a Material Adverse Effect. Except as specifically provided on Schedule 4.6, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to Seller, or to Purchaser after the Closing, by any such Material Permits. 4.7 Compliance with Laws. Seller (i) has complied with all laws, regulations, licensing requirements and orders applicable to its business or personnel and (ii) has filed with the proper authorities all statements and reports required by the laws, regulations, licensing requirements and orders to which it or any of its employees (because of their activities on behalf of their employer) is subject. 19 26 4.8 Contracts. Set forth on Schedule 4.8 is a list of all contracts, leases and commitments (whether oral or written), other than the agreements set forth on Schedule 2.1A (Other Excluded Assets) by which any of the Assets are directly affected or are bound to which the Seller is a party the performance of which involved for the 12-month period ending July 31, 1999, or will or is likely to involve for the 12-month period ending July 31, 2000, in excess of $50,000 in aggregate payments or obligations (the "Contracts") such that relate to: (i) the employment of any person; (ii) collective bargaining with, or any representation of any employees by, any labor union or association; (iii) the acquisition of services, supplies, equipment or other personal property; (iv) the purchase or sale of real property; (v) distribution, agency or construction; (vi) lease of real or personal property as lessor or lessee or sublessor or sublessee; (vii) lending or advancing of funds other than the extension of credit to trade purchasers in the ordinary course of Seller's business consistent with past business practice; (viii) borrowing of funds, receipt of credit or other evidence of Indebtedness except for trade payables in amounts and on terms consistent with past practice; (ix) the sale or purchase of personal property (other than sales of Inventory in the ordinary course of business consistent with past business practice) or services; and (x) any matter or transaction not in the ordinary course of the business of Seller or that is inconsistent with past business practice of Seller. 4.9 Contract Defaults. Except as set forth in Schedule 4.8, Seller has not been declared to be, nor to its Knowledge is, in default in any respect under any Contract, and such Contracts are legal, valid and binding obligations of the respective parties thereto in accordance with their terms and have not been amended; and no defenses, offsets or counterclaims thereto have been asserted by any party thereto other than Seller nor has Seller expressly waived any substantial rights thereunder. 4.10 Litigation. Set forth on Schedule 4.10 is a list of all Actions pending against Seller or, to the Knowledge of Seller, threatened against Seller, Seller's business or any property or rights of Seller, at law or in equity or before or by any Governmental Authority. None of the Actions listed on Schedule 4.10 either (i) results or would, if adversely determined, have a Material Adverse Effect or (ii) affects or would, if adversely determined, affect the right or ability of Seller to carry on its business substantially as now conducted. 4.11 Inventory. The Inventory consists of current items of a quality and quantity that are usable or marketable in the ordinary course of the business of Seller. Inventory is valued at the lower of cost or market. To the Knowledge of Seller and Funk, all of the Inventory is authentic for what it purports to be and none of the Inventory is counterfeit. Except as stated on Schedule 4.11, none of the Inventory is obsolete, based on the expiration dates on such products and in accordance with customary industry practices, and all of the Inventory is located in the warehouse comprising a portion of the Leased Real Property described in Schedule 4.3. 4.12 Financial Condition and Results of Operations. Seller has previously furnished to Purchaser true, correct and complete copies of the balance sheet of Seller as of December 31, 1998 and as of April 30, 1999 (the latter being referred to herein as the "Most Recent Balance 20 27 Sheet"), and the related statements of operations, shareholders' equity and cash flows for the twelve and four months then ended, respectively, and will furnish to Purchaser the Pre-Closing Balance Sheet (collectively, the "Financial Statements"). The Financial Statements (i) are accurate and in accordance with the books and records and accounting methods of Seller and (ii) constitute true, full and complete disclosure of the financial position and results of operations of Seller as of the dates and for the periods indicated in accordance with CAP. Except as may be set forth on the Financial Statements or disclosed in the Schedules hereto, there are no liabilities, contingent or otherwise, by which Seller or any of the Assets or the Business may be bound or affected other than those incurred in the ordinary course of business consistent with past practice. Seller has previously permitted Purchaser full access to papers pertaining to the Financial Statements, including those work papers in the possession of or prepared by Nykiel, Carlin & Cowe, Ltd. 4.13 Employee Benefits. Each employee benefit plan within the meaning of Section 3(3) of ERISA, maintained or contributed to by Seller or any of its Group Members (as defined below) (collectively, the "Plans") is listed on Schedule 4.13, is in substantial compliance with applicable law and has been administered and operated in all material respects in accordance with its terms and applicable law, and any liabilities thereunder have been properly reflected in the Financial Statements. For purposes of this Agreement, "Group Member" shall mean any member of any "affiliated service group" as defined in Section 414(m) of the Code that includes Seller, any member of any "controlled group of corporations" as defined in Section 1563 of the Code that includes Seller, or any member of any group of "trades or businesses under common control" as defined by Section 414(c) of the Code that includes Seller. Neither Seller nor any of its Group Members has incurred, and as of the Closing Date will not incur, any liability with respect to any benefit plan which creates a lien upon, or can be collected from, the Assets being purchased under this Agreement, nor which may impose, directly or indirectly, any obligation or liability on Purchaser, as a successor employer or otherwise. It is expressly understood and agreed that Purchaser is not assuming any of the benefit plans and that Seller shall retain all liabilities (other than Assumed Liabilities) with respect to the benefit plans. 4.14 Employees; Employee Relations. (a) Schedule 4.14 sets forth (i) the name and current annual salary (or rate of pay) and other compensation (including, without limitation, normal bonus, profit-sharing and other compensation) now payable by Seller to each employee whose current total annual compensation or estimated compensation is $50,000 or more, (ii) any increase to become effective after the date of this Agreement in the total compensation or rate of total compensation payable by Seller to each such person other than any increase made prior to the Closing Date of no more than 6% in accordance with Seller's past practices, (iii) any increase to become payable after the date of this Agreement by Seller to employees other than those specified in clause (i) of this Section 4.14(a), (iv) all presently outstanding loans and advances (other than routine travel advances to be repaid or formally accounted for within sixty 60 days) made by Seller to, or made to Seller by, any director, officer or employee, (v) all other transactions between Seller and any director, officer or employee of Seller since January 1, 1999, and (vi) all accrued but unpaid 21 28 vacation or other pay owing to any officer or employee which is not reflected in the Pre-Closing Balance Sheet or incurred in the ordinary course of business thereafter consisted with past practices. (b) Except as disclosed on Schedule 4.14, Seller is not a party to, or bound by, the terms of any collective bargaining agreement, and Seller has not experienced any material labor disputes during the last five years. Except as set forth on Schedule 4.14, there are no labor disputes existing, or to the best knowledge of Seller, threatened involving strikes, work stoppages, slowdowns, picketing, or any other interference with work or production, or any other concerted action by employees. No charges or proceedings before the National Labor Relations Board, or similar agency, exist, or to the best Knowledge of Seller, are threatened. Except as disclosed on Schedule 4.14, Seller is not a party to any written employment contract with any employee. (c) No Actions have been commenced nor to the Seller's Knowledge are threatened against Seller by any employee of Seller under any federal, state or local laws in respect of the employment relationship of such employee including, but not limited to, such under: (i) anti-discrimination statutes such as the Americans with Disabilities Act and Title VII of the Civil Rights Act of 1964, as amended (or similar state or local laws prohibiting discrimination because of race, sex, religion, national origin, age and the like); (ii) the Fair Labor Standards Act or other federal, state or local laws regulating hours of work, wages, overtime and other working conditions; (iii) requirements imposed by federal, state or local governmental contracts such as those imposed by Executive Order 11246; (iv) state laws with respect to tortious employment conduct, such as slander, harassment, false light, invasion of privacy, negligent hiring or retention, intentional infliction of emotional distress, assault and battery, or loss of consortium; or (v) the Occupational Safety and Health Act, as amended, as well as any similar state laws, or other regulations respecting safety in the workplace; and to the Knowledge of Seller, no proceedings, charges, or complaints are threatened under any such laws or regulations and no facts or circumstances exist that would give rise to any such liabilities. Seller is not subject to any consent decree, order or judgment imposing any continuing obligations on Seller in respect to its employment practices. Notwithstanding anything to the contrary in this Agreement, Purchaser is not assuming any of the liabilities or potential liabilities described in this Section 4.14(c) as Assumed Liabilities (whether known or unknown, or whether material or immaterial) and Seller shall retain all of such liabilities and potential liabilities. (d) Since December 31, 1995 Seller has not incurred any liability or obligation under the Worker Adjustment and Retraining Notification Act or similar state laws. Seller has not laid off more than 10% of its employees at any single site of employment in any 90-day period during the 12-month period ending June 30, 1999. 4.15 Consents. Except as set forth in Schedule 4.15 no consent, approval, authorization or order of any court, Governmental Authority or any other person or under any Contract is required to permit Seller to consummate the transactions contemplated by this Agreement. 22 29 4.16 Insurance. Set forth on Schedule 4.16 is a summary description of all policies of fire, casualty, liability and other forms of insurance and all fidelity bonds held by Seller. Seller has provided Purchaser with true and complete copies of all such insurance policies. All premiums due on or prior to the Closing Date on such insurance policies have been paid in full. Seller has not received any notice of non-renewal or termination on any such insurance policy from the insurance company issuing such policy and, except as set forth on Schedule 4.16, is not subject to any dispute regarding the payment of proceeds under any such policy or coverage thereunder. 4.17 Taxes. Seller has duly filed all Income Tax and all other Tax returns required to be filed by it and such returns are true, correct and complete in all respects. Seller has paid all Taxes which have become due or have been assessed against it or the Assets and all Taxes which any taxing authority has proposed or asserted to be owing, except for Taxes which Seller is contesting in good faith and as to which it has provided adequate reserves on its Pre-Closing Balance Sheet. All Tax liabilities to which the properties of Seller may have been subjected have been discharged, except for Taxes assessed but not yet payable. There are no Tax claims presently being asserted against Seller or the Assets and, to Seller's Knowledge, there is no basis for any such claim. Seller has not granted any extension to any taxing authority of the limitation period during which any Tax liability may be asserted thereby. No Tax shall be assumed by the Purchaser as part of the Assumed Liabilities other than Taxes (excluding Federal and state personal income taxes, it being understood that income taxes imposed by the State of California in respect of the Seller's operations are not personal income taxes) set forth in the Pre-Closing Balance Sheet and those accrued in the ordinary course of business through the Closing Date. 4.18 Environmental Laws and Regulations. (a) (i) To the Knowledge of Seller and Funk, the operations of the Subject Property (as defined below) and any use, storage, treatment, disposal or transportation of Hazardous Materials which has occurred in or on the Subject Property prior to the date of this Agreement have been in compliance with Environmental Law; (ii) to the Knowledge of Seller and Funk, no release, leak, discharge, spill, disposal or emission of Hazardous Materials has occurred in, on or under the Subject Property in a quantity or manner which violates or requires further investigation or Remedial Action under Environmental Law; (iii) to the Knowledge of Seller and Funk, the Subject Property is free of Hazardous Materials in violation of Environmental Law as of the date of this Agreement; (iv) there is no pending or, to Seller's or Funk's Knowledge, threatened litigation or administrative investigation or proceeding concerning the Subject Property involving Hazardous Materials or Environmental Laws; (v) to the Knowledge of Seller and Funk, there are no above-ground or underground storage tank systems located at the Subject Property; (vi) except as set forth on Schedule 4.18, Seller has never owned, operated or leased any real property other than the Subject Property; (vii) to the Knowledge of Seller and Funk, Seller's transportation to or disposal at any off-site location of any Hazardous Materials from property now or formerly owned, operated or leased by Seller at the time of Seller's ownership, operation or lease thereof was conducted in full compliance with applicable Environmental Permits; and (ix) to the Knowledge of Seller and Funk, none of the operations of ITC has caused, or could 23 30 reasonably be expected to cause, any liability to Seller under any Environmental Permits or Environmental Laws. (b) For purposes of this Section 4.18, "Subject Property" means all real property comprising a portion of the Assets and any properties listed on Schedules 4.3 and 4.18. 4.19 Absence of Certain Changes or Events. Since April 30, 1999, Seller has not (i) suffered any extraordinary losses or expressly waived any rights of substantial value; (ii) amended its Articles of Incorporation or Bylaws; (iii) except as set forth in Schedule 4.19, made any material change in its mode of management or any change in its method of operation or method of accounting; (iv) except as set forth in Schedule 4.19, made or become obligated to make any capital expenditures other than such expenditures or commitments not exceeding $20,000 individually or $40,000 in the aggregate; (v) suffered any event or circumstance which would reasonably be expected to have a Material Adverse Effect; (vi) entered into any transaction, except in the ordinary course of its business consistent with past practice; (vii) received any notice of any claim asserted against it by any Governmental Authority which would reasonably be expected to have a Material Adverse Effect; or (viii) incurred or agreed to incur any material obligation outside the ordinary course of business that has not been disclosed in the Schedules. 4.20 Accounts Receivable; Evidences of Indebtedness. All Receivables reflected in the Pre-Closing Balance Sheet or acquired since that date are legal, valid and binding obligations of the obligors and Seller has no Knowledge of any fact impairing the collectability of such Receivables in accordance with their terms, except as set forth in Schedule 4.20. Except as set forth on Schedule 4.20, the reserves for doubtful receivables and uncollectible accounts reflected in the Pre-Closing Balance Sheet were established in accordance with GAAP and are sufficient to provide for any losses which may arise in connection with the collection of such Receivables. Since June 30, 1999, Seller has not (i) written off, canceled, committed or become obligated to cancel or write off any Receivables; (ii) disposed of or transferred any Receivables except through the collection thereof in accordance with their terms; or (iii) acquired or permitted to be created any Receivables, except in each instance in the ordinary course of its business consistent with past practice. 4.21 Customers. Schedule 4.21 sets forth the names and addresses of all the customers of the Business which ordered and have been shipped goods or merchandise with an aggregate purchase price of $100,000 or more during the period commencing on January 1, 1999 and ended July 31, 1999 and the amount for which each such customer was invoiced during such period. Except as disclosed in Schedule 4.21, Seller has not received any written notice that any customer set forth on Schedule 4.21 has ceased, or will cease, to use the products, equipment, goods or services of Seller, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services following the Closing Date. Also set forth on Schedule 4.21 are the names and addresses of each Person holding goods or merchandise on consignment from Seller and the cost to Seller of the goods or merchandise shipped to such Person. 24 31 4.22 Suppliers. Schedule 4.22 sets forth the names and addresses of all the suppliers from which Seller ordered materials, supplies, merchandise and other goods for the Business and to which Seller paid, or is obligated to pay, an aggregate purchase price of $200,000 or more during the period commencing January 1, 1999 and ended on July 31, 1999 and the amount for which each such supplier invoiced such member during such period. Except as disclosed in Schedule 4.22, Seller has not received any written notice that any supplier set forth on Schedule 4.22 will not sell materials, supplies, merchandise and other goods to Seller at any time after the Closing Date on terms and conditions similar to those imposed on current sales subject to general and customary price increases. 4.23 Accounts, Lockboxes; Safe Deposit Boxes; Powers of Attorney. Schedule 4.23 is a true and complete list of (i) the names of each bank, savings and loan association, or other financial institution in which Seller has an account, and the names of all persons authorized to draw thereon or have access thereto, (ii) the location of all lockboxes and safe deposit boxes of Seller and the names of all Persons authorized to draw thereon or have access thereto and (iii) the names of all Persons, if any, holding powers of attorney from Seller relating to the Business. On the Closing Date, Seller shall not have any such account, lockbox or safe deposit box other than those listed in Schedule 4.23, nor shall any additional Person have been authorized, from the date of this Agreement, to draw thereon or have access thereto or to hold any such power of attorney, without prior written notice to the Purchaser. 4.24 True, Correct and Complete Information. No representation or warranty by Seller or Funk contained in this Agreement, in the schedules attached hereto or in any certificate furnished by Seller or Funk to Purchaser in connection herewith or pursuant hereto contains any untrue statement of a material fact or omits to state any material fact necessary in order to make any statement herein or therein, in light of the circumstances in which it was made, not misleading. There is no fact known to Seller or Funk that has specific application to Seller, the Business or the Assets (other than general economic or industry conditions) and that materially adversely affects the business, prospects, financial condition, or results of operations of Seller, the Business or the Assets, taken as a whole, which has not been set forth in this Agreement or any Schedule hereto. 4.25 Broker's and Finder's Fees. Except for the fees of Banc One Capital Markets, Inc. which fees are to be paid by Seller, neither Seller nor Funk has made any agreement with any person, or taken any action which would cause any person, to become entitled to an agent's, broker's or finder's fee or commission in connection with the transactions contemplated by this Agreement. 4.26 Disclaimer of Other Representations and Warranties. Except as expressly set forth in this Agreement and in the Additional Documents, neither Seller nor Funk makes any representation or warranty, express or implied, at law or in equity, in respect of any of its assets (including, without limitation, the Assets), liabilities or operations, including, without limitation, with respect to merchantability or fitness for any particular purpose, and any such other 25 32 representations or warranties are hereby expressly disclaimed. Parent and Purchaser hereby acknowledge and agree that, except to the extent specifically set forth in this Article IV, the Purchaser is purchasing the Assets on an "as-is, where-is" basis. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PARENT Purchaser and Parent, jointly and severally, represent and warrant to Seller and Funk as follows: 5.1 Organization and Authority. Each of Purchaser and Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own or lease its properties and to carry on its business as it is presently being operated and in the place where such properties are owned or leased and such business is conducted. The execution, delivery and performance of this Agreement by each of Purchaser and Parent, and all other agreements by and among the parties, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action and no further action or approval is required to permit Purchaser and/or Parent to consummate the transactions contemplated hereby and thereby. This Agreement constitutes, and all other agreements by and among the parties, when executed and delivered in accordance with the terms thereof, will constitute the legal, valid and binding obligations of each of Purchaser and/or Parent, enforceable in accordance with their terms. Each of Purchaser and Parent has full power, authority and legal right to enter into this Agreement and all other agreements by and among the parties and to consummate the transactions contemplated hereby and thereby. The making and performance of this Agreement, and all other agreements by and among the parties, and the consummation of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof will not (i) conflict with the Certificate of Incorporation or the Bylaws of Purchaser or Parent, (ii) result in any breach or termination of, or constitute a default under, or constitute an event which with notice or lapse of time, or both, would become a default under, or result in the creation of any Encumbrance upon any asset of Purchaser or Parent under, or create any rights of termination, cancellation or acceleration in any person under, any contract, lease, arrangement or commitment, or violate any order, writ, injunction or decree, to which Purchaser or Parent is a party or by which Purchaser or Parent or their respective assets, businesses or operations may be bound or affected or under which Purchaser or Parent or their respective assets, businesses or operations receive benefits, (iii) result in the loss or adverse modification of any material license, franchise, permit or other authorization granted to or otherwise held by Purchaser or Parent that is material to the business or financial condition of Purchaser or Parent (iv) result in the violation of any provisions of law applicable to Purchaser or Parent, the violation of which could have a material adverse effect upon the business, operations or assets of Purchaser or Parent. 5.2 Consents. Except as set forth on Schedule 5.2, no consent, approval, authorization or order of any court, Governmental Authority or any other person is required in 26 33 order to permit Purchaser or Parent to consummate the transactions contemplated by this Agreement. 5.3 Litigation. There is no pending or, to the knowledge of Parent and Purchaser, threatened Action before any Governmental Authority (i) in which it is sought to restrain, prohibit, invalidate or obtain damages in respect of the consummation of the purchase and sale of the Assets or the other transactions contemplated hereby, (ii) which could, if adversely determined, result in any material adverse change in the business, operations or assets or the condition, financial or otherwise, or results of operations of Purchaser or Parent or (iii) which could, if adversely determined, have a material adverse effect on the right or ability of Purchaser or Parent to carry on its business substantially as now conducted. 5.4 Broker's and Finder's Fees. Neither Purchaser nor Parent has made any agreement with any person, or taken any action which would cause any person, to become entitled to an agent's, broker's or finder's fee or commission in connection with the transactions contemplated by this Agreement. 5.5 Purchase for Resale. Purchaser's purchase of Inventory is for wholesale, resale or components to be resold in the normal course of Purchaser's Business. 5.6 Disclaimer of Other Representations and Warranties. Except as expressly set forth in this Agreement and in the Additional Documents, neither Parent nor Purchaser makes any representation or warranty, express or implied, at law or in equity, in respect of any of its assets, liabilities or operations. ARTICLE VI COVENANTS OF SELLER AND FUNK Each of Seller and Funk covenants and agrees with Purchaser as follows: 6.1 Affirmative Covenants. Prior to the Closing Date, Seller will operate its business only in the usual, regular and ordinary course of business consistent with past practices, and will use its best efforts to: (i) preserve intact its business organization and the Assets; (ii) maintain its properties, machinery and equipment in good operating condition and repair, ordinary wear and tear excepted; (iii) continue all existing policies of insurance (or comparable insurance) in full force and effect up to and including the Closing Date (and will not cancel any such insurance or take (or fail to take) any action which would enable the insurers under such policies to avoid liability for claims arising out of any occurrence prior to the Closing Date without the prior written consent of Purchaser); (iv) use its best efforts to keep available the services of its present officers, employees and agents; (v) use its best efforts to preserve its present relationships, suppliers and customers; and (vi) except as set forth in Schedule 4.19, maintain its books, accounts and records in the usual, regular and ordinary manner on a basis consistently applied. Seller or Funk will notify Purchaser in writing within five Business Days of learning of any facts, 27 34 events or circumstance which is reasonably likely to have a Material Adverse Effect. 6.2 Negative Covenants. Prior to the Closing Date, Seller will operate its business only in the ordinary course of business consistent with past practices, and will not, without the prior written consent of Purchaser: (i) make any increase in the compensation payable or to become payable by it to any employee or contribute or make any commitment to or representation that it will contribute any amounts to any bonus or other employee benefit plan for employees of Seller, except as required by law or by the terms of any such plan or in the ordinary course of business consistent with past practice; (ii) make any amendment to its Articles of Incorporation, Bylaws or other organizational documents, except as required or permitted herein; (iii) make any material change in the character of its business; (iv) incur any obligation or liability (fixed or contingent) except in the ordinary course of business consistent with past practices; (v) discharge or satisfy any Encumbrance or pay any obligation or liability (fixed or contingent) other than in the ordinary course of business consistent of past practice; (vi) mortgage, pledge, transfer or otherwise dispose of or subject to any Encumbrance any of the Assets, except in the ordinary course of business consistent with past practice; (vii) acquire any assets or properties, except in the ordinary course of business consistent with past practices; (viii) cancel or compromise any Indebtedness, except in the ordinary course of business consistent with past practice; (ix) expressly waive or release any rights of material value; (x) transfer, grant or terminate any contract, lease, arrangement or commitment rights under any concessions, leases, licenses, agreements, or Intellectual Property; (xi) modify or change or terminate any existing contract, lease, arrangement or commitment required to be listed on Schedule 4.8; (xii) undertake any borrowing of money other than under the existing Bank Debt; (xiii) make any loans or extensions of credit, except in the ordinary course of business consistent with past practices; (xiv) except as set forth in Schedule 4.19, make or become obligated to make any capital expenditures or enter into commitments therefor exceeding $20,000 individually or $40,000 in the aggregate; (xv) sell, discount or otherwise dispose of any Receivables; and (xvi) make or become obligated to make any distributions to Funk, except that Seller may, to the extent that the Net Worth of Seller exceeds $13,000,000, prior to the Closing Date, distribute to Funk liquid assets of the Business equal to such excess or borrow such excess under the Bank Debt and distribute the proceeds to Funk. 6.3 Access to Properties and Records. Seller will keep Purchaser advised of all material developments relevant to the consummation of the transactions contemplated hereby and will cooperate fully in (i) permitting Purchaser and its representatives to make a full investigation of the business, properties, financial condition and investments of Seller. Seller will afford to Purchaser and its representatives full access during normal business hours to the offices, buildings, real properties, machinery and equipment, inventory and supplies, records, files, books of account, tax returns, agreements and commitments, corporate record books and stock books and personnel of Seller, that Purchaser shall reasonably determine to be necessary for it to make a full investigation of the Business. Seller will furnish to Purchaser all such further information concerning the business and affairs of Seller as Purchaser may reasonably request. Purchaser and Parent shall use their best efforts to conduct such investigation in a manner to minimize disruption to Seller's Business. In the event of the termination of this Agreement, Purchaser and Parent will 28 35 forthwith deliver to Seller all documents, work papers and other material (including copies thereof) obtained by Purchaser or Parent or on their behalf from Seller as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof and, if the transactions contemplated hereby are not consummated, Purchaser and Parent will hold such information in confidence pursuant to that certain confidentiality agreement between the parties dated on or about February 26, 1999. 6.4 Notice of Developments. Seller will update by amendment or supplement each of the Schedules referred to herein promptly upon any material change in the information set forth in such Schedules, and Seller hereby represents and warrants that such Schedules and such written disclosures, as so amended or supplemented, shall be true, correct and complete as of the date or dates thereof. Unless the Purchaser or Parent has the right to terminate this Agreement pursuant to Section 13.1 by reason of such updated disclosure and exercises that right within the period of 10 Business Days referred to in Section 13.1, the amendment or supplement pursuant to this Section 6.3 will be deemed to have amended the Schedule, to have qualified the representations and warranties contained in Article IV, and to have cured any misrepresentation or breach of warranty which otherwise might have existed hereunder by reason of the development. 6.5 Employees of Seller. Seller shall pay all salaries, wages and bonuses, and all amounts due in lieu of holiday, sick or vacation pay, to all employees of Seller employed in the Business in the ordinary course of its business until the Closing, and effective on the Closing Date shall terminate all of such employees. 6.6 Approvals of Third Parties. As soon as practicable after the date hereof, each of Seller and Funk will use its or his best efforts to secure all necessary consents, approvals and clearances of third parties that shall be required to consummate the transactions contemplated hereby including, without limitation, approvals required under the HSR Act, and will otherwise use its best efforts to cause the consummation of such transactions in accordance with the terms and conditions of this Agreement; provided, that the parties have agreed that Seller need not obtain Excluded Consents and that neither Seller nor Funk shall have any liability to Purchaser or Parent in connection with not obtaining such Excluded Consents. 6.7 Notices. Seller will timely give all notices required to be given relating to the transactions contemplated hereby, including without limitation, (i) those required to be given to employees, (ii) any notices required to be given to all creditors or claimants against Seller and (iii) any notices required or requested to be given pursuant to applicable bulk sales laws or similar laws. 6.8 Access to Books and Records. Seller agrees to provide Purchaser, its accountants, counsel and other representatives, during normal business hours and upon reasonable notice, for a period of four years after the Closing Date, access to the books, records, income tax returns, contracts and other underlying data and documentation of Seller properly retained by Seller hereunder relating to the period prior to the Closing Date and to make available to Purchaser personnel of Seller in Purchaser's review thereof for the purpose of enabling them to determine 29 36 and calculate any tax liabilities in connection with the Assets. Seller agrees that, for such four-year period, it will preserve and keep intact all such books and records. 6.9 No Solicitation of Offers. Each of Seller and Funk covenants and agrees that it or he will not solicit, entertain, encourage or assist any acquisition proposal with respect to the purchase or exchange of the Assets or any portion thereof, or with respect to any proposed merger, consolidation, sale of securities or other acquisition involving Seller (an "Acquisition Proposal"), by or with any person other than Purchaser until September 30, 1999. If Seller or Funk receives such an Acquisition Proposal Seller or Funk shall notify Purchaser within three Business Days of the substance of any inquiry or proposal received thereby. 6.10 Receivables Guaranteed. Seller and Funk, jointly and severally, warrant to Purchaser that all accounts receivable of Seller reflected on the Closing Balance Sheet, net of any reserves for bad debt reflected on the Closing Balance Sheet and net of prompt payment discounts taken in the ordinary course of business in accordance with standard invoice terms, all as determined in accordance with CAP (the "Accounts Receivable"), will be collected by Purchaser no later than 120 days following the Closing Date (the "Receivable Writeback Date"). For greater certainty, the parties acknowledge and agree that the Accounts Receivable reflected on the Closing Balance Sheet and warranted hereunder are net of the unapplied cash and credits as of the Closing Date. For purposes of this Section 6.10, Purchaser and Seller shall use their good faith best efforts to contact the payor of any amounts received by Purchaser following the Closing Date which are not designated as to payment of a particular invoice, to determine which invoice or Account Receivable to credit with such payment. If Purchaser shall fail to collect such amount of the Accounts Receivables by the Receivable Writeback Date, then Seller shall acquire the uncollected Accounts Receivable from Purchaser in an amount equal to such excess (the "Receivable Writeback Amount") in consideration of the Escrow Agent delivering to the Purchaser in accordance with the terms of the Escrow Agreement cash equal to the Receivable Writeback Amount. Proceeds from Accounts Receivable collected after the Receivable Writeback Date and for which Purchaser has received payment under this Section 6.10 shall be promptly and in any event within five Business Days of collection delivered by Purchaser to Seller. Proceeds from any Accounts Receivable written off by Seller in the ordinary course of business consistent with CAP prior to the Closing Balance Sheet Date which are collected after the Closing Balance Sheet Date shall reduce any Receivable Writeback Amount. 6.11 Prepaid Revenue. Seller agrees to remit to Purchaser payments received by Seller on or after the Closing Date, within five Business Days for any revenue received by Seller for goods or services rendered with respect to any period following the Effective Date. 6.12 Release of Financing Statements. Seller shall obtain and file in the appropriate jurisdictions Termination Statements or payoff letters reasonably acceptable to Purchaser properly executed by any parties holding a security interest or other Encumbrance which will be paid by Seller at the Closing with respect to the Assets as identified by lien searches provided by Seller and acceptable to Purchaser with respect to Seller and the Assets. 30 37 6.13 Release of Seller Under Guaranty. Funk shall have obtained the full release and discharge of Seller under that certain Guaranty dated April 10, 1998, and that certain Security Agreement -- Guarantor dated April 10, 1998 (collectively, the "Guaranty Documents"), from Seller in favor of American National Bank and Trust Company of Chicago, on or prior to the Closing Date. ARTICLE VII COVENANTS OF PURCHASER AND PARENT Each of the Purchaser and Parent covenants and agrees with Seller and Funk as follows: 7.1 Furnishing of Information. Purchaser will keep Seller advised of all material developments relevant to the consummation of the transactions contemplated hereby and will cooperate fully with Seller in bringing about the consummation of the transactions contemplated hereby. Purchaser will update by amendment or supplement each of the Schedules referred to herein from Purchaser promptly upon any changes in the information set forth in such Schedule, and Purchaser hereby represents and warrants that such Schedules, as so amended or supplemented, shall be true, correct and complete as of the date or dates thereof. In the event of the termination of this Agreement, Seller will deliver to Purchaser all documents, work papers and other material (including copies thereof) obtained by Seller or on its behalf from Purchaser as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof and, if the transactions contemplated hereby are not consummated, Seller will hold such information in confidence pursuant to that certain confidentiality agreement between the parties dated on or about February 26, 1999. 7.2 Approvals of Third Parties. As soon as practicable after the date hereof, Purchaser and Parent will use their best efforts to secure all necessary consents, approvals and clearances of third parties that shall be required to consummate the transactions contemplated hereby including, without limitation, approvals required under the HSR Act, and will otherwise use their best efforts to cause the consummation of such transactions in accordance with the terms and conditions of this Agreement. 7.3 Access to Books and Records. Purchaser agrees to provide Seller, its accountants, counsel and other representatives during normal business hours and upon reasonable notice, for a period of four years after the Closing Date, access to the books, records, tax returns, contracts and other underlying data and documentation of Purchaser relating to the period prior to the Closing Date and to make available to Seller personnel of Purchaser in Seller's review thereof for the purpose of enabling them to review any tax liabilities for such period. Purchaser agrees that, for such four-year period, it will preserve and keep intact all such books and records. 7.4 Discharge of Assumed Liabilities. Purchaser shall pay, perform and discharge, according to their terms, the Assumed Liabilities. 31 38 7.5 Tax Notification. Purchaser and Seller shall jointly determine whether notification of the Division of Taxation or its equivalent in the states in which Seller conducts its Business (which Seller represents and warrants to be the States of Illinois, California, Georgia or Florida) is required prior to the consummation of the transactions contemplated hereby. If notification is required, Purchaser shall notify the Director (a "Director") of the applicable Divisions of Taxation (or its equivalent) of the transactions contemplated hereby within the time periods required by such statutes and submit such notices and/or documentation as may be required. Seller shall provide Purchaser with all information required to complete such notice(s) and documentation. If a Director notifies Purchaser of any taxes due and owing to such state from Seller or that an amount must be escrowed, then such amount shall be designated as being held in escrow under the Escrow Agreement from the amount set forth in Section 3.2(b), to be disbursed as directed by the Director. Notwithstanding the foregoing, any such taxes which a Director determines are due and owing on or prior to the Closing Balance Sheet Date shall be contributed (i) by Purchaser to the extent such amount was accrued on the Pre-Closing Balance Sheet or incurred in the ordinary course of business consistent with past practices thereafter through the Closing Date and (ii) by Seller to the extent such amount exceeds any such accrual or amount. If Purchaser is required to pay any taxes which Seller should have paid (as being in excess of any accruals on the Pre-Closing Balance Sheet or incurred in the ordinary course of business consistent with past practices thereafter through the Closing), Seller and Funk, jointly and severally, shall replenish the escrowed amounts under Section 3.2(b) by the amount so paid by Purchaser. 7.6 Employees and Agents of Seller. Effective as of the Closing Date, Seller will terminate all employees of the Seller and Purchaser shall offer all employees of Seller, except for those listed in Schedule 7.6, employment by Purchaser at their present locations as of the Closing Date with wages, terms and conditions of employment benefits or benefit plans substantially similar to such that currently exist for Seller's employees and which have been disclosed in Schedule 7.6 or in the other Schedules hereto and with credit for all vacation pay accrued as of the Closing Date and set forth in the Closing Balance Sheet. If any employee who accepts employment with Purchaser demands payment of vacation pay accrued as of the Closing Date and set forth in the Closing Balance Sheet, Purchaser shall pay such accrued vacation pay. The parties agree that the persons so designated on Schedule 7.6 shall be offered one-year employment contracts with Purchaser with wages, terms and conditions of employment benefits or benefit plans substantially similar to such as currently exist for such employees. Notwithstanding the foregoing, no such employee shall have any third party beneficiary rights arising as a result of this Section 7.6 or any contractual rights to employment with Purchaser as a result hereof. All offers of employment shall be contingent upon employment commencing with Purchaser only following the Closing Date. The parties agree not to discourage any individuals who are offered employment with Purchaser from accepting such employment with Purchaser. 7.7 Bank Debt. Purchaser shall pay and discharge the Bank Debt as of the Closing Date. 32 39 ARTICLE VIII CONDITIONS TO OBLIGATIONS OF PURCHASER AND PARENT The obligations of Purchaser and Parent to cause the purchase of the Assets and the other transactions contemplated hereby to occur at Closing shall be subject to the satisfaction on or prior to the Closing Date of all of the following conditions, except such conditions as Purchaser and Parent may waive in writing: 8.1 Representations and Warranties of Seller and Funk. All of the representations and warranties of Seller and Funk contained in this Agreement and in any Schedule or other disclosure in writing from Seller or Funk shall have been true and correct when made, and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. 8.2 Covenants of Seller and Funk. All of the covenants and agreements herein on the part of Seller and Funk to be complied with or performed on or before the Closing Date shall have been fully complied with and performed. 8.3 Seller's Certificate. There shall be delivered to Purchaser a certificate dated as of the Closing date and signed by the President or a Vice President of Seller and by Funk to the effect set forth in Sections 8.1 and 8.2, which certificate shall have the effect of a representation and warranty made by each of Seller and Funk on and as of the Closing Date. 8.4 Noncompetition and Employment Agreements. Seller and Funk shall have executed and delivered to Purchaser the Noncompetition Agreement in substantially the form attached hereto as Exhibit D. Funk shall have executed and delivered to Purchaser the Employment Agreement in substantially the form attached hereto as Exhibit E. 8.5 Escrow Agreement. Seller shall have executed and delivered to Purchaser the Escrow Agreement. 8.6 No Casualty Losses. The Assets shall not have suffered any destruction or damage by fire, explosion or other casualty or any taking by eminent domain which has materially impaired the operation of the Assets or otherwise had a Material Adverse Effect. 8.7 Certificates of Authorities. Seller shall have furnished to Purchaser (i) certificates of the Secretary of State of Illinois and the Franchise Taxing Authority of Illinois, each dated as of a date not more than twenty (20) days prior to the Closing Date, attesting to the organization, existence and good standing of Seller, (ii) a copy, certified by the Secretary of State of Illinois as of a date not more than twenty (20) days prior to the Closing Date, of Seller's Articles of Incorporation and all amendments thereto, (iii) a copy, certified by the Secretary of Seller, of the Bylaws of Seller, as amended and in effect at the Closing Date, (iv) a copy, certified by an authorized officer of Seller, of resolutions duly adopted by the Board of Directors of Seller duly authorizing the transactions contemplated in this Agreement and (v) evidence satisfactory to Purchaser that all Taxes relating to the transactions contemplated by the Agreement have been 33 40 paid in full, or adequate provision has been made therefor, including, without limitation, any and all Taxes described in Section 7.5. 8.8 Litigation. At the Closing Date, there shall not be pending or threatened any litigation in any court or any proceeding before any Governmental Authority, (i) in which it is sought to restrain, invalidate, set aside or obtain damages in respect of the consummation of the purchase and sale of the Assets or the other transactions contemplated hereby, (ii) that could, if adversely determined, result in any Material Adverse Effect, or (iii) as a result of which, in the reasonable judgment of Purchaser, Purchaser would be deprived of the material benefits of its ownership of the Assets. 8.9 Satisfactory to Purchaser's Counsel. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental thereto and all other related matters shall have been satisfactory to Wolff & Samson, P.A., counsel for Purchaser. 8.10 Opinion of Seller's Counsel. Purchaser and Parent shall have received an opinion of Vedder, Price, Kaufman & Kammholz, counsel for Seller and Funk, dated as of the Closing Date, reasonably acceptable to Purchaser and its counsel. 8.11 No Material Adverse Effect. There shall not have occurred any Material Adverse Effect. Purchaser shall receive a certificate from Seller, dated as of the Closing Date and in form and substance satisfactory to Purchaser, as to the fulfillment of the conditions set forth in this Section 8.11. 8.12 Consents. Seller shall have obtained all orders, approvals, estoppel certificates or consents of third parties, including, without limitation, any orders, approvals, certificates or consents deemed necessary by counsel to Purchaser which shall be required to consummate the transactions contemplated hereby, including, without limitation, on or promptly following the Closing, consents to the assignment of the Assumed Liabilities listed on Schedule 2.3(d) (other than any Excluded Consents) and any waiting period (and any extensions thereof) under the HSR Act shall have expired or shall have been terminated. 8.13 Satisfactory Pre-Closing Balance Sheet. Purchaser shall have been satisfied with the results of Seller's operations and financial condition as reflected in the Pre-Closing Balance Sheet. 8.14 Bank Debt and Indebtedness to Vendors. Purchaser shall have received a certificate or written statement of a duly authorized representative of the holder of the Bank Debt, the holder of the indebtedness guaranteed by the Seller under the Guaranty Documents and each other vendor having a lien on any of the Assets as security for a debt owed by Seller to such vendor (each, a "Vendor Debt") (other than Vendor Debt being assumed), dated prior to the Closing Date, setting forth (i) the amount necessary to repay the Bank Debt or Vendor Debt in full (including all principal, interest, fees and other charges) together with a per diem amount for each day thereafter, (ii) the address (or wire transfer account) to which such payment should be 34 41 delivered and (iii) the acknowledgment of such holder that upon its receipt (and collection) of such amount, the Bank Debt or Vendor Debt, as applicable, will be satisfied and paid in full and all collateral and security given therefor will be released and such holder will execute and deliver such further termination statements and similar releases as Purchaser may reasonably request to evidence the foregoing. 8.15 Guaranty Documents. Funk shall have obtained the full release and discharge of Seller under the Guaranty Documents. 8.16 Due Diligence. Purchaser shall have completed to its satisfaction (in its sole and absolute discretion) its due diligence review and analysis of the Business of Seller. 8.17 Pre-Closing Balance Sheet. Purchaser shall have agreed with the Pre-Closing Balance Sheet. 8.18 Further Assurances. Each of Seller and Funk shall take all such further action as may be reasonably requested by Purchaser to effectuate the consummation of the transactions contemplated by this Agreement. If Purchaser shall reasonably determine that any further conveyance, assignment or other document or any further action is necessary to vest in it full title to the Assets, Seller and Funk shall cause the appropriate officers to execute and deliver all such instruments and take all such action as Purchaser may reasonably determine to be necessary. ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER AND FUNK The obligations of Seller and Funk to cause the sale of the Assets and the other transactions contemplated hereby to occur at Closing shall be subject to the satisfaction on or prior to the Closing Date of all of the following conditions, except such conditions as Seller and Funk may waive in writing. 9.1 Representations and Warranties of Purchaser and Parent. All of the representations and warranties of Purchaser and Parent contained in this Agreement and in any Schedule or other disclosure in writing from Purchaser or Parent shall have been true and correct when made, and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. 9.2 Covenants of Purchaser and Parent. All of the covenants and agreements herein on the part of the Purchaser and Parent to be complied with or performed on or before the Closing Date shall have been fully complied with and performed. 9.3 Purchaser's/Parent's Certificate. There shall be delivered to Seller and Funk a certificate dated as of the Closing Date and signed by the President or a Vice President of 35 42 Purchaser and Parent to the effect set forth in Sections 9.1 and 9.2, which certificate shall have the effect of a representation and warranty made by Purchaser and Parent on and as of the Closing Date. 9.4 Assumption Agreement. Purchaser shall have executed and delivered to Seller and Funk the Assumption Agreement. 9.5 Noncompetition and Employment Agreements. Purchaser shall have executed and delivered to Seller and Funk the Noncompetition Agreement. Purchaser shall have executed and delivered to Funk the Employment Agreement. 9.6 Escrow Agreement. Purchaser shall have executed and delivered to Seller the Escrow Agreement. 9.7 Certificates of Authorities. Purchaser and Parent shall have furnished to Seller (i) a certificate of the Secretary of State of Delaware, dated as of a date not more than 20 days prior to the Closing Date, attesting to the organization, existence and good standing of Purchaser and Parent, and (ii) a copy, certified by an authorized officer of Purchaser and Parent, of resolutions duly adopted by the Board of Directors of each of Purchaser and Parent duly authorizing the transactions contemplated in this Agreement. 9.8 Satisfactory to Seller's Counsel. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental thereto and all other related legal matters shall have been satisfactory to Vedder, Price, Kaufman & Kammholz, counsel for Seller and Funk. 9.9 Opinion of Counsel to Parent and Purchaser. Seller shall have received an opinion of Wolff & Samson, P.A., counsel to Parent and Purchaser, dated as of the Closing Date, reasonably satisfactory to Seller and its counsel. 9.10 Pre-Closing Balance Sheet. Seller shall have agreed with the Pre-Closing Balance Sheet. 9.11 Bank Debt. Purchaser shall have paid and discharged the Bank Debt as of the Closing Date. 9.12 Resale Certificate. Purchaser shall have executed and delivered a resale certificate to Seller for the applicable jurisdictions. ARTICLE X DATE AND PLACE OF CLOSING 10.1 Date and Place of Closing. Subject to satisfaction or waiver of the conditions to 36 43 the obligations of the parties, the purchase and sale of the Assets pursuant to this Agreement shall be consummated at a closing (the "Closing") to be held in the offices of Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601, or such other place as mutually agreed to by the parties, at 10:00 a.m., Chicago time, on September 30, 1999, or such other date as the parties may mutually agree upon (the "Closing Date"). 10.2 Effective Date. Subject to the terms and conditions of this Agreement, the Closing shall be deemed effective as of 12:01 a.m. on October 1, 1999 (the "Effective Date"). ARTICLE XI CLOSING 11.1 Performance by Seller and Funk. At the Closing, concurrently with performance by Purchaser and Parent of their respective obligations to be performed at the Closing, Seller and Funk shall: (a) Conveyances. Seller shall execute and deliver to Purchaser, in form and substance acceptable to Purchaser (i) a Bill of Sale and Assignment in substantially the form attached hereto as Exhibit A conveying to Purchaser all items of personally included among the Assets, assignments of each of the contracts, leases, arrangements and commitments listed on Schedule 2.3(d) and (iii) all other assignments, endorsements and instruments of transfer as shall be necessary or appropriate to carry out the intent of this Agreement and as shall be sufficient to vest in Purchaser title to all of the Assets and all right, title and interest of Seller thereto. If requested by Purchaser, such documents shall be in a form suitable for recording. (b) Records. Seller shall deliver to Purchaser all documents, agreements, reports, books, records and accounts pertaining specifically to the Assets that are in Seller's possession. (c) Certificates. Seller and Funk shall execute and deliver to Purchaser the certificates referred to in Sections 8.3 and 8.13. (d) Noncompetition Agreement, Employment Agreement and Escrow Agreement. Seller and Funk shall execute and deliver to Purchaser and Parent, as applicable, the Noncompetition Agreement referred to in Section 8.4, the Employment Agreement referred to in Section 8.4 and the Escrow Agreement referred to in Section 8.5. (e) Certificates of Authorities. Seller shall deliver to Purchaser the certificates of authorities referred to in Section 8.7. (f) Opinion of Counsel to Seller and Funk. Seller and Funk shall deliver to Purchaser and Parent the opinion of their counsel, dated the Closing Date, as to the matters specified in Section 8.10. 37 44 (g) Consents. Seller shall deliver to Purchaser the consents and approvals required by Section 8.14. (h) Other Actions. Each of Seller and Funk shall take all such other steps as may be necessary or appropriate to put Purchaser in actual and complete ownership and possession of the Assets. 11.2 Performance by Purchaser and Parent. At the Closing, concurrently with the performance by Seller of its obligations to be performed at the Closing, Purchaser and Parent, as applicable, shall: (a) Purchase Price. Deliver to Seller the funds specified in Section 4.3(a) and deliver the Payment Shares to the Escrow Agent. (b) Assumption Agreement. Execute and deliver to Seller the Assumption Agreement in substantially the form attached hereto as Exhibit B. (c) Certificate. Execute and deliver the certificate referred to in Section 9.3. (d) Noncompetition Agreement, Employment Agreement and Escrow Agreement. Execute and deliver to Seller and Funk the Noncompetition Agreement referred to in Section 9.5, to Funk the Employment Agreement referred to in Section 9.5 and to Seller the Escrow Agreement referred to in Section 9.6. (e) Certificates of Authorities. Deliver to Seller the certificates of authorities referred to in Section 9.7. (f) Opinion of Counsel to Purchaser and Parent. Purchaser and Parent shall deliver to Seller and Funk the opinion of their counsel, dated as of the Closing Date, as to the matters specified in Section 9.9. (g) Resale Certificate. Deliver to Seller the resale certificates referred to in Section 9.12. 11.3 Other Instruments. In addition to the foregoing, Purchaser, Parent, Seller and Funk agree as follows: (a) Further Action by Seller and Funk. At any time and from time to time, at or after the Closing, upon request of Purchaser, each of Seller and Funk shall do, execute, acknowledge and deliver or shall cause to be done, executed, acknowledged and delivered all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may reasonably be required to evidence, vest in and confirm to Purchaser full and complete title to, possession of, and the right to use and enjoy, the Assets. 38 45 (b) Further Action by Purchaser and Parent. At any time and from time to time, at or after the Closing, upon request of Seller or Funk, each of Purchaser and Parent shall do, execute, acknowledge and deliver or shall cause to be done, executed, acknowledged and delivered all such further acts and assurances as may reasonably be required to better assure and confirm to Seller and Funk the assumption by Purchaser of the obligations to render performance that are to be assumed by Purchaser pursuant to this Agreement. ARTICLE XII SURVIVAL AND INDEMNIFICATION 12.1 Survival of Covenants, Agreements, Representations and Warranties. (a) Covenants and Agreements. All covenants and agreements made under this Agreement shall survive the Closing and shall continue in full force and effect thereafter according to their terms for the applicable statute of limitations or such other period as shall be provided in this Agreement. (b) Representations and Warranties. All representations and warranties contained herein shall survive the Closing and shall continue in full force and effect thereafter for a period of two years and four months following the Effective Date, except that (a) the representations and warranties contained in Section 4.17 hereof shall survive until the earlier of (i) the expiration of the applicable periods (including any extensions) of the respective statutes of limitation applicable to the payment of the taxes to which such representations and warranties relate without an assertion of a deficiency in respect thereof by the applicable taxing authority or (ii) the completion of the final audit and determinations by the applicable taxing authority and final disposition of any deficiency resulting therefrom, (b) the representations and warranties contained in Section 4.18 hereof shall survive for a period of five years following the Closing, (c) the representations and warranties contained in Section 4.13 hereof shall survive until the expiration of the applicable period of the statutes of limitation applicable to ERISA matters, and (d) the representations and warranties contained in Sections 4.1 and 4.2 (other than Section 4.2(b)-(d)) shall survive for the applicable statute of limitations. The right to indemnification provided for herein based on a party's representations, warranties, covenants, and obligations will not be affected by any investigation conducted by any other party with respect to, or any knowledge acquired (or capable of being acquired by any other party) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation, except as to matters set forth in the Schedules. (c) Claims Made Prior to Expiration. Notwithstanding the foregoing survival periods set forth in this Section 12.1, the termination of a survival period shall not affect the rights of an Indemnified Party in respect of any claim made by such party with specificity, in good faith and in writing to the Indemnifying Party in accordance with Sections 12.6 and 14.9 hereof prior to the expiration of the applicable survival period. 39 46 12.2 Purchaser's Losses. Each of Seller and Funk, jointly and severally, but subject to the limitations of Section 12.5 hereof and provided there is an applicable survival period pursuant to Section 12.1 hereof, agrees to indemnify and hold harmless Purchaser, and its directors, officers, employees, representatives, agents and attorneys from, against, for and in respect of any and all damages (including, without limitation, amounts paid in settlement with Seller's consent, which may not be unreasonably withheld), penalties, fines, interest and monetary sanctions, losses, obligations, liabilities, claims, deficiencies, costs and expenses, including, without limitation, reasonable attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding (hereinafter referred to collectively as "Purchaser's Losses") suffered, sustained, incurred or required to be paid by any of them by reason of (i) the failure by Seller to comply with all applicable laws relating to bulk transfers including the provisions of the Uniform Commercial Code of the States of Illinois, California, Georgia and Florida; (ii) any representation or warranty made by Seller and Funk in or pursuant to this Agreement being untrue or incorrect in any respect; (iii) any failure by Seller or Funk to observe or perform its covenants and agreements set forth in this Agreement; or (iv) any failure by Seller or Funk to satisfy and discharge any other liability or obligation of Seller which is not an Assumed Liability; provided, however, that "Purchaser's Losses" shall not include, and neither Seller nor Funk shall be liable for, any Purchaser Losses resulting from any misrepresentation or breach of warranty of which Parent or Purchaser has actual knowledge, as evidenced solely by the Schedules hereto. 12.3 Employee Compensation and Benefits. Each of Seller and Funk, jointly and severally, but subject to the limitations of Section 12.5 hereof and provided there is an applicable survival period pursuant to Section 12.1 hereof, agrees to indemnify and hold Purchaser, and its directors, officers, employees, representatives, agents and attorneys harmless from and against any and all claims made by employees of Seller for wages, salaries, bonuses, pension, workmen's compensation, medical insurance, disability, vacation, severance, pay in lieu of notice, sick benefits or other compensation or benefit arrangements to the extent the same are based solely on employment service rendered to Seller prior to the Closing Date or injury or sickness occurring prior to the Closing Date and are not Assumed Liabilities (collectively, "Employee Claims"). 12.4 Seller's Losses. Purchaser and Parent, jointly and severally, but subject to the limitations of Section 12.5 hereof and provided there is an applicable survival period pursuant to Section 12.1 hereof, agree to indemnify hold harmless Seller and Seller's directors, officers, employees, representatives, agents and attorneys and Funk and his representatives, agents and attorneys from, against, for and in respect of any and all damages (inclosing, without limitation, amounts paid in settlement with Purchaser's consent, which may not be unreasonably withheld), penalties, fines, interest and monetary sanctions, losses, obligations, liabilities, claims, deficiencies, costs and expenses, including, without limitation, reasonable attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding (hereinafter referred to collectively as "Seller's Losses"; Seller's Losses or Purchaser's Losses are sometimes referred to herein as "Losses") suffered, sustained, incurred or required to be paid by any of them by reason of (i) any representation or warranty made by Purchaser in or pursuant to this Agreement being 40 47 untrue or incorrect in any respect; (ii) any liability arising from or with respect to the Assets after the Closing Date; (iii) any failure by Purchaser or Parent to observe or perform its covenants and agreements set forth in this Agreement; or (iv) any failure by Purchaser to satisfy and discharge any of the Assumed Liabilities after the Closing; provided, however, that "Seller's Losses" shall not include, and neither Purchaser nor Parent shall be liable for, any Seller's Losses resulting from any misrepresentation or breach of warranty of which Seller or Funk has actual Knowledge, as evidenced solely by the Schedules hereto. 12.5 Limitations on Losses. (a) In case any event shall occur which would otherwise entitle any party to assert a claim for indemnification hereunder, no Losses shall be deemed to have been sustained by such party to the extent of (i) any actual Tax savings realized by such party with respect thereto or (ii) any proceeds (net of deductibles, taxes and collection costs) received by such party from any property insurance policies maintained by or on behalf of such party with respect to losses to such party's property. The parties agree to submit a claim under such property insurance policies prior to or promptly following making a request for indemnification hereunder. (b) The aggregate liability of (i) Seller and Funk under Section 12.2(ii) shall not exceed (A) the sum of $6,000,000 until the first anniversary of the Closing Date; (B) the sum of $5,000,000 (less the aggregate amount of claims covered by clause (i)(A) of this Section 12.5(b)) from the first anniversary to the second anniversary of the Closing Date; and (C) the sum of $4,000,000 (less the aggregate amount of claims covered by clauses (i)(A) or (i)(B) of this Section 12.5(b)) from and after the second anniversary of the Closing Date; and (ii) Purchaser and Parent under Section 12.4(i) shall not exceed the sum of the Assumed Liabilities, any Growth Earnout Payments and any Maintenance Earnout Payment. (c) The sum of all Losses incurred by Purchaser and Parent in the aggregate under Section 12.2(ii), or the sum of all Losses incurred by Seller in the aggregate under Section 12.4(i), must exceed $225,000 before such parties shall be entitled to indemnification hereunder; provided, however, once such Losses exceed $225,000 such parties shall be entitled to indemnification for all Losses in excess of $150,000. (d) Purchaser's Losses shall be reduced by the amounts of any Overpayment or Receivable Writeback Amounts related to such Losses received by Purchaser. 12.6 Notice of Loss. Except to the extent set forth in the next sentence, a party to this Agreement shall not have any liability under the indemnity provisions of this Agreement with respect to a particular matter unless a notice setting forth in reasonable detail the breach which is asserted has been given to the Indemnifying Party (as hereafter defined) and, in addition, if such matter arises out of a suit, action, investigation or proceeding, such notice is given promptly, but in any event within 30 days after the Indemnified Party (as hereafter defined) is given notice of the commencement of this suit, action, investigation or proceeding. Notwithstanding the preceding sentence, failure of the Indemnified Party to give notice hereunder shall not release the 41 48 Indemnifying Party from its obligations under this Article XII, except to the extent the Indemnifying Party is actually prejudiced by such failure to give notice. With respect to Purchaser's Losses and Employee Claims, Seller and Funk, jointly and severally, shall be the Indemnifying Party and Purchaser shall be the Indemnified Party. With respect to Seller's Losses, Purchaser and Parent, jointly and severally, shall be the Indemnifying Party and Seller and Funk shall be the Indemnified Party. 12.7 Right to Defend. Upon receipt of notice of any suit, action, investigation, claim or proceeding for which indemnification might be claimed by an Indemnified Party, the Indemnifying Party shall be entitled to defend, contest or otherwise protect against such suit, action, investigation, claim or proceeding at its own cost and expense, and the Indemnified Party must cooperate in any such defense or other action. The Indemnified Party shall have the right, but not the obligation, to participate at its own expense in a defense thereof by counsel of its own choosing, but the Indemnifying Party shall be entitled to control the defense unless the Indemnified Party has relieved the Indemnifying Party from liability with respect to the particular matter or the Indemnifying Party fails to assume defense of the matter. If the Indemnifying Party shall fail to defend, contest or otherwise protect in a timely manner against any such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right, but not the obligation, to defend, contest or otherwise protect against the same and make any compromise or settlement thereof and recover the entire cost thereof from the Indemnifying party including reasonable attorneys' fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or the compromise or settlement thereof; provided, however, that the Indemnified Party must send a written notice to the Indemnifying Party of any such proposed settlement or compromise, which settlement or compromise the Indemnifying Party may reject, in its reasonable judgment, within 30 days of its receipt of such written notice. A failure by the Indemnifying Party to reject such settlement or compromise within such 30 day period shall be deemed an acceptance of such settlement or compromise. The Indemnified Party shall have the right to effect a settlement or compromise over the objection of the Indemnifying Party; provided, that if (i) the Indemnifying Party is contesting such claim in good faith or (ii) the Indemnifying Party has assumed the defense from the Indemnified Party, the Indemnified Party waives any right to indemnity therefor. If the Indemnifying Party undertakes the defense of such matters, the Indemnified Party shall not, so long as the Indemnifying Party does not abandon the defense thereof, be entitled to recover from the Indemnifying Party any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than the reasonable costs of investigation undertaken by the Indemnified Party with the prior written consent of the Indemnifying Party. 12.8 Cooperation. Each of Parent, Purchaser, Seller and Funk and each of their affiliates, successors and assigns shall cooperate with each other in the defense of any suit, action, investigation, proceeding or claim by a third party and, during normal business hours, shall afford each other access to their books and records and employees relating to such suit, action, investigation, proceeding or claim and shall furnish each other all such further information that they have the right and power to furnish as may reasonably be necessary to defend such suit, action, investigation, proceeding or claim, including, without limitation, reports, studies, 42 49 correspondence and other documentation relating to Environmental Protection Agency, Occupational Safety and Health Administration, and Equal Employment Opportunity Commission matters. 12.9 Payment Through Escrow. During the term of the Escrow Agreement, if Seller or Funk is determined to owe an indemnification amount pursuant to the procedures set forth in this Article XII (a "Claim"), then the amount due the Indemnified Party hereunder shall be satisfied or partially satisfied first by the delivery to the Indemnified Party pursuant to the Escrow Agreement of funds equal in value to the amount of the applicable Claim, or if the value of the funds being held under the Escrow Agreement is less than the amount of the Claim, by delivery of all of the funds in partial satisfaction of such Claim and by setoff against any Growth Earnout Payment or Maintenance Earnout Payment which has been ascertained at such time and is then due and payable, with any remaining balance of such Claim then to be satisfied by Seller and Funk directly. 12.10 Exclusive Remedy. The Purchaser, Parent, Seller and Funk acknowledge and agree that, in the absence of fraud (in which event any affected party shall have all remedies available at law or in equity), the foregoing indemnification provisions in this Article XII shall be the exclusive remedy of the Purchaser, Parent, Seller and Funk with respect to the Business and the transactions contemplated by this Agreement. ARTICLE XIII TERMINATION 13.1 Termination. This Agreement may be terminated and abandoned at any time on or prior to the Closing Date: (a) By the consent in writing of Purchaser, Parent, Seller and Funk; (b) By Purchaser or Parent in writing if any of the conditions to the obligations of Purchaser contained herein shall not have been satisfied or, if unsatisfied, waived by Purchaser as of the Closing Date; (c) By Purchaser or Parent by giving written notice to the Seller at any time prior to the Closing if the Seller has within the then previous 10 Business Days given the Purchaser and Parent any notice pursuant to Section 6.4 and the development that is the subject of the amendment or supplement would be reasonably expected by Purchaser or Parent to have a Material Adverse Effect; (d) By Seller or Funk in writing if any of the conditions to the obligations of Seller contained herein shall not have been satisfied or, if unsatisfied, waived by Seller as of the Closing Date; (e) By Purchaser or Parent, or Seller or Funk, in writing if the Closing shall not have occurred by September 30, 1999; and 43 50 (f) By Purchaser, upon written notice to Seller, if the results of its due diligence review of the Business of Seller are not satisfactory to it in its sole and absolute discretion. 13.2 No Further Force or Effect. In the event of termination and abandonment of this Agreement pursuant to the provisions of Section 12.1, this Agreement shall be of no further force or effect, except for Sections 5.3, 6.1 and 13.1, which shall not be affected by termination of this Agreement. ARTICLE XIV MISCELLANEOUS 14.1 Expenses. Except as otherwise expressly provided herein, Parent and Purchaser shall pay their own expenses and Funk shall pay the expenses of Seller and Funk in connection with the preparation of this Agreement, and the consummation of the transactions contemplated hereby, including, without limitation, fees of their own counsel, auditors and other experts, whether or not such transactions be consummated. 14.2 Entire Agreement. This Agreement (including the exhibits and schedules hereto) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter thereof, and no party shall be liable or bound to the other in any manner by any representations or warranties not set forth herein. 14.3 Publicity. Except as otherwise required by law, no party hereto shall issue any press release or make any public statement, in either case relating to or in connection with or arising out of this Agreement or the matters contained herein, without obtaining the prior written approval of the other parties hereto to the content and manner of presentation and publication thereof, which consent shall not be unreasonably withheld or delayed. 14.4 Successors and Assigns. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law), and the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of such agreements. 14.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. 44 51 14.6 Headings. The headings of the paragraphs and subparagraphs of this Agreement are inserted for convenience of reference only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 14.7 Use of Certain Terms. As used in this Agreement, the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph or other subdivision. 14.8 Modification and Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof, and this Agreement may be modified or amended by a written instrument executed by Purchaser and Seller and Funk. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 14.9 Notices. All notices of communication required or permitted hereunder shall be in writing and may be given by (a) depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, (b) delivering the same in person to an officer or agent of such party, or (c) telecopying the same with electronic confirmation of receipt. (i) If to Seller and/or to Funk: c/o Arlington Industries, Inc. 1001 Technology Way Libertyville, Illinois 60048 Attention: Craig Funk, Chairman Telecopy Number: (847) 362-8107 With copies to: Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Chicago, Illinois 60601-1003 Attention: Thomas E. Schnur, Esq. Telecopy Number: (312) 609-5005 (ii) If to Purchaser and/or to Parent: c/o Daisytek, Incorporated 500 North Central Expressway Suite 500 Plano, Texas 75074 Attention: Mr. John D. Kearney, Sr. Telecopy Number: (972) 881-0145 45 52 With copies to: Wolff & Samson, P.A. 5 Becker Farm Road Roseland, New Jersey 07068 Attention: Morris Bienenfeld, Esq. Telecopy Number: (973) 740-1407 or at such other address or counsel as any party hereto shall specify pursuant to this Section 14.9 from time to time. 14.10 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. 14.11 Time. Time is of the essence with respect to this Agreement. 14.12 Reformation and Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. [remainder of page left intentionally blank] 46 53 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed in counterparts all as of the date first above written. SELLER: ARLINGTON INDUSTRIES, INC. By: --------------------------------------- Craig Funk Chairman and Chief Executive Officer FUNK: ------------------------------------------- CRAIG FUNK PURCHASER: ARLINGTON ACQUISITION CORP. By: --------------------------------------- John D. Kearney, Sr., Vice President PARENT: DAISYTEK, INCORPORATED By: --------------------------------------- John D. Kearney, Sr., Vice President EX-10.5 6 FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT 1 EXHIBIT 10.5 CHANGE IN CONTROL SEVERANCE AGREEMENT THIS AGREEMENT is entered into as of the ______ day of October, 1999 by and between DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and _______________ ("Executive"). W I T N E S S E T H WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise and that such possibility may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board (as defined in Section 1) has determined that it is in the best interests of the Company and its stockholders to secure Executive's continued services and to ensure Executive's continued and undivided dedication to his duties in the event of any threat or occurrence of a Change in Control (as defined in Section 1) of the Company; and WHEREAS, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below: a) "Board" means the Board of Directors of the Company. a) "Bonus Amount" means the greater of (I) the highest annual incentive bonus earned by Executive from the Company (or its affiliates) during the last three (3) completed fiscal years of the Company immediately preceding Executive's Date of Termination (annualized in the event Executive was not employed by the Company (or its affiliates) for the whole of any such fiscal year) or (ii) the Executive's target bonus for the fiscal year of the Company which includes the Executive's Date of Termination. 2 2 a) "Cause" means (I) the willful and continued failure of Executive to perform substantially his duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Company or delivering a Notice of Termination for Good Reason to the Company) after a written demand for substantial performance is delivered to Executive by the Board which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is demonstrably and materially injurious to the Company or its affiliates. For purpose of the preceding sentence, no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Company (or upon the instructions of the Company's chief executive officer or another senior officer of the Company) shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Cause shall not exist unless and until the Company has delivered to Executive a copy of a resolution duly adopted by a majority of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth in clauses (1) or (2) has occurred and specifying the particulars thereof in detail. The Company must notify Executive of any event constituting Cause within ninety (90) days following the Company's knowledge of its existence or such event shall not constitute Cause under this Agreement. a) "Change in Control" means the occurrence of any one of the following events: (1) individuals who, on the date of this Agreement, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date of this Agreement, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies (or consents) by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; 3 3 (2) any "Person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), or (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); (1) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction); or 4 4 (1) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 30% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. a) "Date of Termination" means (1) the effective date on which Executive's employment by the Company terminates as specified in a prior written notice by the Company or Executive, as the case may be, to the other, delivered pursuant to Section 10 or (2) if Executive's employment by the Company terminates by reason of death, the date of death of Executive. a) "Disability" means termination of Executive's employment by the Company due to Executive's absence from Executive's duties with the Company on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. a) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following events after a Change in Control: (1) (A) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is inconsistent in any material and adverse respect with Executive's position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities); provided, however, that Good Reason shall not be deemed to occur upon a change in duties or responsibilities (other than reporting responsibilities) that is solely and directly a result of the Company no longer being a publicly traded entity and does not involve any other event set forth in this paragraph (g) or (B) a material and adverse change in Executive's titles or offices (including, if applicable, membership on the Board) with the Company as in effect immediately prior to such Change in Control; (1) a reduction by the Company in Executive's rate of annual base salary or annual target bonus opportunity (including any material and adverse change in the formula for such annual bonus target) as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter; 5 5 (1) any requirement of the Company that Executive (A) be based anywhere more than thirty-five (35) miles from the office where Executive is located at the time of the Change in Control, if such relocation increases Executive's commute by more than twenty (20) miles, or (B) travel on Company business to an extent substantially greater than the travel obligations of Executive immediately prior to such Change in Control; (1) the failure of the Company to (A) continue in effect any employee benefit plan, compensation plan, welfare benefit plan or material fringe benefit plan in which Executive is participating immediately prior to such Change in Control or the taking of any action by the Company which would adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate (at substantially equivalent cost with respect to welfare benefit plans), or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of the Company as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control; (1) any refusal by the Company to continue to permit Executive to engage in activities not directly related to the business of the Company which Executive was permitted to engage in prior to the Change in Control; (1) any purported termination of Executive's employment which is not effectuated pursuant to Section 10(b) (and which will not constitute a termination hereunder); or (1) the failure of the Company to obtain the assumption (and, if applicable, guarantee) agreement from any successor (and, if applicable, Parent Corporation) as contemplated in Section 9(b). An isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Executive's right to terminate employment for Good Reason shall not be affected by Executive's incapacity due to mental or physical illness and Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Executive must provide notice of termination of employment within ninety (90) days following Executive's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement). 6 6 a) "Qualifying Termination" means a termination of Executive's employment (I) by the Company other than for Cause or (ii) by Executive for Good Reason. Termination of Executive's employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination. a) "Subsidiary" means any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors or in which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution. a) "Termination Period" means the period of time beginning with a Change in Control and ending two (2) years following such Change in Control. Notwithstanding anything in this Agreement to the contrary, if (I) Executive's employment is terminated prior to a Change in Control for reasons that would have constituted a Qualifying Termination if they had occurred following a Change in Control; (ii) Executive reasonably demonstrates that such termination (or Good Reason event) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control; and (iii) a Change in Control involving such third party (or a party competing with such third party to effectuate a Change in Control) does occur, then for purposes of this Agreement, the date immediately prior to the date of such termination of employment or event constituting Good Reason shall be treated as a Change in Control. For purposes of determining the timing of payments and benefits to Executive under Section 4, the date of the actual Change in Control shall of treated as Executive's Date of Termination under Section l(e). 1. Obligation of Executive. In the event of a tender or exchange offer, proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability or an event which would constitute Good Reason if a Change in Control had occurred, until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned. 1. Term of Agreement. This Agreement shall be effective on the date hereof and shall continue in effect until the Company shall have given three (3) years' written notice of cancellation; provided, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of two (2) years after a Change in Control, if such Change in Control shall have occurred during the term of this Agreement. Notwithstanding anything in this Section to the contrary, this Agreement shall terminate if Executive or the Company terminates Executive's employment prior to a Change in Control except as provided in Section l(j). 7 7 1. Payments and Benefits a) Qualifying Termination - Severance. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, then the Company shall pay to Executive: (1) within ten (10) days following the Date of Termination a lump-sum cash amount equal to the sum of (A) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, (B) a pro rata portion of Executive's annual bonus for the fiscal year in which Executive's Date of Termination occurs in an amount at least equal to (1) Executive's Bonus Amount, multiplied by (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid from the Company's annual incentive plan for the fiscal year in which Executive's Date of Termination occurs, and (C), any compensation previously deferred by Executive other than pursuant to a tax-qualified plan (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; plus (1) within ten (10) days following the Date of Termination, a lump-sum cash amount equal to (I) two (2) times Executive's highest annual rate of base salary during the 12-month period immediately prior to Executive's Date of Termination, plus (ii) two (2) times Executive's Bonus Amount, plus (iii) the value of any Company-provided benefits under the Company's 401(k) Plan which Executive would have accrued in the two (2) years following the Date of Termination had he remained employed by the Company during such period, calculated assuming that both the Executive and the Company contributed the highest permissible amounts to the plans during such period. a) Qualifying Termination - Benefits. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, the Company shall continue to provide, for a period of two (2) years following Executive's Date of Termination, Executive (and Executive's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits upon substantially the same terms and conditions (including contributions required by Executive for such benefits) as existed immediately prior to Executive's Date of Termination (or, if more favorable to Executive, as such benefits and terms and conditions existed immediately prior to the Change in Control); provided, that, if Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes 8 8 reemployed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. a) Nonqualifying Termination. If during the Termination Period the employment of Executive shall terminate other than by reason of a Qualifying Termination, then the Company shall pay to Executive within thirty (30) days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, and (2) any compensation previously deferred by Executive other than pursuant to a tax-qualified plan (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid. The Company may make such additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing. a) Stock Options. In the event of a Change in Control, all options to purchase Company stock held by Executive ("Options") which are not fully vested and exercisable shall become fully vested and exercisable as of a time established by the Board, which shall be no later than a time preceding the Change in Control which allows Executive to exercise the Options and cause the stock acquired thereby to participate in the Change in Control transaction. If the Change in Control transaction is structured such that stock participating therein at one time is or may be treated differently than stock participating therein at a different time (e.g., a tender offer followed by a squeeze-out merger, with differing forms or amounts of consideration), the Board shall interpret this paragraph (d) to provide for the required vesting acceleration in a manner designed to allow Executive to exercise the Options and cause the stock acquired thereby to participate in the earliest portion of the Change in Control transaction. If the consummation of a pending or threatened Change in Control transaction is uncertain (e.g., a tender offer in which the tender of a minimum number of shares is a condition to closing, or a voted merger or proxy contest in which a minimum number of votes is a condition to closing), the Board shall apply this paragraph (d) by using its best efforts to determine if and when the Change in Control transaction is likely to occur, and proceeding accordingly. To the extent necessary to implement this Section 4(d), each stock option agreement reflecting the Options, and each stock option plan relating to each such stock option agreement, if any, shall be deemed amended. 9 9 1. Certain Additional Payments by the Company. a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to (I) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-Up Payment in the Executive's adjusted gross income. a) Subject to the provisions of Section 5(a), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which 10 10 accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this Section 5 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-Up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Executive thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of Executive. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Executive for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Executive shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 1. Withholding Taxes. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom. 1. Reimbursement of Expenses. If any contest or dispute shall arise under this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all reasonable legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute (regardless of the result thereof), together with interest in an amount equal to the Chase Manhattan Bank prime rate from time to time in effect, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives Executive's statement for such fees and 11 11 expenses through the date of payment thereof, regardless of whether or not Executive's claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the Company to the extent that a court issues a final order from which no appeal can be taken, or with respect to which the time period to appeal has expired, setting forth the determination that the position taken by Executive was frivolous or advanced by Executive in bad faith. 1. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle Executive to continued employment with the Company or its Subsidiaries, and if Executive's employment with the Company shall terminate prior to a Change in Control, Executive shall have no further rights under this Agreement (except as otherwise provided hereunder); provided, however, that any termination of Executive's employment during the Termination Period shall be subject to all of the provisions of this Agreement. 1. Successors; Binding Agreement. a) This Agreement shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Agreement shall be binding upon the Surviving Corporation, and such Surviving Corporation shall be treated as the Company hereunder. a) The Company agrees that in connection with any Business Combination, it will cause any successor entity to the Company unconditionally to assume (and for any Parent Corporation in such Business Combination to guarantee), by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption and guarantee prior to the effectiveness of any such Business Combination that constitutes a Change in Control, shall be a breach of this Agreement and shall constitute Good Reason hereunder and shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment were terminated following a Change in Control by reason of a Qualifying Termination. For purposes of implementing the foregoing, the date on which any such Business Combination becomes effective shall be deemed the date Good Reason occurs, and shall be the Date of Termination if requested by Executive. a) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 12 12 a) Notice. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive to the most recent address of such Executive on the books and records of the Company; and If to the Company: Daisytek International Corporation 500 North Central Expressway Plano, Texas 75074 Attention: Secretary or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. a) A written notice of Executive's Date of Termination by the Company or Executive, as the case may be, to the other, shall (I) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) specify the termination date (which date shall be not less than fifteen (15) (thirty (30), if termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice). The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 1. Full Settlement; Resolution of Disputes. The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company, and any severance plan of the Company. The Company's obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the 13 13 provisions of this Agreement and, except as provided in Section 4(b), such amounts shall not be reduced whether or not Executive obtains other employment. 1. Employment with Subsidiaries. Employment with the Company for purposes of this Agreement shall include employment with any Subsidiary. 1. Survival. The respective obligations and benefits afforded to the Company and Executive as provided in Sections 4 (to the extent that payments or benefits are owed as a result of a termination of employment that occurs during the term of this Agreement), 5 (to the extent that Payments are made to Executive as a result of a Change in Control that occurs during the term of this Agreement), 6, 7, 9(c) and 11 shall survive the termination of this Agreement. 1. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF, OF SUCH PRINCIPLES OF ANY OTHER JURISDICTION WHICH COULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. 1. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 1. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits 14 14 payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. 15 15 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written. DAISYTEK INTERNATIONAL CORPORATION By: ------------------------------ Title: --------------------------- THE BOARD OF DIRECTORS OF DAISYTEK INTERNATIONAL CORPORATION By: ------------------------------ Secretary COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF DAISYTEK INTERNATIONAL CORPORATION By: Secretary --------------------------------- [EXECUTIVE] EX-10.6 7 INDUSTRIAL LEASE AGREEMENT 1 EXHIBIT 10.6 INDUSTRIAL LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") is made as of the "Lease Date" (as defined in Section 37 herein) by and between SHELBY DRIVE CORPORATION, a Florida corporation ("Landlord"), and PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation ("Tenant") (the words "Landlord" and "Tenant" to include their respective legal representatives, successors and permitted assigns where the context requires or permits). W I T N E S S E T H: 1. Basic Lease Provisions. The following constitute the basic provisions of this Lease: (a) Demised Premises Address: 4650 Shelby Drive Memphis, Tennessee 38118 (b) Demised Premises Square Footage: approximately 442,184 sq. ft. (c) Building Square Footage: approximately 442,184 sq. ft. (d) Annual Base Rent: Lease Year 1 $1,308,864 Lease Year 2 $1,308,864 Lease Year 3 $1,308,864 Lease Year 4 $1,308,864 Lease Year 5 $1,308,864 (e) Monthly Base Rent Installments: Lease Year 1 $109,072 Lease Year 2: $109,072 Lease Year 3 $109,072 Lease Year 4 $109,072 Lease Year 5 $109,072 (f) Lease Commencement Date: September 1, 1999 (g) Base Rent Commencement Date: September 1, 1999 (h) Expiration Date: August 31, 2004 (i) Term: 5 years (j) Tenant's Operating Expense Percentage: 100% (k) Security Deposit: Not Applicable (l) Permitted Use: Office and partially automated storage and distribution of non-toxic products (m) Address for notice: Landlord: Shelby Drive Corporation c/o L&B Realty Advisors, Inc. 8750 N. Central Expressway Suite 800 Dallas, Texas 75231 Attn: Ed Daley With a copy to: Shelby Drive Corporation c/o IDI Services Group, Inc. 3424 Peachtree Road, Suite 1500 Atlanta, Georgia 30326 2 Tenant: Priority Fulfillment Services, Inc. 500 North Central Expressway Plano, Texas 75074 Attn: Mark C. Layton, Chief Executive Officer (n) Address for rental payments: Shelby Drive Corporation c/o IDI Services Group, Inc. 3424 Peachtree Road, N.E. Suite 1500 Atlanta, Georgia 30326 (o) Broker(s): Commercial Tennessee 3175 Lennox Park Blvd., Suite 100 Memphis, Tennessee 38115 Attn: Wyatt A. Aiken (p) Guarantor: Daisytek International Corporation 2. Demised Premises. For and in consideration of the rent hereinafter reserved and the mutual covenants hereinafter contained, Landlord does hereby lease and demise unto Tenant, and Tenant does hereby hire, lease and accept, from Landlord all upon the terms and conditions hereinafter set forth the following premises, referred to as the "Demised Premises", as outlined on Exhibit A attached hereto and incorporated herein: approximately 442,184 square feet of space, having an address as set forth in Section 1(a), comprising all of Building I (the "Building"), which is located on that certain parcel of land described on Exhibit B attached hereto and incorporated herein (the "Land"), within Southpark (the "Project"), in Shelby County, Tennessee, together with the right to use and enjoy the Building Appurtenance Area (as hereinafter defined). 3. Term. To have and to hold the Demised Premises for a preliminary term (the "Preliminary Term") commencing on the Lease Date and ending on the Lease Commencement Date as set forth in Section 1(f), and a primary term (the "Primary Term") commencing on the Lease Commencement Date and terminating on the Expiration Date as set forth in Section 1(h), as the Lease Commencement Date and the Expiration Date may be revised pursuant to Section 17 (the Preliminary Term, the Primary Term, and any and all extensions thereof, herein referred to as the "Term"). The term "Lease Year" shall mean each one (1) year period of the Term (or portion thereof if the last Lease Year of the Term is less than one (1) full year) beginning on the Lease Commencement Date, and each anniversary thereof, and ending on the day immediately prior to the next succeeding anniversary of the Lease Commencement Date. 4. Base Rent. Tenant shall pay to Landlord at the address set forth in Section 1(n), as base rent for the Demised Premises, commencing on the Base Rent Commencement Date and continuing throughout the Term in lawful money of the United States, the annual amount set forth in Section 1(d) payable in equal monthly installments as set forth in Section 1(e) (the "Base Rent"), payable in advance, without demand and without abatement, reduction, set-off or deduction, on the first day of each calendar month during the Term. If the Base Rent Commencement Date shall fall on a day other than the first day of a calendar month, the Base Rent shall be apportioned pro rata on a per diem basis (i) for the period between the Base Rent Commencement Date and the first day of the following calendar month (which pro rata payment shall be due and payable on the Base Rent Commencement Date), and (ii) for the last partial month of the Term, if applicable. No payment by Tenant or receipt by Landlord of rent hereunder shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or any letter accompanying any check or payment of rent shall be deemed an accord and satisfaction, and Landlord may accept such check as payment without prejudice to Landlord's right to recover the balance of such installment or payment of rent or pursue any other remedies available to Landlord. 5. Intentionally Omitted. 6. Operating Expenses and Additional Rent. (a) Tenant agrees to pay as Additional Rent (as defined in Section 6(b) below) its proportionate share of Operating Expenses (as hereinafter defined). "Operating Expenses" shall be defined as all reasonable expenses for operation, repair, replacement and maintenance as necessary to keep (i) the Building, and (ii) the driveways, parking areas, truck courts, and other improvements (other than the Building) located on the Land, and serving the Demised Premises (collectively, the "Building Appurtenance Area") in good order, condition and repair, including but not limited to, utilities for the Building and the Building Appurtenance Area, expenses associated with the driveways and parking areas (including sealing and restriping, and snow, trash and ice removal), security systems, fire detection and prevention systems, lighting facilities, landscaped areas, walkways, painting and caulking, directional signage, curbs, drainage strips, sewer lines, all charges assessed against or attributed to the Building -2- 3 pursuant to any applicable easements, covenants, restrictions, agreements, declaration of protective covenants (including, without limitation, such dues and assessments payable pursuant to the Declaration of Protective Covenants for the Project, as amended from time to time in accordance with the terms thereof (the "Protective Covenants")) or development standards, property management fees, all real property taxes and special assessments imposed upon the Building and the Building Appurtenance Area, all costs of insurance paid by Landlord with respect to the Building and the Building Appurtenance Area and cost of improvements to the Building and the Building Appurtenance Area required by any law, ordinance or regulation applicable to the Building and the Building Appurtenance Area generally. Operating Expenses shall not include expenses for the costs of any maintenance and repair required to be performed by Landlord at its own expense under Section (10)(b) or advertising, marketing or commission expenses. Further, Operating Expenses shall not include the costs for capital improvements unless such costs are incurred for the purpose of causing a material decrease in the Operating Expenses of the Building or the Building Appurtenance Area or are made with respect to improvements made to comply with laws, ordinances or regulations as described above. Operating Expenses shall be accounted for in accordance with generally accepted accounting principles. The proportionate share of Operating Expenses to be paid by Tenant shall be a percentage of the Operating Expenses based upon the proportion that the square footage of the Demised Premises bears to the total square footage of the Building (such figure referred to as "Tenant's Operating Expense Percentage" and set forth in Section 1(j)). Prior to or promptly after the beginning of each calendar year during the Term, Landlord shall estimate the total amount of Operating Expenses to be paid by Tenant during each such calendar year and Tenant shall pay to Landlord one-twelfth (1/12) of such sum on the first day of each calendar month during each such calendar year, or part thereof, during the Term. Within a reasonable time after the end of each calendar year, Landlord shall submit to Tenant a statement of the actual amount of Operating Expenses for such calendar year, and the actual amount owed by Tenant, and within thirty (30) days after receipt of such statement, Tenant shall pay any deficiency between the actual amount owed and the estimates paid during such calendar year, or in the event of overpayment, Landlord shall credit the amount of such overpayment toward the next installment of Operating Expenses owed by Tenant or remit such overpayment to Tenant if the Term has expired or has been terminated and no Event of Default exists hereunder. The obligations in the immediately preceding sentence shall survive the expiration or any earlier termination of this Lease. If the Lease Commencement Date shall fall on other than the first day of the calendar year, and/or if the Expiration Date shall fall on other than the last day of the calendar year, Tenant's proportionate share of the Operating Expenses for such calendar year shall be apportioned prorata. (b) Any amounts required to be paid by Tenant hereunder (in addition to Base Rent) and any charges or expenses incurred by Landlord on behalf of Tenant under the terms of this Lease shall be considered "Additional Rent" payable in the same manner and upon the same terms and conditions as the Base Rent reserved hereunder except as set forth herein to the contrary. Any failure on the part of Tenant to pay such Additional Rent when and as the same shall become due shall entitle Landlord to the remedies available to it for non-payment of Base Rent. Tenant's obligations for payment of Additional Rent shall begin to accrue on the Base Rent Commencement Date. (c) If applicable in the jurisdiction where the Demised Premises are located, Tenant shall pay and be liable for all rental, sales, use and inventory taxes or other similar taxes, if any, on the amounts payable by Tenant hereunder levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid Landlord by Tenant under the terms of this Lease. Such payment shall be made by Tenant directly to such governmental body if billed to Tenant, or if billed to Landlord, such payment shall be paid concurrently with the payment of the Base Rent, Additional Rent, or such other charge upon which the tax is based, all as set forth herein. 7. Use of Demised Premises. (a) The Demised Premises shall be used for the Permitted Use set forth in Section 1(l) and for no other purpose without Landlord's consent, which consent shall not be unreasonably withheld. (b) Tenant will permit no liens to attach or exist against the Demised Premises. (c) The Demised Premises shall not be used for any illegal purposes, and Tenant shall not allow, suffer, or permit any vibration, noise, odor, light or other effect to occur within or around the Demised Premises that could constitute a nuisance or trespass for Landlord or any occupant of the Building or an adjoining premises. Upon notice by Landlord to Tenant that any of the aforesaid prohibited uses are occurring, Tenant agrees to promptly remove or control the same. (d) Tenant shall not in any way violate any law, ordinance or restrictive covenant affecting the Demised Premises, and shall not in any manner use the Demised Premises so as to cause cancellation of, prevent the use of the fire and extended coverage insurance policy required hereunder. Landlord makes no (and does hereby expressly disclaim any) covenant, representation or warranty as to the Permitted Use being allowed by or being in compliance with any applicable laws, rules, ordinances or restrictive covenants now or hereafter affecting the Demised Premises, and any zoning letters, copies of zoning ordinances or other information from any governmental agency or other third party provided to Tenant by Landlord or any of Landlord's agents or employees shall be for informational purposes only, -3- 4 Tenant hereby expressly acknowledging and agreeing that Tenant shall conduct and rely solely on its own due diligence and investigation with respect to the compliance of the Permitted Use with all such applicable laws, rules, ordinances and restrictive covenants and not on any such information provided by Landlord or any of its agents or employees. (e) In the event insurance premiums pertaining to the Demised Premises, the Building, or the Building Appurtenance Area, whether paid by Landlord or Tenant, are increased over the least hazardous rate available due to the nature of the use of the Demised Premises by Tenant, Tenant shall pay such additional amount as Additional Rent, provided Tenant is given reasonable prior notice of such impending increase and an opportunity to cease or modify such use. 8. Insurance. (a) Tenant covenants and agrees that from and after the Lease Commencement Date or any earlier date upon which Tenant enters or occupies the Demised Premises or any portion thereof, Tenant will carry and maintain, at its sole cost and expense, the following types of insurance, in the amounts specified and in the form hereinafter provided for: (i) Liability insurance in the Commercial General Liability form (or reasonable equivalent thereto) covering the Demised Premises and Tenant's use thereof against claims for bodily injury or death, property damage and product liability occurring upon, in or about the Demised Premises, such insurance to be written on an occurrence basis (not a claims made basis), to be in combined single limits amounts not less than $1,000,000.00 and to have general aggregate limits of not less than $2,000,000.00 with "umbrella" coverage with limits of not less than $5,000,000.00 for each policy year. The insurance coverage required under this Section 8(a)(i) shall, in addition, extend to any liability of Tenant arising out of the indemnities provided for in Section 11 and, if necessary, the policy shall contain a contractual endorsement to that effect. (ii) Insurance covering (A) all of the items included in the leasehold improvements constructed in the Demised Premises by or at the expense of Landlord (collectively, the "Improvements"), including but not limited to demising walls and the heating, ventilating and air conditioning system and (B) Tenant's trade fixtures, merchandise and personal property from time to time in, on or upon the Demised Premises, in an amount not less than one hundred percent (100%) of their full replacement value (or such percentage below 100% which assures full payment by the insurer of any claim) from time to time during the Term, providing protection against perils included within the standard form of "all-risks" fire and casualty insurance policy, together with insurance against sprinkler damage, vandalism and malicious mischief. Any policy proceeds from such insurance relating to the Improvements shall be used solely for the repair, construction and restoration or replacement of the Improvements damaged or destroyed unless this Lease shall cease and terminate under the provisions of Section 20. (b) All policies of the insurance provided for in Section 8(a) shall be issued in form reasonably acceptable to Landlord by insurance companies with a rating of not less than "A," and financial size of not less than Class X, in the most current available "Best's Insurance Reports", and licensed to do business in the state in which the Building is located. Each and every such policy: (i) shall name Landlord and Lender (as defined in Section 24) as an additional insured. In addition, the coverage described in Section 8(a)(ii)(A) relating to the Improvements shall also name Landlord as "loss payee"; (ii) shall be delivered to Landlord, in the form of an insurance certificate acceptable to Landlord as evidence of such policy, prior to the Lease Commencement Date and thereafter within thirty (30) days prior to the expiration of each such policy, and, as often as any such policy shall expire or terminate. Renewal or additional policies shall be procured and maintained by Tenant in like manner and to like extent; (iii) shall contain a provision that the insurer will give to Landlord and such other parties in interest at least fifteen (15) days notice in writing in advance of any cancellation, termination or lapse, or the effective date of any reduction in the amounts of insurance; and (iv) shall be written as a primary policy which does not contribute to and is not in excess of coverage which Landlord may carry. (c) In the event that Tenant shall fail to carry and maintain the insurance coverages set forth in this Section 8, Landlord may upon thirty (30) days notice to Tenant (unless such coverages will lapse in which event no such notice shall be necessary) procure such policies of insurance and Tenant shall promptly reimburse Landlord therefor. (d) Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, their respective property, the Demised Premises, its contents or to the other portions of the Building, arising from any risk covered by all risks fire and extended coverage insurance of the type and amount required to be carried -4- 5 hereunder, provided that such waiver does not invalidate such policies or prohibit recovery thereunder. The parties hereto shall use reasonable efforts to cause their respective insurance companies insuring the property of either Landlord or Tenant against any such loss, to waive any right of subrogation that such insurers may have against Landlord or Tenant, as the case may be. 9. Utilities. During the Term, Tenant shall promptly pay as billed to Tenant all rents and charges for water and sewer services and all costs and charges for gas, steam, electricity, fuel, light, power, telephone, heat and any other utility or service used or consumed in or servicing the Demised Premises. To the extent reasonably possible, such utilities shall be separately metered and billed to Tenant. Any utilities which are not separately metered shall be billed to Tenant by Landlord at Landlord's actual cost. In the event Tenant's use of any utility not metered is in excess of the average use by other tenants, Landlord shall have the right to install a meter for such utility, at Tenant's expense, and bill Tenant for Tenant's actual use. If Tenant fails to pay any utility bills or charges, Landlord may, at its option and upon reasonable notice to Tenant, pay the same and in such event, the amount of such payment, together with interest thereon at the Interest Rate as defined in Section 32 from the date of such payment by Landlord, will be added to Tenant's next due payment as Additional Rent. 10. Maintenance and Repairs. (a) Tenant shall, at its own cost and expense, maintain in good condition and repair the interior of the Demised Premises, including but not limited to the heating, air conditioning and ventilation systems, glass, windows and doors, sprinkler, all plumbing and sewage systems, fixtures, interior walls, floors (including floor slabs), ceilings, storefronts, plate glass, skylights, all electrical facilities and equipment including, without limitation, lighting fixtures, lamps, fans and any exhaust equipment and systems, electrical motors, and all other appliances and equipment (including, without limitation, dock levelers, dock shelters, dock seals and dock lighting) of every kind and nature located in, upon or about the Demised Premises, except as to such maintenance and repair as is the obligation of Landlord pursuant to Section 10(b). During the Term, Tenant shall maintain in full force and effect a service contract for the maintenance of the heating, ventilation and air conditioning systems with an entity reasonably acceptable to Landlord. Tenant shall deliver to Landlord (i) a copy of said service contract prior to the Lease Commencement Date, and (ii) thereafter, a copy of a renewal or substitute service contract within thirty (30) days prior to the expiration of the existing service contract. Tenant's obligation shall exclude any maintenance and repair required because of the act or negligence of Landlord, its employees, contractors or agents, which shall be the responsibility of Landlord. (b) Landlord shall, at its own cost and expense, maintain in good condition and repair the roof, foundation (beneath the floor slab) and structural frame of the Building. Landlord's obligation shall exclude the cost of any maintenance or repair required because of the act or negligence of Tenant or Tenant's agents, contractors, employees and invitees (collectively, "Tenant's Affiliates"), the cost of which shall be the responsibility of Tenant. (c) Except to the extent the same is caused by the negligent action or inaction of Landlord, its employees or agents, and is not covered by the insurance required to be carried by Tenant pursuant to the terms of this Lease, Landlord shall not be liable to Tenant or to any other person for any damage occasioned by failure in any utility system or by the bursting or leaking of any vessel or pipe in or about the Demised Premises, or for any damage occasioned by water coming into the Demised Premises unless caused by the negligent action or inaction of Landlord, costs of which shall be the responsibility of Landlord. 11. Tenant's Personal Property; Indemnity. Except as otherwise set forth in this paragraph, all of Tenant's personal property in the Demised Premises shall be and remain at Tenant's sole risk. Landlord, its agents, employees and contractors, shall not be liable for, and Tenant hereby releases Landlord from, any and all liability for theft thereof or any damage thereto occasioned by any act of God or by any acts, omissions or negligence of any persons. Landlord, its agents, employees and contractors, shall not be liable for any injury to the person or property of Tenant or other persons in or about the Demised Premises, Tenant expressly agreeing to indemnify and save Landlord, its agents, employees and contractors, harmless, in all such cases, except to the extent caused by the negligence of Landlord, its agents, employees and contractors. Tenant further agrees to indemnify and reimburse Landlord for any costs or expenses, including, without limitation, attorneys' fees, that Landlord reasonably may incur in investigating, handling or litigating any such claim against Landlord by a third person, unless such claim arose from the negligence of Landlord, its agents, employees or contractors. The provisions of this Section 11 shall survive the expiration or earlier termination of this Lease with respect to any damage, injury or death occurring before such expiration or termination. The foregoing shall not release Landlord from liability relating to the act or negligence of Landlord, costs of which shall be Landlord's responsibility. 12. Tenant's Fixtures. Tenant shall have the right to install in the Demised Premises trade fixtures required by Tenant or used by it in its business, and if installed by Tenant, to remove any or all such trade fixtures from time to time during and upon termination or expiration of this Lease, provided no Event of Default, as defined Section 22, then exists; provided, however, that Tenant shall repair and restore any damage or injury to the Demised Premises (to the condition in which the Demised Premises existed prior to such installation) caused by the installation and/or removal of any such trade fixtures. -5- 6 13. Signs. No sign, advertisement or notice shall be inscribed, painted, affixed, or displayed on the windows or exterior walls of the Demised Premises or on any public area of the Building, except in such places, numbers, sizes, colors and styles as are approved in advance in writing by Landlord, and which conform to all applicable laws, ordinances, or covenants affecting the Demised Premises. Notwithstanding the foregoing, Tenant shall have the right to affix one (1) identification sign to the exterior of the Demised Premises or to a free-standing "monument sign" in a location reasonably approved by Landlord, provided (a) the dimensions of the sign do not exceed the dimensions (length, width and height) of the sign installed by Starter Corporation and existing at the Demised Premises as of the Lease Date, and (b) Tenant and such sign otherwise comply with the terms and conditions of this Section 13. Any and all signs installed or constructed by or on behalf of Tenant pursuant hereto shall be installed, maintained and removed by Tenant at Tenant's sole cost and expense. 14. Intentionally Omitted. 15. Governmental Regulations. Tenant shall promptly comply throughout the Term, at Tenant's sole cost and expense, with all present and future laws, ordinances, orders, rules, regulations or requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof (collectively, "Governmental Requirements") relating to (a) all or any part of the Demised Premises, and (b) to the use or manner of use of the Demised Premises and the Building Appurtenance Area. Tenant shall also observe and comply with the requirements of all policies of public liability, fire and other policies of insurance at any time in force with respect to the Demised Premises. Without limiting the foregoing, if as a result of one or more Governmental Requirements it is necessary, from time to time during the Term, to perform an alteration or modification of the Demised Premises (a "Code Modification") which is made necessary as a result of the specific use being made by Tenant of the Demised Premises, then such Code Modification shall be the sole and exclusive responsibility of Tenant in all respects; any such Code Modification shall be promptly performed by Tenant at its expense in accordance with the applicable Governmental Requirement and with Section 18 hereof. If as a result of one or more Governmental Requirements it is necessary from time to time during the Term to perform a Code Modification which (i) would be characterized as a capital expenditure under generally accepted accounting principles and (ii) is not made necessary as a result of the specific use being made by Tenant of the Demised Premises, then (a) Landlord shall have the obligation to perform the Code Modification at its expense, (b) the cost of such Code Modification shall be amortized on a straight-line basis over the useful life of the item in question, as reasonably determined by Landlord, and (c) Tenant shall be obligated to pay (as Additional Rent, payable in the same manner and upon the same terms and conditions as the Base Rent reserved hereunder) for the portion of such amortized costs attributable to the remainder of the Term, including any extensions thereof. Tenant shall promptly send to Landlord a copy of any written notice received by Tenant requiring a Code Modification. 16. Environmental Matters. (a) For purposes of this Lease: (i) "Contamination" as used herein means the presence of or release of Hazardous Substances (as hereinafter defined) into any environmental media from, upon, within, below, into or on any portion of the Demised Premises, the Building, the Building Appurtenance Area or the Project so as to require remediation, cleanup or investigation under any applicable Environmental Law (as hereinafter defined). (ii) "Environmental Laws" as used herein means all federal, state, and local laws, regulations, orders, permits, ordinances or other requirements, which exist now or as may exist hereafter, concerning protection of human health, safety and the environment, all as may be amended from time to time. (iii) "Hazardous Substances" as used herein means any hazardous or toxic substance, material, chemical, pollutant, contaminant or waste as those terms are defined by any applicable Environmental Laws (including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. ["RCRA"]) and any solid wastes, polychlorinated biphenyls, urea formaldehyde, asbestos, radioactive materials, radon, explosives, petroleum products and oil. (b) Landlord represents that, except as revealed to Tenant in writing by Landlord, to Landlord's actual knowledge, Landlord has not treated, stored or disposed of any Hazardous Substances upon or within the Demised Premises, nor, to Landlord's actual knowledge, has any predecessor owner of the Demised Premises. (c) Tenant covenants that all its activities, and the activities of Tenant's Affiliates (as defined in Section 10(b)), on the Demised Premises, the Building, or the Project during the Term will be conducted in compliance with Environmental Laws. Tenant warrants that it is currently in compliance with all applicable Environmental Laws and that there are no pending or threatened notices of deficiency, -6- 7 notices of violation, orders, or judicial or administrative actions involving alleged violations by Tenant of any Environmental Laws arising out of its activities on or within the Demised Premises. Tenant, at Tenant's sole cost and expense, shall be responsible for obtaining all permits or licenses or approvals under Environmental Laws necessary for Tenant's operation of its business on the Demised Premises and shall make all notifications and registrations required by any applicable Environmental Laws. Tenant, at Tenant's sole cost and expense, shall at all times comply with the terms and conditions of all such permits, licenses, approvals, notifications and registrations and with any other applicable Environmental Laws. Tenant warrants that it has obtained all such permits, licenses or approvals and made all such notifications and registrations required by any applicable Environmental Laws necessary for Tenant's operation of its business on the Demised Premises. (d) Tenant shall not cause or permit any Hazardous Substances to be brought upon, kept or used in or about the Demised Premises, the Building, or the Project in violation of any Environmental Laws without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that the consent of Landlord shall not be required for the use at the Demised Premises of cleaning supplies, toner for photocopying machines and other similar materials, in containers and quantities reasonably necessary for and consistent with normal and ordinary use by Tenant in the routine operation or maintenance of Tenant's office equipment or in the routine janitorial service, cleaning and maintenance for the Demised Premises. For purposes of this Section 16, Landlord shall be deemed to have reasonably withheld consent if Landlord determines that the presence of such Hazardous Substance within the Demised Premises could result in a risk of harm to person or property or otherwise negatively affect the value or marketability of the Building or the Project. (e) Tenant shall not cause or permit the release of any Hazardous Substances by Tenant or Tenant's Affiliates into any environmental media such as air, water or land, or into or on the Demised Premises, the Building or the Project in any manner that violates any Environmental Laws. If such release shall occur, Tenant shall (i) take all steps reasonably necessary to contain and control such release and any associated Contamination, (ii) clean up or otherwise remedy such release and any associated Contamination to the extent required by, and take any and all other actions required under, applicable Environmental Laws and (iii) notify and keep Landlord reasonably informed of such release and response. (f) Regardless of any consents granted by Landlord pursuant to Section 16(d) allowing Hazardous Substances upon the Demised Premises, Tenant shall under no circumstances whatsoever cause or permit (i) any activity on the Demised Premises which would cause the Demised Premises to become subject to regulation as a hazardous waste treatment, storage or disposal facility under RCRA or the regulations promulgated thereunder, (ii) the discharge of Hazardous Substances into the storm sewer system serving the Project or (iii) the installation of any underground storage tank or underground piping on or under the Demised Premises. (g) Tenant shall and hereby does indemnify Landlord and hold Landlord harmless from and against any and all reasonable and actual expense, loss, and liability suffered by Landlord (except to the extent that such expenses, losses, and liabilities arise out of Landlord's own negligence or willful act), by reason of the storage, generation, release, handling, treatment, transportation, disposal, or arrangement for transportation or disposal, of any Hazardous Substances (whether accidental, intentional, or negligent) by Tenant or Tenant's Affiliates or by reason of Tenant's breach of any of the provisions of this Section 16. Such expenses, losses and liabilities shall include, without limitation, (i) any and all expenses that Landlord may incur to comply with any Environmental Laws; (ii) any and all costs that Landlord may incur in studying or remedying any Contamination at or arising from the Demised Premises, the Building, or the Project; (iii) any and all costs that Landlord may incur in studying, removing, disposing or otherwise addressing any Hazardous Substances; (iv) any and all fines, penalties or other sanctions assessed upon Landlord; and (v) any and all legal and professional fees and costs incurred by Landlord in connection with the foregoing. The indemnity contained herein shall survive the expiration or earlier termination of this Lease. 17. Construction of Demised Premises. Tenant hereby expressly acknowledges and agrees that it shall accept, and shall be deemed to have accepted, the Demised Premises AS IS, WHERE IS, and as suitable for the purposes for which the same are leased hereby and, upon request by Landlord, shall execute and deliver to Landlord a letter of acceptance in which Tenant (i) accepts the Demised Premises AS IS, WHERE IS and (ii) confirms that the Lease Commencement Date, the Base Rent Commencement Date and the Expiration Date remain as set forth in Section 1, or if revised pursuant to the terms hereof, setting forth such dates as so revised. 18. Tenant Alterations and Additions. (a) Tenant shall not make or permit to be made any alterations, improvements, or additions to the Demised Premises (a "Tenant's Change"), without first obtaining on each occasion Landlord's prior written consent (which consent Landlord agrees not to unreasonably withhold) and Lender's prior written consent (if such consent is required). As part of its approval process, Landlord may require that Tenant submit plans and specifications to Landlord, for Landlord's approval or disapproval, which approval shall not be unreasonably withheld. All Tenant's Changes shall be performed in accordance with all legal requirements applicable thereto and in a good and workmanlike manner with -7- 8 first-class materials. Tenant shall maintain insurance reasonably satisfactory to Landlord during the construction of all Tenant's Changes. If Landlord at the time of giving its approval to any Tenant's Change notifies Tenant in writing that approval is conditioned upon restoration, then Tenant shall, at its sole cost and expense and upon the termination or expiration of this Lease, remove the same and restore the Demised Premises to its condition prior to such Tenant's Change. No Tenant's Change shall be structural in nature or impair the structural strength of the Building. Tenant shall pay the full cost of any Tenant's Change. Except as otherwise provided herein and in Section 12 hereof, and except as agreed upon by the parties at the time a Tenant's Change is approved, all Tenant's Changes shall immediately upon completion or installation thereof be and become part of the Demised Premises and the property of Landlord without payment therefor by Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease. (b) To the extent permitted by law, all of Tenant's contracts and subcontracts for such Tenant's Changes shall provide that no lien shall attach to or be claimed against the Demised Premises or any interest therein other than Tenant's leasehold interest in the Demised Premises, and that all subcontracts let thereunder shall contain the same provision. Whether or not Tenant furnishes the foregoing, Tenant agrees to hold Landlord harmless against all liens, claims and liabilities of every kind, nature and description which may arise out of or in any way be connected with such work. Tenant shall not permit the Demised Premises to become subject to any mechanics', laborers' or materialmen's lien on account of labor, material or services furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed for the Demised Premises by, or at the direction or sufferance of Tenant and if any such liens are filed against the Demised Premises, Tenant shall promptly discharge the same; provided, however, that Tenant shall have the right to contest, in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall give to Landlord, within fifteen days after demand, such security as may be reasonably satisfactory to Landlord to assure payment thereof and to prevent any sale, foreclosure, or forfeiture of Landlord's interest in the Demised Premises by reason of non-payment thereof; provided further that on final determination of the lien or claim for lien, Tenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have the lien released and any judgment satisfied. If Tenant fails to post such security or does not diligently contest such lien, Landlord may, without investigation of the validity of the lien claim, discharge such lien and Tenant shall reimburse Landlord upon demand for all costs and expenses incurred in connection therewith, which expenses shall include any attorneys' fees, paralegals' fees and any and all costs associated therewith, including litigation through all trial and appellate levels and any costs in posting bond to effect a discharge or release of the lien. Nothing contained in this Lease shall be construed as a consent on the part of Landlord to subject the Demised Premises to liability under any lien law now or hereafter existing of the state in which the Demised Premises are located. 19. Services by Landlord. Landlord shall be responsible for providing for maintenance of the Building Appurtenance Area, and, except as required by Section 10(b) hereof, Landlord shall be responsible for no other services whatsoever. Tenant, by payment of Tenant's share of the Operating Expenses, shall pay Tenant's pro rata share of the expenses incurred by Landlord hereunder. 20. Fire and Other Casualty. In the event the Demised Premises are damaged by fire or other casualty, Landlord agrees to promptly restore and repair the Demised Premises at Landlord's expense, including the Improvements to be insured by Tenant but only to the extent Landlord receives insurance proceeds therefor, including the proceeds from the insurance required to be carried by Tenant on the Improvements (provided that Landlord shall be responsible for any deductible under Landlord's insurance policies). Notwithstanding the foregoing, in the event that the Demised Premises are (i) in the reasonable opinion of Landlord, so destroyed that they cannot be repaired or rebuilt within ninety (90) days after the date of such damage; or (ii) destroyed by a casualty which is covered by Landlord's insurance but Lender or other party entitled to insurance proceeds fails to make such proceeds available to Landlord in an amount sufficient for restoration of the Demised Premises reasonably acceptable to Tenant, then Landlord shall give written notice to Tenant of such determination (the "Determination Notice") within sixty (60) days of such casualty. Either Landlord or Tenant may terminate and cancel this Lease effective as of the date of such casualty by giving written notice to the other party within thirty (30) days after Tenant's receipt of the Determination Notice. Upon the giving of such termination notice, all obligations hereunder with respect to periods from and after the effective date of termination shall thereupon cease and terminate. If no such termination notice is given, Landlord shall, to the extent of the available insurance proceeds, make such repair or restoration of the Demised Premises to the approximate condition existing prior to such casualty, promptly and in such manner as not to unreasonably interfere with Tenant's use and occupancy of the Demised Premises (if Tenant is still occupying the Demised Premises). Base Rent and Additional Rent shall proportionately abate during the time that the Demised Premises or any part thereof are unusable by reason of any such damage thereto. 21. Condemnation. (a) If all of the Demised Premises is taken or condemned for a public or quasi-public use, or if a portion of the Demised Premises is taken or condemned for a public or quasi-public use and the remaining portion thereof is not usable by Tenant in the reasonable opinion of Landlord, this Lease shall terminate as of the earlier of the date title to the condemned real estate vests in the condemnor or the date on which the Demised Premises are not usable by Tenant. In such event, the Base Rent herein -8- 9 reserved and all Additional Rent and other sums payable hereunder shall be apportioned and paid in full by Tenant to Landlord to that date, all Base Rent, Additional Rent and other sums payable hereunder prepaid for periods beyond that date shall be repaid by Landlord to Tenant on the date such apportioned payment is made, and neither party shall thereafter have any liability hereunder, except that any obligation or liability of either party under this Lease which has accrued on or prior to such termination date shall survive. (b) If only part of the Demised Premises is taken or condemned for a public or quasi-public use and this Lease does not terminate pursuant to Section 21(a), Landlord shall, to the extent of the award it receives, restore the Demised Premises to a condition and to a size as nearly comparable as reasonably possible to the condition and size thereof immediately prior to the taking, and there shall be an equitable adjustment to the Base Rent and Additional Rent according to the value of the Demised Premises before and after the taking. (c) Landlord shall be entitled to receive the entire award in any proceeding with respect to any taking provided for in this Section 21, and Tenant shall receive no part of such award. Nothing herein contained shall be deemed to prohibit Tenant from making a separate claim, against the condemnor, to the extent permitted by law, for the value of Tenant's leasehold estate, moveable trade fixtures, machinery and moving expenses, provided that the making of such claim shall not and does not adversely affect or diminish Landlord's award. 22. Tenant's Default. (a) The occurrence of any one or more of the following events shall constitute an "Event of Default" of Tenant under this Lease: (i) if Tenant fails to pay Base Rent or any Additional Rent hereunder as and when such rent becomes due and such failure shall continue for more than ten (10) days after Landlord gives written notice to Tenant of such failure; (ii) intentionally omitted; (iii) if the Demised Premises become deserted or abandoned for more than thirty (30) consecutive days; (iv) if Tenant permits to be done anything which creates a lien upon the Demised Premises and fails to discharge or bond such lien, or post security with Landlord acceptable to Landlord within thirty (30) days after receipt by Tenant of written notice thereof; (v) if Tenant fails to maintain in force all policies of insurance required by this Lease and such failure shall continue for more than ten (10) days after Landlord gives Tenant written notice of such failure; (vi) if any petition is filed by or against Tenant under any present or future section or chapter of the Bankruptcy Code, or under any similar law or statute of the United States or any state thereof (which, in the case of an involuntary proceeding, is not permanently discharged, dismissed, stayed, or vacated, as the case may be, within ninety (90) days of commencement), or if any order for relief shall be entered against Tenant in any such proceedings; (vii) intentionally omitted; (viii) if a receiver, custodian, or trustee is appointed for the Demised Premises or for all or substantially all of the assets of Tenant, which appointment is not vacated within sixty (60) days following the date of such appointment; or (ix) if Tenant fails to perform or observe any other term of this Lease and such failure shall continue for more than thirty (30) days after Landlord gives Tenant written notice of such failure, or, if such failure cannot be corrected within such thirty (30) day period, if Tenant does not commence to correct such default within said thirty (30) day period and thereafter diligently prosecute the correction of same to completion within a reasonable time. (b) Upon the occurrence of any one or more Events of Default, Landlord may, at Landlord's option, without any demand or notice whatsoever (except as expressly required in this Section 22): (i) Terminate this Lease by giving Tenant notice of termination, in which event this Lease shall expire and terminate on the date specified in such notice of termination and all rights of Tenant under this Lease and in and to the Demised Premises shall terminate. Tenant shall remain liable for all obligations under this Lease arising up to the date of such termination, and Tenant shall surrender the Demised Premises to Landlord on the date specified in such notice; or -9- 10 (ii) Terminate this Lease as provided in Section 22(b)(i) hereof and recover from Tenant all damages Landlord may incur by reason of Tenant's default, including, without limitation, an amount which, at the date of such termination, is calculated as follows: (1) the value of the excess, if any, of (A) the Base Rent, Additional Rent and all other sums which would have been payable hereunder by Tenant for the period commencing with the day following the date of such termination and ending with the Expiration Date had this Lease not been terminated (the "Remaining Term"), over (B) the aggregate fair market rental value of the Demised Premises for the Remaining Term (which excess, if any shall be discounted to present value at the "Treasury Yield" as defined below for the Remaining Term); plus (2) the costs of recovering possession of the Demised Premises and all other expenses incurred by Landlord due to Tenant's default, including, without limitation, reasonable attorney's fees; plus (3) the unpaid Base Rent and Additional Rent earned as of the date of termination plus any interest and late fees due hereunder, plus other sums of money and damages owing on the date of termination by Tenant to Landlord under this Lease or in connection with the Demised Premises. The amount as calculated above shall be deemed immediately due and payable. The payment of the amount calculated in subparagraph (ii)(1) shall not be deemed a penalty but shall merely constitute payment of liquidated damages, it being understood and acknowledged by Landlord and Tenant that actual damages to Landlord are extremely difficult, if not impossible, to ascertain. "Treasury Yield" shall mean the rate of return in percent per annum of Treasury Constant Maturities for the length of time specified as published in document H.15(519) (presently published by the Board of Governors of the U.S. Federal Reserve System titled "Federal Reserve Statistical Release") for the calendar week immediately preceding the calendar week in which the termination occurs. If the rate of return of Treasury Constant Maturities for the calendar week in question is not published on or before the business day preceding the date of the Treasury Yield in question is to become effective, then the Treasury Yield shall be based upon the rate of return of Treasury Constant Maturities for the length of time specified for the most recent calendar week for which such publication has occurred. If no rate of return for Treasury Constant Maturities is published for the specific length of time specified, the Treasury Yield for such length of time shall be the weighted average of the rates of return of Treasury Constant Maturities most nearly corresponding to the length of the applicable period specified. If the publishing of the rate of return of Treasury Constant Maturities is ever discontinued, then the Treasury Yield shall be based upon the index which is published by the Board of Governors of the U.S. Federal Reserve System in replacement thereof or, if no such replacement index is published, the index which, in Landlord's reasonable determination, most nearly corresponds to the rate of return of Treasury Constant Maturities. In determining the aggregate fair market rental value pursuant to subparagraph (ii)(1)(B) above, the parties hereby agree that, at the time Landlord seeks to enforce this remedy, all relevant factors should be considered, including, but not limited to, (a) the length of time remaining in the Term, (b) the then current market conditions in the general area in which the Building is located, (c) the likelihood of reletting the Demised Premises for a period of time equal to the remainder of the Term, (d) the net effective rental rates then being obtained by landlords for similar type space of similar size in similar type buildings in the general area in which the Building is located, (e) the vacancy levels in the general area in which the Building is located, (f) current levels of new construction that will be completed during the remainder of the Term and how this construction will likely affect vacancy rates and rental rates and (g) inflation; or (iii) Intentionally Omitted (iv) Without terminating this Lease, in its own name but as agent for Tenant, enter into and upon and take possession of the Demised Premises or any part thereof. Any property remaining in the Demised Premises may be removed and stored in a warehouse or elsewhere at the cost of, and for the account of, Tenant without Landlord being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby unless caused by Landlord's negligence. Thereafter, Landlord may, but shall not be obligated to, lease to a third party the Demised Premises or any portion thereof as the agent of Tenant upon such terms and conditions as Landlord may deem necessary or desirable in order to relet the Demised Premises. The remainder of any rentals received by Landlord from such reletting, after the payment of any indebtedness due hereunder from Tenant to Landlord, and the payment of any costs and expenses of such reletting, shall be held by Landlord to the extent of and for application in payment of future rent owed by Tenant, if any, as the same may become due and payable hereunder. If such rentals received from such reletting shall at any time or from time to time be less than sufficient to pay to Landlord the entire sums then due from Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any such previous default provided same has not been cured; or (v) Without terminating this Lease, and with or without notice to Tenant, enter into and upon the Demised Premises and, without being liable for prosecution or any claim for damages therefor, maintain the Demised Premises and repair or replace any damage thereto or do anything or make any payment for which Tenant is responsible hereunder. Tenant shall reimburse Landlord immediately upon demand for any expenses which Landlord incurs in thus effecting Tenant's compliance under this Lease and Landlord shall not be liable to Tenant for any damages with respect thereto; or (vi) Without liability to Tenant or any other party and without constituting a constructive or actual eviction, suspend or discontinue furnishing or rendering to Tenant any property, -10- 11 material, labor, utilities or other service, wherever Landlord is obligated to furnish or render the same so long as an Event of Default exists under this Lease; or (vii) With or without terminating this Lease, allow the Demised Premises to remain unoccupied and collect rent from Tenant as it comes due; or (viii) Pursue such other remedies as are available at law or equity. (c) If this Lease shall terminate as a result of or while there exists an Event of Default hereunder, any funds of Tenant held by Landlord may be applied by Landlord to any damages payable by Tenant (whether provided for herein or by law) as a result of such termination or default. (d) Neither the commencement of any action or proceeding, nor the settlement thereof, nor entry of judgment thereon shall bar Landlord from bringing subsequent actions or proceedings from time to time, nor shall the failure to include in any action or proceeding any sum or sums then due be a bar to the maintenance of any subsequent actions or proceedings for the recovery of such sum or sums so omitted. (e) No agreement to accept a surrender of the Demised Premises and no act or omission by Landlord or Landlord's agents during the Term shall constitute an acceptance or surrender of the Demised Premises unless made in writing and signed by Landlord. No re-entry or taking possession of the Demised Premises by Landlord shall constitute an election by Landlord to terminate this Lease unless a written notice of such intention is given to Tenant. No provision of this Lease shall be deemed to have been waived by either party unless such waiver is in writing and signed by the party making such waiver. Landlord's acceptance of Base Rent or Additional Rent in full or in part following an Event of Default hereunder shall not be construed as a waiver of such Event of Default. No custom or practice which may grow up between the parties in connection with the terms of this Lease shall be construed to waive or lessen either party's right to insist upon strict performance of the terms of this Lease, without a written notice thereof to the other party. (f) If an Event of Default shall occur, Tenant shall pay to Landlord, on demand, all expenses incurred by Landlord as a result thereof, including reasonable attorneys' fees, court costs and expenses actually incurred. 23. Landlord's Right of Entry. Tenant agrees to permit Landlord and the authorized representatives of Landlord and of Lender to enter upon the Demised Premises at all reasonable times for the purposes of inspecting the Demised Premises and Tenant's compliance with this Lease, and making any necessary repairs thereto; provided that, except in the case of an emergency, Landlord shall give Tenant reasonable prior notice of Landlord's intended entry upon the Demised Premises. Nothing herein shall imply any duty upon the part of Landlord to do any work required of Tenant hereunder, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform it. Landlord shall not be liable for inconvenience, annoyance, disturbance or other damage to Tenant by reason of making such repairs or the performance of such work in the Demised Premises or on account of bringing materials, supplies and equipment into or through the Demised Premises during the course thereof, and the obligations of Tenant under this Lease shall not thereby be affected; provided, however, that Landlord shall use reasonable efforts not to disturb or otherwise interfere with Tenant's operations in the Demised Premises in making such repairs or performing such work. Landlord also shall have the right upon reasonable notice to enter the Demised Premises at all reasonable times to exhibit the Demised Premises to any prospective purchaser or mortgagee thereof, or, during the last six (6) months of the Term, to any prospective tenant thereof. 24. Lender's Rights. (a) For purposes of this Lease: (i) "Lender" as used herein means the current holder of a Mortgage; (ii) "Mortgage" as used herein means any or all mortgages, deeds to secure debt, deeds of trust or other instruments in the nature thereof which may now or hereafter affect or encumber Landlord's title to the Demised Premises, and any amendments, modifications, extensions or renewals thereof. (b) Except as hereinafter provided, this Lease and all rights of Tenant hereunder are and shall be subject and subordinate to the lien and security title of any Mortgage. Tenant recognizes and acknowledges the right of Lender to foreclose or exercise the power of sale against the Demised Premises under any Mortgage. Tenant's subordination hereunder shall be conditioned upon entering into a subordination, nondisturbance and attornment agreement with the Mortgagee, reasonably acceptable to Tenant and consistent with this Paragraph 24. (c) Tenant shall, in confirmation of the subordination set forth in Section 24(b) and notwithstanding the fact that such subordination is self-operative, and no further instrument or subordination shall be necessary, upon demand, at any time or times, execute, acknowledge, and deliver to -11- 12 Landlord or to Lender any and all instruments reasonably acceptable to Tenant requested by either of them to evidence such subordination. (d) At any time during the Term, Lender may, by written notice to Tenant, make this Lease superior to the lien of its Mortgage. If requested by Lender, Tenant shall, upon demand, at any time or times, execute, acknowledge, and deliver to Lender, any and all instruments reasonably acceptable to Tenant that may be necessary to make this Lease superior to the lien of any Mortgage. (e) If Lender (or Lender's nominee, or other purchaser at foreclosure) shall hereafter succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease, Tenant shall attorn to and recognize such successor as Tenant's landlord under this Lease without change in the terms and provisions of this Lease and shall promptly execute and deliver any instrument that may be necessary to evidence such attornment, provided that such successor shall not be bound by (i) any payment of Base Rent or Additional Rent for more than one month in advance, except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease, and then only if such prepayments have been deposited with and are under the control of such successor, (ii) any provision of any amendment to the Lease to which Lender has not consented, (iii) the defaults of any prior landlord under this Lease, or (iv) any offset rights arising out of the defaults of any prior landlord under this Lease. Upon such attornment, this Lease shall continue in full force and effect as a direct lease between each successor landlord and Tenant, subject to all of the terms, covenants and conditions of this Lease. (f) In the event there is a Mortgage at any time during the Term, Landlord shall use reasonable efforts to cause the Lender to enter into a subordination, nondisturbance and attornment agreement with Tenant reasonably satisfactory to Tenant and consistent with this Section 24. 25. Estoppel Certificate. Landlord and Tenant agree, at any time, and from time to time, within fifteen (15) days after written request of the other, to execute, acknowledge and deliver a statement in writing in recordable form to the requesting party and/or its designee certifying that: (i) this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect, as modified), (ii) the dates to which Base Rent, Additional Rent and other charges have been paid, (iii) whether or not, to the best of its knowledge, there exists any failure by the requesting party to perform any term, covenant or condition contained in this Lease, and, if so, specifying each such failure, (iv) (if such be the case) Tenant has unconditionally accepted the Demised Premises and is conducting its business therein, and (v) and as to such additional matters as may be requested by Landlord and approved by Tenant, it being intended that any such statement delivered pursuant hereto may be relied upon by the requesting party and by any purchaser of title to the Demised Premises or by any mortgagee or any assignee thereof or any party to any sale-leaseback of the Demised Premises, or the landlord under a ground lease affecting the Demised Premises. 26. Landlord Liability. No owner of the Demised Premises, whether or not named herein, shall have liability hereunder after it ceases to hold title to the Demised Premises. Neither Landlord nor any officer, director, shareholder, partner or principal of Landlord, whether disclosed or undisclosed, shall be under any personal liability with respect to any of the provisions of this Lease. In the event Landlord is in breach or default with respect to Landlord's obligations or otherwise under this Lease, Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of Tenant's remedies. It is expressly understood and agreed that Landlord's liability under the terms, covenants, conditions, warranties and obligations of this Lease shall in no event exceed the loss of Landlord's equity interest in the Building. 27. Notices. Any notice required or permitted to be given or served by either party to this Lease shall be deemed given when made in writing, and either (i) personally delivered, (ii) deposited with the United States Postal Service, postage prepaid, by registered or certified mail, return receipt requested, or (iii) delivered by licensed overnight delivery service providing proof of delivery, properly addressed to the address set forth in Section 1(m) (as the same may be changed by giving written notice of the aforesaid in accordance with this Section 27). If any notice mailed is properly addressed with appropriate postage but returned for any reason, such notice shall be deemed to be effective notice and to be given on the date of mailing. 28. Brokers. Tenant represents and warrants to Landlord that, except for those parties set forth in Section 1(o) (the "Brokers"), Tenant has not engaged or had any conversations or negotiations with any broker, finder or other third party concerning the leasing of the Demised Premises to Tenant who would be entitled to any commission or fee based on the execution of this Lease. Tenant hereby further represents and warrants to Landlord that Tenant is not receiving and is not entitled to receive any rebate, payment or other remuneration, either directly or indirectly, from the Brokers, and that it is not otherwise sharing in or entitled to share in any commission or fee paid to the Brokers by Landlord or any other party in connection with the execution of this Lease, either directly or indirectly. Tenant hereby indemnifies Landlord against and from any claims for any brokerage commissions (except those payable to the Brokers, all of which are payable by Landlord pursuant to a separate agreement) and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses, for any breach of the foregoing. The foregoing indemnification shall survive the termination of this Lease for any reason. -12- 13 29. Assignment and Subleasing. Tenant may not assign, mortgage, pledge, encumber or otherwise transfer this Lease, or any interest hereunder, or sublet the Demised Premises, in whole or in part, without on each occasion first obtaining the prior express written consent of Landlord, which consent Landlord shall not unreasonably withhold or delay. Permitted subtenants or assignees shall become liable directly to Landlord for all obligations of Tenant hereunder, without, however, relieving Tenant of any of its liability hereunder. No such assignment, subletting, occupancy or collection shall be deemed the acceptance of the assignee, tenant or occupant, as Tenant, or a release of Tenant from the further performance by Tenant of Tenant's obligations under this Lease. Any assignment or sublease consented to by Landlord shall not relieve Tenant (or its assignee) from obtaining Landlord's consent to any subsequent assignment or sublease. 30. Termination or Expiration. (a) No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, shall affect Landlord's right to collect rent for the period prior to termination thereof. (b) Except as provided in Section 18 above, at the expiration or earlier termination of the Term of this Lease, Tenant shall surrender the Demised Premises and all improvements, alterations and additions thereto, and keys therefor to Landlord, clean and neat, and in the same condition as at the Lease Commencement Date, excepting normal wear and tear, condemnation and casualty other than that required to be insured against by Tenant hereunder. (c) If Tenant remains in possession of the Demised Premises after expiration of the Term, with or without Landlord's acquiescence and without any express agreement of the parties, Tenant shall be a tenant-at-sufferance at 125% of the Base Rent in effect at the end of the Term for sixty (60) days, and thereafter at one hundred fifty percent (150%) of the Base Rent in effect at the end of the Term. Tenant shall also continue to pay all other Additional Rent due hereunder, and there shall be no renewal of this Lease by operation of law. In addition to the foregoing, Tenant shall be liable for all costs incurred by Landlord in enforcing the provisions of this Section 30. No receipt of money by Landlord from Tenant after the termination of this Lease or Tenant's right of possession of the Demised Premises shall reinstate, continue or extend the Term or Tenant's right of possession. 31. Intentionally Omitted. 32. Late Payments. In the event any installment of rent, inclusive of Base Rent, or Additional Rent or other sums due hereunder, if any, is not paid within ten (10) days after the date when due, Tenant shall pay interest on the amount past due at the lesser of (i) the maximum interest rate allowed by law or (ii) a rate of fifteen percent (15%) per annum (the "Interest Rate") to defray the additional expenses incurred by Landlord in processing such payment. 33. Rules and Regulations. Tenant agrees to abide by the rules and regulations set forth on Exhibit D attached hereto, as well as other rules and regulations reasonably promulgated by Landlord from time to time, so long as such rules and regulations are uniformly enforced against all tenants of Landlord in the Project and reasonably acceptable to Tenant. 34. Quiet Enjoyment. So long as Tenant has not committed an Event of Default hereunder, Landlord agrees that Tenant shall have the right to quietly use and enjoy the Demised Premises for the Term. 35. Miscellaneous. (a) The parties hereto hereby covenant and agree that Landlord shall receive the Base Rent, Additional Rent and all other sums payable by Tenant hereinabove provided as net income from the Demised Premises, without any abatement (except as set forth in Section 20 and Section 21), reduction, set-off, counterclaim, defense or deduction whatsoever, except as set forth in Exhibit C attached hereto. (b) If any clause or provision of this Lease is determined to be illegal, invalid or unenforceable under present or future laws effective during the Term, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and that in lieu of such illegal, invalid or unenforceable clause or provision there shall be substituted a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. (c) All rights, powers, and privileges conferred hereunder upon the parties hereto shall be cumulative, but not restrictive to those given by law. (d) Time is of the essence of this Lease. (e) No failure of Landlord or Tenant to exercise any power given Landlord or Tenant hereunder or to insist upon strict compliance by Landlord or Tenant with its obligations hereunder, and no -13- 14 custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Landlord's or Tenant's rights to demand exact compliance with the terms hereof. (f) This Lease contains the entire agreement of the parties hereto as to the subject matter of this Lease and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force and effect. The masculine (or neuter) pronoun, singular number shall include the masculine, feminine and neuter gender and the singular and plural number. (g) This contract shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has a usufruct, not subject to levy and sale, and not assignable by Tenant except as expressly set forth herein. (h) Except to the extent required by any governmental agency in connection with meeting the requirements of the PILOT Program (as defined in Special Stipulation 12 of Exhibit C to this Lease), under no circumstances shall Tenant have the right to record this Lease or a memorandum thereof. (i) The captions of this Lease are for convenience only and are not a part of this Lease, and do not in any way define, limit, describe or amplify the terms or provisions of this Lease or the scope or intent thereof. (j) This Lease may be executed in multiple counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same agreement. (k) This Lease shall be interpreted under the laws of the State where the Demised Premises are located. (l) The parties acknowledge that this Lease is the result of negotiations between the parties, and in construing any ambiguity hereunder no presumption shall be made in favor of either party. No inference shall be made from any item which has been stricken from this Lease other than the deletion of such item. 36. Special Stipulations. The Special Stipulations, if any, attached hereto as Exhibit C, are incorporated herein and made a part hereof, and to the extent of any conflict between the foregoing provisions and the Special Stipulations, the Special Stipulations shall govern and control. 37. Lease Date. For purposes of this Lease, the term "Lease Date" shall mean the later date upon which this Lease is signed by Landlord and Tenant. 38. Authority. If Tenant is not a natural person, Tenant shall cause its corporate secretary or general partner, as applicable, to execute the certificate attached hereto as Exhibit E. Tenant is authorized by all required corporate or partnership action to enter into this Lease and the individual(s) signing this Lease on behalf of Tenant are each authorized to bind Tenant to its terms. 39. No Offer Until Executed. The submission of this Lease to Tenant for examination or consideration does not constitute an offer to lease the Demised Premises and this Lease shall become effective, if at all, only upon the execution and delivery thereof by Landlord and Tenant. 40 Guaranty. It shall be a condition of this Lease that Daisytek International Corporation, a Delaware corporation ("Guarantor"), execute and deliver to Landlord a guaranty in the form attached hereto as Exhibit "F" (the "Guaranty"), pursuant to which Guarantor unconditionally guarantees the performance by Tenant of its obligations hereunder, all as more particularly set forth in the Guaranty. [The remainder of this page is intentionally left blank.] -14- 15 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands under seals, the day and year first above written. LANDLORD: Date: ----------------------------- SHELBY DRIVE CORPORATION, a Florida corporation By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- Attest: --------------------------------- Name: -------------------------------- Title: ------------------------------- [CORPORATE SEAL] TENANT: Date: ----------------------------- PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- Attest: --------------------------------- Name: -------------------------------- Title: ------------------------------- [CORPORATE SEAL] 16 ATTESTATION Landlord: STATE OF -------------------------- COUNTY OF ------------------------- BEFORE ME, a Notary Public in and for said County, personally appeared __________________________ and _______________________, known to me to be the person(s) who, as ___________________________________ and ____________________________________, respectively, of Landlord, signed the same, and acknowledged to me that they did so sign said instrument in the name and upon behalf of said company as officers of said company, that the same is their free act and deed as such officers, respectively, and they were duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporate seal of said company. IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed my official seal, this _____ day of ________________, 19___. ----------------------------------------- Notary Public My Commission Expires: Tenant: STATE OF -------------------------- COUNTY OF ------------------------- BEFORE ME, a Notary Public in and for said County, personally appeared __________________________ and ____________________________ , known to me to be the person(s) who, as ___________________________________ and ____________________________________, respectively, of Priority Fulfillment Services, Inc., the corporation which executed the foregoing instrument in its capacity as Tenant, signed the same, and acknowledged to me that they did so sign said instrument in the name and upon behalf of said corporation as officers of said corporation, that the same is their free act and deed as such officers, respectively, and they were duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporate seal of said corporation. IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed my official seal, this ____ day of ___________________, 19___. ----------------------------------------- Notary Public My Commission Expires: 17 LEASE INDEX
Section Subject ------- ------- 1 Basic Lease Provisions 2 Demised Premises 3 Term 4 Base Rent 5 Intentionally Omitted 6 Operating Expenses and Additional Rent 7 Use of Demised Premises 8 Insurance 9 Utilities 10 Maintenance and Repairs 11 Tenant's Personal Property; Indemnity 12 Tenant's Fixtures 13 Signs 14 Intentionally Omitted 15 Governmental Regulations 16 Environmental Matters 17 Construction of Demised Premises 18 Tenant Alterations and Additions 19 Services by Landlord 20 Fire and Other Casualty 21 Condemnation 22 Tenant's Default 23 Landlord's Right of Entry 24 Lender's Rights 25 Estoppel Certificate 26 Landlord's Liability 27 Notices 28 Brokers 29 Assignment and Subleasing 30 Termination or Expiration 31 Intentionally Omitted 32 Late Payments 33 Rules and Regulations 34 Quiet Enjoyment 35 Miscellaneous 36 Special Stipulations 37 Lease Date 38 Authority 39 No Offer Until Executed 40 Guaranty
Exhibit "A" Demised Premises Exhibit "B" Land Exhibit "C" Special Stipulations Exhibit "D" Rules and Regulations Exhibit "E" Certificate of Authority Exhibit "F" Guaranty 18 VERSION 4/98 INDUSTRIAL LEASE AGREEMENT BETWEEN SHELBY DRIVE CORPORATION AS LANDLORD AND PRIORITY FULFILLMENT SERVICES, INC. AS TENANT 19 EXHIBIT A DEMISED PREMISES a-1 20 EXHIBIT B LAND b-1 21 EXHIBIT C SPECIAL STIPULATIONS The Special Stipulations set forth herein are hereby incorporated into the body of the lease to which these Special Stipulations are attached (the "Lease"), and to the extent of any conflict between these Special Stipulations and the preceding language, these Special Stipulations shall govern and control. 1. Operating Expenses. (a) Tenant shall have an opportunity, upon reasonable notice, at reasonable times, to review Landlord's records with regard to the calculation of Operating Expenses. (b) Notwithstanding the provisions of Paragraph 6 of the Lease, (i) Tenant's annual share of property management fees shall not exceed the amount customarily charged in the Memphis, Tennessee, area by managers of properties similar to the Project, and during the initial Term shall in no event exceed the lesser of (A) two and one-half percent (2.5%) of Annual Base Rent payable to Landlord hereunder, and (B) $0.08 per square foot of space within the Building, (ii) Operating Expenses shall include attorneys' fees only to the extent they pertain to protesting or otherwise attempting to reduce property taxes assessed against the Building, and (iii) Operating Expenses shall not include federal or state income or franchise taxes imposed on or measured by the income or capital of Landlord. (c) As of the Lease Date, the Building, together with the Building Appurtenance Area, comprise 11.807% of the Project for purposes of calculating dues and assessments payable by Landlord (and reimbursed by Tenant pursuant to Section 6(a) of this Lease) under the Protective Covenants. 2. Use of the Demised Premises. Tenant's use of tractor trailers, forklifts, and other equipment normally used by Tenant pursuant to Paragraph 1(m) of the Lease shall not be deemed to violate Paragraph 7 of this Lease. 3. Insurance. Landlord agrees to insure the building shell of the Building, which shall include the exterior walls, roof, foundation and structural frame of the Building, against perils included within the standard all risks fire and casualty insurance. 4. Intentionally Omitted 5. Environmental Matters. (a) Landlord represents as of the Lease Date that (i) Landlord has not treated, stored or disposed of any Hazardous Substances within or upon the Building; (ii) to Landlord's actual knowledge, no party has treated, stored or disposed of Hazardous Substances upon or within the Building, except as may be set forth in the Phase I Environmental Site Assessment Update: Building N Expansion, Southpark Industrial Park in Memphis, Tennessee, dated December, 1994, a copy of which has been received by Tenant; (iii) to Landlord's actual knowledge, the Building contains no asbestos, asbestos-containing materials, or polychlorinated biphenyls (PCBs); (iv) Landlord has received no written notice that the Building is currently or has been in violation of any Environmental Laws; (v) to Landlord's actual knowledge, Landlord has obtained any permits required by Environmental Laws which pertain to Landlord's use of the Building; (vi) to Landlord's actual knowledge, no underground tanks or underground containers of any kind are located on the Building, or were located on the Building and subsequently moved or filled; and (vii) to Landlord's actual knowledge, the Building is not subject to any judgment, decree, order or citation which relates to or arises out of a violation of any Environmental Law, or that requires Landlord to clean up, remove, or take remedial action or other responsive action pursuant to any Environmental Law relating to the Building. (b) Landlord hereby agrees to indemnify and hold harmless Tenant, its permitted subtenants and assigns, from and against any and all reasonable and actual damage, fine, expense, loss, and liability suffered by Tenant (including attorneys fees) by reason of Landlord's breach of the representations set forth in this Special Stipulation 5. In the event of such a breach by Landlord, Landlord shall be responsible for studying, remedying, removing, disposing or otherwise addressing any Hazardous Substances which are upon or within the Demised Premises, the Building or the Project as of the Lease Date and which gave rise to such breach, and Tenant shall not perform such acts unless (i) Tenant is specifically required by applicable law to perform such acts, and (ii) Landlord has failed or refused to perform such acts after having been afforded reasonable notice by Tenant. The indemnity contained herein shall survive the termination or expiration of this Lease for a period of two (2) years after the effective date of such termination or expiration. (c) In the event that during the Term the Demised Premises shall be determined to contain Contamination caused by Landlord, and the remediation of such contamination shall cause the Demised Premises to be untenantable for a period of at least ten (10) consecutive days, Tenant, without waiving any other remedy Tenant may have, may by written notice to Landlord, given within five (5) days after the expiration of such 10-day period, terminate this Lease, and Tenant shall thereafter have no c-1 22 further obligations under this Lease except as otherwise expressly provided. Any other provision of this Lease to the contrary notwithstanding, Tenant shall not be obligated to pay Base Rent or Additional Rent for and during such period of untenantability. 6. Landlord Default. In the event that Tenant shall receive a final, nonappealable judgment against Landlord, its successors or assigns, in a court of competent jurisdiction in the State of Tennessee, as a result of any breach of this Lease, then Tenant, without waiving any other remedy Tenant may have, may offset the amount of any monetary judgment thus obtained, together with Tenant's reasonable attorneys' fees actually incurred in connection with obtaining such judgment, against any installment of Base Rent or Additional Rent coming due to Landlord thereafter. 7. Landlord Liability. For purposes of Section 26 of the Lease, Landlord shall at all times be deemed to have an equity interest in the Building of at least 25% of the fair market value of the Building, such that in the event Landlord shall fail actually to have such equity interest, Landlord shall have liability in excess of Landlord's equity interest in the Building up to a total liability in an amount which equals 25% of the fair market value of the Building. 8. Quiet Enjoyment. Landlord agrees that so long as Tenant pays the Minimum Rent and Additional Rent reserved in this Lease and timely performs its obligations hereunder, Tenant shall have the right to quietly use and enjoy the Demised Premises for the Term hereof. 9. Intentionally Omitted 10. Extension Option. (a) Landlord hereby grants to Tenant one (1) option to extend the Term for a period of four (4) years, such option to be exercised by Tenant giving written notice of its exercise to Landlord in the manner provided in this Lease at least one hundred eighty (180) days prior to (but not more than two hundred ten (210) days prior to) the expiration of the Term, as it may have been previously extended. No extension option may be exercised by Tenant if an Event of Default has occurred and is then continuing or any facts or circumstances then exist which, with the giving of notice or the passage of time, or both, would constitute an Event of Default either at the time of exercise of the option or at the time the Term would otherwise have expired if the option had not been exercised. (b) If Tenant exercises its option to extend the Term, Landlord shall, within thirty (30) days after the receipt of Tenant's notice of exercise, notify Tenant in writing of Landlord's reasonable determination of the Base Rent for the Demised Premises, which amount shall be the greater of (i) the Base Rent in effect for the initial Term, and (ii) fair market rent for the Demised Premises, determined by Landlord by taking into account all relevant factors for space of this type in the southeast Memphis, Tennessee area. Tenant shall have thirty (30) days from its receipt of Landlord's notice to notify Landlord in writing that Tenant agrees with Landlord's determination of the Base Rent and therefore that Base Rent for the Demised Premises for the extended term shall be the Base Rent set forth in Landlord's notice to Tenant. If Tenant does not notify Landlord of such agreement within thirty (30) days of its receipt of Landlord's notice, Tenant shall be deemed to have retracted its option to extend the Term, in which case the Term, as it may have been previously extended, shall expire on its scheduled expiration date and Tenant's option to extend the Term shall be void and of no further force and effect. (c) Except for the Base Rent, which shall be determined as set forth in subparagraph (b) above, leasing of the Demised Premises by Tenant for the extended term shall be subject to all of the same terms and conditions set forth in this Lease, including Tenant's obligation to pay Tenant's share of Operating Expenses as provided in this Lease; provided, however, that any improvement allowances, termination rights, rent abatements or other concessions applicable to the Demised Premises during the initial Term shall not be applicable during any such extended term, nor shall Tenant have any additional extension options unless expressly provided for in this Lease. Landlord and Tenant shall enter into an amendment to this Lease to evidence Tenant's exercise of its renewal option. If this Lease is guaranteed, it shall be a condition of Landlord's granting the renewal that Tenant deliver to Landlord a reaffirmation of the guaranty in which the guarantor acknowledges Tenant's exercise of its renewal option and reaffirms that the guaranty is in full force and effect and applies to said renewal. 11. Sublease. Tenant hereby acknowledges that fee simple title to the Demised Premises is, as of the Lease Date, vested in the Industrial Development Board of the City of Memphis and County of Shelby, Tennessee (the "IDB"), and that Landlord leases the Demised Premises from the IDB pursuant to that certain Lease Agreement between the IDB and Industrial Developments International, Inc., predecessor in interest to Landlord, dated December 8, 1993, and recorded in the real property records of Shelby County, Tennessee as Instrument Number EA 9544, as amended by that certain First Amendment to Lease Agreement dated December 16, 1994, and recorded in the real property records of Shelby County, Tennessee as Instrument Number EV 7310 (as so amended, the "PILOT Lease"). Tenant further acknowledges that this Lease is a sublease subject to the terms and conditions of the PILOT Lease, and that this Lease shall survive and become a prime lease if the Term shall extend beyond the term of the PILOT Lease. Tenant shall execute any and all documents necessary to confirm the status of this Lease as a sublease of the PILOT Lease, and/or of the survival of this Lease beyond the expiration or termination of the PILOT Lease, as applicable. c-2 23 12. PILOT Program. (a) Landlord's predecessor in interest entered into the PILOT Lease to enable Starter (as hereinafter defined) to reduce or freeze the real estate taxes and other impositions for the Demised Premises by participating in the Payment In Lieu Of Taxes ("PILOT Program") available through the City of Memphis and Shelby County, Tennessee. In connection with Tenant's intended use and occupancy of the Demised Premises, Tenant has applied for, and has been granted by the IDB, the right to participate in the PILOT Program. Landlord hereby agrees to cooperate with Tenant as reasonably necessary to fully implement the PILOT Program in connection with Tenant's lease of the Demised Premises, including, without limitation, executing such amendment to, or restatement of, the PILOT Lease as may be reasonably required with respect thereto (provided the form of such amendment or restatement, or any other document necessary to implement the PILOT Program, is in form reasonably acceptable to Landlord); provided, however, that Landlord shall not be obligated to incur any expenses in connection with such cooperation. Tenant shall promptly reimburse to Landlord any and all of Landlord's expenses related to the PILOT Program, including, but not limited to, attorneys' fees and the cost to update Landlord's leasehold title insurance policy insuring Landlord's interest in the Demised Premises. Landlord shall pass through to Tenant all reductions or abatements applicable to the Demised Premises as a result of Tenant's participation in the PILOT Program. (b) Tenant shall review and approve the PILOT Lease, as the same may be hereinafter amended or restated, and shall comply with all terms and conditions thereof. Tenant acknowledges that Additional Rent under this Lease to be paid by Tenant shall include payment of (or reimbursement to Landlord for) any payments Landlord is required to make under the PILOT Lease (as the same may be hereinafter amended or restated). Tenant shall indemnify Landlord from and against all claims, damages, costs and expenses, including, without limitation, reasonable attorneys' fees and court costs, which Landlord may suffer as a result of a default under the PILOT Lease (as the same may be hereinafter amended or restated) caused by the acts or omissions of Tenant. (c) Notwithstanding anything to the contrary contained herein, provided that this Lease is in full force and effect and Tenant is not in default under this Lease (and has not caused a default under the PILOT Lease), Landlord hereby agrees that Landlord shall (i) comply in all material respect with all obligations of the "Lessee" under the PILOT Lease in order to preserve unto Tenant all of the benefits of the PILOT Program awarded to Tenant, (ii) reasonably cooperate with Tenant in ensuring Tenant's receipt of any notices of default under the PILOT Lease issued by the IDB, and an opportunity to cure any such defaults, and (iii) not exercise any option under the PILOT Lease in favor of Landlord to purchase the Demised Premises prior to the expiration or earlier termination of the PILOT period approved for Tenant by the IDB, without Tenant's prior written consent. 13. Blanket Insurance. Any insurance provided for in Section 8(a) may be maintained by means of a policy or policies of blanket insurance, covering additional items or locations or insureds, provided, however, that: (i) Landlord and any other parties in interest from time to time designated by Landlord to Tenant shall be named as an additional insured thereunder as its interest may appear; (ii) the coverage afforded Landlord and any such other parties in interest will not be reduced or diminished by reason of the use of such blanket policy of insurance; (iii) the limits of such blanket policy of insurance apply separately to each location covered thereby; and (iv) the requirements set forth in Section 8 are otherwise satisfied. 14. Existing Tenant. Tenant acknowledges that as of the Lease Date, Starter Corporation ("Starter") is the tenant currently occupying the Demised Premises pursuant to a lease between Landlord (or Landlord's predecessor in interest) and Starter (the "Starter Lease"). Starter has filed for bankruptcy and the Official Committee of Unsecured Creditors (appointed in lieu of a trustee) handling the bankruptcy is expected to reject the Starter Lease (the actual date of any such rejection being referred to herein as the "Starter Rejection Date", and the effective date of any such rejection being referred to herein as the "Starter Effective Date"). Landlord agrees to use reasonable good faith efforts to cause Starter to vacate the Demised Premises (except with respect to any personalty or trade fixtures that will remain in the Demised Premises pursuant to a separate agreement between Starter and Tenant) promptly following the later to occur of (a) the Starter Rejection Date, and (b) the Starter Effective Date (such later date being referred to herein as the "Starter Termination Date"), subject to any orders of the applicable bankruptcy court to the contrary or restrictions or limitations in federal and bankruptcy laws. In the event the Starter Termination Date occurs after September 1, 1999, or in the event Starter refuses or fails to vacate the Demised Premises after the Starter Termination Date (each such event being referred to herein as a "Delay"), the obligations of Tenant hereunder shall remain as set forth herein except that the Lease Commencement Date, the Base Rent Commencement Date and the Expiration Date shall be postponed one day for each day of Delay. In the event the Official Committee of Unsecured Creditors elects to accept c-3 24 the Starter Lease, Landlord shall promptly notify Tenant, and this Lease shall terminate effective as of the date of such notification, in which event, this Lease and the obligations of the parties hereunder shall terminate except for such obligations as are to survive any such termination by their express terms. Notwithstanding anything in this Special Stipulation 14 to the contrary, in the event the Official Committee of Unsecured Creditors fails either to accept or to reject the Starter Lease on or before the sixtieth (60th) day following the Lease Date, then either party shall have the right to terminate this Lease, to be exercised by delivering written notice to the other party on or before the seventieth (70th) day following the Lease Date (provided the Official Committee of Unsecured Creditors has not rejected the Starter Lease prior to such party's receipt of such termination notice), and thereafter neither Landlord nor Tenant shall have any further obligation hereunder. c-4 25 EXHIBIT D RULES AND REGULATIONS These Rules and Regulations have been adopted by Landlord for the mutual benefit and protection of all the tenants of the Building in order to insure the safety, care and cleanliness of the Building and the preservation of order therein. 1. The sidewalks shall not be obstructed or used for any purpose other than ingress and egress. No tenant and no employees of any tenant shall go upon the roof of the Building without the consent of Landlord. 2. No awnings or other projections shall be attached to the outside walls of the Building; provided that nothing herein shall prohibit Tenant from installing dock seals or similar devices on or near dock doors. 3. The plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags or other substances, including Hazardous Substances, shall be thrown therein. 4. No tenant shall cause or permit any objectionable or offensive odors to be emitted from the Demised Premises. 5. The Demised Premises shall not be used for lodging or sleeping or for any immoral or illegal purposes. 6. No tenant shall make, or permit to be made any unseemly or disturbing noises, sounds or vibrations or disturb or interfere with tenants of this or neighboring buildings or premises or those having business with them. 7. Each tenant must, upon the termination of this tenancy, return to the Landlord all keys of stores, offices, and rooms, either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys so furnished, such tenant shall pay to the Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such change. 8. Canvassing, soliciting and peddling in the Building and the Project are prohibited and each tenant shall cooperate to prevent such activity. 9. Landlord will direct electricians as to where and how telephone or telegraph wires are to be introduced. No boring or cutting for wires or stringing of wires will be allowed without written consent of Landlord. The location of telephones, call boxes and other office equipment affixed to the Demised Premises shall be subject to the approval of Landlord, which shall not be unreasonably withheld. 10. Parking spaces associated with the Building are intended for the exclusive use of passenger automobiles. Except for intermittent deliveries, no vehicles other than passenger automobiles may be parked in a parking space without the express written permission of Landlord. Trucks and tractor trailers may only be parked at designated areas of the Building. Trucks and tractor trailers shall not block access to the Building. 11. No tenant shall use any area within the Project for storage purposes other than the interior of the Demised Premises. d-1 26 EXHIBIT E CERTIFICATE OF AUTHORITY CORPORATION The undersigned, Secretary of Priority Fulfillment Services, Inc., a Delaware corporation ("Tenant"), hereby certifies as follows to Shelby Drive Corporation, a Florida corporation ("Landlord"), in connection with Tenant's proposed lease of premises in Building I, at Southpark, Shelby County, Tennessee (the "Premises"): 1. Tenant is duly organized, validly existing and in good standing under the laws of the State of ______________, and duly qualified to do business in the State of Tennessee. 2. That the following named persons, acting individually, are each authorized and empowered to negotiate and execute, on behalf of Tenant, a lease of the Premises and that the signature opposite the name of each individual is an authentic signature: - -------------------- -------------------- --------------------- (name) (title) (signature) - -------------------- -------------------- --------------------- (name) (title) (signature) - -------------------- -------------------- --------------------- (name) (title) (signature) 3. That the foregoing authority was conferred upon the person(s) named above by the Board of Directors of Tenant, at a duly convened meeting held _____________, 19___. ----------------------------------------- Secretary [CORPORATE SEAL] 27 EXHIBIT F GUARANTY THIS GUARANTY (this "Guaranty"), made and entered into this ___ day of ________, 1999, by DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation (hereinafter referred to as "Guarantor") in favor of SHELBY DRIVE CORPORATION, a Florida corporation (hereinafter called "Landlord") and any subsequent owner or holder of the Lease (as hereinafter defined). R E C I T A L S : Landlord has entered into an Industrial Lease Agreement ("Lease") with PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation ("Tenant"), in which Guarantor has a direct or indirect financial interest or affiliation, which Lease was executed by Tenant on ____________, 1999, and provides for the leasing to Tenant of approximately 442,184 square feet of space, comprising all of Building I within Southpark, in Shelby County, Tennessee; and Landlord will not enter into the Lease unless Guarantor guarantees the obligations of Tenant under the Lease as set forth herein; and Guarantor derives benefits from the Lease to Tenant. NOW THEREFORE, as a material inducement to Landlord to enter into the Lease with Tenant, and for other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged and confessed, Guarantor does hereby, irrevocably and unconditionally, warrant and represent unto and covenant and agree with Landlord as follows: 1. Guaranty - Guarantor hereby unconditionally guarantees the full, faithful and punctual payment of all rent, additional rent and other amounts due to Landlord under the Lease by Tenant and the full, faithful and punctual performance by Tenant of all the terms, provisions and conditions of the Lease, together with interest or late charges on all of the foregoing as provided in the Lease and all other costs and expenses of collection (all of the foregoing sometimes hereinafter referred to as the "Obligations"). 2. No Discharge - This Guaranty by Guarantor shall continue for the benefit of Landlord notwithstanding (a) any extension, modification, amendment or alteration of the Lease, (b) any assignment of the Lease, with or without the consent of Landlord, (c) any bankruptcy, reorganization, or insolvency of Tenant or any successor or assignee thereof, or (d) any release, extension or modification of the liability of Tenant or any other party liable under the Lease or any other guaranty of the Lease. This Guaranty shall in all respects be a continuing, absolute and unconditional guaranty of payment and performance and shall remain in full force and effect notwithstanding, without limitation, the death or incompetency of Guarantor or Tenant, or any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Guarantor or Tenant or by any defense which Tenant may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. 3. Primarily Liable - This Guaranty is a guaranty of payment and not of collection. The liability of Guarantor under this Guaranty shall be joint and several and primary and direct and in any right of action which shall accrue to Landlord under the Lease. Landlord shall have the right, at its option, to proceed against Guarantor (or any one or more parties constituting Guarantor) without having commenced any action, or having obtained any judgment, against Tenant or any other party liable under the Lease or any other guaranty of the Lease. 4. Default - In the event of a default by Tenant under the Lease, Landlord shall have the right to enforce its rights, powers and remedies under the Lease, any other guaranty of the Lease, and under this Guaranty and all rights, powers and remedies available to Landlord shall be non-exclusive and cumulative of all other rights, powers and remedies under the Lease, any other guaranty of the Lease or under this Guaranty or by law or in equity. The obligations of Guarantor hereunder are independent of the obligations of Tenant or any other guarantor, and Landlord may proceed directly to enforce all rights under this Guaranty without proceeding against or joining Tenant, any other guarantor or any other person or entity. Until all of the Obligations have been performed and paid in full, Guarantor shall have no right of subrogation to Landlord, and Guarantor hereby waives any rights to enforce any remedy which Landlord may have against Tenant. 5. Waivers - Guarantor expressly waives and agrees not to assert or take advantage of: (a) the defense of the statute of limitations in any action hereunder or in any action for collection of the Obligations, (b) any defense that may arise by reason of the failure of the Landlord to file or enforce a claim against Guarantor -1- 28 or Tenant in bankruptcy or in any other proceeding, (c) any defense based on the failure of Landlord to give notice of the creation, existence or incurring of any new obligations or on the action or non-action of any person or entity in connection with the Obligations, (d) any duty on the part of Landlord to disclose to Guarantor any facts it may know or may hereafter acquire regarding Tenant, (e) any defense based on lack of diligence on the part of Landlord in the collection of any and all of the Obligations, or (f) any demand for payment, presentment, notice of protest or dishonor, notice of acceptance of this Guaranty and any and all other notices or demands to which Guarantor might otherwise be entitled by law. 6. Subordination; Waiver of Subrogation; Preference and Fraudulent Transfer Indemnity. Any indebtedness (including, without limitation, interest obligations) of Tenant to Guarantor now or hereafter existing shall be, and such indebtedness hereby is, deferred, postponed and subordinated to the Obligations. Guarantor hereby unconditionally and irrevocably agrees that (a) Guarantor will not at any time assert against Tenant (or Tenant's estate in the event Tenant becomes bankrupt or becomes the subject of any case or proceeding under the bankruptcy laws of the United States of America) any right or claim to indemnification, reimbursement, contribution or payment for or with respect to any and all amounts Guarantor may pay or be obligated to pay Landlord, including, without limitation, any and all Obligations which Guarantor may perform, satisfy or discharge, under or with respect to this Guaranty; (b) Guarantor waives and releases all such rights and claims and any other rights and claims to indemnification, reimbursement, contribution or payment which Guarantor, or any of them, may have now or at any time against Tenant (or Tenant's estate in the event Tenant becomes bankrupt or becomes the subject of any case or proceeding under any bankruptcy laws); (c) Guarantor shall have no right of subrogation, and Guarantor waives any right to enforce any remedy which Landlord now has or may hereafter have against Tenant; (d) Guarantor waives any benefit of, and any right to participate in, any security now or hereafter held by Landlord; and (e) Guarantor waives any defense based upon an election of remedies by Landlord which destroys or otherwise impairs any subrogation rights of Guarantor or the right of Guarantor to proceed against Tenant for reimbursement. The waivers hereunder shall continue and survive after the payment and satisfaction of the Obligations, and the termination or discharge of Guarantor's obligations under this Guaranty. Guarantor further hereby unconditionally and irrevocably agrees and guarantees (on a joint and several basis) to make full and prompt payment to Landlord of any of the Obligations or other sums paid to Landlord pursuant to the Lease which Landlord is subsequently ordered or required to pay or disgorge on the grounds that such payments constituted an avoidable preference or a fraudulent transfer under applicable bankruptcy, insolvency or fraudulent transfer laws; and Guarantor shall fully and promptly indemnify Landlord for all costs (including, without limitation, attorney's fees) incurred by Landlord in defense of such claims of avoidable preference or fraudulent transfer. 7. Choice of Law - This Guaranty is to be performed in the State of Tennessee and shall be governed by and construed in accordance with the laws of the State of Tennessee, without regard to its conflicts laws or choice of law rules. 8. Time of Essence - Time is of the essence of this Guaranty. 9. Notices - Wherever any notice or other communication is required or permitted hereunder, such notice or other communication shall be in writing and shall be delivered by hand, or by nationally-recognized overnight express delivery service, by U. S. registered or certified mail, return receipt requested, postage prepaid to the addresses set out below or at such other addresses as are specified by written notice delivered in accordance herewith: Landlord: Shelby Drive Corporation c/o L&B Realty Advisors, Inc. 8750 N. Central Expressway Suite 800 Dallas, Texas 75231 Attn: Ed Daley With a copy to: Shelby Drive Corporation c/o IDI Services Group, Inc. 3424 Peachtree Road, Suite 1500 Atlanta, Georgia 30326 Guarantor: Daisytek International Corporation 500 North Central Expressway Plano, Texas 75074 Attn: Mark C. Layton, Chief Executive Officer Any notice or other communication mailed as hereinabove provided shall be deemed effectively given (a) on the date of delivery, if delivered by hand; or (b) on the date mailed if sent by overnight express delivery or if sent by U.S. mail. Such notices shall be deemed received (a) on the date of delivery, if delivered by hand or overnight express delivery service; or (b) on the date indicated on the return receipt if mailed. If any notice mailed is properly addressed but returned for any reason, such notice shall be deemed to be effective notice and to be given on the date of mailing. 10. Authority - If Guarantor is not a natural person, Guarantor shall cause its corporate secretary or general partner, as applicable, to execute the certificate attached hereto as Exhibit -2- 29 A. Guarantor is authorized by all required corporate or partnership action to enter into this Guaranty and the individual(s) signing this Guaranty on behalf of Guarantor are each authorized to bind Guarantor to its terms. 11. Successors and Assigns - This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their heirs, legal representatives, successors and assigns. IN WITNESS WHEREOF, Guarantor has executed under seal and delivered this Guaranty to Landlord on the date and year above first written. GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Attest: --------------------------------- Name: ----------------------------------- Title: ---------------------------------- [CORPORATE SEAL] 30 EXHIBIT A CERTIFICATE OF AUTHORITY CORPORATION The undersigned, Secretary of daisytek international corporation, a Delaware corporation ("Guarantor"), hereby certifies as follows to SHELBY DRIVE CORPORATION, a Florida corporation ("Landlord"), in connection with the execution of a Guaranty by Guarantor (the "Guaranty) of that certain Industrial Lease Agreement dated _____, 1999 between Landlord and Priority Fulfillment Services, Inc. ("Tenant") (the "Lease") relating to the lease of approximately 442,184 square feet, comprising all of Building I at Southpark, located in Shelby County, Tennessee (the "Premises"): 1. Guarantor is duly organized, validly existing and in good standing under the laws of the State of Delaware, and duly qualified to do business in the State of Tennessee. 2. That the following named persons, acting individually, are each authorized and empowered to negotiate and execute, on behalf of Guarantor, a Guaranty of the Lease and that the signature opposite the name of each individual is an authentic signature: - -------------------- -------------------- --------------------- (name) (title) (signature) - -------------------- -------------------- --------------------- (name) (title) (signature) - -------------------- -------------------- --------------------- (name) (title) (signature) 3. That the foregoing authority was conferred upon the person(s) named above by the Board of Directors of Guarantor, at a duly convened meeting held _____________, 19___. -------------------------------- Secretary [CORPORATE SEAL] EX-10.7 8 LEASE CONTRACT 1 EXHIBIT 10.7 LEASE CONTRACT BETWEEN TRANSPORTS WEERTS C/O DUIJSENS MARIE RUE VARN, 1C B - 3793 TEUVEN represented by Mr. H. Levaux, Financial Director, hereinafter "the lessor" AND PRIORITY FULFILLMENT SERVICES EUROPE B.V. MARKT 28 NL - 6221 CJ MAASTRICHT represented by Mr. Lindsley D. Medlin, Jr., Managing Director, hereinafter "the lessee" AFTER HAVING STATED IN ADVANCE THE FOLLOWING: S.A. WEERTS is owner of industrial land located at B- 4460 Grace-Hollogne (Bierset), entered in the land register under section A, 2nd division, numbers 151a, 153, 150g, 137d, 136c, with a surface area of approximately 2.5 hectares. On part of the above-mentioned land, an industrial building will be erected in accordance with the annexed building plans and technical description. 2 2 The lessor guarantees to the lessee that the rented premises will be delivered in accordance with the urban development regulations that are imposed by the authorities concerned. THE FOLLOWING TERMS AND CONDITIONS ARE AGREED: ARTICLE 1 - OBJECT OF THE LEASE The lessor hereby agrees to lease to the lessee, who accepts, an industrial property, situated Cargo Village Industrial Estate, at 4460 Grace-Hollogne (Bierset). The property comprises 13,732 sq.m. of warehouse space and 75 parking spaces, as outlined in red on the annexed plans, duly initialed by both parties. This building will be constructed in accordance with the building plans, that make up part of this agreement. ARTICLE 2 - DESTINATION The lessee shall be entitled to use the property as a distribution center. All possible associated uses in connection with the running of a distribution center will be admitted. By express agreement, the utilisation of the leased premises shall be of the essence in the lease. It is expressly stipulated that the premises may not in any circumstances be used for a business or activity governed by the Commercial Leases Act of 30th April 1951. ARTICLE 3 - DURATION OF THE LEASE This agreement is for a term of nine years, taking effect from 25th July 1999, expiring lawfully at midnight on 24th July 2008, to be extended, if applicable, by a period corresponding to the period of late delivery of the space. The Lessee shall however be entitled to terminate this contract ahead of term at the fifth, sixth, seventh and eighth anniversary of the lease, subject to prior notice of six months served on the Lessor by registered letter. 3 3 At the end of the lease, the continuation of occupation of the premises shall never be considered as a tacit renewal. The Lessor agrees to make the building accessible to contractors working for the Lessee as from 25th June 1999 without rent to be due from the Lessee. ARTICLE 4 - RENT The lease is hereby granted and accepted for the basic annual rent of BEF 14,830,560 (fourteen million, eight hundred thirty thousand, five hundred sixty Belgian Francs). The rent is payable monthly in advance on the first day of each month in Belgian Francs, by payment to the lessor's account, account number 197-2583002-23, or by any other way the lessor should indicate to the lessee, during the lease. The rent, due for the period between the start of the lease and the next monthly quarter day, forms the first period and is calculated prorata temporis. The rent due for the period preceding the expiration of the lease will be reduced, if needed, prorata temporis. The first rent is payable and will be paid the day of the start of the lease. ARTICLE 5 - ADJUSTMENT OF THE RENT The parties hereto expressly agree that the above mentioned rent shall be tied to fluctuations in the health index as published monthly in the "Moniteur Belge" (Belgian Official Gazette). The rent shall be adjusted once per year on the anniversary of the effective date of this lease, subject to written notice by the Lessor. The adjustments of the rent are calculated by application of the following formula : New rent : base rent x new index --------------------- initial index 4 4 The parties hereto agree that: - - the base rent is the one mentioned in Article 4; - - the new index shall be the health index for the month preceding the adjustment of the rent; - - the initial index shall be the health index of the month preceding the signing of the lease. Should the health index not be published in the "Moniteur Belge", the parties hereto shall refer to the new instrument for measurement of the cost of living instituted to replace the consumer price index. In the absence of such system, the parties hereto shall refer to the evolution of the increases in the cost of living. ARTICLE 6 - DELAY OF PAYMENT All amounts due by the lessee by virtue of the present lease, will bear interest as from the tenth day after the date when they fall due, subject to prior notification by the Lessor. Concerning this, the payment order of the bank will be determinant. The interest will be calculated on the basis of the interest rate of the Belgian National Bank at that time, increased by 2%. ARTICLE 7 - SUBLETTING AND ASSIGNMENT The lessee may assign this lease or sublet all or part of the premises without the prior consent of the lessor, subject to the condition that the assignee or sublessee is of a financial standing similar or superior to the current lessee. ARTICLE 8 - TAXES, LEVIES, CONTRIBUTIONS All present or future taxes, levies and contributions of any kind whatsoever payable to the State, to the local or regional authority or group of authorities or to any other 5 5 authority in respect of the leased property, including withholding tax on property or other real estate taxes on property, shall be payable jointly and equally by each party. Taxes levied on the Lessee's activity on occupation of the leased premises, including Value Added Tax, shall be payable by the Lessee. The lessor will do everything possible to obtain an exemption from property taxation. ARTICLE 9 - CHARGES The subscriptions to the water-, gas- and electricity companies, the connection costs and the lease of the counters and material are due by the lessee, as well as the consumption. ARTICLE 10 - INSURANCE All insurance pertaining to the property and the operation thereof shall be taken out by the lessor to cover all risks, including the neighbours claims. The lessee shall take out insurance at his own expense to cover his liability. The lessee shall also take out an insurance at his own risk to cover all movable goods, including the partitioning, at least against fire, explosion and water damage. ARTICLE 11 - FINISHING - FITTING OUT - TRANSFORMATION - MODIFICATION The lessee shall have the right to install fixtures that need to be used to conduct business ; if installed by the lessee, these fixtures will be removed by the lessee upon termination of the lease and will not become the property of the lessor. The lessee shall repair and restore any damage or injury to the premises to the condition in which the demised premises existed prior to such installation. ARTICLE 12 - SCHEDULE OF CONDITION An ingoing schedule of condition will be drawn up no later than the first of the following dates : either at the date of start of the lease or the date of effective occupation of the leased premises by the lessee. 6 6 This description will be drawn up by the expert agreed by both parties or the experts designated by each party or, if not, by the judge of the "Justice de Paix" court of the area where the building is located, at the request of the most diligent party. The fees will be paid half by each party. This report will form part of the present contract. At the end of the lease, the lessee will reinstate the premises as they were received according to the ingoing schedule of condition, except for what has perished or been degraded by normal wear and tear. An outgoing schedule of condition will be drawn up at the latest by the last day of the lease, after that the lessee has completely vacated the premises. This schedule will be drawn up by the expert agreed by both parties or the experts designated by each party, at the latest 15 days before the end of the lease, or, if not, by the judge of the "Justice de Paix" court of the area where the building is located, at the request of the most diligent party. The expert(s) will establish the amount of the degradation compensation. Such degradation compensation includes a compensation for non-availability of the leased premises resulting from necessary reparations of the leased premises in order to bring them back in their original state as determined in the ingoing schedule of condition, save for normal wear and tear. The compensation for the non-availability of the leased premises is determined by reference to the rent payable at then end of the lease. The reports of the expert(s) chosen by the parties or by the judge will bind both parties, without any possible recourse. ARTICLE 13 - USE OF THE PREMISES The lessee engages himself to occupy the premises as a good house keeper and not exercise an activity prejudicial to the quiet and calm enjoyment of the neighbours, according to the destination of the premises, and to the reputation of the building. The maximum loading capacity of the floor is 5.000 kg/sq.m. for the warehouse zones and 300 kg/m(2) for the office zones, partitioning included. It is forbidden for the lessee to organize public sales in the building, for any reason. 7 7 After the ingoing schedule of condition, the lessee can proceed with the installation of telephone, radio, television, and other technical machines inside the leased premises without the prior approval of the lessor. The installation and the use of these machines are under the responsibility of the lessee and paid by him. The lessee declares that his activity is not an unhealthy or dangerous activity and that he is owner of all the permissions to carry them out. The lessee's use of tractor trailers, forklifts, conveyors and other equipment normally used by the lessee shall not be deemed to violate the lease. ARTICLE 14 - MAINTENANCE AND REPAIRS Parties refer to articles 1720 and 1754 till 1756 of the Belgian Civil Code, in order to govern the issue of maintenance and repairs. The lessee hereby undertakes to occupy the leased premises in a reasonable manner and to maintain them in a reasonable state of repair. The lessee will among others be responsible for the maintenance of the gardens, the green areas and the driveways. At his expense, the lessor will among others be responsible to maintain in good condition and repair the roof, foundation (below floor slab), and structural frame of the building. The lessor is responsible for the maintenance and surveillance of the materials for fire safety. The lessor will carry out, as quickly as possible, all repair work or improvements which may become necessary during the period of the lease, so as to cause minimum disturbance to the lessee. The lessor shall maintain at its sole cost and expense the plumbing, electrical utilities and sewer outside the outside walls of the premises, from said walls to the point that such lines are maintained by governmental entities or the provider of such utility. The lessee must permit access to the leased premises to the lessor or his representatives, architects, contractors, workmen or any other person designated by the lessor, in order to verify the state of the leased premises and the building in general, the respect of the 8 8 articles of this lease and to proceed to the necessary inspections and repairs, by means of a notice of 48 hours, except in an emergency. ARTICLE 15 - ADVERTISING AND VISITING RIGHTS For the last six months before the expiry of the lease term, the lessee shall be bound to allow bills announcing the sale or rental to be posted (insofar as they do not adversely affect the normal utilization of the leased premises). Visits to the leased premises by prospective buyers will be subject to the prior approval of the lessee (to be able to control access by any of the lessee's competitors). The prospective buyers must be accompanied by a representative of the lessor, and no visits shall be allowed outside the opening hours of the building. ARTICLE 16 The lessee hereby declares that he elects domicile in the leased premises. This election of domicile shall remain effective after expiry of the lease, unless the lessee informs the lessor by registered letter of a new elected domicile. ARTICLE 17 - REGISTRATION All such costs and fees of any kind whatsoever as might arise out of the execution of this contract, the registration fees, stamp costs and fines in the event of late registration or failure to register, shall be payable by the lessee. All charges not quantified herein are evaluated for taxation purposes at 10% of the rent. ARTICLE 18 - DATE OF NOTIFICATION All notifications done by registered letter in execution of the present contract are supposed to be done at the date of presentation of the registered letter to the post office, the date of the receipt serving as a proof. 9 9 ARTICLE 19 - SIGNAGE External signage can be placed by the lessee without prior and written agreement of the lessor. At the end of the lease, the lessee is obliged to dismantle the advertising and to put back the premises in their original state. ARTICLE 20 - LITIGATIONS All disputes arising out this contract, its interpretation, its execution, its avoidance or its resolution are subject to the jurisdiction of the "Justice de Paix" court of the area in which the leased premises are located. In the event a judgement is delivered against the lessor and in favour of the lessee, and provided that such judgement is no longer subject to appeal, nor opposition, the lessee will be entitled to reduce the rent due to the lessor to the extent that the above judgement found in favour of the lessee. ARTICLE 21 - SPECIAL TERMS AND CONDITIONS - - The lessor warrants to be and to remain during the entire course of this agreement, the owner of the land located at B-4460 Grace-Hollogne (Bierset), entered in the land register under section A, 2nd division, numbers 151a, 153, 150g, 137d, 136c, with a total surface area of approx. 2.5 hectares (see attachement). On part of the above land, an industrial building will be erected , which will entirely belong to, and will remain to belong to, the lessor during the entire course of this agreement. The lessor will therefore, among others, refrain from selling, trading or contributing in kind the above land. The building will be erected in accordance with the annexed plans and technical description. The lessor guarantees to the lessee that the rented premises will be delivered in accordance with the urban development regulations that are imposed by the authorities concerned. - - Construction works shall be performed at the expense of, and under the sole responsibility of, the lessor. The lessor will obtain the administrative consents required and will comply with any regulations. The lessor will guarantee the lessee 10 10 against all and any redress of third parties, due to these works. - - Without prejudice to the lessee to claim additional damages, a liquidated damages penalty for non-performance amounting to $ 20,000- US per calendar day will be due by the Lessor if the building is not completed within the projected time frame of four months after the signing of the lease. - - The Lessor grants to the lessee an option to lease an additional and similar warehouse, that the lessor would be obliged to construct as an attachment to the initial building. This option expires one year from the occupation of the initial building and to exercise this option, notice must be given by registered mail to the Lessor. In the event that the option is exercised, the additional building will be let on the following conditions : - the basic rent will be the rent which is mentioned in Article 4; - the additional warehouse will be similar to the initial warehouse and will be equipped with 25 loading docks and 1 loading door; - the additional building will be delivered within 1 month of the exercising of the option or at a later date if specified by the lessee; - the other stipulations of this lease will also be applicable to the letting of the additional building; The land required for the additional building is optioned by the Lessor. - - The points outstanding will be agreed between the parties in due course. - - A French version of this contract will be drawn up for registration purposes within two weeks of the signing of this document. 11 11 Executed at Maastricht, on 25th March 1999, in duplicate. Each of the parties hereto acknowledges that he is in possession of his copy. THE LESSOR THE LESSEE EX-10.8 9 COMMITMENT LETTER DATED 9/9/99 1 EXHIBIT 10.8 SCOTIA BANK THE BANK OF NOVA SCOTIA 625 Cochrane Drive, Markham, Ontario L3R949 August 31, 1999 Daisytek (Canada) Inc. c/o Daisytek International Corporation 500 N. Central Expressway Plano, Texas 75047 Attention: Mr. Thomas J. Madden Chief Financial Officer Mr. Thomas Graham Director of Treasury & Budget Dear Sir: We confirm that subject to acceptance by you, The Bank of Nova Scotia (the "Bank") will make available to Daisytek (Canada) Inc. (the "Borrower") credit facilities on the terms and conditions set out in the attached Terms and Conditions Sheet and Schedule "A". If the arrangements set out in this letter and in the attached Terms and Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are acceptable to you, please sign the enclosed copy of this letter in the space indicated below and return the letter to us by the close of business on September 17, 1999, after which date this offer will lapse. This Commitment Letter replaces all previous commitments issued by the Bank to the Borrower. Yours very truly, /s/ J.A. Neat /s/ I.C. McFetters -------------------------- ------------------ J.A. Neat I.C. McFetters Senior Account Manager Vice-President and Manager The arrangements set out above and in the attached Terms and Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are hereby acknowledged and accepted by: DAISYTEK (CANADA) INC. DAISYTEK INTERNATIONAL CORPORATION - -------------------------------------- ---------------------------------------- Name Name By: /s/ Thomas Graham By: /s/ Thomas Graham /s/ Harvey Achatz ---------------------------------- ---------------------------------------- Title: Director of Treasury & Budget Title: Director of Treasury & Budget Date: 9/9/99 Date: 9/9/99 -------------------------------- ---------------------------------- DAISYTEK INCORPORATED ---------------------------------------- Name By: /s/ Thomas Graham /s/ Harvey Achatz ------------------------------------ Title: Director of Treasury & Budget Date: 9/9/99 ---------------------------------- 2 Page 1 TERMS AND CONDITIONS CREDIT NUMBER: 01 AUTHORIZED AMOUNT: $10,000,000 - -------------------------------------------------------------------------------- TYPE Revolving Term PURPOSE Assist with financing of day-to-day general operating requirements. CURRENCY Canadian and/or U.S. dollar equivalent thereof. AVAILMENT The Borrower may avail the Credit by way of direct advances evidenced by Demand Promissory Notes and/or Bankers' Acceptances in Canadian dollars in multiples of $100,000 (subject to a minimum availment amount of $500,000) and having terms of maturity of 30 to 364 days without grace. TERMINATION Provided the Borrower is in compliance with all terms and conditions outlined, the Revolving term facility will be committed for 2 years following acceptance of this Commitment. Advances are repayable the earlier of the expiry of the facility or on demand by the Bank if the Borrower is in default of the terms and conditions outlined. In the event of extension, the Borrower is to provide written notice not less than 40 days and up to 90 days prior to expiry, requesting extension for a further period, subject to no event of default having occurred and with extension subject to the Bank's approval. INTEREST RATE AND FEES WHILE REVOLVING (Canadian dollars:) The Bank's Prime Lending Rate, plus 10 basis points, from time to time, with interest payable monthly. (Bankers' Acceptances:) The Bankers' Acceptance Fee of 160 basis points, subject to a minimum fee of $500 per transaction, payable at the time of each acceptance. (U.S. dollars:) The Bank's U.S. Dollar Base Rate in New York, plus 10 basis points, with interest payable monthly. OTHER FEES A Standby Fee of 1/4% per annum on the daily unused portion of the Credit payable in Canadian dollars, is payable monthly from the date of acceptance of this commitment. An application Fee of $20,000 is payable on the Borrower. 3 Page 2 REPAYMENT The Borrower may make repayment of advances under the Revolving Term facility at any time, other than term instruments which may be repaid at maturity. PREPAYMENT Floating Interest Rate Advances Prepayment is permitted without penalty at any time in whole or in part except for Bankers' Acceptances which may be prepared on maturity date. Prepayments are to be applied against installments of principal in the inverse order of their maturities. SPECIFIC SECURITY The following security, evidenced by documents in form satisfactory to the Bank and registered or recorded as required by the Bank, is to be provided prior to any advances or availment being made under the Credit: Bankers' Acceptance Agreement. ADDITIONAL FACILITIES a) Subject to availability and execution of mutually satisfactory documentation the Borrower may enter into Forward Exchange Contracts with the Bank for maximum terms of up to one year. Maximum aggregate Forward Exchange Contracts outstanding at any one time are not to exceed $5,000,000 U.S. dollars or the equivalent thereof in other approved currencies. b) Subject to availability, and to execution of mutually satisfactory documentation, based on the Bank's standard International Swap Dealers Association (ISDA) Master Agreement and Schedule, incorporating all security held pursuant to this Commitment Letter, the Borrower shall have the option, available until August 31, 2000 to enter into (Interest Rate Swap transactions. The swap transactions are limited to U.S. and Canadian only, for terms not exceeding 5 years from the date of drawdown of the amount to be swapped. The aggregate amount of all outstanding transactions at any one time is not to exceed $10,000,000. GENERAL SECURITY, TERMS AND CONDITIONS APPLICABLE TO ALL CREDITS GENERAL SECURITY The following security, evidenced by documents in form satisfactory to the Bank and registered or recorded as required by the Bank, is to be provided prior to any advances or availment being made under the Credits: Guarantees given by the following (with corporate seals and resolutions as applicable) in the amount shown: 4 Page 3
NAME AMOUNT ---- ------ Daisytek International Corporation* $10,000,000 Daisytek Incorporated* $10,000,000
* Joint and Several GENERAL CONDITIONS Until all debts and liabilities under the Credits have been discharged in full, the following conditions will apply in respect of the Credits: Any default under the Credit Agreement dated May 22, 1995 and as subsequently amended, of Daisytek, Incorporated and Daisytek International Corporation as guarantor, constitutes a default under the terms of credits outlined herein. Without the Bank's Prior written consent: No change in ownership is permitted. The Borrower or guarantors will not pledge their respective assets to another party, other than as allowed in the above referenced Credit Agreement dated May 22, 1995 with limitations as to type and aggregate dollar limits outlined therein still currently in effect and continuing unless otherwise agreed in writing by the Bank. GENERAL BORROWER REPORTING CONDITIONS Until all debts and liabilities under the Credits have been discharged in full, the Borrower will provide the Bank with the following: Annual Internally Prepared Unconsolidated Financial Statements, within 120 days of the Borrower's fiscal year end, duly signed. Annual Audited Consolidated Financial Statements of Daisytek International Corporation within 120 days of fiscal year end, duly signed. Quarterly Internally Prepared Unconsolidated Financial Statements of the Borrower within 60 days of period end. Quarterly Prepared Consolidated Financial Statements of Daisytek International Corporation within 60 days of period end. Quarterly Compliance Certificate from Daisytek International Corporation, certifying compliance with all conditions of credit facilities. A copy of any amendment to the existing Guarantor Credit Agreement or any new Credit Agreement in its entirety, at the time of execution of any such amendment or new Agreement, with any amendment to the cure period subject to Scotiabank concurrence. 5 Page 4 SCHEDULE A ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO ALL CREDITS Calculation and Payment of Interest 1) Interest on loans/advances made in Canadian dollars will be calculated on a daily basis and payable monthly on the 22nd day of each month (unless otherwise stipulated by the Bank). Interest shall be payable not in advance on the basis of a calendar year for the actual number of days elapsed both before and after demand of payment or default and/or judgment. 2) Interest on loans/advances made in U.S. dollars will be calculated on a daily basis and payable monthly on the 22nd day of each month (unless otherwise stipulated by the Bank). Interest shall be payable not in advance on the basis of a 360 day year for the actual number of days elapsed both before and after demand of payment or default and/or judgment. The rate of interest based on a 360 day year is equivalent to a rate based on a calendar year of 365 days of 365/360 times the rate of interest that applies to the U.S. dollar loans/advances. Interest on Overdue Interest 3) Interest on overdue interest shall be calculated at the same rate as interest on the loans/advances in respect of which interest is overdue, but shall be compounded monthly and be payable on demand, both before and after demand and judgment. Calculation and Payment of Bankers' Acceptance Fee 4) The fee for the acceptance of each Bankers' Acceptance will be payable on the face amount of each Bankers' Acceptance at the time of acceptance of each draft calculated on the basis of a calendar year for the actual number of days elapsed from and including the date of acceptance to the due date of the draft. Calculation and Payment of Standby Fee 5) Standby fees shall be calculated daily and payable monthly on the basis of a calendar year for Canadian dollar credits and on the basis of a 360 day year for U.S. dollar credits from the date of acceptance by the Borrower of this Commitment Letter. Environment 6) The Borrower agrees: (a) to obey all applicable laws and requirements of any federal, provincial, or any other governmental authority relating to the environment and the operation of the business activities of the Borrower: 6 Page 5 (b) to allow the Bank upon reasonable prior notice and at reasonable times access to the business premises of the Borrower to monitor and inspect all property and business activities of the Borrower; (c) to notify the Bank from time to time of any business activity conducted by the Borrower which involves the use or handling of hazardous materials or wastes or which increases the environmental liability of the Borrower in any material manner; (d) to notify the Bank of any proposed change in the use or occupation of the property of the Borrower prior to any change occurring; (e) to provide the Bank with immediate written notice of any environmental problem and any hazardous materials or substances which have an adverse effect on the property, equipment, or business activities of the Borrower and with any other environmental information requested by the Bank from time to time. (f) to conduct all environmental remedial activities which a commercially reasonable person would perform in similar circumstances to meet its environmental responsibilities and if the Borrower fails to do so, the Bank may perform such activities; and (g) to pay for any environmental investigations, assessments or remedial activities with respect to any property of the Borrower that may be performed for or by the Bank from time to time. If the Borrower notifies the Bank of any specified activity or change or provides the Bank with any information pursuant to subsections (c), (d), or (e), or if the Bank receives any environmental information from other sources, the Bank, in its sole discretion, may decide that an adverse change in the environmental condition of the Borrower or any of the property, equipment, or business activities of the Borrower has occurred which decision will constitute, in the absence of manifest error, conclusive evidence of the adverse change. Following this decision being made by the Bank, the Bank shall notify the Borrower of the Bank's decision concerning the adverse change. If the Bank decides or is required to incur expenses in compliance or to verify the Borrower's compliance with applicable environmental or other regulations, the Borrower shall indemnify the Bank in respect of such expenses, which will constitute further advances by the Bank to the Borrower under this Agreement. Initial Drawdown 7) The right of the Borrower to obtain the initial drawdown under the Credit(s) is subject to the condition precedent that there shall not have been any material adverse changes in the financial condition or the environmental condition of the Borrower or any guarantor of the Borrower. 7 Page 6 Evidence of Indebtedness 9) The Bank's accounts, books and records constitute, in the absence of manifest error, conclusive evidence of the advances made under this Credit, repayments on account thereof and the indebtedness of the Borrower to the Bank. Acceleration 10) (a) All indebtedness and liability of the Borrower to the Bank payable on demand, is repayable by the Borrower to the Bank at any time on demand; (b) All indebtedness and liability of the Borrower to the Bank not payable on demand, shall, at the option of the Bank, become due and payable, subject to specific cure periods outlined in Daisytek Incorporated's Credit Agreement dated May 22, 1995 and subsequent Amending Agreements, moreother, the security held by the Bank shall become enforceable, and the obligation of the Bank to make further advances or other accommodation available under the Credits shall terminate, if any one of the following Events of Default occurs; i) the Borrower or any guarantor fails to make when due, whether on demand or at a fixed payment date, by acceleration or otherwise, any payment of interest, principal, fees, commissions or other amounts payable to the Bank; ii) there is a breach by the Borrower or any guarantor of any other term or condition contained in the Commitment Letter or in any other agreement to which the Borrower and/or any guarantor and the Bank are parties; iii) any default occurs under any security listed in this Commitment Letter under the headings "Specific Security" or "General Security" or under any other credit, loan or security agreement to which the Borrower and/or any guarantor is a party; iv) any bankruptcy, re-organization, compromise, arrangement, insolvency or liquidation proceedings or other proceedings for the relief of debtors are instituted by or against the Borrower or any guarantor and, if instituted against the Borrower or any guarantor, are allowed against or consented to by the Borrower or any guarantor or are not dismissed or stayed with 60 days after such institution; 8 Page 7 v) a receiver is appointed over any property of the Borrower or any guarantor or any judgement or order by any process of any court becomes enforceable against the Borrower or any guarantor or any property of the Borrower or any guarantor or any creditor takes possession of any property of the Borrower or any guarantor; vi) any course of action is undertaken by the Borrower or any guarantor or with respect to the Borrower or any guarantor which would result in the Borrower's or any guarantor's reorganization, amalgamation or merger with another corporation or the transfer of all of the Borrower's or any guarantor's assets; vii) any guarantee of indebtedness and liability under the Credit Line is withdrawn, determined to be invalid or otherwise rendered ineffective. Judgement Currency 11) The obligations of the Borrower or any Guarantor shall be payable in (Canadian/US) Dollars. Such obligations shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other currency except to the extent to which such tender or recovery shall result in the effective receipt by the Bank of the full amount of (Canadian/US) Dollars so payable. Accordingly, the obligation of the Borrower shall be enforceable as an alternate or additional cause of action for the purpose of recovery in (Canadian/US) Dollars of the amount (if any) by which such effective receipt shall fall short of the full amount of (Canadian/US) Dollars so payable and shall not be affected by any judgment being obtained for any other sum due hereunder. Costs 12) All costs, including legal and appraisal fees incurred by the Bank relative to security and other documentation and the enforcement thereof, shall be for the account of the Borrower and may be charged to the Borrower's deposit account when submitted. EX-27.1 10 FINANCIAL DATA SCHEDULE - 6 MOS. ENDED 9/30/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR SIX MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-2000 SEP-30-1999 2,590 0 156,749 6,949 120,867 281,112 47,029 23,515 347,638 114,100 71,103 0 0 172 162,263 347,638 479,926 479,926 426,733 426,733 0 5,354 1,020 8,418 3,283 5,135 0 0 0 5,135 0.30 0.29
EX-27.2 11 FINANCIAL DATA SCHEDULE - 6 MOS. ENDED 9/30/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR SIX MONTHS ENDED SEPTEMBER 30, 1998 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. 1,000 6-MOS MAR-31-1999 SEP-30-1998 1,161 0 125,732 2,385 107,195 236,604 33,899 17,706 273,748 83,358 42,089 0 0 171 148,310 273,748 442,740 442,740 389,490 389,490 0 1,073 1,641 17,127 6,408 10,719 0 0 (405) 10,314 0.60 0.58
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