-----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, QiqggK6dIbpmhXzAZ7FnfmdwYzmmLlkczwheKZb7QGVNaNOQawdTbD8T7HCNV45C 31BSI3sN0Gma6lZIxGzuXg== 0000950134-98-004851.txt : 19980601 0000950134-98-004851.hdr.sgml : 19980601 ACCESSION NUMBER: 0000950134-98-004851 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980529 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-25400 FILM NUMBER: 98634534 BUSINESS ADDRESS: STREET 1: 500 N CENTRAL EXPRWY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 2148814700 MAIL ADDRESS: STREET 1: 500 N CENTRAL EXPWY CITY: PLANO STATE: TX ZIP: 75074 10-K405 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 Commission File Number 0-25400 DAISYTEK INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2421746 (State or other jurisdiction of (I.R.S. Employer Number) incorporation or organization) 500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 972-881-4700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 9, 1998 (based on the closing price as reported by the National Association of Securities Dealers Automated Quotation System) was $390,012,298. As of May 9, 1998, there were 16,025,204 shares outstanding of the registrant's Common Stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Part II - Prospectus dated March 26, 1998 2 Unless the context otherwise requires, references to Daisytek International Corporation include its direct and indirect subsidiaries, including Daisytek, Incorporated, the Company's primary operating subsidiary. References in this Report to the Company's fiscal year means the 12 month period ending on March 31 of such year. INDEX
PART 1 Page ---- Item 1. Business....................................................................... 3 Item 2. Properties..................................................................... 9 Item 3. Legal Proceedings.............................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................................... 10 Item 6. Selected Financial Data ....................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 12 Item 8. Financial Statements and Supplementary Data ................................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 19 PART III Item 10. Directors and Executive Officers of the Registrant............................. 39 Item 11. Executive Compensation ........................................................ 41 Item 12. Security Ownership of Certain Beneficial Owners and Management ................................................................ 43 Item 13. Certain Relationships and Related Transactions ................................ 45 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................................... 45 SIGNATURES ................................................................................. 51
-2- 3 PART I ITEM 1. BUSINESS GENERAL Daisytek International Corporation (the "Company") is a leading wholesale distributor of non-paper computer and office automation supplies and accessories ("computer supplies products"). The Company distributes over 10,000 computer supplies products to over 25,000 customer locations, including value-added resellers ("VARs"), computer supplies dealers, office product dealers, contract stationers, buying groups, computer and office product superstores and other retailers who resell the products to end-users. The Company believes it is the largest wholesale distributor of computer supplies products in the world. The Company sells primarily nationally known, name-brand computer supplies products manufactured by over 150 original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital Equipment Corporation, Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. The Company's products include consumable supplies such as laser toner, inkjet cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage products, computer tape cartridges and accessories. The Company's products are used in a broad range of computers and office automation products, including laser and inkjet printers, photocopiers, fax machines and data storage products. The Company utilizes sophisticated telemarketing, direct mail programs, frequent innovative sales promotions and electronic commerce technology to market its computer supplies products throughout the United States, Canada, Mexico, Australia and Latin America, as well as in other international markets, including Singapore and the Pacific Rim. The Company presently operates one centralized "superhub" distribution center in Memphis, Tennessee, to service the U.S. and certain international markets. To service other international markets, the Company also operates smaller regional sales and distribution centers in Miami, Florida, Mexico, Australia and Canada and recently opened a sales and distribution facility in Singapore. Most of the Company's U.S. computer supplies products shipments are shipped via Federal Express under an agreement (the "Federal Express Agreement") which, together with the Company's centralized distribution center, enables the Company to accept orders for computer supplies products until 9:00 p.m. Eastern Standard Time (EST) and offer its customers next business day delivery of product in stock. During fiscal year 1996, the Company formed Priority Fulfillment Services ("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its business partners and other customers. Through PFS, the Company sells its core competencies in call center, product fulfillment, logistics and support services. PFS customizes these services to meet the specific requirements of these companies. PFS's call-center services include: order entry, order tracking and customer service (inbound), outbound telemarketing services and customized reporting of customer and call information. PFS also provides other support services such as invoicing, credit management and collection services, and accounting and systems support. PFS utilizes the Company's distribution facilities and maintains relationships with a number of shipping companies to provide next business day delivery on domestic package orders, truck shipments on larger domestic orders and a variety of air and surface delivery options for international orders. PFS presently provides its services under both fee-based contracts (where revenue is based on either the sales value of the products or service activity volume) and transaction based contracts (where PFS takes title and resells the products). In January 1998, the Company expanded its product line and customer base by acquiring Steadi-Systems, Ltd., ("Steadi-Systems") an independent wholesale distributor of media products to the filmed entertainment and multimedia industries. Steadi-Systems distributes a wide array of professional-grade media products (film stock, video, audio and data storage media) and video hardware (analog and digital equipment) and is an authorized dealer for leading manufacturers such as Sony, Fuji, JVC, Avid and others. Steadi-Systems' customers include production companies, post-production operations, educational institutions, governmental agencies, television stations and other professional and individual customers. The Company believes that the integration of Steadi-Systems into the -3- 4 Company's call center technology, management information systems and distribution expertise should provide Steadi-Systems with the opportunity to expand its customer base and offer higher and more efficient levels of service, although no assurance can be given in this regard. In May 1998, the Company announced that it had signed a letter of intent to acquire The Tape Company, Inc. ("The Tape Company"), a Chicago-based independent distributor of professional-grade audio and video media products. The Company plans to integrate The Tape Company and Steadi-Systems into a leading nationwide wholesale distributor of professional tape products, although no assurance can be given in this regard. PRODUCTS The Company distributes over 10,000 different computer supplies products and regularly updates its product line to reflect advances in technology and provide a wide product range of the most popular products. Computer supplies products sales represented over 90% of the Company's total net sales in fiscal year 1998. The Company's major computer supplies product categories can generally be classified as follows: Non-Impact Printer Supplies. Non-impact printer supplies include toner cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and fax supplies. Non-impact printers, such as laser printers, personal copiers and fax machines, are rapidly growing in popularity and have a wide range of applications. Sales of non-impact printer supplies accounted for approximately 55.4% of the Company's total net sales of computer supplies products in the year ended March 31, 1998. The Company also sells specialized all-in-one toner cartridges for laser printers produced by manufacturers such as Canon, Hewlett-Packard, Digital, Brother and Apple. Sales of these supplies accounted for approximately 23.4% of the Company's total net sales of computer supplies products in fiscal year 1998. Magnetic Media Products. Magnetic media products include computer tapes, data cartridges, diskettes, optical disks and other products which store or record computer information and are used in a variety of computers ranging from notebook and personal computers to large mainframe computer systems. Sales of magnetic media products accounted for approximately 8.4% of the Company's total net sales of computer supplies products in fiscal year 1998. Impact Printer Supplies. Impact printer supplies include printwheels, ribbons, elements, fonts and other consumable supplies used in impact printers ranging from electronic typewriters to high-speed dot matrix printers. While new technology is moving toward non-impact printing, the Company believes that a substantial installed base of impact printers, such as dot matrix printers, are still in use and require a continuing amount of computer supplies products. Sales of impact printer supplies accounted for approximately 7.9% of the Company's total net sales of computer supplies products in fiscal year 1998. Accessories and Other Products. Accessories sold by the Company include cleaning supplies, disk storage boxes, data cartridge storage, racks, surge protection devices, workstation accessories and anti-glare screens. The Company also sells a number of other products such as transparencies, banking supplies and selected business machines. Sales of accessories and other products accounted for approximately 4.9% of the Company's total net sales of computer supplies products in fiscal year 1998. SUPPLIERS The Company's computer supplies products are manufactured by over 150 original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Digital Equipment Corporation, Apple, Panasonic, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. During fiscal year 1998, approximately 70% of the Company's total net sales were derived from computer supplies products supplied by the Company's ten largest suppliers, with the sale of Hewlett-Packard and Canon products accounting for approximately 35% and 9% of total net sales, respectively, and the sale of Lexmark, IBM, Xerox, Epson, Brother and Okidata products each accounting for between approximately 3% to 6% of total net sales. -4- 5 Many of the Company's suppliers offer rebate programs under which, subject to the Company purchasing certain predetermined amounts of inventory, the Company receives rebates based on a percentage of the dollar volume of total rebate program purchases. The Company also takes advantage of several other programs offered by substantially all of its suppliers. These include price protection plans under which the Company receives credits against future purchases if the supplier lowers prices on previously purchased inventory and stock rotation or stock balancing privileges under which the Company can return slow moving inventory in exchange for other products. In addition, in order to introduce new products, many suppliers will permit the Company to return all unsold inventory after an introductory trial period. Material changes by one or more of the Company's key suppliers of their pricing arrangements or other marketing programs may materially and adversely affect the Company's business. The Company's purchases of computer supplies products inventory are closely tied to sales and are generally based upon the sales volume of the most recent six to ten week periods. Many of the Company's suppliers require minimum annual purchases, which, for fiscal year 1999, will aggregate approximately $66 million. The Company has entered into written distribution agreements with Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata and many of the other major suppliers of the products it distributes. As is customary in the industry, these agreements generally provide non-exclusive distribution rights, have one-year renewable terms and are terminable by either party at any time, with or without cause. The Company considers its relationships with its major suppliers, including Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata to be good; nevertheless, there can be no assurance that a material change in the Company's relationship with one or more of its major suppliers will not have a material adverse effect on the Company's business. Although the Company purchases most of its products directly from authorized U.S. manufacturers, the Company also imports products from foreign sources, particularly when fluctuations in foreign exchange rates or product prices make it attractive to do so. Similarly, depending upon product pricing and availability, the Company also purchases products from secondary sources, such as other wholesalers and selected dealers, rather than directly from the manufacturer. The Company utilizes its ability to purchase imported and secondary source products in order to provide its customers with competitive prices and a wide range of product lines. In order to ensure that such imported and secondary source products are not produced by unauthorized manufacturers, the Company has established various procedures which it believes enable it to identify unauthorized products and, to the extent possible, return such unauthorized products to the foreign or secondary source. Nevertheless, there can be no assurance that the Company will be completely successful in such efforts or that such imported and secondary source products will continue to be available or that any lack of availability will not have a material adverse effect on the Company's business. SALES AND MARKETING The Company utilizes sophisticated telemarketing, direct mail programs and frequent innovative sales promotions and other marketing efforts to market its computer supplies products to a wide array of dealers, VARs, retailers and other resellers. The Company's customer and prospect list includes U.S., Canadian, Australian, Mexican, Latin American, Singaporean and other foreign computer supplies dealers, office product dealers, VARs, buying groups, computer stores, contract stationers, computer and office product superstores, catalog merchandisers, college bookstores and other resellers. The Company currently ships its computer supplies products to over 25,000 customer locations. The Company's typical customer is a small to medium sized reseller who does not have the resources to establish direct purchasing relationships with multiple manufacturers and, instead, must rely on wholesale distributors like the Company. The Company also sells its products to computer and office product superstores, which the Company believes will become an increasingly important group of customers as the Company demonstrates its ability to serve the superstores' need for timely delivery of fast-moving products and efficient distribution of a variety of product lines to multiple store locations in a more cost-effective manner than presently provided by many product manufacturers. No single customer accounts for more than 10% of the Company's sales for each of the fiscal years ended March 31, 1998, 1997 and 1996. At March 31, 1998, five computer and office product superstores and -5- 6 warehouse clubs represent approximately 29% of the Company's trade accounts receivable, with the largest two customers being approximately 13% and 11% of trade accounts receivable, and reflects the significance of this market segment. As a result of customer consolidation, the Company's U.S. sales growth of computer supplies products has been slowing. The Company presently expects to partially offset this reduced sales growth through international expansion, growth in its PFS business and acquisitions of businesses with complementary product lines. There can be no assurance, however, that these activities will be successful. The Company's international sales accounted for approximately 22% of the Company's total net sales in fiscal year 1998, and the Company believes that international markets represent further opportunities for growth. To take advantage of the growing Far East and Australia marketplace, in October 1996, the Company acquired Lasercharge Pty Ltd., a large computer and office automation supplies wholesaler in Australia, and in January 1998, the Company opened a sales and distribution facility in Singapore. To service the growing Latin American market, the Company opened a sales office and distribution center in Mexico City, Mexico in November 1994 and opened a similar facility in Miami, Florida, in January 1996. The Company also has sales and distribution operations in Canada. There can be no assurance, however, that the Company will be successful in these or other international efforts or that the risks inherent in international operations, such as currency fluctuations or the political or economic instability of certain foreign countries and regions, such as Mexico and the Pacific Rim, will not have a material adverse effect on the Company's results of operations. See Note 8 of the Notes to Consolidated Financial Statements for certain financial information regarding the Company's domestic and international sales during the last three fiscal years. The Company's computer supplies products sales force, as of March 31, 1998, consisted of approximately 185 telemarketing sales representatives located in the Company's headquarters in Plano, Texas, 27 telemarketing sales representatives located in Memphis, Tennessee, 47 telemarketing sales representatives located in the Company's office in Canada, 36 telemarketing sales representatives located in the Company's office in Mexico, 14 telemarketing sales representatives located in the Company's office in Australia, 2 telemarketing sales representatives located in the Company's office in Miami, Florida, and 2 telemarketing sales representative located in Singapore. The Company's computer supplies sales and telemarketing department is divided into several groups or teams, each having its own particular sales objective. For example, the Retail Department focuses specifically on large computer retailers and office product superstores and highlights the Company's ability to more efficiently distribute a wide variety of small shipments to a larger number of store locations than presently provided by product manufacturers. Similarly, a separate group of sales representatives are responsible for a select group of national accounts, such as contract stationers, office products dealers and buying groups, while others focus on new accounts, existing business or international and export sales. By utilizing sophisticated telemarketing software and call management systems, including caller identification, sales representatives are able to verify customer account numbers and contact persons and quickly identify a customer's buying patterns, recent purchases, credit availability and other sales and marketing information. The telecommunications software also enables sales and marketing management to better identify, control and monitor sales representatives' prospecting activity with the Company's customers. The Company provides extensive training for new computer supplies products sales personnel with special emphasis on the need for regular customer contact, response to customers' demands for product information and the need to inform customers of technological advancements by the Company's suppliers. The Company, together with its major suppliers, provides the Company's sales personnel with ongoing product-specific training and education emphasizing computer supplies as well as new technologies, new products and new product applications. In order to maintain its position as a low cost wholesale distributor, the Company regularly monitors the efficiency of its sales staff. By utilizing sophisticated telecommunications equipment, the Company is able to measure the number of calls being fielded by a sales representative, their success rate in terms of orders obtained compared to calls taken and customer service statistics, such as abandoned call rates and average response times. The Company's sales force receives a base salary as well as varying sales incentives based on gross profit margin -6- 7 achievements. In addition, a number of suppliers periodically offer sales bonus programs in connection with specific product sales campaigns which can further augment a sales representative's compensation. One of the Company's primary marketing tools of computer supplies products is its quarterly catalog, known as the "Book of Deals." In order to promote its image as a low cost wholesaler and provider of value-added services, the Book of Deals will usually highlight a theme related to specific products, customer services or a combination of the two. The Company presently distributes a total of approximately 41,000 catalogs and contract price books to its active U.S. customers each quarter. The Company also distributes a separate Book of Deals designed specifically for each of its Canadian, Mexican and Australian subsidiaries as well as for its subsidiary in Singapore. Other catalog-type marketing tools used by the Company include customized catalogs produced by the Company for the reseller to distribute to its end-user customers. The Company also distributes "flyers" which announce new product line additions or special promotions and are usually inserted in the Book of Deals or mailed directly to customers. Although the Book of Deals remains one of the Company's primary marketing tools, the Company also uses electronic commerce marketing tools as well. The Company believes it has established itself as a leader in the deployment of electronic commerce in the computer supplies products industry. These tools are designed to win further market share and to reduce cost in the customer relationship by automating information flow. By accepting both externally developed commercially available technologies as well as internally developed proprietary technologies, the Company can offer a suite of electronic commerce solutions including: traditional X.12 and proprietary EDI; third party software systems such as DDMS, OPUS, Britannia, and Moore O.P. Services; and Internet, intranet, and extranet systems. During fiscal year 1997, the Company introduced a CD-ROM based electronic catalog of computer supplies products and on-line ordering tool, known as "SOLO", the System for Online Ordering, and during fiscal year 1998, introduced a World Wide Web version of the product, known as "SOLOnet". These electronic tools provide customers with on-line ordering capabilities; fingertip access to up-to-date pricing, product and order information; search and retrieval capabilities based on part numbers, manufacturers, product description, retail price, machine compatibility and other factors; and convenient access to manufacturers' product literature and training videos; and allows customers to view their own account information. Certain of the Company's suppliers provide the Company with cooperative advertising programs, marketing development funds and other types of incentives and discounts which offset the production costs of the Company's quarterly Book of Deals, other published marketing tools and other related costs. The Company permits its customers to return defective products (most of which are then returned by the Company to the manufacturer) and incorrect shipments for credit against other purchases. During the last three fiscal years, the Company's net expense for returns of the Company's consumable supply products has not been material. MANAGEMENT INFORMATION SYSTEMS The Company maintains advanced management information systems and has automated virtually all key business functions using on-line, real time systems. These on-line systems provide management with information concerning sales and margins, inventory levels, customer payments and other operations which is essential for the Company to operate as a low cost, high efficiency wholesale distributor. The implementation of these systems has allowed the Company to offer an advanced suite of electronic commerce tools to its customers so that the Company can communicate with their computer systems and automatically process, send and receive purchase orders, invoices and acknowledgments. The Company offers "customer links" to provide customers with direct access to a proprietary Company database to examine pricing, credit information, product description and availability and promotional information. This link also allows customers to place orders directly into the Company's order processing system. These systems also allow the Company to offer similar features to its customers through SOLOnet. -7- 8 The Company has also invested in advanced telecommunications, voice response equipment, electronic mail and messaging, automated fax technology, scanning, wireless technology, bar coding, fiber optic network communications and automated inventory management. The Company has developed and utilizes telecommunications technology which provide for automatic customer call recognition and customer profile recall for inbound telemarketing representatives and computer generated outbound call objectives for outbound telemarketing representatives. The Company plans to continue to invest in various management information systems enhancements and upgrades to improve efficiency, monitor its operations, manage inventory risks and offer faster and higher levels of service to its customers and vendors. DISTRIBUTION During fiscal year 1993, the Company consolidated its five U.S. regional distribution centers into a new "superhub" distribution center located in Memphis, Tennessee. During fiscal year 1997, the Company more than doubled the size of this facility to its current size of approximately 370,000 square feet. The facility is located approximately four miles from the Federal Express hub facility and contains automated conveyors, in-line scales and shipment photographs for automatic accuracy checking, computerized sorting equipment, powered material handling equipment and scanning and bar-coding systems. Since the consolidation of its regional U.S. distribution centers and the opening of the Memphis distribution center, the Company has (i) reduced the amount of "safety stock" inventory previously carried in different distribution centers, which, in turn, has reduced the Company's working capital borrowings, (ii) increased its inventory turnover rate, (iii) improved its order fill rate to a level of approximately 95%, (iv) improved personnel productivity and reduced shipping errors and their associated costs, (v) improved delivery time to most geographic areas through later order acceptance times (currently 9:00 p.m. EST) and next business day delivery with the implementation of the Federal Express Agreement and (vi) reduced real estate expenses. The Company believes that consumable computer supplies and other products sold by the Company are particularly suited to cost effective overnight delivery because of their unique value to weight characteristics. Accordingly, almost all of the Company's U.S. computer supplies package orders are shipped via Federal Express, except for certain "heavyweight" packages or as otherwise requested by the customer. The Company's centralized distribution center, together with the implementation of the Federal Express Agreement, enables the Company to offer to its customers next business day delivery to most U.S. geographic areas. The Company ships virtually 100% of U.S. computer supplies orders for product in stock on the same day. The material handling system at its Memphis distribution center includes several high technology enhancements, including an automated package routing system and a paperless order picking system. These systems have allowed the Company to substantially increase the package movement capacity within the existing facility, further improve package shipment accuracy and enhance the Company's ability to perform value-added services for its customers, including custom labeling and price stickering. Substantially all of the Company's U.S. computer supplies products sales are distributed from the Memphis distribution center. In order to effectively service foreign markets, the Company also operates smaller, regional warehouse and distribution facilities in Toronto and Vancouver, Canada; Mexico City, Mexico; Sydney, Australia; Singapore; and Miami, Florida. EMPLOYEES As of March 31, 1998, the Company had 865 full-time employees and 106 part-time employees (including PFS and Steadi-Systems), of which 305 were in executive and administrative positions, including accounting, purchasing, credit and management information systems, 372 were in sales and marketing and 294 were in warehousing and related functions. None of the Company's employees are represented by a labor union, and the Company has never suffered an interruption of business as a result of a labor dispute. The Company considers its relations with its employees to be favorable, and the Company believes it will be able to continue this relationship by various employee incentive and participation programs, including employee stock options. The Company also actively recruits college graduates through on-campus recruiting programs. Each newly hired employee for this program is placed into the Company's training program for approximately three months, -8- 9 which introduces them to most aspects of the Company's business. Management believes that this program is an important tool in recruiting and developing high quality individuals with management potential to support the Company's future growth. COMPETITION The Company believes that most, if not all, of its customers maintain several sources of supply for their computer supplies product requirements. Accordingly, the Company competes with product manufacturers, general office supply wholesalers, other national and regional wholesale computer supplies distributors, computer hardware and software distributors and, to a lesser extent, non-specialized wholesaler distributors. Many of these competitors such as product manufacturers, computer hardware distributors and general office supply wholesalers are larger and have substantially greater financial and other resources than the Company. Competition in the Company's industry is generally based on price, breadth of product lines, product and credit availability, delivery time and the level and quality of customer services. The Company competes primarily on the basis of its ability to offer low prices and quality service while maintaining a high level of operating efficiency. The Company believes its competitive advantages over product manufacturers and other wholesale distributors include its ability to efficiently maintain a wide selection of name brand products in stock ready to be shipped on a same-day basis and delivered overnight, to efficiently distribute its products, to provide innovative and high quality value-added customer service programs and to respond to changing customer demands and product development. BACKLOG The Company does not have a significant backlog of orders and does not consider backlog to be material to an understanding of its business. ITEM 2. PROPERTIES The Company's U.S. sales and executive and administrative offices are located in a 65,419 square foot central office facility located in Plano, Texas, a Dallas suburb. The Company also operates regional sales and distribution centers in Singapore; Toronto, Ontario; Mexico City, Mexico; Vancouver, British Columbia; Sydney, Australia; and Miami, Florida. Steadi-Systems operates from offices in New York, New York; Hollywood, San Francisco and Irvine, California; Phoenix, Arizona; and Miami, Florida. The Company's central U.S. distribution center is located in Memphis, Tennessee. All of the Company's facilities are leased under leases, which contain one or more multiple year renewal options. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -9- 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed and trades on the Nasdaq Stock Market under the symbol "DZTK." The following table sets forth for the period indicated the high and low sale price for the Common Stock as reported by the Nasdaq National Market, as adjusted to reflect the two for one stock split effective March 2, 1998:
PRICE ------------------ HIGH LOW ---- --- Fiscal Year 1997 First Quarter....................... $ 23 1/2 $ 16 1/4 Second Quarter...................... $ 22 1/16 $ 17 1/4 Third Quarter....................... $ 21 3/4 $ 17 1/4 Fourth Quarter...................... $ 21 $ 15 1/2 Fiscal Year 1998 First Quarter....................... $ 19 7/8 $ 12 3/8 Second Quarter...................... $ 24 $ 19 3/8 Third Quarter....................... $ 22 1/2 $ 16 5/16 Fourth Quarter ..................... $ 28 1/4 $ 17 3/8
As of May 9, 1998, there were approximately 3,200 shareholders of which 84 were record holders of the Common Stock. The Company has never paid cash dividends on its Common Stock and does not anticipate the payment of cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain all earnings to finance the further development of its business. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of income data for each of the fiscal years ended March 31, 1998, 1997 and 1996, and the selected consolidated balance sheet data as of March 31, 1998 and 1997 have been derived from the Company's audited consolidated financial statements, and should be read in conjunction with those statements, which are included in this Form 10-K. The selected consolidated statements of income data for the fiscal years ended March 31, 1995 and 1994 and the selected consolidated balance sheet data as of March 31, 1996, 1995 and 1994 have been derived from the Company's audited consolidated financial statements, and should be read in conjunction with those statements, which are not included in this Form 10-K . The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto which are included elsewhere in this Form 10-K. -10- 11
FISCAL YEARS ENDED MARCH 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF INCOME DATA: Net sales ................... $757,027 $603,814 $464,169 $352,953 $276,699 Cost of sales ............... 679,726 543,848 416,199 316,982 247,480 Provision for losses from disposal of software and hardware inventory ....... -- -- -- -- 402 -------- -------- -------- -------- -------- Gross profit ......... 77,301 59,966 47,970 35,971 28,817 Selling, general and administrative expenses .. 47,684 36,630 29,024 23,260 20,338 Acquisition integration costs 735 -- -- -- -- -------- -------- -------- -------- -------- Income from operations ......... 28,882 23,336 18,946 12,711 8,479 Interest expense ............ 2,698 1,677 1,482 2,050 1,726 -------- -------- -------- -------- -------- Income before income taxes .................... 26,184 21,659 17,464 10,661 6,753 Provision for income taxes .................... 10,024 8,292 6,697 4,165 2,496 -------- -------- -------- -------- -------- Net income .................. $ 16,160 $ 13,367 $ 10,767 $ 6,496 $ 4,257 ======== ======== ======== ======== ======== PER SHARE DATA (1): Net income per common share: Basic ................ $ 1.19 $ 1.03 $ 0.85 $ 0.68 $ 0.49 Diluted .............. $ 1.13 $ 0.97 $ 0.80 $ 0.59 $ 0.40 Weighted average common shares outstanding: Basic ................ 13,566 12,934 12,602 9,550 8,676 Weighted average common and common share equivalents outstanding: Diluted ............... 14,343 13,826 13,514 11,084 10,576
AS OF MARCH 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- ------- ------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Working capital .............. $122,318 $ 80,248 $ 56,663 $43,427 $28,167 Total assets ................. 246,651 175,288 128,601 94,421 67,385 Long-term debt, net of current maturities ....... 12,655 30,454 16,419 11,334 19,640 Shareholders' equity ......... 139,370 67,193 51,661 40,817 15,937
(1) In February 1998, the Company's Board of Directors approved a two for one stock split effected in the form of a stock dividend paid on March 2, 1998 to stockholders of record on February 16, 1998. Share data is based upon the weighted average common shares and share equivalents outstanding for each period, adjusted to reflect the split. -11- 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain financial information from the Company's audited consolidated statements of income expressed as a percentage of net sales.
FISCAL YEARS ENDED MARCH 31, ---------------------------- 1998 1997 1996 ------ ------ ------ Net sales .................................. 100.0% 100.0% 100.0% Cost of sales .............................. 89.8 90.1 89.7 ------ ------ ------ Gross profit ............................. 10.2 9.9 10.3 Selling, general and administrative expenses 6.3 6.0 6.2 Acquisition integration costs .............. 0.1 -- -- ------ ------ ------ Income from operations ................... 3.8 3.9 4.1 Interest expense ........................... 0.3 0.3 0.3 ------ ------ ------ Income before income taxes ............... 3.5 3.6 3.8 Provision for income taxes ................. 1.4 1.4 1.5 ------ ------ ------ Net income ............................... 2.1% 2.2% 2.3% ====== ====== ======
The following table sets forth certain unaudited quarterly financial data and certain data expressed as a percentage of net sales for fiscal years 1998 and 1997. The unaudited quarterly information includes all adjustments, consisting of only normal recurring adjustments, which management considers necessary for a fair presentation of the information shown. The financial data and ratios for any quarter are not necessarily indicative of results of any future period.
FISCAL YEAR 1998 FISCAL YEAR 1997 ----------------------------------------------- ----------------------------------------------- 4TH QTR 3RD QTR 2ND QTR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Net sales ...... $218,061 $186,586 $179,568 $172,812 $174,343 $154,429 $138,148 $136,894 Gross profit ... $ 23,361 $ 18,763 $ 17,871 $ 17,306 $ 17,503 $ 15,204 $ 13,589 $ 13,670 Gross profit margin ..... 10.7% 10.1% 10.0% 10.0% 10.0% 9.8% 9.8% 10.0% SG&A expenses ... $ 14,541 $ 11,508 $ 11,052 $ 10,583 $ 10,552 $ 9,375 $ 8,397 $ 8,306 Percent of net sales ...... 6.7% 6.2% 6.2% 6.1% 6.1% 6.1% 6.1% 6.1% Acquisition integration costs ....... $ 735 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Percent of net sales ...... 0.3% -- -- -- -- -- -- -- Income from operations ... $ 8,085 $ 7,255 $ 6,819 $ 6,723 $ 6,951 $ 5,829 $ 5,192 $ 5,364 Operating margin ..... 3.7% 3.9% 3.8% 3.9% 4.0% 3.8% 3.8% 3.9% Net income ..... $ 4,324 $ 4,138 $ 3,869 $ 3,829 $ 4,007 $ 3,364 $ 2,955 $ 3,041 Net margin ... 2.0% 2.2% 2.2% 2.2% 2.3% 2.2% 2.1% 2.2%
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997 Net Sales. Net sales for the year ended March 31, 1998 were $757.0 million as compared to $603.8 million for the year ended March 31, 1997, an increase of $153.2 million, or 25.4%, as the result of an increase in U.S. net -12- 13 sales of $99.3 million, or 20.2%, and an increase in international net sales of $53.9 million, or 47.9%. The growth in U.S. and international net sales was primarily due to increased sales volume to large national accounts, computer and office product superstores, new customers and the Company's continued introduction of new products. Also, sales grew during fiscal year 1998 as a result of higher sales volume of products under revenue-based outsourcing contracts, and the addition of net sales from its Australian subsidiary and from Steadi-Systems, acquired by the Company during the third quarter of fiscal year 1997 and the fourth quarter of fiscal year 1998, respectively. Net sales to new customers for the year ended March 31, 1998 were approximately $36 million, including the net sales from Steadi-Systems, while net sales to existing customers increased by approximately $117 million during the year. During November 1997, the Company announced it would not match lower pricing offered by a competitor to one of the Company's largest customers. Net sales to this customer ranged from approximately 5% to 7% of the Company's total net sales during fiscal year 1997 and the first six months of fiscal year 1998. The Company believes that the loss of net sales to this customer in the future will reduce the Company's growth rate in net sales, gross profit and net income for fiscal year 1999. In addition, continuing consolidation among the Company's domestic customers may reduce the rate of U.S. sales growth below that achieved in the past. Gross Profit. Gross profit for the year ended March 31, 1998 was $77.3 million as compared to $60.0 million in fiscal year 1997, an increase of $17.3 million, or 28.9%, primarily as the result of increased sales volume in fiscal year 1998. The Company's gross profit margin as a percent of net sales was 10.2% for the year ended March 31, 1998 as compared to 9.9% for the prior year. The increase in the Company's gross profit margin percentage for fiscal year 1998 was a result of enhanced product sourcing in fiscal year 1998, and the addition of sales from Steadi-Systems, whose gross profit percentages are higher than the Company's core computer supplies business. Gross profit margins for fiscal year 1998 were maintained at approximately 10.0% to 10.1% of net sales during the first, second and third quarters and increased to 10.7% of net sales during the fourth quarter. This increase was also due to enhanced product sourcing and due to the addition of Steadi-Systems. The Company believes that the competitive environment and consolidation of its wholesale computer supplies products customers will continue to place downward pressure on the Company's gross profit margin percentage during fiscal year 1999. SG&A Expenses. SG&A expenses for the year ended March 31, 1998 were $47.7 million (excluding one-time acquisition integration costs), or 6.3% of net sales, as compared to $36.6 million, or 6.0% of net sales, for the year ended March 31, 1997. The increase in SG&A expenses was primarily a result of the increase in variable costs associated with the Company's increased sales volume. The increase in SG&A expenses as a percentage of net sales for fiscal year 1998 were primarily due to increased SG&A costs from the addition of Steadi-Systems, whose SG&A expenses are higher than the Company's core computer supplies business, and due to incremental SG&A expenses associated with its PFS subsidiary. For the fourth quarter of fiscal year 1998, SG&A expenses, excluding the one-time charges, increased to 6.7% of net sales as compared to approximately 6.1% to 6.2% of net sales for the first, second and third quarters of fiscal year 1998. This increase was primarily due to the higher SG&A expenses as a percent of net sales associated with Steadi-Systems. These increased costs during fiscal year 1998 were partially offset by lower costs due to improved operating efficiencies and staff productivity as a result of increased sales volume and continued technological enhancements implemented by the Company. Acquisition Integration Costs. During January 1998, the Company purchased all of the common stock of Steadi-Systems. The Company recorded a one-time acquisition integration charge related to the completion of transition, integration and merger activities of about $0.7 million, or approximately $0.03 per share, in the Company's fourth financial quarter ending March 31, 1998. See further discussion of the acquisition of Steadi-Systems in "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources". Income from Operations. Income from operations for the year ended March 31, 1998 was $28.9 million. Income from operations excluding one-time acquisition integration costs, was $29.6 million as compared to $23.3 million for fiscal year 1997, an increase of $6.3 million, or 26.9%. This increase was primarily due to increased sales volume and increased gross profit, which were partially offset by higher SG&A costs. Income from operations as a percentage of net sales was 3.8% for the year ended March 31, 1998. Income from operations as a percentage of net sales, excluding the one-time acquisition integration costs, was 3.9% for the years ended March 31, 1998 and 1997. Interest Expense. Interest expense was $2.7 million during the year ended March 31, 1998 and was $1.7 million during the year ended March 31, 1997. Interest expense increased as a result of an increase in the average -13- 14 line of credit to support a larger revenue base, the acquisition of Steadi-Systems, and higher inventory levels due to purchasing opportunities. The weighted average interest rate was 6.7% during the years ended March 31, 1998 and 1997. Income Taxes. The Company's provision for income taxes was $10.0 million for the year ended March 31, 1998 as compared to $8.3 million for the year ended March 31, 1997. The increase was due to increased pretax profits. The effective tax rate for both years was approximately 38.3%. Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996 Net Sales. Net sales for the year ended March 31, 1997 were $603.8 million as compared to $464.2 million for the year ended March 31, 1996, an increase of $139.6 million, or 30.1%, as the result of an increase in U.S. net sales of $103.0 million, or 26.5%, and an increase in international net sales of $36.6 million, or 48.2%. The growth in U.S. and international net sales was primarily due to increased sales volume to large national accounts, computer and office product superstores, new customers and the Company's continued introduction of new products, and the addition of net sales from its Australian subsidiary which was acquired by the Company during the third quarter of fiscal year 1997. The growth rate in net sales to computer and office product superstore customers for the year ended March 31, 1997 was less than the growth rate experienced for such customers during the prior year. Net sales to new customers for the year ended March 31, 1997 were approximately $49 million, including the net sales from its new Australian subsidiary, while net sales to existing customers increased by approximately $91 million during the year. Gross Profit. Gross profit for the year ended March 31, 1997 was $60.0 million as compared to $48.0 million in fiscal year 1996, an increase of $12.0 million, or 25.0%, primarily as the result of increased sales volume in fiscal year 1997. The Company's gross profit margin as a percent of net sales was 9.9% for the year ended March 31, 1997 as compared to 10.3% for the prior year. Gross profit margin percentage declined during the year ended March 31, 1997 primarily because the prior year's results include the benefit of incremental margins earned on the sale of certain one-time inventory purchases by the Company prior to manufacturer price increases. If the benefits of the one-time inventory purchase actions are excluded from the prior year's results, gross profit as a percentage of net sales for fiscal year 1997 is slightly lower as compared to the prior year. Increased sales at lower gross profit margins to large national accounts and computer and office product superstores also contributed to the decline in gross profit margin percentages during the year ended March 31, 1997. SG&A Expenses. SG&A expenses for the year ended March 31, 1997 were $36.6 million, or 6.0% of net sales, as compared to $29.0 million, or 6.2% of net sales, for the year ended March 31, 1996. The increase in SG&A expenses was primarily a result of the increase in variable costs associated with the Company's increased sales volume. The decrease in SG&A expenses as a percentage of net sales was primarily due to improved operating efficiencies and staff productivity as a result of increased sales volume and continued technological enhancements implemented by the Company. During fiscal 1997, the Company incurred incremental SG&A expenses associated with its PFS subsidiary and also associated with an expansion of its leased facilities in Memphis and Plano. Income from Operations. Income from operations for the year ended March 31, 1997 was $23.3 million as compared to $18.9 million for fiscal year 1996, an increase of $4.4 million, or 23.2%. This increase was primarily due to increased sales volume, increased gross profit and improved operating efficiencies. Income from operations as a percentage of net sales was 3.9% for the year ended March 31, 1997 as compared to 4.1% for the year ended March 31, 1996, primarily as the result of a decrease in gross profit margin as a percentage of net sales which was somewhat offset by a decline in SG&A expenses as a percentage of net sales. Income from operations as a percentage of net sales for the year ended March 31, 1997 declined primarily because the prior year's results include the effects of the one-time inventory purchase actions. When the benefits of the one-time inventory purchase actions are excluded from the prior year's results, income from operations as a percentage of net sales for fiscal year 1997 was slightly higher than fiscal year 1996. Interest Expense. Interest expense was $1.7 million during the year ended March 31, 1997 and was $1.5 million during the year ended March 31, 1996. Interest expense increased as a result of an increase in the average -14- 15 line of credit to support a larger revenue base, which was partially offset by a reduction in interest rates during fiscal year 1997. The weighted average interest rate was 6.7% during the year ended March 31, 1997 as compared to 7.5% for the previous year. Income Taxes. The Company's provision for income taxes was $8.3 million for the year ended March 31, 1997 as compared to $6.7 million for the year ended March 31, 1996. The increase was primarily due to increased pretax profits. The effective tax rate for both years was approximately 38.3%. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been from financing activities. Net cash provided by financing activities was $33.4 million, $15.6 million and $5.2 million for fiscal years 1998, 1997 and 1996, respectively. Cash provided by financing activities, primarily through the proceeds received from the issuance of common stock and from the Company's lines of credit, have been used to finance the Company's operations and expansion. In March 1998, the Company sold 2,300,000 shares of common stock in a secondary common stock offering, using the net proceeds of approximately $52.6 million to reduce outstanding indebtedness under the Company's lines of credit. Net cash used in operating activities was $20.5 million, $7.0 million and $0.4 million for fiscal years 1998, 1997 and 1996, respectively. The Company's net cash used in operations mainly related to increases in working capital requirements, primarily due to increases in accounts receivable and inventory partially offset by an increase in accounts payable, to support growth in the Company's business during the periods. These increased working capital requirements were partially funded by cash generated by the Company's operations. The Company's principal use of funds for investing activities was capital expenditures of $6.1 million, $5.9 million and $5.0 million for fiscal years 1998, 1997 and 1996, respectively, and for acquisitions of businesses of $6.3 million and $2.1 million in fiscal years 1998 and 1997, respectively. Capital expenditures have consisted primarily of additions to upgrade the Company's management information systems, including the Company's Internet based catalog and ordering tool (SOLOnet) and other methods of electronic commerce, and general expansion of its facilities. The Company anticipates that its total investment in upgrades and additions to facilities for fiscal 1999 will be approximately $6 to $7 million. Working capital increased to $122.3 million at March 31, 1998 from $80.2 million at March 31, 1997, an increase of $42.1 million which was primarily attributable to increases in accounts receivable and inventory which were partially offset by increases in accounts payable. During fiscal years 1998 and 1997, the Company generally maintained an accounts receivable balance of approximately 47 and 46 days of sales, respectively. This increase is primarily related to an increased concentration of receivables from large retail computer and office product superstores, which generally take longer to pay. During fiscal years 1998 and 1997 the Company generally maintained an inventory turnover rate of approximately 11 turns, excluding inventory owned by the Company related to PFS, its subsidiary which provides product fulfillment and distribution services to third parties. The levels of such inventory is generally managed by the third party and thus is not indicative of the inventory turnover maintained by the Company's core wholesale business. From time-to-time, the Company may take advantage of attractive product sourcing opportunities that may temporarily lower the Company's overall inventory turnover rate. In May 1995, the Company entered into an agreement with certain banks for an unsecured revolving line of credit facility (the "Facility") that, as amended on February 13, 1998, has a maximum borrowing availability of $65.0 million and expires on December 31, 2000. Availability under the Facility is based upon amounts of eligible accounts receivable, as defined. As of March 31, 1998, the Company completed a secondary offering of its common stock and applied the net proceeds of approximately $52.6 million to repay in full all outstanding amounts under the Facility, leaving $65.0 million available for additional borrowings. The Facility accrues interest, at the Company's option, at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum -15- 16 level of tangible net worth, and restrictions on certain activities of the Company, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, which expires on July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $5.0 million (U.S.) at March 31, 1998. The Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the Australian Facility. As of March 31, 1998, the Company had borrowed approximately $4.4 million (U.S.), leaving approximately $0.6 million (U.S.) available under the Australian Facility for additional borrowings. During December 1997, the Company's Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). The Canadian Facility, which expires on July 1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $10.6 million (U.S.) at March 31, 1998. The Company had borrowed approximately $8.1 million (U.S.), leaving approximately $2.5 million (U.S.) available under the Canadian Facility at March 31, 1998. The Canadian Facility accrues interest at the Company's option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the Canadian Facility. During January 1998, the Company entered into a promissory note agreement with a bank which allows the Company to borrow up to a maximum of $10.0 million. Amounts borrowed under this note agreement bear interest at the bank's discretion, primarily based on a money market borrowing rate plus an adjustment. The maturity date of any amounts borrowed will occur prior to January 1999, the expiration date of the note. The Company had no borrowings outstanding under this promissory note agreement at March 31, 1998. During fiscal year 1998, approximately $166.4 million, or 22%, of the Company's net sales were sold through the Company's Canadian, Mexican, Australian, Singaporean and U.S. export operations, including Latin America. The Company believes that international markets represent further opportunities for growth. The Company attempts to protect itself from foreign currency translation risks by denominating substantially all its non-Canadian and non-Australian international sales in U.S. dollars. In addition, on an annual basis, the Company has entered into various forward Canadian and Australian currency exchange contracts in order to hedge the Company's net investment in, and its intercompany payable applicable to, its Canadian and Australian subsidiaries. The Company had the following forward currency exchange contracts outstanding as of March 31, 1998:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------------ ------------------- ------------------------ ------------ Canadian Dollars $15.2 million Sell Canadian Dollars May 1998 Canadian Dollars $6.3 million Buy Canadian Dollars May 1998 Australian Dollars $1.8 million Sell Australian Dollars October 1998 Australian Dollars $0.5 million Sell Australian Dollars October 1998
As of March 31, 1998, the Company had incurred unrealized gains of approximately $0.4 million, net of income taxes, on these outstanding Canadian and Australian forward exchange contracts, which are included as a component of shareholders' equity. The Company may consider entering into other forward exchange contracts in order to hedge the Company's net investment in its Canadian, Australian, Mexican, and Singaporean subsidiaries, although no assurance can be given that the Company will be able to do so on acceptable terms. During January 1998, the Company purchased all of the common stock of Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media products to the filmed entertainment and multimedia industries. The acquisition of Steadi-Systems was accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets and liabilities assumed based on the fair values at the date of acquisition. The Company believes that future integration of Steadi-Systems in the Company's business operations will not require significant working capital nor create other significant financing needs. -16- 17 The Company may attempt to acquire other businesses to expand its product line and/or in the call-center or public warehousing industries in connection with its efforts to grow its PFS subsidiary. In May 1998, the Company announced it had signed a letter of intent to acquire The Tape Company, Inc., ("The Tape Company") a Chicago-based distributor of professional-grade audio and video media products. It is anticipated that the Company will account for this transaction as a pooling of interests and will issue shares of its common stock. The Tape Company had revenues of approximately $40 million during the twelve-month period ending March 31, 1998. The Company is also currently involved in the due diligence process for another potential acquisition target. The Company can give no assurance at this time as to whether it will ultimately acquire these targets. Should the Company acquire these or other businesses, the Company may require additional financing to consummate such a transaction. Acquisitions involve certain risks and uncertainties, therefore, the Company can give no assurance with respect to whether it will be successful in identifying such a business to acquire, whether it will be able to obtain financing to complete such an acquisition, or whether the Company will be successful in operating the acquired business. The Company believes it will be able to satisfy its working capital needs for fiscal year 1999, as well as business growth and planned capital expenditures, through funds available under the Company's various lines of credit facilities, trade credit, lease financing, internally generated funds and by increasing the amount available under the Company's credit facilities. In addition, depending on market conditions and the terms thereof, the Company may also consider obtaining additional funds through an additional line of credit, other debt financing or the sale of capital stock; however, no assurance can be given in such regard. YEAR 2000 ISSUE The Company has developed plans to ensure its information systems are capable of properly utilizing dates beyond December 31, 1999. The Company believes that with upgrades or modifications to existing software and conversion to new software, the impact of the Year 2000 issue can be mitigated. However, if such upgrades, modifications and conversions are not made, or are not made in a timely manner, the Year 2000 issue could have a material impact on the Company's operations. The total cost of implementing these system upgrades and modifications is not expected to be material to the Company's results of operations or cash flows, and the Company estimates completion by December 31, 1998. The costs of the Year 2000 project and the date on which the Company plans to complete Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from these estimates. To the extent it can, the Company is also working with its customers, suppliers and other service providers to ensure their systems are Year 2000 compliant. There can be no assurance that customers or suppliers will successfully implement Year 2000 compliant systems. In the event that numerous or significant customers or suppliers do not successfully implement Year 2000 compliant systems, the Company's operations could be materially affected. In the event any service providers are unable to convert their systems appropriately, the Company plans to switch to providers capable of performing such processing, if such providers are available. INVENTORY MANAGEMENT The Company manages its computer consumable supplies inventories held for sale in its wholesale distribution business by maintaining sufficient quantities of product to achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory balances will fluctuate as the Company adds new product lines and makes large purchases from suppliers to take advantage of attractive terms. To reduce the risk of loss to the Company due to supplier price reductions and slow moving inventory, the Company's purchasing agreements with many of its suppliers, including most of its major suppliers, contain price protection and stock return privileges under which the Company receives credits against future purchases if the supplier lowers prices on previously purchased inventory or the Company can return slow moving inventory in exchange for other products. Beginning in fiscal year 1997, the Company, through its PFS subsidiary, began providing product fulfillment and distribution services for third parties. Certain of these distribution agreements provide that the Company own -17- 18 the related inventory, some of which also allow for the third party to manage the levels of inventory held by the Company. As a result, the levels of inventory held by the Company under these contracts are higher than the Company would normally carry in its core wholesale business. SEASONALITY Although the Company historically has experienced its greatest sequential quarter revenue growth in its fourth fiscal quarter, management has not been able to determine any specific seasonal factors that may cause quarterly variability in operating results. Management believes, however, that factors that may influence quarterly variability include the overall growth in the non-paper computer supplies industry and shifts in demand for the Company's products due to a variety of factors, including sales increases resulting from the introduction of new computer supplies products. The Company generally experiences a relative slowness in sales during the summer months, which may adversely affect the Company's first and second fiscal quarter results in relation to sequential quarter performance. The Company believes that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. INFLATION Management believes that inflation has not had a material effect on the Company's operations. FORWARD-LOOKING INFORMATION The matters discussed in this report on Form 10-K, other than historical information, and, in particular, information regarding future revenue, earnings and business plans and goals, consist of forward-looking information under the Private Securities Litigation Reform Act of 1995, and are subject to and involve risks and uncertainties which could cause actual results to differ materially from the forward-looking information. These risks and uncertainties include, but are not limited to, the "Risk Factors" set forth in the Company's prospectus dated March 26, 1998, which are incorporated by reference herein, as well as general economic conditions, industry trends, the loss of key suppliers or customers, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), risks inherent in acquiring, integrating and operating new businesses, concentrations of credit risk, distribution efficiencies, capacity constraints, technological difficulties, exchange rate fluctuations, and the regulatory and trade environment (both domestic and foreign). IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes new standards for computing and presenting earnings per share ("EPS"). The Company adopted SFAS No. 128 during the quarter ended December 31, 1997. The Company restated its EPS data for all periods presented. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for fiscal years beginning after December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires the presentation of comprehensive income and its components in a full set of financial statements. SFAS No. 131 requires the disclosure of financial and descriptive information about reportable operating segments. Both SFAS No. 130 and 131 are modifications of existing disclosure requirements, which will have no effect on the results of operations or financial condition of the Company. The Company is currently evaluating the standards and their potential impact on disclosures and will adopt these pronouncements in its fiscal year 1999 financial statements. -18- 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................................................. 20 Consolidated Balance Sheets as of March 31, 1998 and 1997................................ 21 Consolidated Statements of Income for the Fiscal Years Ended March 31, 1998, 1997 and 1996................................................................................... 23 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 1998, 1997 and 1996.................................................................... 24 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1998, 1997 and 1996............................................................................... 25 Notes to Consolidated Financial Statements............................................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -19- 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Daisytek International Corporation: We have audited the accompanying consolidated balance sheets of Daisytek International Corporation (a Delaware corporation) and subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Daisytek International Corporation and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 5, 1998 -20- 21 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
MARCH 31, ----------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash ......................................................... $ 1,068 $ 552 Accounts receivable, net of allowance for doubtful accounts of $2,655 and $2,360 at March 31, 1998 and 1997, respectively . 122,621 90,778 Inventories, net: Inventories, excluding Priority Fulfillment Services ....... 78,060 54,426 Inventories, Priority Fulfillment Services ................. 11,634 10,354 Prepaid expenses and other current assets .................... 3,561 1,214 Deferred income tax asset .................................... -- 565 --------- --------- Total current assets .................................. 216,944 157,889 --------- --------- PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment ............................ 26,968 20,949 Leasehold improvements ....................................... 1,852 673 --------- --------- 28,820 21,622 Less-- Accumulated depreciation and amortization ............. (14,024) (9,648) --------- --------- Net property and equipment ............................ 14,796 11,974 EMPLOYEE RECEIVABLE ............................................ 459 423 EXCESS OF COST OVER NET ASSETS ACQUIRED, net ................... 14,452 5,002 --------- --------- Total assets .......................................... $ 246,651 $ 175,288 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. -21- 22 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, ---------------------- 1998 1997 -------- --------- CURRENT LIABILITIES: Current portion of long-term debt............................................. $ 239 $ 662 Trade accounts payable ....................................................... 83,787 69,321 Accrued expenses ............................................................. 7,550 6,260 Income taxes payable ......................................................... 1,504 1,398 Deferred income tax liability ................................................ 1,546 -- -------- --------- Total current liabilities ............................................. 94,626 77,641 -------- --------- LONG-TERM DEBT, less current portion ........................................... 12,655 30,454 -------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at March 31, 1998 and 1997, none issued and outstanding ....................... -- -- Common stock, $0.01 par value; 20,000,000 shares authorized at March 31, 1998 and 1997; 15,961,032 and 13,041,418 and shares issued and outstanding at March 31, 1998 and 1997, respectively ............ 160 130 Additional paid-in capital ................................................... 89,878 33,266 Retained earnings ............................................................ 51,263 35,103 Cumulative foreign currency translation adjustment ........................... (1,931) (1,306) -------- --------- Total shareholders' equity ............................................ 139,370 67,193 -------- --------- Total liabilities and shareholders' equity............................. $246,651 $ 175,288 ======== =========
The accompanying notes are an integral part of these consolidated balance sheets. -22- 23 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31, -------------------------------- 1998 1997 1996 -------- -------- -------- NET SALES .................................. $757,027 $603,814 $464,169 COST OF SALES .............................. 679,726 543,848 416,199 -------- -------- -------- Gross profit ............. 77,301 59,966 47,970 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............ 47,684 36,630 29,024 ACQUISITION INTEGRATION COSTS .............. 735 -- -- -------- -------- -------- Income from operations ... 28,882 23,336 18,946 INTEREST EXPENSE ........................... 2,698 1,677 1,482 -------- -------- -------- Income before income taxes 26,184 21,659 17,464 PROVISION FOR INCOME TAXES: Current .................. 7,913 8,095 6,460 Deferred ................. 2,111 197 237 -------- -------- -------- 10,024 8,292 6,697 -------- -------- -------- NET INCOME ................................. $ 16,160 $ 13,367 $ 10,767 ======== ======== ======== NET INCOME PER COMMON SHARE: Basic .................... $ 1.19 $ 1.03 $ 0.85 Diluted .................. $ 1.13 $ 0.97 $ 0.80 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic .................... 13,566 12,934 12,602 WEIGHTED AVERAGE COMMON AND COMMON SHARE EQUIVALENTS OUTSTANDING: Diluted .................. 14,343 13,826 13,514
The accompanying notes are an integral part of these consolidated statements. -23- 24 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL CUMULATIVE COMMON STOCK PAID-IN RETAINED TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL ------ ------ ------- -------- ---------- ----- BALANCE, March 31, 1995 .................. 12,489,364 $125 $ 30,733 $10,969 $(1,010) $ 40,817 Net income .................... -- -- -- 10,767 -- 10,767 Net proceeds from exercise of common stock options ....... 196,142 2 561 -- -- 563 Costs associated with secondary offering of stock .......... -- -- (484) -- -- (484) Foreign currency translation adjustment ................. -- -- -- -- (2) (2) ---------- ---- -------- ------- ------- --------- BALANCE, March 31, 1996 .................. 12,685,506 127 30,810 21,736 (1,012) 51,661 Net income .................... -- -- -- 13,367 -- 13,367 Net proceeds from exercise of common stock options ....... 315,796 3 1,635 -- -- 1,638 Issuance of common stock for acquisition of subsidiary .. 38,562 -- 791 -- -- 791 Issuance of common stock ...... 1,554 -- 30 -- -- 30 Foreign currency translation adjustment ................. -- -- -- -- (294) (294) ---------- ---- -------- ------- ------- --------- BALANCE, March 31, 1997 .................. 13,041,418 130 33,266 35,103 (1,306) 67,193 Net income .................... -- -- -- 16,160 -- 16,160 Net proceeds from exercise of common stock options ....... 616,326 7 3,932 -- -- 3,939 Net proceeds from issuance of common stock ............... 2,303,288 23 52,680 -- -- 52,703 Foreign currency translation adjustment ................. -- -- -- -- (625) (625) ---------- ---- -------- ------- ------- --------- BALANCE, March 31, 1998 .................. 15,961,032 $160 $ 89,878 $51,263 $(1,931) $ 139,370 ========== ==== ======== ======= ======= =========
The accompanying notes are an integral part of these consolidated statements. -24- 25 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 16,160 $ 13,367 $ 10,767 Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effect from acquisitions of businesses: Depreciation and amortization ............. 4,740 3,786 2,296 Provision for doubtful accounts ........... 1,936 1,594 999 Deferred income tax provision ............. 2,111 197 237 Changes in operating assets and liabilities Accounts receivable ................... (31,278) (22,801) (18,888) Inventories, net ...................... (22,063) (19,580) (12,017) Trade accounts payable and accrued expenses ............................ 10,145 14,559 18,495 Income taxes payable .................. 127 969 (478) Prepaid expenses and other current assets .............................. (2,378) 873 (1,776) -------- -------- -------- Net cash used in operating activities ................................ (20,500) (7,036) (365) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .............. (6,128) (5,931) (4,959) Acquisitions of businesses, net of cash acquired . (6,322) (2,105) -- Advances of employee receivables, net ............ (45) (30) (80) -------- -------- -------- Net cash used in investing activities .... (12,495) (8,066) (5,039) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of) revolving lines of credit, net ................................... (20,361) 14,660 5,735 Payments on capital leases and notes payable ..... (2,784) (656) (571) Net proceeds from sale of stock and exercise of stock options and warrants .................... 56,582 1,638 79 -------- -------- -------- Net cash provided by financing activities ............................. 33,437 15,642 5,243 -------- -------- -------- EFFECT OF EXCHANGE RATES ON CASH ................... 74 (192) (83) -------- -------- -------- NET INCREASE (DECREASE) IN CASH .................... 516 348 (244) CASH, beginning of period .......................... 552 204 448 -------- -------- -------- CASH, end of period ................................ $ 1,068 $ 552 $ 204 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements -25- 26 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: Organization and Nature of Business Daisytek International Corporation (a Delaware corporation) and subsidiaries (the "Company") is primarily a wholesale distributor of non-paper computer and office automation supplies and accessories, whose primary products are laser toner, inkjet cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage products, computer tape cartridges and accessories such as cleaning kits and media storage files. The Company's products are used in a broad range of computers and office automation products including laser and inkjet printers, photocopiers, fax machines and data storage products. The Company, through its wholly owned subsidiaries in the U.S., Canada, Australia, Mexico and Singapore, sells products primarily in North America, as well as in Latin America, Australia, Singapore, the Pacific Rim, Europe and Africa. The Company's customers include value-added resellers, computer supplies dealers, office product dealers, contract stationers, buying groups, computer and office product superstores and other retailers who resell the products to end-users. No single customer accounted for more than 10% of the Company's annual net sales for the fiscal years ended March 31, 1998, 1997 and 1996. At March 31, 1998, five computer and office product superstores and warehouse clubs represent approximately 29% of trade accounts receivable, with the largest two customers being approximately 13% and 11% of trade accounts receivable, reflecting the significance of this market segment. The Company recognizes revenue upon shipment of product to customers and provides for estimated returns and allowances. The Company permits its customers to return defective products (many of which are then returned by the Company to the manufacturer) and incorrect shipments for credit against other purchases. The Company offers terms to its customers that it believes are standard for its industry. During fiscal year 1996, the Company formed Priority Fulfillment Services, Inc. ("PFS"), a wholly owned subsidiary, to provide outsourcing solutions to its business partners and other customers. Through PFS, the Company sells its core competencies in call-center, product fulfillment, logistics and support services to client companies worldwide. PFS customizes these services to meet specific requirements of these companies. PFS's call-center services include: order entry, order tracking and customer service (inbound), outbound telemarketing services and customized reporting of customer and call information. PFS also provides other support services such as invoicing, credit management and collection services, and accounting and systems support. PFS utilizes primarily the Company's centralized distribution facility in Memphis, Tennessee and also the Company's foreign distribution facilities, and maintains relationships with a number of shipping companies to provide next business day delivery on domestic package orders, truck shipments on larger domestic orders and a variety of air and surface delivery options for international orders. PFS presently provides its services under both fee-based contracts (where revenue is based on either the sales value of the products or service activity volume) and transaction based contracts (where PFS takes title and resells the product). In January 1998, the Company expanded its product line by acquiring Steadi-Systems, Ltd., ("Steadi-Systems") an independent wholesale distributor of media products to the filmed entertainment and multimedia industries. Steadi-Systems distributes a wide array of professional-grade audio and video media products and video hardware and is an authorized dealer for leading manufacturers such as Sony, Fuji, JVC, Avid and others. Steadi-Systems' customers include production companies, post-production operations, educational institutions, governmental agencies, television stations, and other professional and individual customers. Basis of Presentation The consolidated financial statements include the accounts of Daisytek International Corporation and its subsidiaries. All significant intercompany transactions are eliminated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Reclassifications Certain prior year data has been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income, shareholders' equity or net cash flows. -26- 27 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Inventories Inventories (merchandise held for resale, all of which are finished goods) are stated at the lower of weighted average cost or market. Inventories held and owned by the Company's PFS subsidiary relate to product fulfillment and logistics services provided for third parties, and are presented separately in the consolidated balance sheet as certain of these distribution agreements generally allow for the third party to manage the levels of inventory held by the Company. As a result, the levels of inventory held by the Company under these contracts are higher than the Company would normally carry in its core wholesale business. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets which range from one to seven years. Excess of Cost Over Net Assets Acquired Excess of cost over net assets acquired is amortized on a straight-line basis over 20 to 40 years. The related amortization expense for each of the fiscal years 1998, 1997 and 1996 was approximately $263,000, $140,000, and $50,000, respectively. Accumulated amortization as of March 31, 1998 and 1997 was approximately $884,000 and $608,000 respectively. Foreign Currency Translation and Transactions For the Company's Canadian and Australian subsidiaries, the local currency is the functional currency. All assets and liabilities are translated at exchange rates in effect at the end of the period, and income and expense items are translated at the average exchange rates for the period. Translation adjustments are reported as a separate component of shareholders' equity. In addition, the Company periodically enters into foreign exchange contracts in order to hedge the Company's net investment in, and its intercompany payable balance (of a long-term investment nature) applicable to its Canadian and Australian subsidiaries. The Company had the following forward currency exchange contracts outstanding as of March 31, 1998:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------------ ------------------- ------------------------ ------------ Canadian Dollars $15.2 million Sell Canadian Dollars May 1998 Canadian Dollars $ 6.3 million Buy Canadian Dollars May 1998 Australian Dollars $ 1.8 million Sell Australian Dollars October 1998 Australian Dollars $ 0.5 million Sell Australian Dollars October 1998
As of March 31, 1998, the Company had incurred unrealized gains of approximately $0.4 million, net of income taxes, on these outstanding Canadian and Australian forward exchange contracts, which are included as a component of shareholders' equity. The Company may consider entering into other forward exchange contracts in order to hedge the Company's net investment in its Canadian, Australian, Mexican, and Singaporean subsidiaries, although no assurance can be given that the Company will be able to do so on acceptable terms. For the Company's Mexican subsidiary, the U.S. dollar is the functional currency. Monetary assets and liabilities are translated at the rates of exchange on the balance sheet date and certain assets (notably inventory, and property and equipment) are translated at historical rates. Income and expense items are translated at average rates of exchange for the period except for those items of expense, which relate to assets, which are translated at historical rates. The gains and losses from foreign currency transactions and translation related to the Mexican subsidiary are included in net income and have not been material. -27- 28 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Net Income Per Common Share Basic net income per common share is calculated by dividing net income by the weighted average common shares outstanding for each period. Diluted net income is calculated by dividing net income by the weighted average common shares and share equivalents outstanding for each period. The difference between the Company's basic and diluted weighted average common shares outstanding is due to dilutive common stock options outstanding. The stock splits discussed in Note 3 have been reflected in the net income per common share calculations for all periods presented. Adoption of New Accounting Standards The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal year 1997. SFAS No. 121 requires companies to periodically evaluate long-lived assets and to record an impairment loss if the expected undiscounted future cash flows is less than the carrying value of those assets. The effect of the application of SFAS No. 121 was not material. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in fiscal year 1997. The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans, and has opted to comply with the disclosure requirements of SFAS No. 123. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This statement establishes new standards for computing and presenting earnings per share ("EPS"). The Company adopted SFAS No. 128 during the quarter ended December 31, 1997. The Company restated its EPS data for all periods presented. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for fiscal years beginning after December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires the presentation of comprehensive income and its components in a full set of financial statements. SFAS No. 131 requires the disclosure of financial and descriptive information about reportable operating segments. Both SFAS No. 130 and 131 are modifications of existing disclosure requirements, which will have no effect on the results of operations or financial condition of the Company. The Company is currently evaluating the standards and their potential impact on disclosures and will adopt these pronouncements in its fiscal year 1999 financial statements. Acquisitions of Businesses Effective October 1, 1996, the Company acquired, with cash and common stock, substantially all of the assets and liabilities of Lasercharge Pty Ltd ("Lasercharge"). Lasercharge is an Australian wholesale distributor of computer and office automation supplies and accessories. The acquisition of Lasercharge was accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets and liabilities assumed based on fair values at the date of acquisition. This resulted in cost in excess of fair value of approximately $3.6 million which is being amortized on a straight-line basis over 20 years. Pro forma results of operations have not been presented because the effects of the acquisition were not significant. During January 1998, the Company purchased all of the common stock of Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media products to the filmed entertainment and multimedia industries. The acquisition of Steadi-Systems was accounted for using the purchase method of accounting, and, accordingly, the purchase price was allocated to the assets and liabilities assumed based on the fair values at the date of acquisition. This resulted in cost in excess of fair value of approximately $10.4 million which is being amortized on a straight-line basis over 25 years. Pro-forma results of operations have not been presented because the effects of the acquisition were not significant. The Company recorded a one-time acquisition integration charge related to the -28- 29 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) completion of transition, integration and merger activities, of about $0.7 million, or approximately $0.03 per share, net of income taxes, in the Company's fourth financial quarter ending March 31, 1998. Steadi-Systems was acquired using cash of approximately $6.3 million during fiscal year 1998. Not included in this amount are contingent cash payment arrangements payable if certain events occur. These contingent payments will be recorded upon the occurrence of the specified events. During May 1998, those events occurred and the Company incurred approximately $2.4 million in additional costs for the acquisition of Steadi-Systems. 2. DEBT: Debt at March 31, 1998 and 1997 is as follows (dollars in thousands):
MARCH 31, ----------------------------- 1998 1997 -------- -------- Revolving line of credit with commercial banks, interest at the Company's option at the prime rate of a bank (8.5% at March 31, 1998), or the Eurodollar rate plus 0.625% to 1.125% (6.6% at March 31, 1998), due December 31, 2000 .......................................................... $ -- $ 30,100 Revolving line of credit with commercial bank, interest at the Australian Bank Bill Rate plus 0.75% (5.7% at March 31, 1998), due July 1, 1999.............................. 4,410 -- Revolving line of credit with commercial bank, interest at the Canadian bank's cost of funds plus 0.65% (5.7% at March 31, 1998), due July 1, 1999................................... 8,101 -- Notes payable and obligations under capital leases for warehouse equipment, computer equipment, office furniture and fixtures, interest at varying rates ranging from 8% to 21%, with initial lease terms varying from three to seven years......................................................... 383 1,016 -------- -------- Long-term debt..................................... 12,894 31,116 Less: current portion of long--term debt......................... (239) (662) -------- -------- Long-term debt, less current portion............... $ 12,655 $ 30,454 ======== ========
In May 1995, the Company entered into an agreement with certain banks for an unsecured revolving line of credit facility (the "Facility") that, as amended on February 13, 1998, has a maximum borrowing availability of $65.0 million and expires on December 31, 2000. Availability under the Facility is based upon amounts of eligible accounts receivable, as defined. As of March 31, 1998, the Company completed a secondary offering of its common stock and applied the net proceeds of approximately $52.6 million to repay in full all outstanding amounts under the Facility, leaving $65.0 million available for additional borrowings. The Facility accrues interest, at the Company's option, at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities of the Company, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. This Facility is part of the Company's integrated cash management system in which accounts receivable collections are used to pay down the Facility and disbursements are paid from the Facility. This system allows the Company to optimize its cash flow. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, which expires on July 1, 1999, allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $5.0 million (U.S.) at March 31, 1998. The Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the Australian Facility. As of March 31, 1998, the Company had borrowed approximately $4.4 million (U.S.), leaving approximately $0.6 million (U.S.) available under the Australian Facility for additional borrowings. During December 1997, the Company's Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). The Canadian Facility, which expires on July 1, 1999, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million -29- 30 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Canadian), or approximately $10.6 million (U.S.) at March 31, 1998. The Company had borrowed approximately $8.1 million (U.S.), leaving approximately $2.5 million (U.S.) available under the Canadian Facility at March 31, 1998. The Canadian Facility accrues interest at the Company's option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the Canadian Facility. The Company is a party to a number of non-cancelable capital lease agreements involving warehouse equipment, computer equipment, and office furniture and fixtures. The Company's property held under capital leases, included in furniture, fixtures and equipment in the balance sheet, amounted to approximately $284,000, net of accumulated amortization of approximately $2,538,000 at March 31, 1998, and approximately $684,000 net of accumulated amortization of approximately $2,054,000 at March 31, 1997. Annual maturities of long-term debt and capital leases are as follows (in thousands):
Fiscal year ended March 31, 1999.......................................................... $ 239 2000.......................................................... 12,655 Thereafter.................................................... -- -------- Total................................................. $ 12,894 ========
3. STOCK OPTIONS AND SHAREHOLDERS' EQUITY: Public Offerings In January 1995, the Company completed an initial public offering (the "IPO") of 2,760,000 shares of common stock. In January 1996, the Company completed a secondary offering of 2,415,500 shares of common stock, sold by certain principal and selling shareholders. The Company did not receive any of the proceeds from the sale of shares by these principal and selling shareholders. The Company incurred approximately $484,000 in costs related to the secondary offering, which is reflected as a reduction in Shareholders' Equity. During March 1998, the Company completed a secondary offering of 3,300,000 shares, consisting of 2,300,000 shares offered by the Company, and 1,000,000 shares offered by a principal and selling shareholder. Preferred Stock In connection with the IPO, the Company authorized the issuance of up to 1,000,000 shares of preferred stock, par value $1.00 per share, none of which is issued or outstanding at March 31, 1998 and 1997. Stock Splits In conjunction with the IPO, the Company's Board of Directors approved the conversion of each share of common stock into 1.45 shares upon consummation of the IPO. In February 1998, the Company's Board of Directors approved a two for one stock split which provided each holder of common stock to receive one additional share for each share held. The stock split was effected in the form of a stock dividend on March 2, 1998. The consolidated financial statements and the notes thereto have been adjusted to reflect these stock splits on a retroactive basis for all periods presented. Stock Options At March 31, 1998 and 1997, the Company had stock option compensation plans and a non-employee Director stock option plan, which are described below. The Company may also, from time to time, issue non-qualified options outside these plans. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these stock options. Accordingly, no compensation cost has been recognized for stock-based compensation awards. Pro forma net income and earnings per share assuming compensation cost for the Company had been -30- 31 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) determined under SFAS No. 123, "Accounting for Stock-Based Compensation," are as follows (dollars in thousands, except per share data):
FISCAL YEARS ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ------- -------- -------- Net income: As reported........................................... $16,160 $ 13,367 $ 10,767 Pro forma............................................. $12,884 $ 11,202 $ 10,039 Earnings per share: Basic: As reported........................................ $ 1.19 $ 1.03 $ 0.85 Pro forma.......................................... $ 0.95 $ 0.87 $ 0.80 Diluted As reported........................................ $ 1.13 $ 0.97 $ 0.80 Pro forma.......................................... $ 0.90 $ 0.81 $ 0.74
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in fiscal year 1996: no dividends; expected volatility of 38.51%; risk-free interest rate of 6.9%; and expected life of 6 years. The following assumptions were used for grants during fiscal year 1997: no dividends, expected volatility ranging between 39.25% and 39.50%; risk-free interest rate ranging between 5.9% and 6.6%; and expected life of 6 years. The following assumptions were used for grants during the fiscal year 1998: no dividends, expected volatility ranging between 40.97% and 41.40%; risk-free interest rate ranging between 5.6% and 6.8%; and expected life of 6 years. In January 1989, the Company established an employee stock option plan (the "Plan") in which shares of common stock are reserved for the granting of options at an amount not less than market price, as determined by the Board of Directors, at the date of grant. There were no options available at March 31, 1998 to be granted under the plan. As of March 31, 1997, 17,108 remained available to be granted under the Plan. In 1994, the Company adopted the 1994 Stock Option Plan for Key Employees of Daisytek International Corporation (the "1994 Plan"). The 1994 Plan authorizes the Company to grant options to select officers and other key employees of the Company and to non-employee directors. The 1994 Plan provides for the granting to employees of both incentive stock options and nonqualified stock options. The maximum number of shares of common stock for which options may be granted is 1,450,000, subject to adjustments for certain changes in the shares issued and outstanding as described in the 1994 Plan. The exercise price of incentive stock options granted under the 1994 Plan may not be less than the fair market value at the date of the grant. The exercise price of nonqualified stock options granted under the 1994 Plan is determined by the option committee of the Board of Directors. As of March 31, 1998 and 1997, 100,974 and 510,904 options, respectively, remain to be granted in the future under the 1994 Plan. During fiscal year 1997, the Company adopted the Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee Director Plan"). The Non-Employee Director Plan authorizes the Company to grant nonqualified common stock options to non-employee directors at the fair market value of the Company's common stock on the date of grant. The options vest over a three-year period starting on the date of grant. The maximum number of shares which may be granted under the Non-Employee Director Plan is 100,000 shares, subject to adjustments for certain changes in the shares issued and outstanding as described in the plan. As of March 31, 1998 and 1997 there were 7,440 and 6,000 options, respectively, granted under the Non-Employee Director Plan. During fiscal year 1998, the Company adopted the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the Company to grant options to select officers, directors and other key employees of the Company. The 1997 Plan provides for the granting to employees of both incentive stock options and nonqualified stock options. The maximum number of shares of common stock for which options may be granted is 2,000,000, subject to adjustments for certain changes in the shares issued and outstanding as described in the 1997 Plan. -31- 32 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The exercise price of incentive stock options granted under the 1997 Plan may not be less than the fair market value of the Company's stock at the date of the grant. In the case of an individual then owning more than 10% of the total combined voting power of the Company, the exercise price may not be less than 110% of the fair market value of the Company's stock at the date of the grant. As of March 31, 1998, 1,864,942 options remain to be granted in the future under the 1997 Plan. During fiscal years 1998, 1997 and 1996, the Company granted options to certain employees pursuant to its employee stock option plans. In addition to the options under such plans, the Company granted options to certain key employees, executives and directors to purchase 181,826 shares of common stock in fiscal year 1998, 110,000 shares of common stock in fiscal year 1997 and 45,000 shares of common stock in fiscal year 1996. These options were granted at the fair market value at the date of the grant and become exercisable over a three-year period starting on the date of the grant. During April 1997, the Company, at the option of individual employees and directors, canceled options issued during fiscal year 1997 and issued replacement options, granted at the fair market value of the Company's common stock on the date of the replacement grant. Such options also become exercisable over a three-year period starting with the date of the replacement grant, based on vesting percentages. The following table summarizes stock option activity for the three years in the period ended March 31, 1998.
PRICE PER WEIGHTED AVERAGE SHARES SHARE EXERCISE PRICE ------ -------------- -------------- Outstanding, March 31, 1995............ 1,123,130 $ 0.64--$ 3.80 $ 1.75 Granted.............................. 520,000 $ 9.75 $ 9.75 Exercised............................ (196,142) $ 0.64--$ 3.80 $ 1.84 Canceled............................. (9,000) $ 9.75 $ 9.75 --------- Outstanding, March 31, 1996............ 1,437,988 $.0.64--$ 9.75 $ 4.58 Granted.............................. 678,228 $16.25--$20.00 $16.54 Exercised............................ (315,796) $ 0.64--$ 9.75 $ 2.45 Canceled............................. (93,482) $ 3.80--$16.25 $13.27 --------- Outstanding, March 31, 1997............ 1,706,938 $ 0.64--$20.00 $ 9.25 Granted.............................. 1,341,650 $12.50--$22.44 $12.91 Exercised............................ (616,326) $ 0.64--$16.25 $ 2.76 Canceled............................. (706,288) $ 9.75--$20.00 $15.97 --------- Outstanding, March 31, 1998............ 1,725,974 $ 0.64--$22.44 $11.66 =========
The weighted average fair values of options granted during each of the years ended March 31, 1998, 1997 and 1996, were $7.02, $8.08 and $4.85 respectively. As of March 31, 1998, 1997 and 1996, 234,531, 682,543 and 806,788, respectively, of options outstanding were exercisable. The remaining options will become exercisable over the next three years based on vesting percentages. The following table summarizes information about the Company's stock options outstanding at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------- ---------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE EXERCISE PRICES MARCH 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1998 EXERCISE PRICE - --------------- ----------------- ---------------- ---------------- ----------------- -------------- $ 0.64-- $ 5.00 99,440 3.5 $ 1.82 99,440 $ 1.82 $ 5.01-- $10.00 355,120 7.1 $ 9.75 133,786 $ 9.75 $10.01-- $15.00 1,168,320 9.0 $ 12.50 -- -- $15.01-- $22.44 103,094 9.4 $ 18.28 1,305 $ 16.25
-32- 33 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes information about the Company's stock options outstanding at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- -------------------------------------------------- WEIGHTED RANGE OF AVERAGE WEIGHTED WEIGHTED EXERCISE OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE PRICES MARCH 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1997 EXERCISE PRICE -------------- -------------- ---------------- -------------- -------------- -------------- $ 0.64--$ 5.00 626,018 4.6 $ 1.59 626,018 $ 1.59 $ 5.01--$10.00 457,260 8.1 $ 9.75 56,525 $ 9.75 $10.01--$20.00 623,660 9.1 $ 16.57 -- --
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31, ---------------------------- 1998 1997 1996 ------ ------- ------ Cash paid during the period for: Interest ........................ $2,762 $ 1,830 $1,445 Income taxes .................... $5,416 $ 6,411 $6,953 Fixed assets acquired under capital leases ........................ $ 84 $ -- $ -- Acquisitions of businesses: Fair value of net assets acquired $6,322 $ 2,896 $ -- Stock issued .................... -- (791) -- ------ ------- ------ Net cash paid for acquisition . $6,322 $ 2,105 $ -- ====== ======= ======
5. RELATED PARTY TRANSACTIONS: The Company has made various loans to its President, a Senior Vice President, and a Vice President. These loans accrue interest at the Company's effective borrowing rate (6.8% at March 31, 1998 and March 31, 1997). The Company had notes receivable (including accrued interest) from its President of approximately $459,000 and $423,000 as of March 31, 1998 and 1997, respectively, which are classified as non-current assets in the consolidated balance sheet. The Company's note receivable from a Senior Vice President as of March 31, 1998 and March 31, 1997 were approximately $186,000 and $122,000, respectively. The Company's receivables from a Vice President as of March 31, 1997 was $61,000. These notes are classified as accounts receivable in the accompanying consolidated balance sheet. The Company also had trade accounts receivable due from companies in which either the Company or its largest shareholder owns a minority interest. Such sales were made in accordance with the Company's usual terms, except that such companies were provided with extended payment terms. In fiscal year 1993, the principal shareholder transferred his minority interest in all but one of these companies to a subsidiary of the Company for a nominal amount, which approximated the fair market value of these minority interests. In fiscal year 1997, the Company sold its interest in its only remaining related party company. In fiscal year 1998, the Company's largest shareholder sold the minority interest in the remaining company. Trade accounts receivable and advances from these related party companies totaled approximately $517,000 at March 31, 1997, and are classified as accounts receivable in the accompanying consolidated balance sheet. Sales to these related parties totaled approximately $537,000, $1,844,000 and $2,707,000 for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. In April 1997, the Company entered into a one-year aircraft lease with a company owned by the Company's largest shareholder under which the Company, on a non-exclusive basis, leases an aircraft from such company. The lease was terminable by either party at any time. During fiscal year 1998, the Company incurred approximately $342,000 in lease payments and reimbursement of certain operating costs relating to this aircraft lease. The aircraft lease was terminated on March 31, 1998. 6. INCOME TAXES Deferred taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. These differences relate primarily to provisions for doubtful accounts, capitalization of inventory costs, reserves for inventory, book versus tax depreciation differences, and certain accrued expenses deducted for book purposes but not yet deductible for tax purposes. A reconciliation of the difference between the expected income tax provision at the U.S. Federal statutory -33- 34 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) corporate tax rate (35.0%, 35.0% and 34.9% in fiscal years 1998, 1997 and 1996, respectively, and the Company's effective tax rate is as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ------------------------------- 1998 1997 1996 -------- ------- ------ Provision computed at statutory rate ......... $ 9,164 $ 7,581 $6,086 Impact of foreign taxation at different rate.. 356 270 141 State income taxes, net of federal benefit ... 415 335 297 Expenses not deductible for tax purposes ..... 149 104 56 Change in valuation reserve .................. 48 (123) 8 Other ........................................ (108) 125 109 -------- ------- ------ Provision for income taxes .............. $ 10,024 $ 8,292 $6,697 ======== ======= ======
The consolidated income before taxes, by domestic and foreign entities, is as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Domestic ...... $20,910 $18,703 $16,355 Foreign ....... 5,274 2,956 1,109 ------- ------- ------- Total..... $26,184 $21,659 $17,464 ======= ======= =======
The provision (benefit) for income taxes is summarized as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ------------------------------------------------ 1998 1997 1996 -------- -------- --------- Current Domestic............................... $ 5,141 $ 6,317 $ 5,349 State.................................. 639 515 456 Foreign................................ 2,133 1,263 655 -------- -------- --------- Total current...................... 7,913 8,095 6,460 -------- -------- --------- Deferred Domestic............................... 2,018 197 265 Foreign................................ 93 -- (28) -------- -------- --------- Total deferred..................... 2,111 197 237 -------- -------- --------- Total......................... $ 10,024 $ 8,292 $ 6,697 ======== ======== =========
-34- 35 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The components of the deferred tax asset (liability) as of March 31, 1998 and 1997 are as follows (in thousands):
MARCH 31, ------------------- 1998 1997 ------- ------- Deferred tax asset: Allowance for doubtful accounts ........ $ 692 $ 872 Capitalized inventory costs ............ 182 170 Inventory obsolescence reserve ......... 252 273 Accrued straight-line rent ............. 63 70 Accrued vacation ....................... 82 58 Foreign net operating loss carryforwards 1,659 631 Other .................................. 106 204 ------- ------- 3,036 2,278 Less-- Valuation reserve ............... (311) (263) ------- ------- Total deferred tax asset ....... 2,725 2,015 ------- ------- Deferred tax liability: Property and equipment ................. (413) (426) Accounts receivable discount ........... (2,077) (411) Foreign inventory purchases ............ (1,257) (463) Other .................................. (524) (150) ------- ------- Total deferred liability ....... (4,271) (1,450) ------- ------- Deferred tax asset (liability), net ...... $(1,546) $ 565 ======= =======
For financial reporting purposes, the tax benefit of cumulative temporary differences is recorded as an asset to the extent that management assesses the utilization of such temporary differences to be "more likely than not". Foreign net operating loss carryforwards relate primarily to taxable losses of the Company's Mexico subsidiary. These loss carryforwards begin to expire in fiscal year 2005. As of March 31, 1998 and 1997 a valuation allowance was recorded due to uncertainties regarding the Company's utilization of its Mexico subsidiary's net tax asset. 7. COMMITMENTS AND CONTINGENCIES: The Company and its subsidiaries lease facilities, and warehouse, office, transportation and other equipment under operating leases expiring in various years through fiscal year 2010. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (in thousands): 1999..................................................... $ 4,325 2000..................................................... 4,473 2001..................................................... 3,291 2002..................................................... 2,041 2003..................................................... 912 Thereafter............................................... 5,921 --------- Total............................................ $ 20,963 =========
Total rental expense under operating leases approximated $3,822,000, $3,107,000 and $2,255,000 for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Although the Company carries products and accessories supplied by numerous vendors, the Company's net sales from products manufactured by its ten largest suppliers were approximately 70%, 74% and 72% of total net sales during fiscal years 1998, 1997 and 1996, respectively. The Company has entered into written distribution agreements with nearly all of its major suppliers. As is customary in the industry, these agreements generally provide non-exclusive distribution rights, have one-year renewable terms and are terminable by either party at any time, with or without cause. Certain of these agreements require minimum annual purchases. Total minimum purchase requirements for fiscal year 1999 approximate $66 million. Additionally, many of the Company's -35- 36 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) suppliers offer rebate programs under which, subject to the Company purchasing certain predetermined amounts of inventory, the Company receives rebates based on a percentage of the dollar volume of total rebate program purchases. The Company also takes advantage of several other programs offered by substantially all of its suppliers. These include price protection plans under which the Company receives credits against future purchases if the supplier lowers prices on previously purchased inventory and stock rotation or stock balancing privileges under which the Company can return slow-moving inventory in exchange for other products. Certain of the Company's suppliers also provide the Company with cooperative advertising programs, marketing development funds and other types of incentives and discounts which offset the production costs of the Company's published marketing tools and other related costs. The Company is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material effect on the Company's financial position or results of operations. 8. FOREIGN OPERATIONS AND EXPORTS The Company, through its wholly owned subsidiaries, sells products in Canada, Australia, Mexico and in Singapore. All intercompany activity is eliminated in computing net sales and net income. Information related to the Company's Australia, Mexico and Singapore subsidiaries are included in Other in the following table. Financial information, summarized by geographical area, is as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ------------------------------------------------ 1998 1997 1996 ----------- ---------- ----------- Net sales: Domestic..................... $ 653,525 $ 541,710 $ 424,667 Canada....................... 77,589 57,295 44,459 Other........................ 53,707 26,425 8,932 Intercompany elimination..... (27,794) (21,616) (13,889) ----------- ----------- ----------- Consolidated.............. $ 757,027 $ 603,814 $ 464,169 =========== =========== =========== Net income: Domestic..................... $ 13,112 $ 11,675 $ 10,284 Canada....................... 2,326 1,346 759 Other........................ 722 346 (276) ----------- ----------- ----------- Consolidated.............. $ 16,160 $ 13,367 $ 10,767 =========== =========== =========== Identifiable assets: Domestic..................... $ 200,774 $ 144,836 $ 115,219 Canada....................... 23,331 16,924 10,360 Other........................ 22,546 13,528 3,022 ----------- ----------- ----------- Consolidated.............. $ 246,651 $ 175,288 $ 128,601 =========== =========== ===========
The Company also exports its products for sale throughout Latin America, Europe, the Far East, Africa and Australia. Total export sales to these geographic regions for fiscal years 1998, 1997 and 1996, included in Domestic sales in the preceding table, were approximately $38.0 million, $33.5 million and $31.8 million, respectively. 9. EMPLOYEE SAVINGS PLAN The Company has a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to participate in the plan. The Company, at its discretion, may match employee contributions to the plan and also make an additional matching contribution in the form of profit sharing in recognition of Company performance. For fiscal year 1998, the Company matched 10% of employee contributions resulting in a charge against income of approximately $53,000. For fiscal year 1997, the Company matched 20% of employee contributions resulting in a charge against income of approximately -36- 37 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) $78,000. For the fiscal year 1996, the Company matched 25% of employee contributions, resulting in a charge against income of approximately $95,000. 10. FAIR VALUES OF FINANCIAL INSTRUMENTS The Company estimates fair value based on market information and appropriate valuation methodologies. Fair value is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The fair values of all non-derivative financial instruments approximate their carrying amounts in the accompanying consolidated balance sheets. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company's derivative financial instruments outstanding as of March 31, 1998 and 1997, consisted of forward foreign currency exchange contracts used to hedge the Company's net investment in, and its intercompany payable balance applicable to its Canadian and Australian subsidiaries (See Note 1). The fair values of these contracts based on fiscal year-end exchange rates, excluding related income taxes, were net gains of approximately $420,000 and $67,000 at March 31, 1998 and 1997, respectively. 11. SUBSEQUENT EVENT On May 4, 1998, the Company signed a letter of intent to acquire The Tape Company, Inc. ("The Tape Company"), a Chicago-based independent distributor of professional-grade audio and video media products. It is anticipated that the Company will account for this transaction as a pooling of interests and will issue shares of its common stock. The Tape Company had revenues of approximately $40 million during the twelve month period ending March 31, 1998. -37- 38 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. QUARTERLY DATA (UNAUDITED) Summarized quarterly financial data for fiscal years 1998 and 1997 are as follows (dollars in thousands, except per share data):
FISCAL YEAR 1998 ----------------------------------------------------------- 4TH QTR 3RD QTR. 2ND QTR. 1ST QTR. ----------- ----------- ----------- ----------- Net sales ................................................. $ 218,061 $ 186,586 $ 179,568 $ 172,812 Gross profit .............................................. $ 23,361 $ 18,763 $ 17,871 $ 17,306 Gross profit margin .................................. 10.7% 10.1% 10.0% 10.0% SG&A expenses ............................................. $ 14,541 $ 11,508 $ 11,052 $ 10,583 Percent of net sales ................................. 6.7% 6.2% 6.2% 6.1% Acquisition integration costs.............................. $ 735 $ -- $ -- $ -- Percent of net sales.................................. 0.3% -- -- -- Income from operations .................................... $ 8,085 $ 7,255 $ 6,819 $ 6,723 Operating margin ..................................... 3.7% 3.9% 3.8% 3.9% Net income ................................................ $ 4,324 $ 4,138 $ 3,869 $ 3,829 Net margin ........................................... 2.0% 2.2% 2.2% 2.2% Net income per common and common equivalent share Basic ............................................ $ 0.32 $ 0.30 $ 0.28 $ 0.29 Diluted .......................................... $ 0.30 $ 0.29 $ 0.27 $ 0.27
FISCAL YEAR 1997 ----------------------------------------------------------- 4TH QTR 3RD QTR. 2ND QTR. 1ST QTR. ----------- ----------- ----------- ----------- Net sales ................................................. $ 174,343 $ 154,429 $ 138,148 $ 136,894 Gross profit .............................................. $ 17,503 $ 15,204 $ 13,589 $ 13,670 Gross profit margin .................................. 10.0% 9.8% 9.8% 10.0% SG&A expenses ............................................. $ 10,552 $ 9,375 $ 8,397 $ 8,306 Percent of net sales ................................. 6.1% 6.1% 6.1% 6.1% Income from operations .................................... $ 6,951 $ 5,829 $ 5,192 $ 5,364 Operating margin ..................................... 4.0% 3.8% 3.8% 3.9% Net income ................................................ $ 4,007 $ 3,364 $ 2,955 $ 3,041 Net margin ........................................... 2.3% 2.2% 2.1% 2.2% Net income per common and common equivalent share Basic ............................................ $ 0.31 $ 0.26 $ 0.23 $ 0.24 Diluted .......................................... $ 0.29 $ 0.24 $ 0.21 $ 0.22
-38- 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the directors and executive officers of the Company.
NAME AGE POSITION --------------------------- ------- --------------------------- David A. Heap.............. 54 Chairman of the Board Mark C. Layton............. 38 President, Chief Executive Officer, Chief Operating Officer and Director Christopher Yates.......... 43 Senior Vice President-- Business Development and Director James R. Powell............ 37 Senior Vice President-- Sales and Marketing and Director Steven Graham.............. 46 Senior Vice President-- Information Technologies, Chief Information Officer Harvey H. Achatz........... 57 Vice President-- Administration and Secretary Thomas J. Madden........... 36 Vice President-- Finance, Chief Financial Officer, Chief Accounting Officer and Treasurer Peter D. Wharf............. 39 Vice President-- International Operations Suzanne Garrett............ 33 Vice President-- Product Management and Marketing Edgar D. Jannotta, Jr...... 37 Director Timothy M. Murray.......... 45 Director Peter P. J. Vikanis........ 47 Director
DAVID A. HEAP has served as Chairman of the Board since 1982, as Chief Executive Officer from 1982 until his retirement in April 1997 and as President from 1982 to 1990. From 1970 to 1985, Mr. Heap served as Chairman of ISA International plc (and its predecessors) ("ISA"), a now publicly traded company he founded in England in 1970. ISA is a distributor of computer supplies in Western Europe. MARK C. LAYTON has served as President, Chief Executive Officer and Chief Operating Officer since April 1997 and as a Director since 1988. Mr. Layton served as President, Chief Operating Officer and Chief Financial Officer from 1993 to April 1997, as Executive Vice President from 1990 to 1993 and as Vice President -- Operations from 1988 to 1990. Prior to joining the Company, Mr. Layton served as a management consultant with Arthur Andersen & Co., S.C. for six years through 1988 specializing in wholesale and retail distribution and technology. CHRISTOPHER YATES was appointed Senior Vice President -- Business Development in February 1996 and served as Vice President -- Business Development from November 1995 to February 1996, as a Director of the Company since February 1995, as Vice President -- Marketing from January 1994 to November 1995, as Vice President -- Sales from 1988 to 1994 and in various other sales capacities for the Company since 1982. Prior to joining the Company, Mr. Yates served in various sales capacities for ISA. JAMES R. POWELL has served as a Director and Senior Vice President -- Sales and Marketing since 1996. Mr. Powell served as Vice President -- Sales from 1992 to 1996 and in various other sales capacities from 1988 to 1992. Prior to joining the Company, Mr. Powell was engaged in various sales and marketing activities. STEVEN GRAHAM has served as Senior Vice President of Information Technologies and Chief Information Officer since 1996. Prior to joining the Company, Mr. Graham was employed by Ingram Micro, a major microcomputer distributor. Mr. Graham has over 23 years of experience in the information-technology field. -39- 40 HARVEY H. ACHATZ serves as Vice President -- Administration and Secretary, positions he has held since 1993 and 1984, respectively. Mr. Achatz served as Vice President -- Finance from 1985 to 1993, as Controller from 1981 to 1985 and as a Director from 1984 to 1990. THOMAS J. MADDEN was appointed Chief Financial Officer in July 1997 and serves as Vice President -- Finance, Treasurer and as Chief Accounting Officer, positions he has held since November 1994, March 1994 and 1992, respectively. From 1992 to 1994 he also served as Controller. From 1983 to 1992, Mr. Madden served in various capacities with Arthur Andersen & Co., S.C., including financial consulting and audit manager. Mr. Madden is a certified public accountant. PETER D. WHARF serves as Vice President -- International Operations, a position he has held since February 1996. Mr. Wharf joined the Company in 1992 and has served in various export and international sales capacities since such time. Prior to joining the Company, Mr. Wharf served in various sales capacities for ISA. SUZANNE GARRETT was recently promoted to Vice President of Product Management and Marketing and has served as new-products manager, marketing manager, and director of product management and marketing. Prior to joining the Company in 1991, Ms. Garrett served as an account executive for United Media. EDGAR D. JANNOTTA, JR. has served as a Director of the Company since 1991. Mr. Jannotta is a Principal of GTCR Golder Rauner L.L.C.; an investment banking firm he joined in 1998. Mr. Jannotta is also a director of Gibraltar Packaging Group, Inc., a diversified packaging company, and several privately held corporations. TIMOTHY M. MURRAY has served as a Director of the Company since 1991. Mr. Murray is a Principal of William Blair & Company, L.L.C.; an investment banking firm he joined in 1979. Mr. Murray is also a director of several privately held corporations. PETER P. J. VIKANIS was appointed a Director of the Company during fiscal year 1996. Mr. Vikanis served as Chief Operating Officer of ISA from 1991 to 1995, as a director of ISA from 1979 to 1995, and also served in various management capacities at ISA from 1971 to 1991. Pursuant to the Company's Certificate of Incorporation, the Board of Directors is divided into three classes. Each class serves three years, with the terms of office of the respective classes expiring in successive years. Class I consists of Messrs. Powell and Yates whose term will expire at the annual meeting of stockholders in 1998. Messrs. Powell and Yates have been nominated by the Board for election at the 1998 annual meeting. Class II consists of Messrs. Murray and Layton whose terms will expire at the annual meeting of stockholders in 1999; and Class III consists of Messrs. Heap, Janotta and Vikanis whose terms will expire at the annual meeting of stockholders in 2000. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and controlling stockholders to file initial reports of ownership and reports of changes of ownership of the Company's Common Stock with the Securities and Exchange Commission and the Company. To the Company's knowledge, all reports required to be so filed were filed in accordance with the provisions of said Section 16(a). -40- 41 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company to its Chief Executive Officer and to each of the four most highly compensated executive officers for services rendered during fiscal years ended March 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ------------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPLE POSITION YEAR SALARY BONUS OPTIONS COMPENSATION (1) - ----------------------------- ---- ---------- --------- ------------ ---------------- David A. Heap............... 1998 $ 250,000 $ 201,897 151,554 $ 4,951 Chairman 1997 385,000 222,900 85,728 5,970 1996 385,000 280,676 75,666 8,636 Mark C. Layton.............. 1998 319,599 269,196 122,836 9,731 President, Chief 1997 299,013 222,900 69,832 8,458 Executive and Operating 1996 276,386 280,676 56,040 6,008 Officer Christopher Yates........... 1998 248,454 88,835 84,742 6,088 Senior Vice President - 1997 232,200 73,557 41,120 5,004 Business Development 1996 215,000 92,623 40,276 2,430 Steven Graham............... 1998 189,491 88,835 60,000 37,829 Senior Vice President - 1997 78,268 32,439 50,000 5,610 Information 1996 -- -- -- -- Technologies and Chief Information Officer James R. Powell............. 1998 175,037 88,835 76,116 3,015 Senior Vice President - 1997 163,652 73,557 42,660 3,715 Sales and Marketing 1996 150,359 70,169 28,008 3,707
- -------------------- (1) Represents compensation in respect of one or more of the following: personal use of Company automobiles; life insurance premiums paid by the Company for the benefit of the name executive officer; tax return preparation services paid by the Company; personal travel expenses; and relocation costs. The following table sets forth information with respect to grants of stock options during the year ended March 31, 1998 to the name executive officers reflected in the Summary Compensation Table: OPTION GRANTS IN FISCAL YEAR 1998
INDIVIDUAL GRANTS -------------------------------------------------- % OF TOTAL POTENTIAL REALIZABLE VALUE NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2) (3) OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------------- NAME GRANTED YEAR SHARE (3) DATE (1) (3) 5% 10% - ----------------------- ---------- ---------- ----------- ------------ ---------- ------------ David A. Heap.......... 151,554 11.3% $ 12.50 4-17-07 $ 1,191,394 $ 3,019,226 Mark C. Layton......... 122,836 9.2% 12.50 4-17-07 965,636 2,447,112 Christopher Yates...... 84,742 6.3% 12.50 4-17-07 666,172 1,688,212 Steven Graham.......... 60,000 4.5% 12.50 4-17-07 471,671 1,195,307 James R. Powell........ 76,116 5.7% 12.50 4-17-07 598,362 1,516,366
- ------------------ (1) All of such options are subject to a three-year cumulative vesting schedule. (2) These are hypothetical values using assumed annual rates of stock price appreciation as prescribed by the rules of the Securities and Exchange Commission. -41- 42 (3) The fiscal year 1997 option grants were cancelled in April 1997 and reissued at an exercise price per share of $12.50 (the fair market value on the date of reissue) and have a ten year term. All such options are subject to a three year cumulative vesting schedule and are included in the option grants in the table above. The following table sets forth information concerning the aggregate stock option exercises during the fiscal year ended March 31, 1998 and stock option values as of the end of fiscal year 1998 for unexercised stock options held by each of the named executive officers: AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END (1) (3) ON VALUE --------------------------- ----------------------------- NAME EXERCISE RECEIVED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- -------- --------- ----------- ------------- ----------- ------------- (2) David A. Heap.......... -- $ -- 37,833 189,387 $ 553,308 $ 2,353,011 Mark C. Layton......... 91,532 987,401 19,614 150,856 286,855 1,868,470 Christopher Yates...... 121,600 1,814,154 20,138 104,880 294,518 1,300,830 Steven Graham.......... -- -- -- 60,000 -- 712,500 James R. Powell........ 21,856 275,947 -- 90,120 -- 1,108,686
- ------------------ (1) Calculated by determining the difference between $24 3/8 (the last sale price of the Common Stock on March 31, 1998 as reported by the Nasdaq National Market) and the exercise price of the shares of Common Stock underlying the options. (2) Calculated by determining the difference between the last sale price of the Common Stock on the date of exercise as reported by the Nasdaq National Market and the exercise price. (3) See footnote 3 above. COMPENSATION OF DIRECTORS Each non-employee director receives an annual director's fee of $20,000 for each year in which he or she serves as a director. Non-employee directors do not receive additional Board or Committee meeting fees. The Company has also adopted a Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee Director Plan") pursuant to which each non-employee director (i) may elect to receive payment of the director's fees in shares of Common Stock in lieu of cash, and (ii) is entitled to receive certain grants of options in accordance with the formula, and subject to the conditions precedent, set forth therein. The Non-Employee Director Plan is a formula grant plan pursuant to which each non-employee director receives options to purchase shares of Common Stock as of the date of each annual meeting of stockholders. Under the terms of the Non-Employee Director Plan, during fiscal year 1998, each of the Company's non-employee directors received options to purchase 2,480 share of Common Stock at an exercise price of $22 7/16 (the fair market value on the date of grant) as of the date of the 1998 Annual Meeting. The number of options to be issued under the Non-Employee Director Plan will increase each year based on the percentage increase, if any, in the Company's earnings before taxes ("EBT") for such fiscal year over the Company's EBT for the immediately preceding fiscal year. No options will be issued, however, under the Non-Employee Director Plan with respect to any fiscal year in which the company's EBT does not equal or exceed the Company's projected EBT for such year, nor will any options be issued to any non-employee director who does not attend at lease 75% of all Board (and committee) meetings held during such fiscal year. All options issued under the Non-Employee Director Plan are non-qualified options for federal income tax purposes and have an exercise price equal to the fair market value of a share of common stock as of the date of the annual meeting upon which such option is granted. All options are subject to a three year cumulative vesting schedule. -42- 43 Directors who are employees of the Company or any of its subsidiaries do not receive additional compensation for service on the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee of the Company's Board of Directors are Timothy M. Murray and Edgar D. Jannotta, Jr. who are non-employee directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of May 9, 1998, certain information regarding the beneficial ownership of the Common Stock by (i) each person who is known to the Company to beneficially own more than 5% of the Common Stock, (ii) each of the Directors and executive officers of the Company individually, (iii) the Directors and executive officers of the Company as a group and (iv) the Selling Stockholder. The information contained in this table reflects "beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless otherwise indicated, the stockholders identified in this table have sole voting and investment power with respect to the shares owned of record by them.
NUMBER NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT(1) ------------------------------------- --------- ------- David A. Heap(2).......................... 1,224,997 7.6% 500 North Central Expressway Plano, Texas 75074 Royal Bank of Canada Trust Company (Jersey) Limited and Kenneth Edward Rayner, Trustees, of the David Heap Life Interest Settlement (No. 10)(3).................................. 1,169,346 7.3% 19-21 Broad Street St. Helier, Jersey, Channel Islands Robert Fleming Inc.(4).................... 1,053,910 6.6% 1285 Avenue of the Americas New York, New York 10019 Amvescap Plc(5)........................... 915,600 5.7% 11 Devonshire Square London, England Mark C. Layton(6)......................... 253,234 * Christopher Yates(7)...................... 52,987 * Harvey H. Achatz(8)....................... 59,484 * James R. Powell(9)........................ 14,004 * Steven Graham(10)......................... 9,000 * Thomas J. Madden(11)...................... 60,634 * Edgar D. Jannotta, Jr.(12)................ 39,179 * Timothy M. Murray(13)..................... 69,679 * Peter P.J. Vikanis(14).................... 2,125 * Suzanne Garrett(15)....................... 12,186 * Peter D. Wharf(16)........................ 20,421 * All directors and executive officers as a group (11 persons)(17)............. 1,817,930 11.3%
- ---------- * Represents less than 1% (1) This table is based on 16,025,204 shares of Common Stock outstanding on May 9, 1998. -43- 44 (2) Includes outstanding options to purchase 98,399 shares of Common Stock, which are fully vested and exercisable. Does not include (i) 1,800 shares held by Mr. Heap's spouse as custodian for minor children as to which beneficial ownership is disclaimed, (ii) options to purchase 128,821 shares of Common Stock which are not vested or exercisable and (iii) 1,169,346 shares of Common Stock held of record by the trust set forth above (the "Heap Trust"). Although Mr. Heap and members of his family are the primary beneficiaries of the Heap Trust, neither Mr. Heap nor such beneficiaries have voting or investment power with respect to such shares. Of the shares owned of record by Mr. Heap, 222,099 are pledged to a financial institution to secure indebtedness owing by Mr. Heap to such institution. (3) Shares are held of record by a Trust established by Mr. Heap for which he and members of his family are the primary beneficiaries, although neither Mr. Heap nor such beneficiaries may exercise voting or investment power with respect to such shares. (4) Based upon a Schedule 13G dated February 19, 1998 filed by Robert Fleming Inc. reporting beneficial ownership and shared voting and dispositive power as of December 31, 1997. (5) Based upon a Schedule 13G dated February 9, 1998 filed by Amvescap Plc, as parent holding company of Avz, Inc., AIM Management Group, Inc., Amvescap Group Services Inc., Invesco, Inc., and Invesco North American Holdings Inc., reporting beneficial ownership and shared voting and dispositive power as of December 31, 1997. (6) Includes outstanding options to purchase 66,060 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 104,410 shares of Common Stock, which are not vested or exercisable. (7) Includes outstanding options to purchase 52,987 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 72,031 shares of Common Stock, which are not vested or exercisable. (8) Includes outstanding options to purchase 59,484 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 6,374 shares of Common Stock, which are not vested or exercisable. (9) Includes outstanding options to purchase 14,004 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 64,699 shares of Common Stock, which are not vested or exercisable. (10) Includes outstanding options to purchase 9,000 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 51,000 shares of Common Stock, which are not vested or exercisable. (11) Includes outstanding options to purchase 39,184 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 51,298 shares of Common Stock, which are not vested or exercisable. (12) Includes outstanding options to purchase 300 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 4,180 shares of Common Stock, which are not vested or exercisable. (13) Includes outstanding options to purchase 300 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 4,180 shares of Common Stock, which are not vested or exercisable. -44- 45 (14) Includes outstanding options to purchase 300 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 4,180 shares of Common Stock, which are not vested or exercisable. (15) Includes outstanding options to purchase 12,186 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 29,432 shares of Common Stock, which are not vested or exercisable. (16) Includes outstanding options to purchase 20,421 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 41,091 shares of Common Stock, which are not vested or exercisable. (17) Includes outstanding options to purchase 372,625 shares of Common Stock, which are fully vested and exercisable. Does not include (i) outstanding options to purchase 561,696 shares of Common Stock which are not vested or exercisable or (ii) shares of Common Stock held by the Heap Trust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN TRANSACTIONS During fiscal year 1998, the Company made loans in varying amounts to Messrs. Layton, Powell and Wharf in order to provide such persons with the funds necessary to satisfy various personal obligations and for other purposes. The largest amount owing by such persons during fiscal year 1998 was $458,684, $186,440 and $61,956, respectively. Mr. Wharf repaid in full his indebtedness to the Company prior to March 31, 1998. As of March 31, 1998, Messrs. Layton and Powell were indebted to the Company in the amount $458,684 and $186,440, respectively. The indebtedness owing by such persons accrues interest at the rate charged to the Company for working capital borrowings. Messrs. Layton's and Powell's indebtedness is due and payable in one installment on March 31, 1999. David Heap, the Company's Chairman of the Board, owned approximately a one-third equity interest in a small computer supplies dealer, Business Software Centers, Inc. ("BSC"). In December 1991, Mr. Heap agreed to remit to the Company any dividends, distributions or other amounts which he may receive in respect of such interest. Mr. Heap has not received any dividends, distributions or other amounts in respect of his equity interest. During fiscal year 1998, Mr. Heap sold all of his remaining equity interest and no longer retains an equity interest in BSC. During fiscal year 1998, the Company's sales to BSC during the period of the year that Mr. Heap owned an equity interest in BSC aggregated approximately $537,000 and contributed less than 1% of the Company's total sales in such fiscal year. Such sales were made in accordance with the Company's usual terms, except that BSC received extended payment terms in return for which BSC agreed, among other things, to provide the Company with quarterly financial information. In April 1997, the Company entered into a one-year aircraft lease with a company owned by Mr. Heap under which the Company, on a non-exclusive basis, leases an aircraft from such company. The lease was terminable by either party at any time. During fiscal year 1998, the Company incurred approximately $342,000 in lease payments and reimbursement of certain operating costs relating to this aircraft lease. The aircraft lease was terminated on March 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets as of March 31, 1998 and 1997 Consolidated Statements of Income for the Fiscal Years Ended March 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statements Schedules Report of Independent Public Accountants Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. 3. Exhibits Exhibit No. Description of Exhibit 3.1(7) - Amended and Restated Certificate of Incorporation of Daisytek International Corporation. -45- 46 3.1.1(7) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.2(1) - Amended and Restated By-laws of Daisytek International Corporation. 10.1(2) - Employee Stock Option Plan of Daisytek International Corporation. 10.2(2) - 1994 Stock Option Plan of Daisytek International Corporation. 10.3(7) - Non-Employee Director Stock Option and Retainer Plan. 10.4(10) - 1997 Employee Stock Option Plan of Daisytek International Corporation. 10.5(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, Texas Commerce Bank National Association, as Agent, and Texas Commerce Bank National Association and State Street bank and Trust Company, as Lenders. 10.5.1(8)- First Amendment to Credit Agreement dated April 15, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association and State Street Bank and Trust Company, as Lenders. 10.5.2(9)- Second Amendment to Credit Agreement dated November 14, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association, NBD Bank, and State Street bank and Trust Company, as Lenders. 10.6(2) - Industrial Lease Agreement between Industrial Developments International, Inc. and Daisytek, Incorporated, as amended. 10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings Association and Daisytek, Incorporated, as amended. 10.8(2) - Lease dated October 28, 1994 between Robco Enterprises, Ltd., Yen Hoy Enterprises Ltd., George Yen and Daisytek (Canada) Inc. 10.9(4) - Lease dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6) Inc. and Daisytek (Canada) Inc. 10.10(2) - Lease Agreement dated December 30, 1998 between Daisytek, Incorporated and State Street Bank and Trust Company. 10.11(2) - Term Lease master Agreement dated November 29, 1990 between IBM Credit Corporation and Daisytek, Incorporated. 10.12(10)- U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard Company and Daisytek, Incorporated, with Addendum. 10.13(2) - Lease dated July 4, 1994 between Fraccionadora Industrial Del Norte, S.A. De C.V. and Daisytek De Mexico, S.A. De C.V. 10.14(2) - Marketing Advantage Program Enrollment Agreement dated November 11, 1994 between Federal Express Corporation and Daisytek, Incorporated. 10.15(5) - Lease Agreement dated May 22, 1995 between New World Partners Joint Number Three and Daisytek and Daisytek Latin America, Inc. 10.16(10)- Forward Exchange Contact dated May 22, 1997 between Daisytek and Texas Commerce Bank National Association. 10.17(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and David A. Heap. 10.18(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and Mark C. Layton. 10.19(6) - Second Amendment to Industrial Lease Agreement between New York Life Insurance Company and Daisytek, Incorporated. 10.20(6) - Agreement dated December 19, 1995 between Diesel Recon Company and Daisytek, Incorporated. 10.21(6) - Sixth Modification to Lease Agreement dated November 30, 1995 between Atrium Association, L.P. and Daisytek, Incorporated. 10.22(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and David A.Heap. -46- 47 10.23(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Steve Graham. 10.24(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Peter Vikanis. 10.25(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Timothy Murray. 10.26(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Edgar D. Jannotta, Jr. 10.27(11)- Third Amendment to Credit Agreement dated June 30, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.28(12)- Lease Amending Agreement dated September 5, 1997 to Lease Agreement dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6) Inc. and Daisytek (Canada) Inc. 10.29(12)- Lease Agreement dated October 21, 1997 between G.T.W. International PTE LTD and Daisytek Asia PTE LTD. 10.30(12)- Committed Credit Facility Agreement dated October 22, 1997 between Daisytek Australia PTY LTD, as Borrower, Daisytek International Corporation and Daisytek, Inc., as Guarantors, and The First National Bank of Chicago, as Lender. 10.31(12)- Fourth Amendment to Credit Agreement dated December 11, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.32(12)- Revolving Credit and Foreign Exchange Facility Agreement dated December 31, 1997 between Daisytek (Canada) Inc., as Borrower, Daisytek, Inc., as Guarantor, and First Chicago NBD Bank, Canada, as Lender. 10.33(*) - Stock Purchase Agreement by and among the Stockholders of Steadi-Systems, Ltd., Daisytek, Incorporated, and Daisytek International Corporation dated January 5, 1998. 10.34(*) - Fifth Amendment to Credit Agreement dated February 13, 1998 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders. 11(*) - Statement re: computation of per share earnings. 21(*) - Subsidiaries of the Registrant. 23(*) - Consents. 27(*) - Financial Data Schedule. - ----------- (*) Filed herewith. (1) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1994 dated March 10, 1995. (2) Incorporated by reference from Registration Statement on Form S-1 No. 33-86926. (3) Incorporated by reference from Current Report on Form 8-K dated May 22, 1995. (4) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1995 dated June 23, 1995. (5) Incorporated by reference from Current Report on Form 8-K dated August 22, 1995. (6) Incorporated by reference from Registration Statement on Form S-1 No. 33-99796. (7) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1996 dated June 26, 1996. (8) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1996 dated August 13, 1996. -47- 48 (9) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1996 dated February 13, 1997. (10) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1997 dated June 27, 1997. (11) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997 dated August 14, 1997. (12) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1997 dated February 17, 1998. (b) Reports on Form 8-K 1. On January 28, 1998, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated January 28, 1998 announcing third quarter results. 2. On February 9, 1998, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated February 9, 1998 announcing a two for one stock split. 3. On March 26, 1996, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's Underwriting Agreement dated March 26, 1998 for the sale of 3,300,000 shares of Common Stock. -48- 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Daisytek International Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Daisytek International Corporation (a Delaware corporation) and subsidiaries included in this Form 10-K and have issued our report thereon dated May 5, 1998. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II of this Form 10-K is the responsibility of the Company's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Dallas, Texas May 5, 1998 -49- 50 SCHEDULE II DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED MARCH 31, 1998 (AMOUNTS IN THOUSANDS)
ADDITIONS ----------------------- BALANCE AT CHARGES TO CHARGES TO BALANCE AT BEGINNING COST AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD --------- --------- ---------- ---------- ------ Fiscal Year Ended March 31, 1996: Allowance for doubtful accounts........... $ 1,535 999 -- (776) $ 1,758 Income tax valuation allowance............ $ 378 8 -- -- $ 386 Fiscal Year Ended March 31, 1997: Allowance for doubtful accounts........... $ 1,758 1,594 -- (992) $ 2,360 Income tax valuation allowance............ $ 386 -- -- (123) $ 263 Fiscal Year Ended March 31, 1998: Allowance for doubtful accounts........... $ 2,360 1,936 -- (1,641) $ 2,655 Income tax valuation allowance............ $ 263 48 -- -- $ 311
-50- 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAISYTEK INTERNATIONAL CORPORATION By: /s/ Thomas J. Madden -------------------------------------- Thomas J. Madden, Chief Financial Officer and Vice President - Finance May 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David A. Heap Chairman of the Board May 29, 1998 ------------------------- David A. Heap /s/ Mark C. Layton Chief Executive and Operating May 29, 1998 ------------------------- Officer, President and Director Mark C. Layton (principal executive officer) /s/ Thomas J. Madden Chief Financial Officer, Vice May 29, 1998 ------------------------- Thomas J. Madden President - Finance (principal financial and accounting officer) /s/ Christopher Yates Director May 29, 1998 ------------------------- Christopher Yates /s/ James R. Powell Director May 29, 1998 ------------------------- James R. Powell /s/ Timothy M. Murray Director May 29, 1998 ------------------------- Timothy M. Murray /s/ Edgar D. Jannotta, Jr. Director May 29, 1998 ------------------------- Edgar D. Jannotta, Jr. /s/ Peter P. J. Vikanis Director May 29, 1998 ------------------------- Peter P. J. Vikanis
-51- 52 EXHIBIT INDEX
Exhibit No. Description of Exhibit - ------- ---------------------- 3.1(7) - Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.1.1(7) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.2(1) - Amended and Restated By-laws of Daisytek International Corporation. 10.1(2) - Employee Stock Option Plan of Daisytek International Corporation. 10.2(2) - 1994 Stock Option Plan of Daisytek International Corporation. 10.3(7) - Non-Employee Director Stock Option and Retainer Plan. 10.4(10) - 1997 Employee Stock Option Plan of Daisytek International Corporation. 10.5(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, Texas Commerce Bank National Association, as Agent, and Texas Commerce Bank National Association and State Street bank and Trust Company, as Lenders. 10.5.1(8)- First Amendment to Credit Agreement dated April 15, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association and State Street Bank and Trust Company, as Lenders. 10.5.2(9)- Second Amendment to Credit Agreement dated November 14, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association, NBD Bank, and State Street bank and Trust Company, as Lenders. 10.6(2) - Industrial Lease Agreement between Industrial Developments International, Inc. and Daisytek, Incorporated, as amended. 10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings Association and Daisytek, Incorporated, as amended. 10.8(2) - Lease dated October 28, 1994 between Robco Enterprises, Ltd., Yen Hoy Enterprises Ltd., George Yen and Daisytek (Canada) Inc. 10.9(4) - Lease dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6) Inc. and Daisytek (Canada) Inc. 10.10(2) - Lease Agreement dated December 30, 1998 between Daisytek, Incorporated and State Street Bank and Trust Company. 10.11(2) - Term Lease master Agreement dated November 29, 1990 between IBM Credit Corporation and Daisytek, Incorporated. 10.12(10)- U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard Company and Daisytek, Incorporated, with Addendum. 10.13(2) - Lease dated July 4, 1994 between Fraccionadora Industrial Del Norte, S.A. De C.V. and Daisytek De Mexico, S.A. De C.V. 10.14(2) - Marketing Advantage Program Enrollment Agreement dated November 11, 1994 between Federal Express Corporation and Daisytek, Incorporated. 10.15(5) - Lease Agreement dated May 22, 1995 between New World Partners Joint Number Three and Daisytek and Daisytek Latin America, Inc. 10.16(10)- Forward Exchange Contact dated May 22, 1997 between Daisytek and Texas Commerce Bank National Association. 10.17(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and David A. Heap. 10.18(6) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and Mark C. Layton. 10.19(6) - Second Amendment to Industrial Lease Agreement between New York Life Insurance Company and Daisytek, Incorporated. 10.20(6) - Agreement dated December 19, 1995 between Diesel Recon Company and Daisytek, Incorporated. 10.21(6) - Sixth Modification to Lease Agreement dated November 30, 1995 between Atrium Association, L.P. and Daisytek, Incorporated. 10.22(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and David A.Heap.
53
10.23(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Steve Graham. 10.24(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Peter Vikanis. 10.25(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Timothy Murray. 10.26(10)- Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Edgar D. Jannotta, Jr. 10.27(11)- Third Amendment to Credit Agreement dated June 30, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.28(12)- Lease Amending Agreement dated September 5, 1997 to Lease Agreement dated June 1, 1995 between GPM Real Property (6) Ltd. and Endow (6) Inc. and Daisytek (Canada) Inc. 10.29(12)- Lease Agreement dated October 21, 1997 between G.T.W. International PTE LTD and Daisytek Asia PTE LTD. 10.30(12)- Committed Credit Facility Agreement dated October 22, 1997 between Daisytek Australia PTY LTD, as Borrower, Daisytek International Corporation and Daisytek, Inc., as Guarantors, and The First National Bank of Chicago, as Lender. 10.31(12)- Fourth Amendment to Credit Agreement dated December 11, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.32(12)- Revolving Credit and Foreign Exchange Facility Agreement dated December 31, 1997 between Daisytek (Canada) Inc., as Borrower, Daisytek, Inc., as Guarantor, and First Chicago NBD Bank, Canada, as Lender. 10.33(*) - Stock Purchase Agreement by and among the Stockholders of Steadi-Systems, Ltd., Daisytek, Incorporated and Daisytek International Corporation dated January 5, 1998. 10.34(*) - Fifth Amendment to Credit Agreement dated February 13, 1998 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders. 11(*) - Statement re computation of per share earnings. 21(*) - Subsidiaries of the Registrant. 23(*) - Consents. 27(*) - Financial Data Schedule.
- ----------- (*) Filed herewith (1) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1994 dated March 10, 1995. (2) Incorporated by reference from Registration Statement on Form S-1 No. 33-86926. (3) Incorporated by reference from Current Report on Form 8-K dated May 22, 1995. (4) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1995 dated June 23, 1995. (5) Incorporated by reference from Current Report on Form 8-K dated August 22, 1995. (6) Incorporated by reference from Registration Statement on Form S-1 No. 33-99796. (7) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1996 dated June 26, 1996. (8) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1996 dated August 13, 1996. (9) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1996 dated February 13, 1997. (10) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1997 dated June 27, 1997. (11) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997 dated August 14, 1997. (12) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1997 dated February 17, 1998. EX-10.33 2 STEADI ACQUISITION AGREEMENT 1 EXHIBIT 10.33 STOCK PURCHASE AGREEMENT by and among THE STOCKHOLDERS OF STEADI-SYSTEMS, LTD., DAISYTEK, INCORPORATED and DAISYTEK INTERNATIONAL CORPORATION January 5, 1998 2 STOCK PURCHASE AGREEMENT dated as of January 5, 1998 among RICHARD D. SCHOENBERG, ROBERT SCHOENBERG and STEVEN KLEIN (each, a "Seller" and collectively, the "Sellers"), DAISYTEK, INCORPORATED, a Delaware corporation (the "Purchaser") and DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Parent"). WHEREAS, the Sellers are the record and beneficial owner of all of the issued and outstanding shares of Common Stock, no par value (the "Shares"), of Steadi-Systems, Ltd., a California corporation (the "Company"); and WHEREAS, the Company is a distributor of media products and video hardware to the filmed entertainment and multimedia industries (the "Business"); and WHEREAS, the Sellers desire to sell to the Purchaser, and the Purchaser desires to purchase from the Sellers, all of the Shares, subject to and in accordance with the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, Parent, the Purchaser and the Sellers hereby agree as follows: ARTICLE I DEFINITIONS 1. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "Abrams Agreement" means the agreement between the Company and Larry Abrams dated the date hereof pursuant to which the Company has agreed, subject to the conditions set forth therein, to pay to Larry Abrams the principal amount of $223,000, of which $163,000 is payable on the Closing Date and $60,000 is payable on May 15, 1998. "Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation, in each case, by or before any Governmental Authority. "Additional Agreements" means the Employment Agreements and the Options. "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. "Audited Financial Statements" has the meaning set forth in Section 4.7. 3 "Bank Debt" means the Indebtedness owing by the Company to Congress Financial Corporation. "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in The City of New York. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations promulgated thereunder. "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System. "Closing" and "Closing Date" have the meanings specified in Section 2.3. "Code" means the Internal Revenue Code of 1986, as amended. "Company Stock" means the shares of Common Stock, no par value, of the Company. "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. "Cost of Sales" means, for any fiscal year, the sum of (a) the aggregate of the Steadi Group's equipment purchases, film stock purchases, video tape purchases, audio tape purchases, data media purchases, repair purchases, digital tech purchases and miscellaneous purchases and freight cost less purchase returns and allowances, rebates and discounts plus or minus net Inventory adjustments and giving effect to the establishment of appropriate reserves in respect of Inventory obsolescence, in each case, determined in a manner consistent with the Audited Financial Statements and (b) the aggregate cost of sales incurred by Parent or any Affiliate thereof in respect of New Business for such fiscal year, determined in a manner consistent with Parent's financial statements. "D&T" means Deloitte & Touche, L.L.P. "Employment Agreements" means the Employment Agreements to be executed by the Company and each of Richard D. Schoenberg and Robert Schoenberg, as of the Closing Date, substantially in the form of Exhibit A hereto. "Encumbrance" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential -2- 4 arrangement, or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. "Environment" means surface waters, groundwaters, soil, subsurface strata and ambient air. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any Environmental Permit (hereinafter "Claims"), including without limitation (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Laws" means any federal, state or local law or any foreign law, including any statute, rule, regulation, ordinance, code or rule of common law, now or hereafter in effect and in each case as amended, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including, without limitation, the CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss. 6901 et seq.; the Clean Water Act, 33 U.S.C. ss.ss. 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq.; the Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f et seq.; the Atomic Energy Act, 42 U.S.C. ss.ss. 2011 et seq.; and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq. "Environmental Permits" means all permits, written approvals, U.S. Environmental Protection Agency or state generator numbers, licenses and other authorizations from applicable Governmental Authorities required under any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "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. -3- 5 "Gross Profit" means, for any fiscal year, Net Sales minus Cost of Sales for such fiscal year, as determined in a manner consistent with the Audited Financial Statements and, with respect to New Business, Parent's financial statements. "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. "Immediate Family" means any spouse, brother, sister, parent or child of any specified individual. "Indebtedness" means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services, (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all Indebtedness of others referred to in clauses (a) through (f) 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 (h) all Indebtedness referred to in clauses (a) through (f) 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 all trademarks, patents, copyrights, tradenames, service marks, logos and all registrations and applications for registration thereof and all renewals or reissues thereof. -4- 6 "Inventories" and "Inventory" mean all inventory, merchandise, goods, raw materials, finished goods, packaging and supplies, maintained, held (including, without limitation, on consignment) or stored by or for any member of the Steadi Group, and held or offered for sale in the ordinary course of the Business, and any prepaid deposits for any of the same, but excluding any fixed assets (as such term is used in the Audited Financial Statements) held or offered for lease or rent. "Knowledge" (including the terms "to the knowledge of" or "to the best knowledge of") means, with respect to the Sellers, the actual personal knowledge of one or more of the Sellers at the time when the applicable statement is made as evidenced by one or more written statements or other documentary evidence. "Leased Real Property" means the real property leased by any member of the Steadi Group, as tenant, together with, to the extent leased by such member, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures attached or appurtenant thereto, and all easements, licenses, rights and appurtenances relating to the foregoing. "Liabilities" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any law (including, without limitation, any Environmental Law), rule, regulation, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking, including all indemnification obligations under any charter document, any indemnity agreement or as permitted under applicable law. "Material Adverse Effect" means any circumstance, change in, or effect on, the Business that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Business, taken as a whole: (a) is, or would be, materially adverse to the operations, assets or liabilities (including, without limitation, contingent liabilities), employee relationships, customer or supplier relationships, prospects, results of operations or the condition (financial or otherwise) of the Business or (b) would materially adversely affect the ability of the Purchaser to operate or conduct the Business in the manner in which it is currently operated or conducted by the Steadi Group. "Material Contracts" has the meaning specified in Section 4.8. "Multiplier" means, for the 12 month period ending December 31, 1998 (the "1998 Multiplier") or the 12 month period ending December 31, 1999 (the "1999 Multiplier"), the percentage (not to exceed 100%) set forth in the intersecting cell of the applicable Net Revenue column and Gross Profit column for such fiscal year as set forth on Exhibit B attached hereto. "New Business" means the sale of goods or services by Parent or any Affiliate thereof to any third party and which meets the following tests: (i) such third party was introduced to Parent or any Affiliate thereof by a Seller, (ii) such sale of goods or services would not have occurred but -5- 7 for the actions or steps taken by a Seller, (iii) the Seller shall have designated such sale as "New Business" hereunder prior to such introduction and prior to any such sale and (iv) "New Business" shall not include the wholesale sale or distribution of consumable computer and office supplies and shall not include sales of goods or services which are sold as part of the Business, regardless of whether such sales are by the Steadi Group or by Parent or an Affiliate of Parent (which shall be deemed sales of the Steadi Group). "Net Sales" means, for any fiscal year, the sum of (a) the aggregate of equipment sales, film stock sales, video tape sales, audio sales, data media sales, repair income, equipment rental fees, digital tech sales, equipment service fees, management and administration fees, processing fees, services charges, freight revenue and miscellaneous income received by the Steadi Group for such fiscal year, in each case, determined in a manner consistent with the Audited Financial Statements, plus (b) the aggregate net revenue received by Parent or any Affiliate thereof in respect of New Business for such fiscal year, determined in a manner consistent with Parent's financial statements. "Options" means options (which are designated as "incentive stock options" under the Code) to purchase 15,000 and 12,500 shares of Parent Common Stock, respectively, to be issued by Parent under and in accordance with the terms of the Daisytek International Corporation 1997 Stock Option Plan, to each of Richard Schoenberg and Robert Schoenberg, respectively, on the Closing Date. "Parent Common Stock" means the shares of Common Stock, $.01 par value, of Parent. "Permits" has the meaning specified in Section 4.17. "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Plan" has the meaning specified in Section 4.24. "Purchase Price" has the meaning specified in Section 2.2. "Regulations" means the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes. "Remedial Action" means all action reasonably necessary and required under any applicable Environmental Law or Environmental Permit and all action required by a Governmental Authority to (i) clean up, remove, treat or handle in any other way Hazardous Materials in the Environment; (ii) prevent the Release of Hazardous Materials so that they do not migrate, endanger or threaten to endanger public health or the Environment; or (iii) perform remedial -6- 8 investigations, feasibility studies, corrective actions, closures, and postremedial or postclosure studies, investigations, operations, maintenance and monitoring on, about or in any Real Property. "Sands Note" means the Buyout Note dated November 2, 1995 executed and delivered by the Company to William Sands in the original principal amount of $3,000,000. "Sellers' Representative" means Richard D. Schoenberg, or, in the event of his death or incapacity, such other person as may have been designated by him. "Shareholder Note" means the promissory note dated December 31, 1996 payable by Richard Schoenberg to the Company in the original principal amount of $442,121. "Shares" means the shares of Company Stock owned of record and beneficially by the Sellers. "Steadi Group" and the "members of the Steadi Group" mean the Company and the Subsidiaries, jointly and severally. "Subsidiaries" means the subsidiaries of the Company set forth on Schedule 4.2, each of which is referred to as a "Subsidiary". "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. ARTICLE II SALE AND PURCHASE OF SHARES 2.1 SALE AND PURCHASE OF SHARES. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, each Seller shall sell, transfer and convey to the Purchaser all the Shares owned by such Seller, and Parent shall cause the Purchaser to purchase and acquire, and the Purchaser shall purchase and acquire from each Seller all the Shares owned by such Seller. 2.2. PURCHASE PRICE. The aggregate purchase price ("Purchase Price") for the Shares shall be $7,638,000. The Purchase Price shall be allocated among the Sellers in accordance with Schedule 2.2. -7- 9 2.4. CLOSING. Subject to the terms and conditions of this Agreement, the purchase and sale of the Shares shall take place at a closing (the "Closing") to be held at the offices of Spitzer & Feldman P.C., 405 Park Avenue, New York, New York 10022 at 10:00 a.m., local time, on the date hereof (the "Closing Date"). ARTICLE III PAYMENT OF PURCHASE PRICE 3.1 PAYMENT OF PURCHASE PRICE. Subject to the terms set forth herein, the Purchase Price shall be payable in two installments. The first portion (the "Closing Payment") shall be equal to $5,698,000 and the second portion (the "Contingent Payment") shall be equal to $1,940,000. 3.2 CLOSING PAYMENT. The Closing Payment shall be payable at the Closing by wire transfer to an account designated by the Sellers' Representative and set forth on Exhibit C hereto. 3.3 ADDITIONAL PAYMENT. In the event that, pursuant to the terms of the Abrams Agreement, the conditions precedent to the payment by the Company thereunder of $60,000 on May 15, 1998 are not satisfied, the Purchaser shall pay such amount to the Sellers in accordance with the allocation and payment and delivery instructions set forth in Schedule 2.2 and Exhibit C. 3.4 CONTINGENT PAYMENT. The Contingent Payment shall be determined and payable in accordance with the following: (a) Not later than March 1, 1999, the Purchaser shall deliver to the Sellers' Representative a detailed statement (the "Contingent Payment Statement") of the Purchaser's chief financial officer setting forth (i) Net Sales, Cost of Sales and Gross Profit in respect of the 12 month period ending December 31, 1998 (including a detailed statement setting forth the items included therein) and (ii) the amount (the "Purchaser's Contingent Payment Amount") determined by multiplying the Contingent Payment by the 1998 Multiplier determined by the Purchaser. The Sellers' Representative and his 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 documentation reasonably requested in order to verify the accuracy of the Contingent Payment Statement. The Purchaser and the Sellers' Representative shall meet on a quarterly basis to review preliminary non-binding determinations of Net Sales, Cost of Sales and Gross Profit (and each of the items included therein) during the 1998 calendar year. (b) The Sellers' Representative shall have the right to dispute any amount set forth in the Contingent Payment Statement and the Purchaser's Contingent Payment Amount, provided, however, the Sellers' Representative shall notify (the "Sellers' Representative's Notice") the Purchaser in writing of the nature and basis of such dispute within 60 days of the Purchaser's delivery of the Contingent Payment Statement; provided, further, however, that such 60-day period shall be reasonably extended in the event there is any delay by the Purchaser in providing to the Sellers' Representative any of the information (including all necessary details) reasonably requested by the Sellers' Representative in connection with his review of the Contingent Payment Statement and supporting documentation. The Purchaser and the Sellers' Representative shall -8- 10 attempt to resolve all disputes set forth in the Sellers' Representative's Notice. In the event the difference between the Purchaser's Contingent Payment Amount and the amount determined by the Sellers' Representative as the Contingent Payment Amount does not exceed $100,000, then the Purchaser's Contingent Payment Amount shall be increased by one-half of such difference (but not to exceed $50,000) and such dispute shall be deemed conclusively determined and binding upon the parties. If the difference between the Purchaser's Contingent Payment Amount and the Sellers' Representative's Contingent Payment Amount exceeds $100,000 and the Purchaser and the Sellers' Representative are unable to resolve such dispute within 20 Business Days of the Purchaser's receipt of the Sellers' Representative's Notice, such dispute shall be submitted to D&T (or if such firm is unwilling or unable to serve, such other independent nationally recognized accounting firm mutually acceptable to the Purchaser and the Sellers' Representative) who shall, within 30 Business Days after such submission, resolve such disputed items in accordance with the terms of this Agreement, which resolution shall (absent manifest error) be final, binding and conclusive on the parties hereto. All fees and expenses of D&T (or other accounting firm as aforesaid) arising in connection with the resolution of disputes hereunder shall be divided equally between the Sellers and the Purchaser. (c) Concurrently with the delivery of the Contingent Payment Statement, the Purchaser shall deliver to the Sellers (in accordance with the allocation and payment and delivery instructions set forth in Schedule 2.2 and Exhibit C) the Purchaser's Contingent Payment Amount reflected therein. (d) Upon the final resolution of all disputes as provided in the preceding paragraph, the Purchaser shall deliver to the Sellers (in accordance with the allocation and payment and delivery instructions set forth in Schedule 2.2 and Exhibit C) the excess, if any, of (i) the amount determined by multiplying the Contingent Payment by the 1998 Multiplier, over (ii) the Purchaser's Contingent Payment Amount previously paid. (e) Notwithstanding the foregoing, the Contingent Payment shall be immediately payable in full to all Sellers (in accordance with the allocation and payment and delivery instructions set forth in Schedule 2.2 and Exhibit C) in the event that either or both of the Employment Agreements shall be terminated prior to the expiration of the Initial Term (as defined therein), except that the foregoing shall not apply to any voluntary termination by Richard or Robert Schoenberg thereunder. 3.5 CARRYOVER AMOUNT. If the First Contingent Payment Amount is less than the Contingent Payment, such shortfall (the "Carryover Amount") shall be determined and payable in accordance with the following: (a) Not later than March 1, 2000, the Purchaser shall deliver to the Sellers' Representative a detailed statement (the "Carryover Statement") of the Purchaser's chief financial officer setting forth (i) Net Sales, Cost of Sales and Gross Profit in respect of the 12 month period ending December 31, 1999 (including a detailed statement setting forth the items included therein) and (ii) the amount determined by multiplying the Carryover Amount by the 1999 Multiplier. The Sellers' Representative 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 -9- 11 supporting documentation reasonably requested in order to verify the accuracy of the Carryover Statement. The Purchaser and the Sellers' Representative shall meet on a quarterly basis to review preliminary non-binding determinations of Net Sales, Cost of Sales and Gross Profit (and each of the items included therein) during the 1999 calendar year. (b) All of the terms and provisions of Sections 3.4(b), (c), (d) and (e) above regarding payments, disputes, notices thereof, the resolution process thereof and the costs and expenses associated therewith shall apply to the Carryover Statement and the matters set forth therein. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Sellers hereby, jointly and severally, make the following representations and warranties to the Purchaser and Parent (except that no Seller shall be deemed to make any representation or warranty regarding any other Seller): 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of California with full corporate power and authority to own its properties and to carry on the Business as now conducted. Schedule 4.1 sets forth the state of incorporation of each Subsidiary, and each Subsidiary is a corporation, duly organized, validly existing and in good standing under the laws of its state of incorporation with full corporate power and authority to own its properties and to carry on the Business as now conducted. The Company and each Subsidiary 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, which are the only jurisdictions wherein the nature of the business conducted by it or its ownership or lease of real property requires it to be so qualified or licensed or to hold such permits. 4.2 CAPITALIZATION. The Sellers own all of the Shares which are the only shares of Company Stock which are issued and outstanding. The Company is not authorized to issue, and has not issued, any shares of capital stock or equity interests (whether common or preferred) other than the Shares. The total authorized and issued capital stock of each of the Subsidiaries is set forth on Schedule 4.2 (the "Subsidiaries Stock"). The Company is the lawful record and beneficial owner of all of the issued and outstanding shares of the Subsidiaries Stock and has good and marketable title thereto, free and clear of all Encumbrances. All of the issued and outstanding shares of Company Stock and Subsidiaries Stock have been duly authorized and validly issued in full compliance with all applicable federal, state and other securities and other laws, and without any violation of any pre-emptive rights and are fully paid and non-assessable. There are no other shares or other securities of the Company or any Subsidiary which are authorized, issued and/or outstanding other than the Shares and the Subsidiaries Stock owned by the Company. Except as set forth on Schedule 4.2, there are no outstanding subscriptions, options, warrants, rights, calls, contracts, commitments, understandings or agreements to purchase, redeem, retire, defease or otherwise acquire or relating to the issuance of any shares of Company Stock or other securities of the Company or any Subsidiary, including, without limitation, any options, rights, warrants or -10- 12 other rights of conversion or exchange under any outstanding securities or other instruments, other than this Agreement. Except as set forth in Schedule 4.2, the Company does not own any capital shares or other proprietary interests, directly or indirectly, in any Person, other than the Subsidiaries, and the Subsidiaries do not, jointly or severally, own any capital shares or other proprietary interests, directly or indirectly, in any Person. 4.3 CHARTER DOCUMENTS. The copies of the certificates of incorporation and by-laws of each of the Company and the Subsidiaries, certified by the respective secretaries or assistant secretaries thereof, which have been delivered to Purchaser are complete and correct in all respects. Except as set forth in Schedule 4.3, there are no voting trusts, stockholder agreements, proxies or other agreements or understandings currently in effect with respect to the voting or transfer of any of the shares of Company Stock or Subsidiaries Stock. 4.4 TITLE TO STOCK. Except as set forth in Schedule 4.4, each Seller represents he is the lawful record and beneficial owner of the number of Shares set forth opposite his name on Schedule 4.4 and each Seller represents he has good and marketable title thereto, free and clear of all Encumbrances, including, without limitation, any agreements, subscriptions, options, warrants, calls, commitments or rights of any character granting to any Person any interest or right to acquire from such Seller at any time, or upon the happening of any stated event, any of the Shares. Upon the delivery by each Seller to the Purchaser of the Shares owned by such Seller and set forth opposite his name on Schedule 4.4, the Purchaser shall acquire the legal, valid and indefeasible title to such Shares, free and clear of all Encumbrances and shall become the lawful record and beneficial owner thereof. Except for the Shares set forth opposite his name on Schedule 4.4, each Seller represents that he does not own any shares or any other Shares of capital stock, securities or equity interests of the Company. 4.5 AUTHORITY; BINDING OBLIGATION. Each Seller represents that he has all requisite power and authority to execute, deliver and perform his respective obligations under this Agreement and the Additional Agreements to which each may be a party and consummate the transactions contemplated herein and therein. Each Seller represents that this Agreement and the Additional Agreements have been duly executed and delivered by such Seller (to the extent a party thereto) and constitute the legal, valid and binding obligation of such Seller enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditor's rights' generally and to general equitable principles. 4.6 NO VIOLATIONS. Except as set forth in Schedule 4.6, the execution, delivery and performance of this Agreement and the Additional Agreements and the consummation of the transactions contemplated herein and therein by the Sellers parties thereto do not and will not, with or without the giving of notice or passage of time or both (a) violate, conflict with or result in the breach of any term or provision of, or require any notice, filing or consent under (i) the certificate of incorporation, by-laws or other charter documents of any member of the Steadi Group, (ii) any statutes, laws, rules, regulations, ordinances or Permits of any Governmental Authority applicable to Sellers or any member of the Steadi Group or (iii) any Governmental Order binding upon any Seller or any member of the Steadi Group or any of their respective properties or assets; (b) conflict with or result in the breach of any term or provision of, require any notice or consent under, give rise to a right -11- 13 of termination of, constitute a default under, result in the acceleration of, or give rise to a right to accelerate any obligation under, (i) any of the Material Contracts or (ii) any loan agreement, mortgage, indenture, financing agreement, lease or any other agreement or instrument to which (A) any Seller is a party or by which any of their respective properties or assets are bound or (B) the Company or any member of the Steadi Group is a party or by which any of their respective properties or assets are bound and which will cause a Material Adverse Effect; or (c) result in any Encumbrance on any of the properties or assets of any of the Sellers or any member of the Steadi Group. 4.7 FINANCIAL STATEMENTS. The Sellers have furnished to the Purchaser the audited consolidated balance sheet of the Company as at September 30, 1997 and the related audited consolidated statements of operations and retained earnings and cash flows for the twelve months then ended, including the notes thereto, certified by D&T (the "Audited Financial Statements"), copies of which are attached hereto as Schedule 4.7. The Audited Financial Statements (i) were prepared in all material respects in accordance with the books of account and other financial records of the Company and its Subsidiaries, (ii) fairly present the consolidated financial condition, results of operations, changes in retained earnings and, cash flows for Company and the Subsidiaries as of the dates and for the periods covered thereby and (iii) have been prepared in accordance with GAAP applied on a basis consistent with past practice. 4.8 BOOKS OF ACCOUNTS. To the best of the Sellers' knowledge, the books of account and other financial records of each member of the Steadi Group (i) reflect all material items of income and expense and all material assets and material liabilities required to be reflected therein in accordance with GAAP consistently applied and (ii) are in all material respects complete and correct and do not contain or reflect any material inaccuracies or discrepancies. 4.9 ABSENCE OF UNDISCLOSED LIABILITIES. No member of the Steadi Group has any Liabilities, except: (a) Liabilities that were reflected, disclosed or reserved against in the Audited Financial Statements and not heretofore paid or discharged; (b) Liabilities specifically disclosed in Schedule 4.9; (c) Liabilities incurred in, or as a result of, the ordinary course of the Business consistent with past practice since September 30, 1997 which do not exceed $25,000 for any one transaction or $50,000 in the aggregate; and (d) Liabilities in respect of open purchase orders of Inventory which are cancelable without penalty. 4.10 ACCOUNTS RECEIVABLE. To the Sellers' knowledge, Schedule 4.10 sets forth an aged list of trade accounts receivable arising in the ordinary course of the Business as of September 30, 1997 showing separately those accounts receivable that, as of such date, had been outstanding (i) for 30 days or less, (ii) 31 to 60 days, (iii) 61 to 90 days and (iv) more than 90 days, and a list of all other accounts receivable outstanding as of such date. Except for any allowance for doubtful accounts (considered in the aggregate) set forth therein, all accounts receivable reflected on the Audited Financial Statements (a) have arisen in the ordinary course of the Business consistent with past practice, (b) to the Sellers' knowledge, are not subject to any valid defenses, set-offs or counterclaims and (c) to the Sellers' knowledge, are good and collectible in full in the ordinary course of business and no member of the Steadi Group has received any written notice that any account debtor thereof intends to contest payment. Except as set forth in Schedule 4.10, each member of the Steadi Group has good and marketable title to all of its accounts receivable, free and clear of any Encumbrances. -12- 14 4.11 INVENTORY. Except as set forth in Schedule 4.11, all Inventories are in the physical possession of the Company or its Subsidiaries at the facilities located on the Leased Real Property. The value at which all Inventories are carried in the Audited Financial Statements reflect the historical inventory valuation policy of the Company. Except as set forth in Schedule 4.11, each member of the Steadi Group has good and marketable title to all of its Inventories, free and clear of all Encumbrances. Except as set forth in Schedule 4.11, the Inventory does not include any items held on consignment for others, and no member of the Steadi Group is under any obligation or liability with respect to accepting returns of Inventory or merchandise in the possession of its customers other than in the ordinary course of the Business consistent with past practice. As of the date hereof, the Sellers have no present knowledge that the Inventory reflected in the Audited Financial Statements is over-valued in any material respect or that any Inventory reserve is insufficient or inadequate in any material respect. 4.12 [Deleted] 4.13 [Deleted] 4.14 CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES. (a) Since September 30, 1997, except as disclosed in Schedule 4.14, there has not been any change in the condition (financial or otherwise) of the Business or the Liabilities, assets, customer or supplier relations, operations, results of operations, prospects or condition (financial or otherwise) of the Steadi Group, taken as a whole, including, without limitation, any damage or destruction of property by fire or other casualty, which change would have a Material Adverse Effect. (b) Since September 30, 1997, except as disclosed in Schedule 4.14, the Business has been conducted in all material respects in the ordinary course and consistent with past practice. For the avoidance of doubt and as amplification and not limitation of the foregoing, except as disclosed in Schedule 4.14, since September 30, 1997, no member of the Steadi Group has: (i) permitted or allowed any of its assets or properties (whether tangible or intangible) to be subjected to any Encumbrance, other than Encumbrances reflected in the Audited Financial Statements; (ii) amended, terminated, canceled or compromised any material claims or waived any other rights of value in excess of $25,000; (iii) sold, transferred, leased, subleased, licensed or otherwise disposed of any properties or assets, real, personal or mixed (including, without limitation, leasehold interests and intangible property), of or relating to the Business in excess of $25,000, other than in the ordinary course of the Business consistent with past practice; (iv) [deleted]; -13- 15 (v) (A) granted or proposed any increase, or announced any increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by it to any of its employees, other than aggregate annual increases which do not exceed $250,000, or (B) established or increased or promised or proposed to increase any benefits under any Plan, in either case except as required by law and except for ordinary increases consistent with the past practice of the Business; (vi) made any material change in any method of accounting or accounting practice or policy, other than such changes required by GAAP; (vii) made or changed any express or deemed election or settled or compromised any liability with respect to Taxes or prepaid any Taxes, except in the ordinary course of the Business consistent with past practice, or as may be required by any applicable law, rule or regulation; (viii) [deleted]; (ix) incurred any Indebtedness for borrowed money described in clauses (a), (c) and (f) of the definition of Indebtedness in excess of $10,000, in the aggregate and currently outstanding, except as reflected in the Audited Financial Statements or arising in the ordinary course of the Business consistent with past practice; (x) [deleted]; (xi) redeemed any of its capital stock or, declared, made or paid any dividends or distributions (whether in cash, securities or other property), other than dividends, distributions and redemptions declared, made or paid by any Subsidiary solely to the Company; (xii) issued or sold any capital stock, notes, bonds or other securities, or any option or warrant to purchase the same (other than the issuance by any Subsidiary solely to the Company); (xiii) amended or restated its charter or by-laws; (xiv) made any capital expenditure or commitment for any capital expenditure in excess of $100,000 individually or $250,000 in the aggregate; (xv) merged with, entered into a consolidation with or acquired (by purchase, merger, consolidation, stock acquisition or otherwise) a substantial portion of the assets or business of any other Person or any division or line of business thereof, or, except as permitted by clause (xiv), acquired any material assets other than in the ordinary course of the Business consistent with past practice; -14- 16 (xvi) entered into any agreement with any of its directors, officers or shareholders (or any Immediate Family member thereof); (xvii) made any loan to, guaranteed any Indebtedness of or otherwise incurred any Indebtedness on behalf of, any Person in excess of $10,000 which remains outstanding, other than Indebtedness solely among or between the members of the Steadi Group; (xviii) materially amended, modified or consented to the termination of any Material Contract or any of its rights therein, except in the ordinary course of Business and as would not reasonably be expected to have a Material Adverse Effect; (xix) allowed any Permit or Environmental Permit that was issued to it and is required to operate the Business in the ordinary course and consistent with past practice to lapse or terminate (unless the same has been reinstated); (xx) failed in the aggregate to maintain its plant, property and equipment in its general operating condition, ordinary wear and tear excepted; (xxi) to the best of Sellers' knowledge, violated any law, rule or regulation of any Governmental Authority or any Governmental Order which can reasonably be expected to have a Material Adverse Effect; (xxii) made any charitable contribution which would cause the aggregate amount of charitable contributions of all the members of the Steadi Group made since September 30, 1996 to exceed the aggregate amount of charitable contributions made by the Steadi Group during the fiscal year ended September 30, 1996; (xxiii) suffered any casualty loss or damage with respect to any of its assets, plant, property or equipment which, when aggregated with the casualty losses or damages of the other members of the Steadi Group suffered since September 30, 1997, would have a replacement cost of more than $250,000, whether or not such losses or damage shall have been covered by insurance; or (xxiv) agreed, whether in writing or otherwise, to take any of the actions specified in this Section or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights with respect to any of the actions specified in this Section, except as expressly contemplated by this Agreement. 4.15 LITIGATION. Except as set forth in Schedule 4.15 (which sets forth a summary of each Action disclosed therein containing the following information: parties, nature of the proceeding, date commenced, description of claim and amount of damages or other relief sought and, if applicable, paid or granted), to the knowledge of the Sellers, there are no Actions, pending or threatened, against any member of the Steadi Group. Except as set forth in Schedule 4.15, to the knowledge of the Sellers, no member of the Steadi Group nor any of their respective assets or properties, is subject to any Governmental Order (nor, to the knowledge of the Sellers, are there -15- 17 any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or would have a Material Adverse Effect. 4.16 COMPLIANCE WITH LAWS. Except as set forth in Schedule 4.16, to the knowledge of the Sellers, each member of the Steadi Group has each conducted and continues to conduct the Business substantially in accordance with all applicable laws, ordinances, statutes, rules, regulations and Governmental Orders applicable to it or any of its properties or assets or the Business (except where any such failure would not have a Material Adverse Effect), and, to the knowledge of the Sellers, no member of the Steadi Group is in material violation of any such law, ordinance, statute, rule, regulation or Governmental Order (except where any such violation would not have a Material Adverse Effect). No member of the Steadi Group nor any officer, director, employee, agent or representative of any member of the Steadi Group has violated or is currently in violation of the Foreign Corrupt Practices Act of 1977, as amended. 4.17 ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS. (a) Except as disclosed in Schedule 4.17, to the knowledge of the Sellers, each member of the Steadi Group currently holds all health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities (collectively, "Permits"), including, without limitation, Environmental Permits, necessary or proper for the current use, occupancy or operation of any of its assets or properties or the conduct of the Business (except where the failure to hold any such Permit or Environmental Permit will not have a Material Adverse Effect), and all such Permits and Environmental Permits are in full force and effect. To the knowledge of Sellers, Schedule 4.17 contains a true, correct and complete list of all Permits held by each member of the Steadi Group (setting forth the issuer thereof and any expiration or terminate date). Except as disclosed in Schedule 4.17, to the knowledge of the Sellers, there is no existing practice, action or activity of any member of the Steadi Group and no existing condition of the properties or assets of any member of the Steadi Group, or the Business, which will give rise to any civil or criminal Liability under, or violate or prevent compliance with, any health or occupational safety Environmental Law or other applicable statute, regulation, ordinance or decree (except where the same will not have a Material Adverse Effect). No member of the Steadi Group has received any notice from any Governmental Authority revoking, canceling, rescinding, materially modifying or refusing to renew any Permit or Environmental Permit or providing written notice of violations under any Environmental Law. Except as disclosed in Schedule 4.17, to the knowledge of the Sellers each member of the Steadi Group is in all material respects substantially in compliance with all applicable Permits, all applicable Environmental Laws and the requirements of all applicable Environmental Permits (except where the failure to be in compliance will not have a Material Adverse Effect). (b) Except as disclosed in Schedule 4.17, to the knowledge of the Sellers (i) Hazardous Materials have not been generated, used, treated, handled or stored on, or transported to or from, or released (as "release" is defined under any applicable Environmental Law) by any member of the Steadi Group on any Leased Real Property or any property adjoining any Leased Real Property; (ii) the members of the Steadi Group have disposed of all wastes, including those containing Hazardous Materials, in compliance with all applicable Environmental Laws and Environmental Permits; (iii) there are no past, pending or threatened Environmental Claims, nor -16- 18 any basis for asserting the same, against any member of the Steadi Group, or any Leased Real Property; and (iv) no Leased Real Property or any property adjoining any Leased Real Property, is listed or proposed for listing on the National Priorities List under CERCLA or on the CERCLIS or any analogous state list of sites requiring investigation or cleanup. 4.18 MATERIAL CONTRACTS. (a) Schedule 4.18 lists each of the following contracts and agreements to which any member of the Steadi Group is a party (such contracts and agreements being collectively referred to herein as the "Material Contracts"): (i) any contract, agreement, invoice, purchase order or other arrangement, whether oral or written which imposes upon any member of the Steadi Group the current or future obligation (whether primary or secondary, direct or contingent) to make any payment (or series of payments) of $100,000 or more and which is not terminable by any member of the Steadi Group without penalty or further payment at any time upon not more than 30 calendar days' notice; (ii) [deleted]; (iii) [deleted]; (iv) any indebtedness for borrowed money (including without limitation, all promissory notes, bonds, debentures, credit agreements, letters of credit, acceptances and other similar items) as to which any member of the Steadi Group has any Liability, whether as borrower or guarantor; (v) any contract or agreement with any Governmental Authority other than purchase orders in the ordinary course of the Business; (vi) [deleted]; (vii) any contract or agreements that limits the ability of any member of the Steadi Group to compete in any line of business or with any Person or entity or in any geographic area or during any period of time; (viii) any contract or agreement (including without limitation those relating to employment) between or among any member of the Steadi Group and any Seller (or any member of any Seller's Immediate Family); (ix) any collective bargaining agreement, employment contract, severance agreement and any contract, agreement for providing benefits under any Plan, except, in each case, any agreement or contract which is terminable by any member of the Steadi Group without penalty or further payment at any time upon not more than 30 calendar days' notice; and -17- 19 (x) any other contract or agreement, except those made in the ordinary course of the Business, which if terminated by the other party thereto (with or without notice and with or without cause) would cause a Material Adverse Effect. (b) Except as expressly set forth in Schedule 4.18 (which shall identify each such Material Contract), each Material Contract: (i) is valid and binding on the member of the Steadi Group that is a party to such Material Contract and, to the knowledge of the Sellers, on the other parties thereto and is in full force and effect, (ii) upon consummation of the transactions contemplated by this Agreement shall continue in full force and effect without penalty or other adverse consequence and unaffected by such transactions. No member of the Steadi Group is in material breach or default under the terms of any Material Contract. (c) Except as expressly set forth in Schedule 4.18 (which shall identify each such Material Contract), to the knowledge of the Sellers, no other party to any Material Contract is in material breach or default thereunder. (d) Except as expressly set forth in Schedule 4.18, there is no contract, agreement or other arrangement granting any Person any right of first refusal or similar preferential right to purchase any of the properties or assets of any member of the Steadi Group. (e) To their knowledge, the Sellers have delivered to the Purchaser true, correct and complete copies of each written Material Contract. (f) The Sellers have delivered to the Purchaser a true, correct and complete copy of the Abrams Agreement. 4.19 INTELLECTUAL PROPERTY. Except for the application filed for "Steadi-Systems Firm Video Multimedia Sales Service Rentals" in Class 042, no member of the Steadi Group owns (or has any rights as licensee in) any Intellectual Property. To the best of the Sellers' knowledge, no member of the Steadi Group has infringed upon, or used without authorization, any Intellectual Property of any other Person. 4.20 REAL PROPERTY. (a) Except as set forth in Schedule 4.20, no member of the Steadi Group currently owns or has ever owned any real property and no member of the Steadi Group is currently the lessor or sublessor of any real property. (b) Schedule 4.20 contains true and complete copies of all leases for each Leased Real Property and all amendments, modifications and supplements thereto and all material ancillary documents pertaining thereto. (c) Except as described in Schedule 4.20, no Seller has received any written notice of any material violation of any law, regulation or ordinance relating to any of the Leased Real Property. (d) With respect to each of the leases contained in Schedule 4.20: -18- 20 (i) such lease is legal, valid, binding, enforceable and in full force and effect with respect to the member of the Steadi Group that is a party thereto, and, to the knowledge of the Sellers, with respect to all other parties thereto and is the entire agreement between the parties thereto with respect to such property; (ii) [deleted]; (iii) except as otherwise disclosed in Schedule 4.20, with respect to each such lease: (A) no Seller nor any member of the Steadi Group has received any notice of cancellation or termination under such lease and, to the knowledge of the Sellers, no lessor has any right of termination or cancellation under such lease except in connection with the default of a member of the Steadi Group thereunder, and (B) no Seller nor any member of the Steadi Group has received any notice of a breach or default by any member of the Steadi Group under such lease, which breach or default has not been cured; and (iv) no member of the Steadi Group is presently in arrears with respect to any rental payments or other sums due under any such lease (other than payments due in respect of the current month) and, to the knowledge of the Sellers, no member of the Steadi Group nor any other party to such lease is in breach or default in any material respect, and, to the knowledge of the Sellers, no event has occurred that, with notice or lapse of time, would constitute such a material breach or default or permit termination, modification or acceleration under such lease. (e) To the knowledge of the Sellers, no member of the Steadi Group has, within the past 12 months, wrongfully terminated any lease or sublease for any real property or abandoned any real property held by it under lease or sublease. 4.21 TANGIBLE PERSONAL PROPERTY. (a) Schedule 4.21 contains true and complete copies of all leases (whether capital leases or operating leases) for tangible personal property to which any member of the Steadi Group is a party, as lessee, and which has remaining annual rental payments in excess of $35,000 and any and all material ancillary documents pertaining thereto (including, but not limited to, any amendments, consents and evidence of commencement dates and expiration dates). With respect to each of these leases: (i) such lease is legal, valid, binding, enforceable and in full force and effect in all material respects with respect to the member of the Steadi Group that is a party thereto and, to the knowledge of the Sellers, with respect to all other parties thereto and is the entire agreement between the parties thereto with respect to such property; (ii) [deleted]: (iii) except as otherwise disclosed in Schedule 4.21, with respect to each such lease: (A) no Seller nor any member of the Steadi Group has received any notice of cancellation or termination under such lease and, to the knowledge of the Sellers, no lessor has any right of termination or cancellation under such lease except in connection with the default of a member of the Steadi Group thereunder, and (B) no Seller nor any member of the Steadi Group has received -19- 21 any notice of a breach or default under such lease, which breach or default has not been cured; and (iv) member of the Steadi Group is presently in arrears with respect to any rental payments or other sums due under any such lease (other than payments due in respect of the current month) and, to the knowledge of the Sellers, no member of the Steadi Group, nor any other party to such lease, is in breach or default thereunder in any material respect, and, to the knowledge of the Sellers, no event has occurred that, with notice or lapse of time would, constitute such a material breach or default or permit termination, modification or acceleration under such lease. 4.22 CUSTOMERS. Listed in Schedule 4.22 are the names and addresses of the top ten customers of the Company and the members of the Steadi Group (on a consolidated basis), ranked by revenue, for the fiscal year ending September 30, 1997 and the respective revenue amounts for each such customer. Except as disclosed in Schedule 4.22, no Seller nor any member of the Steadi Group has received any written notice that any customer listed in Schedule 4.22 has ceased, or will cease, to use the products, equipment, goods or services of the Steadi Group, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services following the Closing Date. Also listed in Schedule 4.22 are the names and addresses of each Person holding goods or merchandise on consignment from any member of the Steadi Group and the cost to such member of the Steadi Group of the goods or merchandise shipped to such Person. 4.23 SUPPLIERS. Listed in Schedule 4.23 are the names and addresses of the top ten suppliers of the Company and the members of the Steadi Group (on a consolidated basis), ranked by purchases, for the fiscal year ending September 30, 1997 and the approximate respective purchase amounts for each such supplier. Except as disclosed in Schedule 4.23, no Seller nor any member of the Steadi Group has received any written notice that any supplier listed in Schedule 4.23 will not sell materials, supplies, merchandise and other goods to the Steadi Group at any time after the Closing Date on terms and conditions similar to those imposed on current sales, except for general and customary price increases. Schedule 4.23 also contains a true, correct and complete copy of the written distributor agreement or similar agreement between any supplier listed therein and any member of the Steadi Group (other than ordinary purchase orders and correspondence arising in the ordinary course of the Business), and, to the knowledge of the Sellers, no member of the Steadi Group is in breach or default thereunder in any material respect. 4.24 EMPLOYEE BENEFIT MATTERS. (a) Plans and Material Documents. Schedule 4.24 lists (i) all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements to which any member of the Steadi Group is a party, with respect to which any member of the Steadi Group has any obligation or which are maintained, contributed to or sponsored by any member of the Steadi Group for the benefit of any current or former employee, officer or director of such member and (ii) each employee benefit plan for which any member of the Steadi Group could incur liability -20- 22 under Section 4069 of ERISA in the event such plan has been or were to be terminated (collectively, the "Plans"). Except as set forth in Schedule 4.24, each Plan is in writing and the Sellers have furnished the Purchaser with a complete and accurate copy of each written Plan and a complete and accurate copy of each material document prepared in connection with each such Plan, including, where applicable, without limitation, (i) each current trust or other funding arrangement, (ii) each current summary plan description and summary of material modifications, (iii) the most recently filed Internal Revenue Service ("IRS") Form 5500, (iv) the most recently received IRS determination letter for each such Plan, and (v) the most recently prepared actuarial report and financial statement in connection with each such Plan. Except as disclosed on Schedule 4.24, there are no other employee benefit plans, programs, arrangements or agreements, whether formal or informal, whether in writing or not, to which any member of the Steadi Group is a party, with respect to which any member of the Steadi Group has any obligation or which are maintained, contributed to or sponsored by any member of the Steadi Group for the benefit of any current or former employee, officer or director of such member. (b) [deleted]. (c) Compliance with Applicable Law. To the Sellers' knowledge, each Plan offered by any member of the Steadi Group is operated in all material respects in accordance with the requirements of all applicable law, including, without limitation, ERISA and the Code, and, to the knowledge of the Sellers, all persons who participate in the operation of such Plans and all Plan "fiduciaries" (within the meaning of Section 3(21) of ERISA) have acted in all material respects in accordance with the provisions of all applicable law, including, without limitation, ERISA and the Code. To the Sellers' knowledge, each member of the Steadi Group has performed all material obligations required to be performed by it under, is not in any material respect in default under or in violation of, and has no knowledge of any default or violation by any party to any Plan. (d) Qualification of Certain Plans. To the knowledge of the Sellers, no fact or event has occurred since the date of any Plan's determination letter from the IRS to adversely affect the qualified status of any such Plan or the exempt status of any such trust established in connection therewith. (e) Absence of Certain Liabilities and Events. To the knowledge of the Sellers, there has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan. To the knowledge of the Sellers, no member of the Steadi Group has incurred any liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B of the Code and, to the knowledge of the Sellers, no fact or event exists which could give rise to any such liability. To the knowledge of the Sellers, no member of the Steadi Group has incurred any material liability under, arising out of or by operation of Title IV of ERISA (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course); and, to the knowledge of the Sellers, no fact or event exists which could give rise to any such liability. To the knowledge of the Sellers, no complete or partial termination has occurred within the five years preceding the date hereof with respect to any Plan subject to -21- 23 Title IV of ERISA. To the knowledge of the Sellers, no reportable event (within the meaning of Section 4043 of ERISA) has occurred or is expected to occur with respect to any Plan subject to Title IV of ERISA. To the knowledge of the Sellers, no Plan had an accumulated funding deficiency (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the most recently ended plan year of such Plan. None of the assets of any member of the Steadi Group is the subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code; no member of the Steadi Group has been required to post any security under Section 307 of ERISA or Section 401(a)(29) of the Code; and, to the knowledge of the Sellers, no fact or event exists which could give rise to any such lien or requirement to post any such security. (f) Plan Contributions and Funding. To the Sellers' knowledge, all employer and employee contributions, premiums or payments required to be made with respect to any Plan have been made on or before their due dates. To the Sellers' knowledge, as of the date hereof, no Plan which is subject to Title IV of ERISA has an "unfunded benefit liability" (within the meaning of Section 4001(a)(18) of ERISA). 4.25 LABOR MATTERS. Except as set forth in Schedule 4.25, (a) no member of the Steadi Group is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by any member of the Steadi Group and currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit which could affect any member of the Steadi Group; (b) there are no strikes, slowdowns or work stoppages pending or, to the best knowledge of the Sellers, threatened between any member of the Steadi Group and any of their respective employees, and no member of the Steadi Group has experienced any such strike, slowdown or work stoppage within the past three years; (c) to the Sellers' knowledge, each member of the Steadi Group is currently in material compliance with all applicable laws, rules and regulations relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Authority and has withheld and paid to the appropriate Governmental Authority or is holding for payment not yet due to such Governmental Authority all amounts required to be withheld from such employees of such member of the Steadi Group and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing (except as otherwise reflected in the Audited Financial Statements); (d) there is no material claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or, to the knowledge of the Sellers, threatened before any Governmental Authority with respect to any persons currently or formerly employed by any member of the Steadi Group; (e) no member of the Steadi Group is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices; (f) to the Sellers' knowledge, there is no material charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted in the past 12 months or is now pending or threatened with respect to any member of the Steadi Group; (g) to the Sellers knowledge, there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted in the past 12 months or is now pending or, threatened in writing before the United States Equal Employment Opportunity Commission, or any other Governmental Authority in any jurisdiction in which any member of the Steadi Group has employed employees; (h) no member of the Steadi Group has violated or otherwise failed to comply with the requirements of the Workers Adjustment and -22- 24 Retraining Notification Act; and (i) no member of the Steadi Group is party to any written employment agreement. 4.26 KEY EMPLOYEES. Schedule 4.26 lists the name, place of employment, the current annual salary rates, bonuses, deferred or contingent compensation (other than compensation under a 401(k) plan), "golden parachute" and other like benefits paid or payable (in cash or otherwise), the date of employment and job title of each current salaried employee, officer, director, consultant or agent of any member of the Steadi Group whose annual compensation exceeds $100,000 for the fiscal year ending September 30, 1997. 4.27 CERTAIN INTERESTS. (a) Except as disclosed in Schedule 4.27, no Seller or Immediate Family member thereof: (i) has any direct or indirect financial interest in any competitor, supplier or customer of any member of the Steadi Group, provided, however, that the ownership of securities representing no more than two percent of the outstanding voting power of any competitor, supplier or customer, and which are also listed on any national securities exchange or traded actively in the national over-the-counter market, shall not be deemed to be a "financial interest" so long as the Person owning such securities has no other connection or relationship with such competitor, supplier or customer; (ii) owns, directly or indirectly, in whole or in part, or has any other interest in any material tangible or intangible property which any member of the Steadi Group uses or proposes to use in the conduct of the Business; or (iii) has outstanding any Indebtedness in excess of $5,000 to any member of the Steadi Group. 4.28 TAXES. Except as set forth in Schedule 4.28, (i) all returns and reports in respect of Taxes required to be filed with respect to each member of the Steadi Group or the Business have been timely filed; (ii) all Taxes required to be shown on such returns and reports or otherwise due have been timely paid; (iii) all such returns and reports are true, correct and complete in all material respects; (iv) no adjustment relating to such returns has been proposed formally or informally by any Governmental Authority and, to the knowledge of the Sellers, no basis exists for any such adjustment; (v) there are no pending or, to the knowledge of the Sellers, threatened actions or proceedings for the assessment or collection of Taxes against any member of the Steadi Group or any corporation that was included in the filing of a return with any member of the Steadi Group on a consolidated or combined basis; (vi) no consent under Section 341(f) of the Code has been filed with respect to any member of the Steadi Group; (vii) there are no Tax liens on any assets of any member of the Steadi Group or of the Business; (viii) there are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which any member of the Steadi Group may be subject; (ix) there are no requests for information currently outstanding that could affect the Taxes of any member of the Steadi Group; (x) there are no proposed reassessments of any property owned by any member of the Steadi -23- 25 Group; and (xi) no power of attorney that is currently in force has been granted with respect to any matter relating to Taxes. 4.29 INSURANCE. (a) Schedule 4.29 sets forth true, correct and complete copies of all insurance policies (including policies providing property, casualty, liability, workers' compensation, and bond and surety arrangements) under which any member of the Steadi Group is presently an insured, a named insured or otherwise the principal beneficiary of coverage thereunder. (b) With respect to each such insurance policy: (i) the policy is legal, valid, binding and enforceable in accordance with its terms with respect to the member of the Steadi Group that is a party thereto and, to the knowledge of the Sellers, with respect to the other parties thereto and, to the Sellers' knowledge, is in full force and effect; (ii) to the Sellers' knowledge, no member of the Steadi Group is in breach or default (including any breach or default with respect to the payment of premiums or the giving of notice), and no event has occurred which, with notice or the lapse of time, would constitute such a material breach or default or which would permit termination or modification, under the policy; and (iii) no party to the policy has repudiated, or given notice of an intent to repudiate, any provision thereof. (c) No member of the Steadi Group is self-insured or covered under any risk retention program. The terms "self-insured" and "risk retention program" as used in this Section shall not refer to the mere absence of insurance, but, in the case of self-insurance, to a formal program of self-insurance that includes the actuarial projections of losses, the maintenance of reserves and the adherence to formal claim procedures and, in the case of a risk retention program, to means other than insurance by which the availability of funds to pay losses arising out of defined risks is assured before the losses occur (including, without limitation, retention group). (d) All material properties and risks of the Business and of each member of the Steadi Group are, and for the past five years have been, covered by valid and, except for policies that have expired under their terms in the ordinary course, currently effective insurance policies or binders of insurance (including, without limitation, general liability insurance, property insurance and workers' compensation insurance) issued in favor of such member of the Steadi Group or the member of the Steadi Group bearing such risk of the Business. (e) At no time during the past three years has any member of the Steadi Group (i) been denied any insurance or indemnity bond coverage which it has requested, (ii) made any material reduction in the scope or amount of its insurance coverage, or received notice from any of its insurance carriers that any insurance premiums will be subject to increase in an amount materially disproportionate to the amount of the increases with respect thereto (or with respect to similar insurance) in prior years or that any insurance coverage will not be available in the future substantially on the same terms as are now in effect, except for increases in premiums occurring in the ordinary course of the Business or (iii) suffered any extraordinary increase in premium for renewed coverage, except increases applicable to all insureds under similar policies. During the past three years, no insurance carrier has canceled, failed to renew or materially reduced any -24- 26 insurance coverage for any member of the Steadi Group or given any notice or other indication of its intention to cancel, not renew or reduce any such coverage. 4.30 ACCOUNTS; LOCKBOXES; SAFE DEPOSIT BOXES; POWERS OF ATTORNEY. Schedule 4.30 is a true and complete list of (i) the names of each bank, savings and loan association, or other financial institution in which any member of the Steadi Group has an account, and the names of all persons authorized to draw thereon or have access thereto, (ii) the location of all lockboxes and safe deposit boxes of each member of the Steadi Group and the names of all Persons authorized to draw thereon or have access thereto and (iii) the names of all Persons, if any, holding powers of attorney from any member of the Steadi Group relating to the Business. On the Closing Date, no member of the Steadi Group shall have any such account, lockbox or safe deposit box other than those listed in Schedule 4.31, 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. Except as disclosed in Schedule 4.31, no member of the Steadi Group has commingled monies or accounts of any member of the Steadi Group with other monies or accounts of the Sellers. 4.31 BROKERS. Except for Barrington Associates, whose fees and other compensation shall be paid by the Sellers, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Sellers or any member of the Steadi Group. 4.32 FULL DISCLOSURE. No Seller has knowledge of any facts pertaining to the Sellers, any member of the Steadi Group or the Business which, in such Seller's reasonable opinion, could have a Material Adverse Effect and which have not been disclosed in this Agreement or any of the Schedules hereto. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER Parent and the Purchaser, jointly and severally, represent and warrant to the Sellers as follows: 5.1 ORGANIZATION AND QUALIFICATION. Each of Parent and the Purchaser is a corporation duly organized validly existing and in good standing under the laws of its state of incorporation with full corporate power and authority to own its properties and to carry on its business as now conducted. Each of Parent and the Purchaser 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 wherein the nature of the business conducted by it or its ownership or lease of real property requires it to be so qualified or licensed or to hold such permits. The Purchaser is a wholly-owned subsidiary of Parent. 5.2 AUTHORITY; BINDING OBLIGATION. Parent and the Purchaser have all requisite power and authority to execute, deliver and perform their respective obligations under this Agreement and the Additional Agreements to which each may be a party and consummate the transactions -25- 27 contemplated herein and therein. The Purchaser's and Parent's execution, delivery and performance of this Agreement and the Additional Agreements to which each may be a party and the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and this Agreement and the Additional Agreements have been duly executed and delivered by the Purchaser and Parent (to the extent parties thereto) and constitute the legal, valid and binding obligation of the Purchaser and Parent (to the extent parties thereto) enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditor's rights' generally and to general equitable principles. 5.3 NO VIOLATIONS. The execution and delivery of this Agreement and the Additional Agreements and the consummation of the transactions contemplated herein and therein by the Purchaser and Parent (to the extent parties thereto) do not and will not, with or without the giving of notice or passage of time or both (a) violate, conflict with or result in the breach of any term or provision of, or require any notice, filing or consent under (i) the certificate of incorporation, by-laws or other charter documents of the Purchaser or Parent, (ii) any statutes, laws, rules, regulations, ordinances or Permits of any Governmental Authority applicable to Purchaser or Parent or (iii) any Governmental Order binding upon the Purchaser or Parent or any of their respective properties or assets; (b) conflict with or result in the breach of any term or provision of, require any notice or consent under, give rise to a right of termination of, constitute a default under, result in the acceleration of, or give rise to a right to accelerate any obligation under, any material contract or any loan agreement, mortgage, indenture, financing agreement, lease or any other agreement or instrument to which the Purchaser or Parent is a party or by which any of their respective properties or assets are bound; or (c) result in any Encumbrance on any of the properties or assets of the Purchaser or Parent. 5.4 SEC DOCUMENTS. Parent has filed all required reports, schedules, forms, statements and other documents with the Securities and Exchange Commission the ("SEC Documents"). Parent has made available to the Sellers true, correct and complete copies of all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and final Proxy Statements included within the SEC Documents. All of the SEC Documents (other than preliminary material or material which was subsequently amended), as of their respective filing dates, complied in all material respects with all applicable requirements of the Act, and the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). None of the SEC Documents, as of their respective dates, contained any untrue statements of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been amended, modified or superseded by later SEC Documents. Parent's consolidated financial statements included in the SEC Documents were prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP, the consolidated financial position thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end adjustments). 5.5 FINANCIAL ABILITY. The Purchaser and Parent have the financial resources to pay the Purchase Price and consummate the transactions described herein. -26- 28 5.6 BROKERS AND FINDERS. Neither the Purchaser nor Parent has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. 5.7 FULL DISCLOSURE. No representation or warranty of Parent or the Purchaser in this Agreement, or any Schedule hereto, or any certificate furnished or to be furnished to the Sellers pursuant to this Agreement, contains or will contain any untrue statements of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE VI POST-CLOSING COVENANTS 6.1 PERSONAL GUARANTIES. Schedule 6.1 sets forth a true, correct and complete copy of personal guarantees (the "Personal Guarantees") executed and delivered by certain Sellers with respect to obligations (the "Guaranteed Obligations") of the Company or members of the Steadi Group, together with true, correct and complete copies of all instruments, agreements and documents evidencing the Guaranteed Obligations. Following the Closing, Parent agrees to indemnify and hold the Sellers harmless from and against and in respect of any claim or demand made or asserted under the Personal Guarantees with respect to the Guaranteed Obligations. 6.2 CREDIT SUPPORT. Following the Closing, Parent agrees to provide the Company with the necessary credit support (whether by means of inter-company loans, advances, guarantees or other method, and upon such terms and conditions, reasonably deemed appropriate by Parent), but not to exceed the principal amount of $4,500,000 (excluding the repayment of the Sands Note), to continue to operate the Business in the ordinary course and the reasonably projected growth thereof. 6.3 NO THIRD PARTY BENEFIT. Except for the parties hereto and their permitted successors and assigns, nothing contained in this Article VI shall confer upon any Person any rights, remedies or benefits, nor shall any such Person be deemed a third party beneficiary thereof. ARTICLE VII CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS The obligation of the Sellers to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by the Sellers' Representative, prior to or at the Closing, of each of the following conditions precedent: 7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Parent and the Purchaser contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same effect as though such representations and warranties were made or given on and as of such date (other than such representations and warranties as are made as of another specified date, which shall be true and correct as of such other specified date). -27- 29 7.2 PERFORMANCE OF OBLIGATIONS. Parent and the Purchaser shall have performed and complied with all of the covenants, agreements and conditions required by this Agreement to be performed and complied with by them prior to or on the Closing Date. 7.3 COMPLIANCE CERTIFICATE. Parent and the Purchaser shall each have delivered to Sellers' Representative on the Closing Date a certificate signed by an authorized officer thereof and dated as of the Closing Date to the effect that each of the representations and warranties of Parent and the Purchaser, respectively, contained in this Agreement is true, correct and complete in all material respects as of the Closing Date (other than such representations and warranties as are made as of another specified date, which shall be true and correct as of such other specified date), and each of Parent and the Purchaser, respectively, has complied with, fulfilled and performed each of the covenants, terms and conditions to be complied with, fulfilled or performed by it under this Agreement on or prior to the Closing Date 7.4 ABSENCE OF LITIGATION. No Action shall be threatened or pending on the Closing Date in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such Action shall be pending or threatened. 7.5 REQUIRED CONSENTS AND APPROVALS; HSR. Each Governmental Authority and all other Persons whose approval, consent or waiver may be necessary or required with respect to the transactions contemplated herein shall have given or granted such approval, consent or waiver. Specifically, but without limiting the foregoing, any waiting period (and any extension thereof) under the HSR Act shall have expired or shall have been terminated. 7.6 RESOLUTIONS. The Sellers' Representative shall have received a true and complete copy, certified by the Secretary or Assistant Secretary of each of Parent and the Purchaser, of the resolutions duly adopted by the Board of Directors of each of Parent and the Purchaser evidencing its authorization of the execution and delivery of this Agreement and the Additional Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby. 7.7 INCUMBENCY CERTIFICATE. The Sellers' Representative shall have received a certificate of the Secretary or Assistant Secretary of each of Parent and the Purchaser certifying the names and signatures of the officers of Parent and the Purchaser authorized to sign this Agreement and the Additional Agreements to which is a party. 7.8 LEGAL OPINION. The Sellers' Representative shall have received a legal opinion, dated as of the Closing Date, of Wolff & Samson, P.A., as to the matters set forth in Sections 5.1, 5.2 and 5.3, substantially in the form of Exhibit D. 7.9 ADDITIONAL AGREEMENTS. The Company shall have executed and delivered the Employment Agreements and Parent shall have executed and delivered the Options. -28- 30 7.10 PAYMENT OF BANK DEBT. Parent shall provide the Company with the necessary funds to repay the Bank Debt in full and the Company shall cause the Bank Debt to be paid in full and all collateral securing the same shall be released. 7.11 SANDS NOTE. Parent shall provide the Company with the necessary funds to pay the Sands Note in full and the Company shall cause the Sands Note to be paid in full and all collateral securing the same shall be released. 7.12 ABRAMS AGREEMENT. Parent shall provide the Company with the necessary funds to pay the Closing payment due under the Abrams Agreement and the Company shall pay such amount to Larry Abrams. 7.13 CLOSING PAYMENT. The Purchaser shall have made the payment set forth in Section 3.2 in accordance with the allocation and payment instructions set forth in Schedule 2.2 and Exhibit C. ARTICLE VIII CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS The obligation of the Purchaser and Parent to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by the Purchaser, prior to or at the Closing, of each of the following conditions precedent: 8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Sellers contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same effect as though such representations and warranties were made or given on and as of such date (other than such representations and warranties as are made of another specified date, which shall be true and correct as of such other specified date). 8.2 PERFORMANCE OF OBLIGATIONS. Sellers shall have performed and complied with all of the covenants, agreements and conditions required by this Agreement to be performed and complied with by them prior to or on the Closing Date. 8.3 COMPLIANCE CERTIFICATE. Sellers shall have delivered to Purchaser on the Closing Date a certificate signed by or on behalf of Sellers and dated as of the Closing Date to the effect that each of the representations and warranties of Sellers contained in this Agreement is true, correct and complete in all material respects as of the Closing Date (other than such representations and warranties as are made of another specified date, which shall be true and correct as of such other specified date), and Sellers have complied with, fulfilled and performed each of the covenants, terms and conditions to be complied with, fulfilled or performed by Sellers under this Agreement on or prior to the Closing Date. 8.4 ABSENCE OF LITIGATION. No Action shall be threatened or pending on the Closing Date in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such Action shall be pending or threatened. -29- 31 8.5 REQUIRED CONSENTS AND APPROVALS; HSR. Each Governmental Authority and all other Persons whose approval, consent or waiver may be necessary or required with respect to the transactions contemplated herein shall have given or granted such approval, consent or waiver. Specifically, but without limiting the foregoing, any waiting period (and any extension thereof) under the HSR Act shall have expired or shall have been terminated. 8.6 ORGANIZATIONAL DOCUMENTS; MINUTE BOOKS. The Purchaser shall have received for each member of the Steadi Group (i) its certificate of incorporation, as amended, certified by the Secretary of State (or other similar official) of its state of incorporation, (ii) a long form good standing certificate from the Secretary of State (or other similar official) of its state of incorporation and each other jurisdiction set forth in Schedule 4.1 hereof, (iii) a copy of its By-laws, certified by the Secretary of such member, (iv) the original minute book and stock ledger or register, certified by the Secretary of such member and (v) the resignation of each member of its Board of Directors. 8.7 LEGAL OPINION. The Purchaser shall have received a legal opinion, dated as of the Closing Date, of Spitzer & Feldman, as to the matters set forth in Sections 4.1, 4.2, 4.4, 4.5, 4.6 and 4.15, substantially in the form of Exhibit E. In rendering such opinion, such counsel may rely as to factual matters upon certificates or other documents furnished by the Sellers and officers of the Company and government officials and upon such other documents as such counsel deems appropriate as the basis for such opinion. 8.8 ADDITIONAL AGREEMENTS. Richard Schoenberg and Robert Schoenberg shall have executed and delivered the Employment Agreements. 8.9 ABRAMS AGREEMENT. Provided Parent shall have delivered the necessary funds therefor, the Company shall pay the Closing Payment due under the Abrams Agreement to Larry Abrams. 8.10 SHAREHOLDER NOTE. The Shareholder Note shall have been discharged or paid in full as of the Closing Date and the Purchaser shall have received a copy thereof marked canceled. 8.11 BANK DEBT. Provided Parent shall have delivered the necessary funds therefor, the Company shall have caused the Bank Debt to be paid in full and all collateral securing the same shall be released. 8.12 SANDS NOTE. Provided Parent shall have delivered the necessary funds therefor, the Company shall have caused the Sands Note to be paid in full and all collateral securing the same shall be released. 8.13 STOCK CERTIFICATES. The Purchaser shall have received original stock certificates evidencing the Shares, duly endorsed in blank, or accompanied by stock powers duly executed in blank, in form reasonably satisfactory to the Purchaser, with all required stock transfer tax stamps affixed -30- 32 8.14 BARRINGTON RELEASE. Barrington Associates shall have delivered to the Company a full and unconditional release of any obligation or liability to pay any fee, commission or other amount (including any reimbursement of expenses) in connection with the transactions described herein or any other matter. 8.15 MAXIMUM DEBT. As of the Closing Date, the outstanding principal balance of (i) the Sands Note shall not exceed $2,045,000 and (ii) the Bank Debt shall not exceed $2,900,000. ARTICLE IX OTHER MATTERS 9.2 FEES AND EXPENSES. Except for the fees and expenses of D&T in connection with the Audited Financial Statements (which shall be apportioned between the Company and the Purchaser in accordance with a separate engagement letter of D&T), all legal, accounting, investment banking and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Without limiting the foregoing, the Sellers shall be responsible for and pay and discharge all fees and expenses payable to Barrington Associates and Spitzer & Feldman in connection with the negotiation, preparation and consummation of this Agreement and the transactions contemplated hereby. 9.3 TAXES. Each party and their respective Affiliates shall be liable for all federal, state and local taxes on capital gains, transfer, documentary, stamp and other similar taxes which may be due or payable by it in connection with the consummation of the transactions contemplated hereunder. ARTICLE X INDEMNIFICATION 10.1 INDEMNIFICATION BY SELLERS. From and after the Closing, the Sellers shall, jointly and severally, but subject to the limitations of Section 10.3 hereof, reimburse, indemnify and hold harmless the Purchaser, Parent and their respective officers, directors, employees, agents, representatives and successors and assigns (collectively, "Purchaser Indemnitees") from and against and in respect of each of the following (collectively, the "Purchaser's Indemnification Events"): (a) any and all actual damages, losses, deficiencies, liabilities, claims, demands, charges, costs and expenses of every nature and character whatsoever, including, without limitation, reasonable attorneys' fees and costs, excluding punitive or consequential damages of any kind (collectively, the "Losses") that result from or arise out of any misrepresentation or breach of warranty of the Sellers in this Agreement or any of the Schedules provided hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of the Sellers or any of them in connection with the performance of this Agreement and the transactions contemplated herein; and (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses incident to any of the foregoing or to the successful enforcement of this Section. -31- 33 10.2 INDEMNIFICATION OF SELLERS. From and after the Closing, the Purchaser and Parent shall, jointly and severally, but subject to the limitations of Section 10.3 hereof, reimburse, indemnify and hold harmless Sellers and each of their respective heirs, estate, successors and assigns (collectively, "Seller Indemnitees") from and against and in respect of each of the following (collectively, the "Sellers' Indemnification Events"): (a) any and all Losses that result from or arise out of any misrepresentation or breach of warranty of the Purchaser or Parent in this Agreement or any of the Schedules provided hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of the Purchaser or Parent in connection with the performance of this Agreement and the transactions contemplated herein; and (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses incident to any of the foregoing or to the successful enforcement of this Section. 10.3 LIMITATIONS ON LOSSES (a) In case any event shall occur that would otherwise entitle any party to assert a claim for indemnification hereunder, no Losses shall be deemed to have been sustained by such party to the extent of (i) any actual tax savings realized by such party with respect thereto or (ii) any proceeds (net of deductibles, taxes and collection costs) received by such party from any insurance policies maintained by or on behalf of such party with respect to losses to such party's property. The parties agree to submit a claim under such insurance policies prior to or promptly following making a request for indemnification hereunder. (b) No Seller shall be liable under Section 10.1 for any misrepresentation or breach of warranty solely made by any other Seller. (c) Robert Schoenberg and Steven Klein shall only be liable for 20% and 10%, respectively, of all Losses, except for a misrepresentation or breach of warranty made by them individually as set forth in Sections 4.2, 4.4 or 4.5 hereof. (d) The maximum liability of each Seller under Section 10.1 shall not exceed an amount equal to such Seller's proportionate share (as set forth in Schedule 2.2) of the Purchase Price (each Seller's "Maximum Liability"), provided, however, that to the extent any Seller has not received his full allocable share of the Purchase Price, then (i) such Seller shall not be required to pay any amount in excess of the portion of the Purchase Price received by him and (ii) the Purchaser may offset any shortfall against any portion of the Purchase Price thereafter payable to such Seller up to the amount of his Maximum Liability. (e) The sum of all Losses incurred by the Purchaser and Parent in the aggregate, or the sum of all Losses incurred by all Sellers in the aggregate, must exceed $250,000 before such parties shall be entitled to indemnification hereunder; provided, however, once such Losses exceed $250,000, such parties shall be entitled to indemnification for all Losses to the extent such Losses exceed $100,000 (it being agreed that such parties shall only be liable for such excess amounts). -32- 34 (f) No party shall have any liability hereunder in respect of claims asserted against any Indemnified Party on or after March 1, 2000; provided, however, (i) the representations and warranties of the Sellers relating to (A) title to the Shares shall survive indefinitely and (B) Taxes and Environmental matters shall survive until the applicable statute of limitations has expired and (ii) except as to claims asserted on or prior to May 15, 1998, the maximum aggregate liability of the Sellers shall not exceed the unpaid Contingent Payment. The limitation set forth in this paragraph shall not apply to any claim asserted on or before May 15, 1998 or March 1, 2000, as the case may be. (g) Purchasers' Indemnification Events shall not include any misrepresentation or breach of warranty set forth in Section 4.7, to the extent the same relates to accounts receivable or Inventory and does not constitute a misrepresentation or breach of warranty set forth in Sections 4.10 or 4.11, respectively. (h) Purchaser's Indemnification Events shall not include any misrepresentation or breach of warranty of which Parent or Purchaser has actual knowledge (as evidenced by the Schedules hereto or a written statement or other documentary evidence addressed and delivered to Parent or Purchaser) prior to or as of the Closing. (i) None of the limitations set forth in this Section 10.3, or the provisions of Section 10.5, shall apply to any party who is found to have fraudulently made any misrepresentation hereunder. 10.4 NOTICE. (a) Promptly after receipt by an Indemnified Party of notice of the assertion of any claim by a Person not a party to this Agreement (a "Third Party Claim") with respect to which such Indemnified Party expects to make a request for indemnification hereunder, such Indemnified Party shall give the Indemnifying Party written notice describing such claim in reasonable detail. The Indemnifying Party shall, upon receipt of such notice, be entitled to participate in or, at the Indemnifying Party's option, assume the defense, appeal or settlement of, such claim with respect to which such indemnity has been invoked with counsel selected by it and approved by the Indemnified Party (such approval not to be unreasonably withheld), and the Indemnified Party will fully cooperate with the Indemnifying Party in connection therewith; provided, that the Indemnified Party shall be entitled to employ separate counsel (at the expense of the Indemnifying Party) to represent such Indemnified Party if counsel selected by the Indemnifying Party cannot, by reason of any actual or deemed conflict of interest, adequately represent the interests of the Indemnified Party. In the event that the Indemnifying Party fails to assume the defense, appeal or settlement of such claim within 20 days after receipt of notice thereof from the Indemnified Party, and the Indemnified Party is, or reasonably may be, prejudiced thereby, the Indemnified Party shall have the right to undertake the defense or appeal of, or settle or compromise, such claim on behalf of and for the account and risk of the Indemnifying Party; provided, however, no settlement shall be for an amount in excess of such claim. The Indemnifying Party shall not settle or compromise any such claim without the Indemnified Party's prior written consent, unless the terms of such settlement or compromise release the Indemnified Party from any and all liabilities with respect to such Third Party Claim. -33- 35 (b) Any indemnifiable claim that is not a Third Party Claim shall be asserted by written notice to the Indemnifying Party. If the Indemnifying Party does not respond to such notice within 30 days, it shall have no further right to contest the validity of such claim. 10.5 EXCLUSIVE REMEDY. Except as set forth in Section 10.7 below, the indemnification rights of the parties hereto under this Agreement shall be subject to, and deemed effective as of, the Closing of the transactions contemplated hereunder and, except as set forth in Section 10.3(i), are the exclusive rights and remedies of the parties hereto, including, without limitation, for any misrepresentation or breach of warranty. 10.6 REPRESENTATIONS OF THE PARTIES. Except for the representations and warranties expressly set forth herein and the Schedules hereto, no party hereto makes any representation or warranty of any kind or nature regarding the Business or any other matter, fact or circumstance, and Parent and the Purchaser acknowledge that they (and their authorized agents and representatives, including Arthur Anderson, LLP) have conducted their own investigation and due diligence review of the Company and have reviewed the operations, facilities, books and records of the Company and the Steadi Group and have met with and interviewed such employees, suppliers and customers as they deemed appropriate. 10.7 CERTAIN ADDITIONAL MATTERS. (a) Notwithstanding anything contained herein, the Sellers shall pay, satisfy and discharge, and indemnify and hold the Purchaser Indemnitees harmless from and against (i) any and all Taxes of the Steadi Group for all taxable periods, or portions thereof, prior to the Closing Date, (ii) all claims and causes of action now or hereafter asserted by any third party against any member of the Steadi Group in connection with the matters set forth in Numbers 3 and 4 of Schedule 4.15 hereto and (iii) all claims and causes of action now or hereafter inserted by William Sands against any member of the Steadi Group in connection with any event, occurrence or cause of action arising prior to the Closing Date. (b) The liability of the Sellers under the preceding paragraph (a) shall be joint and several, except that Robert Schoenberg and Steven Klein shall only be liable for 20% and 10%, respectively, of such amounts. (c) The obligation of the Sellers to pay the Taxes of the Steadi Group as set forth in paragraph (a)(i) above shall (i) not apply to federal, state and city income taxes for the fiscal year ending September 30, 1997 and all taxable periods thereafter, (ii) not apply to any state sales or use tax arising in connection with sales or rentals occurring after November 30, 1997, provided, and only to the extent that, the Company has collected the proper amount of tax in respect of each such transaction or event and (iii) only apply to the extent the aggregate amount of such Taxes for which the Sellers have the obligation to pay exceeds $145,000, in which event the aforesaid obligation of the Sellers shall be to pay such excess. (d) The matters described in this Section 10.7 shall not be deemed "Purchaser's Indemnification Events" under Section 10.1 above, and the indemnification -34- 36 contained in Section 10.1 shall not include all Losses arising from the matters described in this Section 10.7. ARTICLE XI MISCELLANEOUS 11.1 COVENANT OF FURTHER ASSURANCES. The parties hereto covenant and agree to execute and deliver any and all additional writings, instruments and other documents and take such further actions as shall be reasonably required or requested to effectuate the terms and conditions of this Agreement. 11.2 ENTIRE AGREEMENT. This Agreement and the Additional Agreements represent the entire agreements between the parties hereto and thereto with respect to the subject matter hereof and thereof, and supersede all prior agreements and communications with respect thereto and all prior agreements and understandings, whether oral or written, are merged into this Agreement. 11.3 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor any rights or obligations hereunder may be assigned by any party hereto without the express written consent of the others and any attempted assignment in violation thereof shall be null and void; provided, however, that the rights of the Purchaser may be assigned to any Affiliate of Parent. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties hereto or their respective successors or permitted assigns or the Indemnified Parties (who shall be deemed third party beneficiaries hereof) any rights, remedies, obligations or liabilities under or by reason of this Agreement. 11.4 AMENDMENT OR MODIFICATION. This Agreement may not be waived, amended, modified or supplemented by the parties hereto in any manner, except by an instrument in writing signed by the Purchaser and the Sellers' Representative. 11.5 SEVERABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the remaining provisions of this Agreement, all of which shall remain in full force and effect, nor shall it affect their validity or enforceability in any other jurisdiction. To the extent permitted by law, each party hereto waives any provision of law which renders any provision hereof unenforceable in any respect. 11.6 NOTICES. All notices, requests, demands or other communications under or with respect to this Agreement shall be in writing and shall be given by hand, by telecopy with request for acknowledgment or confirmation of receipt, by Federal Express or other nationally recognized overnight delivery service providing for receipt against delivery (delivery charges prepaid) or by certified or registered U.S. Mail, postage prepaid, return receipt requested, and shall be deemed to have been duly given and effective upon the earlier of (i) its actual receipt (or acknowledgment or confirmation of receipt), (ii) the next business day after having been sent by Federal Express or similar nationally recognized overnight delivery service providing for receipt against delivery, delivery charges prepaid, or (iii) three days after having been sent by certified or registered U.S. mail, return receipt requested, postage prepaid, addressed as follows: -35- 37 If to Sellers: Richard D. Schoenberg Steadi-Systems, Ltd. 931 N. Cole Avenue Hollywood, CA 90038 Telecopier: 213-465-9961 - with a copy to - Spitzer & Feldman, P.C. 405 Park Avenue New York, NY 10022 Attention: M. James Spitzer, Jr., Esq. Telecopier: 212-838-7472 If to Purchaser: Daisytek, Incorporated 500 North Central Expressway Plano, TX 75074 Attention: Tom Madden Telecopier: 972-423-1108 - with a copy to - Wolff & Samson, P.A. 5 Becker Farm Road Roseland, New Jersey 07068 Attention: Morris Bienenfeld, Esq. Telecopier: 973-740-1407 Any such Person by written notice to each of the others listed in this Section in accordance herewith may change the address to which notices may be directed, but such notice shall be deemed duly given and effective only upon actual receipt thereof. 12.7 WAIVERS AND EXTENSIONS. Any waiver by any party hereto of any provision or condition of this Agreement or breach thereof or any extension of time granted by any party under this Agreement shall not be construed or deemed to be a waiver of any other provision or condition of this Agreement or breach thereof or extension of time with respect thereto or a waiver of a subsequent breach of or subsequent extension of time with respect to same provision or condition. 12.8 GOVERNING LAW; PERSONAL JURISDICTION. This Agreement shall be governed by, and be construed in accordance with, the laws of the State of New York without regard to the conflicts of laws principles thereof. Each party hereto hereby agrees that any legal action or proceeding (other than any action seeking injunctive relief, specific performance or other equitable relief) shall be brought in the courts of the State of New York, New York County, or of the United States for the Southern District of New York, and each party hereto hereby accepts for itself and in respect of its property the jurisdiction of said courts in any such suit or proceeding, and each party consents that process therein -36- 38 may be served by registered or certified mail addressed to such party at the address designated for notice pursuant hereto. 12.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement but all of which taken together shall constitute one and the same instrument. 12.10 CAPTIONS AND HEADINGS. The captions, section and other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 12.11 EXHIBITS AND SCHEDULES. All Exhibits annexed hereto, and all Schedules referred to herein, are hereby incorporated in and made a part of this Agreement as if set forth herein. 12.12 CONSTRUCTION. The parties hereto hereby acknowledge and agree that they and their respective counsel have independently reviewed and made amendments to this Agreement and that the normal rule of construction, whereby ambiguities are to be resolved against the drafting party, shall be inapplicable to this Agreement. 12.13 PUBLICITY. Except as otherwise required by applicable laws or regulations, neither Sellers, the Purchaser, Parent, nor any Affiliate of the foregoing, shall issue any press release or make any other public statement prior to the Closing relating to or connected with or arising out of this Agreement or the matters contained herein, without obtaining the prior approval of the other parties hereto to the contents and the manner of presentation and publication thereof, such consent not to be unreasonably delayed or withheld. 12.14 SELLERS' REPRESENTATIVE. Each Seller hereby appoints the Sellers' Representative as his agent and representative to give and receive all notices and services of process and to take any action, give any consents and waivers or take any other action in connection with the transactions contemplated by this Agreement; provided, however, each Seller shall have the right at any time, upon prior written notice to Parent, to revoke such appointment. -37- 39 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SELLERS: --------------------------------------- Richard D. Schoenberg --------------------------------------- Robert Schoenberg --------------------------------------- Steven Klein PURCHASER: DAISYTEK, INCORPORATED By: ------------------------------------ Name: Mark C. Layton Title: President & CEO PARENT: DAISYTEK INTERNATIONAL CORPORATION By: ------------------------------------ Name: Mark C. Layton Title: President & CEO -38- 40 SCHEDULES AND EXHIBITS TO STOCK PURCHASE AGREEMENT Exhibit A - Form of Employment Agreements Exhibit B - Multiplier Table Exhibit C - Wire transfer instructions Exhibit D - Form of Legal Opinion Exhibit E - Form of Legal Opinion Schedule 2.2 - Seller Allocation of Purchase Price and Shares Schedule 4.1 - Organization and Qualification Schedule 4.2 - Capitalization Schedule 4.3 - Voting Trusts, etc. Schedule 4.4 - Title to Stock Schedule 4.6 - No Violations Schedule 4.7 - Audited Financial Statements Schedule 4.9 - Undisclosed Liabilities Schedule 4.10 - Accounts Receivable Schedule 4.11 - Inventory Schedule 4.14 - Absence of Changes Schedule 4.15 - Litigation Schedule 4.16 - Compliance with Laws Schedule 4.17 - Environmental and Other Permits Schedule 4.18 - Material Contracts Schedule 4.20 - Real Property Schedule 4.21 - Tangible Personal Property Schedule 4.22 - Customers Schedule 4.23 - Suppliers Schedule 4.24 - Employee Benefit Matters Schedule 4.25 - Labor Matters Schedule 4.26 - Key Employees Schedule 4.27 - Certain Interests Schedule 4.28 - Taxes Schedule 4.29 - Insurance Schedule 4.30 - Accounts, Lockboxes Schedule 6.1 - Personal Guaranties -39- EX-10.34 3 5TH AMENDMENT TO CREDIT AGREEMENT 2/13/98 1 EXHIBIT 10.34 FIFTH AMENDMENT TO CREDIT AGREEMENT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated and effective as of February 13, 1998, is among DAISYTEK, INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary Guarantors"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust ("State Street"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), and CHASE BANK OF TEXAS, N.A., a national banking association formerly named Texas Commerce Bank National Association ("Chase"), as a lender and as administrative agent for itself, State Street and First Chicago (State Street, First Chicago, Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement being referred to, collectively, as "Lenders"). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State Street, First Chicago (as assignee, effective June 30, 1997, of NBD Bank, a Michigan banking corporation) and Chase are parties to that certain Credit Agreement dated as of May 22, 1995, as amended by that certain First Amendment to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to Credit Agreement dated as of November 14, 1996 and effective as of November 18, 1996, that certain Third Amendment to Credit Agreement dated and effective as of June 30, 1997, and that certain Fourth Amendment to Credit Agreement dated and effective as of December 11, 1997 (as so amended, the "Credit Agreement"), establishing a revolving credit facility in the aggregate maximum principal amount of $50,000,000; and WHEREAS, the parties desire to increase the maximum principal amount of the revolving credit facility from $50,000,000 to $65,000,000, to extend the stated maturity date thereof to December 31, 2000, and to modify certain provisions regarding the rates at which interest accrues. 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. The following definitions in Section 1.1 of the Credit Agreement are amended to read in their entireties as follows: ""Adjusted Eurodollar Rate" means, at any time, a rate of interest per annum determined by reference to the Adjustment Ratio in effect on the date such interest rate is determined according to the following table:
Adjustment Ratio (%) Rate ---------------- ---- <65 Eurodollar Rate plus 0.625% > or = to 65 to <85 Eurodollar Rate plus 0.700% > or = to 85 to <120 Eurodollar Rate plus 0.775% > or = to 120 to <150 Eurodollar Rate plus 0.875% > or = to 150 Eurodollar Rate plus 1.125%"
2 ""Committed Sum" means, with respect to the Loan Commitment, Twenty-Five Million Dollars ($25,000,000) with respect to Chase, Twenty-Five Million Dollars ($25,000,000) with respect to State Street, and Fifteen Million Dollars ($15,000,000) with respect to First Chicago." ""Loan Commitment" means Sixty-Five Million Dollars ($65,000,000)." ""Loan Maturity Date" means December 31, 2000, or such earlier date as results pursuant to Article X." 2. New Definitions. The following definitions are added to Section 1.1 of the Credit Agreement, to read in their entireties as follows: ""Fifth Amendment Closing Date" means February 13, 1998, being the effective date of the Fifth Amendment to Credit Agreement among Borrower, Guarantor, Subsidiary Guarantors, Lenders and Agent." ""First Chicago" means The First National Bank of Chicago, a national banking association." 3. Amendment of Section 2.2. The first sentence of Section 2.2 of the Credit Agreement is amended to read in its entirety as follows: "The Loan made by Lenders pursuant to this Article II shall be evidenced by the Notes dated as of the Fifth Amendment Closing Date and substantially in the form of Exhibit A." 4. Amendment of Section 11.3. Lenders' names and 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: James Perry Telecopy: 214-965-2990 State Street Bank and Trust Company 225 Franklin Street - M8 Boston, Massachusetts 02101 Attention: Michael St. Jean Telecopy: 617-338-4041 FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 2 3 The First National Bank of Chicago One First National Plaza, Suite 0088 Chicago, Illinois 60670 Attention: Cory M. Olson Telecopy: 312-732-2991 As to any Lender who becomes such pursuant to Section 11.4A, to such Lender at its address given to Agent." In addition, all references to "Texas Commerce Bank National Association" are hereby amended to be references to "Chase Bank of Texas, N.A.," and all references to "TCB" are hereby amended to be references to "Chase." 5. Amendment of Exhibit A. Exhibit A to the Credit Agreement is amended in its entirety to be in the form of Exhibit A attached to this Amendment. 6. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon the prior receipt by Agent of the documentation and fees set forth below: (a) Certificates. A certificate of the Secretary of each Daisytek Corporation, dated as of the Fifth 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 Fifth 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 Fifth Amendment Closing Date; (c) Other Certificates. Certificates of each Daisytek Corporation's existence, good standing and qualification to do business, issued by appropriate officials in any state in which such corporation is incorporated, owns property or otherwise qualified, or required to qualify, to do business; (d) Notes. The Notes, duly executed; (e) Opinion of Counsel. An executed opinion of Wolff & Samson, P.C., Roseland, New Jersey, counsel to the Daisytek Corporations, dated as of the Fifth Amendment Closing Date and in form and substance satisfactory to Lenders and their counsel; FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 3 4 (f) Other Documents. Any and all other documents or certificates reasonably requested by a Lender in connection with the execution of this Amendment; and (g) Fee. The fee referred to in Borrower's letter to Agent of February 6, 1998. 7. Guaranties. Each of Guarantor and each Subsidiary Guarantor hereby acknowledges, consents and agrees to this Amendment and (a) acknowledges that its obligations under that certain Guaranty executed by it, in favor of a Lender, includes a guaranty of all of the obligations, indebtedness and liabilities of Borrower under the Credit Agreement as amended by this Amendment (specifically including, without limitation, the obligations, indebtedness and liabilities resulting from the increase in the maximum principal amount of the revolving credit facility established by the Credit Agreement from $50,000,000 to $65,000,000), (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. 8. 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. 9. Terms of Agreement. Except as expressly amended by this Amendment, the Credit Agreement is and shall be unchanged. 10. Effect of Amendment. The Credit Agreement and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement in the Credit Agreement or the other documents shall mean a reference to the Credit Agreement as amended hereby. Lenders agree to undertake reasonable efforts among themselves such that, as of the Fifth Amendment Closing Date, amounts outstanding under the Loan shall, as to each Lender, be held Pro Rata (as Pro Rata is modified by the amendment, in this Amendment, of the term "Committed Sum."). 11. 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. 12. 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. FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 4 5 13. 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. CHAPTER 15 OF TEXAS REVISED CIVIL STATUTES ARTICLE 5069 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, OR THE NOTES. 14. 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. 15. 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. 16. 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 FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 5 6 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. 17. 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. 18. 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.] FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 6 7 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: WORKING CAPITAL OF AMERICA, DAISYTEK DE MEXICO SERVICES, INC., a Delaware corporation S.A. DE C.V., a Mexican corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ HOME TECH DEPOT, INC., a Delaware PRIORITY FULFILLMENT SERVICES, corporation INC., a Delaware corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ DAISYTEK (CANADA) INC., a Canadian DAISYTEK AUSTRALIA PTY. LIMITED, an corporation Australian corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ SUBSIDIARY GUARANTORS (cont'd): FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 7 8 WORKING CAPITAL OF AMERICA, PRIORITY FULFILLMENT SERVICES OF INC., a corporation CANADA, INC., a Canadian corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ PRIORITY FULLFILLMENT SERVICES OF DAISYTEK DE MEXICO, S.A. DE C.V., AUSTRALIA PTY. LIMITED, an a Mexican corporation Australian corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ SUPPLIES EXPRESS, INC., a Delaware DAISYTEK ASIA PTY. LIMITED, a corporation Singapore corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ DAISYTEK LATIN AMERICA, INC., a STEADI SYSTEMS LTD., Florida corporation a California corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ PRIORITY FULFILLMENT SERVICES STEADI SYSTEMS NEW YORK, INC., DE MEXICO, S.A. DE C.V., a Mexican a New York corporation corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 8 9 STEADI SYSTEMS MIAMI, INC., a Florida corporation By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 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: ------------------------------ 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: --------------------------------- James F. Gable, Authorized Agent FIFTH AMENDMENT TO CREDIT AGREEMENT - Page 9 EX-11 4 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended March 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Net Income $16,160 $13,367 $10,767 ======= ======= ======= Weighted average common shares outstanding 14,343 13,826 13,514 ======= ======= ======= Net income per common share-diluted $ 1.13 $ 0.97 $ 0.80 ======= ======= ======= Calculation of weighted average common shares: Weighted average common shares outstanding 13,566 12,934 12,602 Weighted average common stock options, utilizing the treasury stock method 777 892 912 ------- ------- ------- 14,343 13,826 13,514 ======= ======= =======
EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF NAME INCORPORATION - ---- --------------- Daisytek, Incorporated Delaware Subsidiaries of Daisytek, Incorporated: Daisytek (Canada) Inc. Canada Working Capital of America, Inc. Delaware Home Tech Depot, Inc. Delaware Daisytek De Mexico S.A. De C.V. Mexico Daisytek Latin America, Inc. Florida Supplies Express, Inc. Delaware Priority Fulfillment Services, Inc. Delaware Priority Fulfillment Services of Canada, Inc. Canada Daisytek De Mexico Services, S.A. de C.V. Mexico Priority Fulfillment Services de Mexico, S.A. de C.V. Mexico Daisytek Australia Pty. Ltd. Australia Daisytek Asia PTY LTD Singapore Steadi-Systems, Ltd. (including 6 wholly-owned U.S. subsidiaries operating as distributors of professional-grade audio and video media products) California Steadi-Systems De Mexico, S.A. De C.V. Mexico Steadi-Systems Canada Inc. Canada
EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statement File Nos. 33-96728 and 333-53505. ARTHUR ANDERSEN LLP Dallas, Texas, May 29, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1998 MAR-31-1998 1,068 0 125,276 2,655 89,694 216,944 28,820 14,024 246,651 94,626 12,894 0 0 160 139,210 246,651 757,027 757,027 679,726 679,726 0 1,936 2,698 26,184 10,024 16,160 0 0 0 16,160 1.19 1.13
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