-----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, SdyAQSbZyb4T9kZfOao/hut0kHW484lcMGkYbApm8XqmgUJka8Z+B6o3aJMtZ52D ncjUDbmGXIW0dqyzfiVzGA== 0000950134-98-006984.txt : 19980817 0000950134-98-006984.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950134-98-006984 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-25400 FILM NUMBER: 98689393 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-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1998 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ------- ------- Commission File Number 0-25400 DAISYTEK INTERNATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 75-2421746 ------------------------ -------------------------- (State of Incorporation) (I.R.S. Employer I.D. No.) 500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074 --------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 881-4700 --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At July 31, 1998 there were 17,096,528 shares of registrant's common stock outstanding. 2 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q JUNE 30, 1998 INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Financial Statements: Unaudited Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998...................................................... 3 Unaudited Interim Consolidated Statements of Income for the Three Months Ended June 30, 1998 and 1997 .......................... 5 Unaudited Interim Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1998 and 1997........................... 6 Notes to Unaudited Interim Condensed Consolidated Financial Statements.......................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ......................................... 21 SIGNATURES............................................................................. 22
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
June 30, March 31, 1998 1998 (a) ---------- ---------- CURRENT ASSETS: Cash $ 725 $ 2,087 Accounts receivable, net of allowance for doubtful accounts of $2,075 and $2,765 at June 30, 1998 and March 31, 1998, respectively 114,651 127,563 Inventories, net: Inventories, excluding Priority Fulfillment Services Division 105,347 81,956 Inventories, Priority Fulfillment Services Division 14,375 11,634 Prepaid expenses and other current assets 5,946 3,944 ---------- ---------- Total current assets 241,044 227,184 ---------- ---------- PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment 29,885 28,391 Leasehold improvements 2,060 1,907 ---------- ---------- 31,945 30,298 Less - Accumulated depreciation and amortization (16,307) (15,025) ---------- ---------- Net property and equipment 15,638 15,273 EMPLOYEE RECEIVABLE 463 459 OTHER ASSETS 3,980 -- EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated amortization of $1,091 and $931 at June 30, 1998 and March 31, 1998, respectively 17,466 14,929 ---------- ---------- Total assets $ 278,591 $ 257,845 ========== ==========
- ---------------------- (a) Retroactively restated to combine the financial positions of Daisytek International Corporation ("Daisytek") with The Tape Company, Inc. ("The Tape Company"), which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (see Footnotes 1 and 3 of these Interim Unaudited Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated balance sheets. 3 4 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, March 31, 1998 1998 (a) ---------- ---------- CURRENT LIABILITIES: Current portion of long-term debt $ 176 $ 3,010 Trade accounts payable 84,226 87,390 Accrued expenses 10,288 9,768 Income taxes payable 2,316 1,484 Deferred income tax liability 1,032 1,546 ---------- ---------- Total current liabilities 98,038 103,198 ---------- ---------- LONG-TERM DEBT, less current portion 37,085 16,916 ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at June 30, 1998 and March 31, 1998; none issued and outstanding -- -- Common stock, $0.01 par value; 20,000,000 shares authorized at June 30, 1998 and March 31, 1998; 17,041,308 and 16,935,896 shares issued and outstanding at June 30, 1998 and March 31, 1998, respectively 170 169 Additional paid-in capital 91,322 89,879 Retained earnings 54,034 49,614 Cumulative foreign currency translation adjustment (2,058) (1,931) ---------- ---------- Total shareholders' equity 143,468 137,731 ---------- ---------- Total liabilities and shareholders' equity $ 278,591 $ 257,845 ========== ==========
- ---------------------- (a) Retroactively restated to combine the financial positions of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (see Footnotes 1 and 3 of these Interim Unaudited Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated balance sheets. 4 5 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, ----------------------------- 1998 1997 (a) ------------ ------------ Net sales $ 222,589 $ 182,777 Cost of sales 196,062 163,154 ------------ ------------ Gross profit 26,527 19,623 Selling, general and administrative expenses 16,875 12,522 Acquisition related costs 405 -- ------------ ------------ Income from operations 9,247 7,101 Interest expense 852 586 ------------ ------------ Income before income taxes 8,395 6,515 Provision for income taxes 3,002 2,415 ------------ ------------ Net income $ 5,393 $ 4,100 ============ ============ Net income per common share: Basic $ 0.32 $ 0.29 Diluted $ 0.30 $ 0.27 Pro forma data (b): Net income $ 5,393 $ 4,100 Pro forma adjustments: Provision for income taxes (291) (82) Acquisition related costs, net of tax 246 -- ------------ ------------ Pro forma net income $ 5,348 $ 4,018 ============ ============ Pro forma net income per common share: Basic $ 0.31 $ 0.28 Diluted $ 0.30 $ 0.27 Weighted average common and common share equivalents outstanding: Basic 17,005 14,339 Diluted 17,814 14,983
- ---------------------- (a) Retroactively restated to combine the results of operations of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (see Footnotes 1 and 3 of these Interim Unaudited Consolidated Financial Statements). (b) Pro forma data includes the following adjustments: (1) The Tape Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. The pro forma provision for income tax adjustment is provided to reflect income tax under a corporate tax structure. (2) Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company. The pro forma adjustment for acquisition related costs, net of tax, excludes such costs from pro forma net income for the three months ended June 30, 1998. The accompanying notes are an integral part of these interim consolidated statements. 5 6 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Months Ended June 30, ------------------------- 1998 1997(a) ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,393 $ 4,100 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization 1,782 1,223 Provision for doubtful accounts 525 418 Deferred income tax provision (benefit) (399) 2 Changes in operating assets and liabilities -- Accounts receivable 11,949 (390) Inventories, net (26,690) (7,492) Trade accounts payable and accrued expenses (2,217) 4,197 Income taxes payable 828 (332) Prepaid expenses and other current assets (2,526) (632) ---------- --------- Net cash provided by (used in) operating activities (11,355) 1,094 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,807) (837) Additional cost of acquired business (2,886) -- Advances to employees, net (29) (138) Increase in other assets (3,980) -- ---------- --------- Net cash used in investing activities (8,702) (975) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit, net 25,024 (50) Payments on capital leases and notes payable (7,132) (746) Net proceeds from exercise of stock options 1,443 2,331 Distributions to shareholders of pooled company (973) (985) ---------- ---------- Net cash provided by financing activities 18,362 550 ---------- --------- EFFECT OF EXCHANGE RATES ON CASH 333 (141) ---------- ---------- NET INCREASE (DECREASE) IN CASH (1,362) 528 CASH, beginning of period 2,087 557 ---------- --------- CASH, end of period $ 725 $ 1,085 ========== =========
- ------------------------ (a) Retroactively restated to combine the cash flows of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (see Footnotes 1 and 3 of these Interim Unaudited Consolidated Financial Statements). The accompanying notes are an integral part of these interim consolidated statements. 6 7 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) 1. BASIS OF PRESENTATION: The Interim Unaudited Consolidated Financial Statements include the accounts of Daisytek International Corporation and the accounts of companies acquired in business combinations accounted for under 1) the purchase method from their respective acquisition dates, and 2) the pooling of interests method, giving retroactive effect for all periods presented. See Footnote 3 of these Interim Unaudited Consolidated Financial Statements for a reconciliation of the Company's retroactively restated and previously reported revenue, net income, pro forma net income and weighted average common share and common share equivalents outstanding, resulting from the business combination with The Tape Company, Inc. ("The Tape Company"), which was acquired by the Company during June 1998 and accounted for as a pooling of interests. In the opinion of management, the Interim Unaudited Condensed Consolidated Financial Statements of the Company include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company's financial position as of June 30, 1998, its results of operations and its results of cash flows for the three months ended June 30, 1998 and 1997. Results of the Company's operations for interim periods may not be indicative of results for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). The Interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes of the Company included in the Company's Form 10-K (File Number 0-25400) as filed with the SEC on May 29, 1998 (the "Company's Form 10-K"). Accounting policies used in the preparation of the Interim Unaudited Condensed Consolidated Financial Statements are consistent in all material respects with the accounting policies described in the Notes to Consolidated Financial Statements in the Company's Form 10-K. Certain prior period data has been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income, shareholders' equity or cash flows. Presented as follows, for informational purposes only, are the Company's unaudited interim consolidated statements of income for the three month periods ended June 30, 1998 and 1997: 7 8 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.)
Three Months Ended June 30, ------------------------------------------------------- 1997 % 1997 1998 Reported (a) Change Restated (b) ------------ ------------ ------ ------------- Net sales $ 222,589 $ 172,812 28.8% $ 182,777 Cost of sales 196,062 155,506 163,154 ------------ ------------ ------------ Gross profit 26,527 17,306 53.3% 19,623 Selling, general and administrative expenses 16,875 10,583 59.5% 12,522 Acquisition related costs 405 -- -- ------------ ------------ ------------ Income from operations 9,247 6,723 37.5% 7,101 Interest expense 852 519 586 ------------ ------------ ------------ Income before income taxes 8,395 6,204 6,515 Provision for income taxes 3,002 2,375 2,415 ------------ ------------ ------------ Net income $ 5,393 $ 3,829 40.8% $ 4,100 ============ ============ ============ Net income per common share: Basic $ 0.32 $ 0.29 10.3% $ 0.29 Diluted $ 0.30 $ 0.27 11.1% $ 0.27 Pro forma data (c): Net income $ 5,393 $ 3,829 $ 4,100 Pro forma adjustments: Provision for income taxes (291) -- (82) Acquisition related costs, net of tax 246 -- -- ------------ ------------ ------------ Pro forma net income $ 5,348 $ 3,829 39.7% $ 4,018 ============ ============ ============ Pro forma net income per common share: Basic $ 0.31 $ 0.29 6.9% $ 0.28 Diluted $ 0.30 $ 0.27 11.1% $ 0.27 Weighted average common and common share equivalents outstanding: Basic 17,005 13,364 27.2% 14,339 Diluted 17,814 14,008 27.2% 14,983
- ------------------------ (a) Results previously reported for Daisytek prior to the acquisition of The Tape Company. (b) Retroactively restated to combine the results of operations of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (c) Pro forma data includes the following adjustments: (1) The Tape Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. The pro forma provision for income tax adjustment is provided to reflect income tax under a corporate tax structure. (2) Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company. The pro forma adjustment for acquisition related costs, net of tax, excludes such costs from pro forma net income for the three months ended June 30, 1998. 8 9 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) 2. ORGANIZATION AND NATURE OF BUSINESS: The Company is a wholesale distributor of non-paper computer and office automation supplies and accessories, whose primary products are laser toner, inkjet cartridges, copier 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, warehouse clubs and other retailers who resell the products to end-users. 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 collections 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 professional-grade audio and video media products (pro-tape products) to the filmed entertainment and multimedia industries. The Company further expanded its operations in the distribution of pro-tape products through the acquisition of The Tape Company in June 1998. Through Steadi-Systems and The Tape Company, the Company distributes a wide array of professional-grade audio and video media products and video hardware and is an authorized distributor for leading manufacturers such as Sony, Fuji, JVC, Avid and others to customers including production companies, post-production operations, and television stations. 9 10 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) 3. BUSINESS COMBINATIONS: During June 1998, the Company completed the acquisition of The Tape Company through a stock-for-stock merger. Under the terms of the acquisition, accounted for as a pooling of interest, the Company exchanged 974,864 shares of Company common stock for all of The Tape Company's common stock. The Tape Company is a Chicago, Ill.-based independent distributor of professional grade audio and video media products. Retroactively restated and previously reported revenue, net income, pro forma net income and weighted average common share and common share equivalents outstanding are as follows (in thousands, except per share data):
Three Months Ended June 30, 1997 ----------------------------------------------- Daisytek - Previously The Tape Daisytek - Reported Company Restated ------------ ------------ ------------ Net sales $ 172,812 $ 9,965 $ 182,777 Net income $ 3,829 $ 271 $ 4,100 Net income per common share: Basic $ 0.29 $ 0.29 Diluted $ 0.27 $ 0.27 Pro forma data (a): Net income $ 3,829 $ 271 $ 4,100 Pro forma adjustment for income taxes -- (82) (82) ------------ ------------ ------------ Pro forma net income $ 3,829 $ 189 $ 4,018 ============ ============ ============ Pro forma net income per common share: Basic $ 0.29 $ 0.28 Diluted $ 0.27 $ 0.27 Weighted average common and common share equivalents outstanding: Basic 13,364 14,339 Diluted 14,008 14,983
- ------------------------ (a) Pro forma data includes the following adjustments: (1) The Tape Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. The pro forma provision for income tax adjustment is provided to reflect income tax under a corporate tax structure. (2) Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company. The pro forma adjustment for acquisition related costs, net of tax, excludes such costs from pro forma net income for the three months ended June 30, 1998. 4. INVENTORIES: Inventories (merchandise held for resale, all of which is finished goods) are stated at the lower of weighted average cost or market. 10 11 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) 5. DEBT: Debt as of June 30, 1998 and March 31, 1998, is as follows (dollars in thousands):
June 30, March 31, 1998 1998 ---------- ---------- Revolving line of credit with commercial banks, interest (weighted average rate of 6.9% at June 30, 1998) at the Company's option at the prime rate of a bank (8.5% at June 30, 1998) or the Eurodollar rate plus 0.625% to 1.125% (6.3% at June 30, 1998), due December 31, 2000 $ 24,900 $ -- Revolving line of credit with commercial bank, interest at the Australian Bank Bill Rate or the Australian bank's overnight rate plus 0.75% (6.0% at June 30, 1998), due December 31, 2000 3,813 4,410 Revolving line of credit with commercial bank, interest (weighted average rate of 5.8% at June 30, 1998) at the Canadian bank's cost of funds plus 0.65% (5.8% at June 30, 1998) or the Canadian bank's prime rate (6.5% at June 30, 1998), due December 31, 2000 8,271 8,101 Revolving line of credit with commercial bank, interest payable monthly at the Federal Funds rate plus 2%, due October 31, 1998, and secured by a blanket lien on all assets of The Tape Company and affiliates -- 2,161 Term loan with commercial bank, payable monthly at a rate of $25 plus interest at 7.65%, due October 31, 2002 and secured by a blanket lien on all assets of The Tape Company and affiliates -- 1,400 Note payable to individual, payable monthly at a rate of $41 including interest at a rate of 6.66%, due July 25, 2007 -- 3,413 Notes payable and obligations under capital leases for warehouse equipment, computer equipment, office furniture, fixtures and transportation equipment interest at varying rates ranging from 7.5% to 11%, with lease terms varying from three to seven years 277 441 ---------- ---------- Long-term debt 37,261 19,926 Less: Current portion of long-term debt (176) (3,010) ---------- ---------- Long-term debt, less current portion $ 37,085 $ 16,916 ========== ==========
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. The Facility accrues interest, at the Company's option, at the prime rate of a bank or the Eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios 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, 11 12 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) investments and asset sales. As of June 30, 1998, the Company had borrowed $24.9 million under the Facility, leaving $40.1 million available for additional borrowings. This Facility is part of the Company's integrated cash management system in which accounts receivable collections are used to pay down the Facility and disbursements are paid from the Facility. This system allows the Company to optimize its cash flow. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, as amended in July 1998, expires on December 31, 2000 and allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $4.6 million (U.S.) at June 30, 1998. The Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian bank's overnight rate plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the Australian Facility. As of June 30, 1998, the Company had borrowed approximately $3.8 million (U.S.), leaving approximately $0.8 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, as amended in July 1998, expires on December 31, 2000 and allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $10.2 million (U.S.) at June 30, 1998. The Company had borrowed approximately $8.3 million (U.S.) under the Canadian Facility at June 30, 1998, leaving approximately $1.9 million (U.S.) available under the Canadian Facility for additional borrowings. The Canadian Facility accrues interest at the Company's option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the Canadian Facility. In conjunction with the business combination with The Tape Company, certain debt of The Tape Company, including the revolving line of credit due October 31, 1998, the term loan with commercial bank due October 31, 2002, and the note payable to individual due July 25, 2007, were paid in full by the Company and were retired. 6. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Three Months Ended June 30, ----------------------- 1998 1997 --------- --------- Cash paid during the period for: Interest $ 728 $ 590 Income taxes $ 2,177 $ 1,103
12 13 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) 7. STOCK OPTIONS: During the three months ended June 30, 1998, the Company granted options to certain employees under its employee stock option plans (the "Plans"). These options were granted at the fair market value of the Company's common stock at the date of the grant. Such options become exercisable over a three year period starting with the date of grant, based on vesting percentages.
Shares Price per Share ---------- --------------- Outstanding, March 31, 1998 1,725,974 $0.64 - $22.44 Granted 737,298 $21.50 - $22.88 Exercised (104,779) $2.65 - $16.25 Canceled (74,031) $9.75 - $17.38 ---------- Outstanding, June 30, 1998 2,284,462 $0.64 - $22.88 ==========
8. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires companies to report comprehensive income, which is defined as all changes in equity during a period, except those resulting from investment by owners and distribution to owners. The Company adopted SFAS No. 130 during the three months ended June 30, 1998. Comprehensive income for the Company includes net income and foreign currency translation adjustments for the Company's foreign subsidiaries where the local currency is the functional currency. The Company's comprehensive income is as follows (in thousands):
Three months ended June 30, ------------------------ 1998 1997 -------- -------- Net income $ 5,393 $ 4,100 Comprehensive income adjustments: Cumulative translation adjustment (127) (224) -------- -------- Comprehensive income $ 5,266 $ 3,876 ======== ========
9. NEW ACCOUNTING STANDARDS: The Company adopted SFAS No. 128, "Earnings per Share," during the quarter ended December 31, 1997. The statement establishes new standards for computing and presenting earnings per share ("EPS"). The Company restated its earnings per share data for all periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal years beginning after December 15, 1997; however, earlier adoption is permitted. SFAS No. 131 requires the disclosure of financial and descriptive information about reportable operating segments. SFAS No. 131 modifies 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 standard and its potential impact on disclosures and will adopt these pronouncement in its fiscal year 1999 annual financial statements. 13 14 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATED TO THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 AND RELATED TO MARCH 31, 1998 IS UNAUDITED.) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be used to hedge certain types of transactions, including foreign currency exposures of a net investment in a foreign operation. The Company presently utilizes derivative financial instruments only to hedge its net investment in certain of its foreign operations. SFAS No. 133 requires gains or losses on these financial instruments to be included in other comprehensive income as a part of the cumulative translation adjustment. The Company currently complies with the provisions of SFAS No. 133 in its accounting treatment of these financial instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, with initial application as of the beginning of an entity's fiscal quarter. Early adoption of the standard is allowed, however, the statement cannot be applied retroactively to financial statements of prior periods. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Interim Unaudited Consolidated Financial Statements include the accounts of Daisytek International Corporation and the accounts of companies acquired in business combinations accounted for under 1) the purchase method from their respective acquisition dates, and 2) the pooling of interests method, giving retroactive effect for all periods presented. RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 1998 AND 1997. Net Sales. Net sales for the three months ended June 30, 1998 were $222.6 million as compared to $182.8 million for the three months ended June 30, 1997, an increase of $39.8 million, or 21.8%. The increase was the result of an increase in domestic and international computer supplies sales, revenues from outsourcing activities of Priority Fulfillment Services ("PFS"), and the addition of net sales of professional-grade audio and video media products (pro-tape products) resulting from the acquisitions of Steadi-Systems, Ltd. ("Steadi-Systems") in January 1998. The business combination of Steadi-Systems was accounted for under the purchase method, thus its results of operations are included in the Company's consolidated results after the acquisition date. The growth in U.S. net sales was approximately $24 million, or approximately 17%, and the growth in international net sales was approximately $16 million, or approximately 41%. The growth in U.S. and international net sales was primarily due to new customers, increased sales volume to large national accounts, computer and office product superstores, and the Company's continued introduction of new products, including those new products added through business acquisitions. 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 three months ended June 30, 1998 was $26.5 million as compared to $19.6 million in the same period in 1997, an increase of $6.9 million, or 35.2%, primarily as the result of increased sales volume in the first quarter of fiscal year 1999. The Company's gross profit margin as a percent of net sales was 11.9% for the three month period ended June 30, 1998 as compared to 10.7% for the same period of 1997. The increase in the Company's gross profit margin as a percentage of net sales was a result of an increase in pro-tape net sales, which have higher margins than the Company's traditional computer supplies products, as a percent of total net sales. Also increased higher margin fee revenue business for the Company's outsource providing subsidiary, Priority Fulfillment Services ("PFS"), and enhanced product sourcing in fiscal year 1999 contributed to increased gross profit margins during fiscal year 1999. The Company believes that the competitive environment and consolidation of its computer supplies products customers may negatively impact the Company's gross profit margin percentage during fiscal year 1999. The Company continues to look for opportunities to offset such impact, however, there can be no assurance that the Company will be successful in doing so. SG&A Expenses. SG&A expenses for the three months ended June 30, 1998 were $16.9 million (excluding acquisition related costs), or 7.6% of net sales, as compared to $12.5 million, or 6.9% of net sales, for the three months ended June 30, 1997. The increase in SG&A expenses was primarily a result of the increase in costs associated with the Company's increased sales volume. The increase in SG&A expenses as a percentage of net sales for fiscal year 1999 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. The Company continues to incur incremental SG&A expenses to invest in growth areas of the business, PFS and international operations in particular. 15 16 Acquisition Related Costs. During June 1998, the Company completed the acquisition of The Tape Company, Inc. ("The Tape Company") through a stock-for-stock merger, which is accounted for as a pooling of interest in the accompanying Unaudited Interim Consolidated Financial Statements and notes thereto. Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company of approximately $0.4 million, or approximately $0.01 per share net of income taxes. These costs were charged to income during the 3 months ended June 30, 1998. The Company expects to incur approximately $0.4 million of expenses in each of the next two fiscal quarters relating to The Tape Company merger activities. Income from Operations. Income from operations for the three months ended June 30, 1998 was $9.2 million. Income from operations excluding acquisition related costs was $9.7 million as compared to $7.1 million for the same period during 1997, an increase of $2.6 million, or 35.9%. This increase was due to increased sales volume and increased gross profit partially offset by increased SG&A expenses. Income from operations as a percentage of net sales was 4.2% for the three months ended June 30, 1998. Income from operations excluding acquisition related costs as a percentage of net sales was 4.3% for the three months ended June 30, 1998 as compared to 3.9% for the corresponding period ending June 30, 1997. Interest Expense. Interest expense for the three months ended June 30, 1998 was $0.9 million as compared to $0.6 million for the three months ended June 30, 1997. Interest expense was higher during the three months ended June 30, 1998 primarily due to an increase in the average line of credit, partially offset by a slight decrease in interest rates during fiscal year 1999. The weighted average interest rate was 6.7% and 7.0% during the three months ended June 30, 1998 and 1997, respectively. Income Taxes. The Company's provision for income taxes was $3.0 million for the three months ended June 30, 1998 as compared to $2.4 million for the three months ended June 30, 1997. The increase was primarily due to increased pretax profits. The effective tax rate was 35.8% and 37.1% for the three months ended June 30, 1998 and 1997, respectively. The effective tax rate for the three months ended June 30, 1998 was lower than the corresponding period during 1997 as The Tape Company's income before income taxes represented a larger percentage of the Company's total income before income taxes during the three months ended June 30, 1998. The Tape Company, prior to its acquisition by the Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. In future periods, The Tape Company, including all of its operating units, will be taxed under a corporate tax structure, and accordingly, the Company's effective tax rate should be in the range of 38% to 39% during the remainder of fiscal year 1999. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been from financing activities. During the three months ended June 30, 1998, net cash of $18.4 million was provided by financing activities, compared to net cash provided by financing activities of $0.6 million for the three months ended June 30, 1997. Cash provided by financing activities was generated primarily from proceeds from revolving lines of credit and the exercise of common stock options during the three months ended June 30, 1998. In conjunction with the business combination with The Tape Company, certain debt of The Tape Company, including the revolving line of credit due October 31, 1998, the term loan with commercial bank due October 31, 2002, and the note payable to an individual due July 25, 2007, were paid in full by the Company during the three months ended June 30, 1998, and were retired. Included in cash flows from financing activities for the three months ended June 30, 1998 and 1997 are distributions made to shareholders of The Tape Company relating to taxes incurred by these shareholders for earnings of the business unit of The Tape Company which was organized as a subchapter S corporation. These distributions were made prior to the business combination with the Company. During the three months ended June 30, 1997, cash provided by financing activities was generated primarily from proceeds received from the exercise of common stock options. Financing activities should provide the Company's primary source of cash during the remainder of fiscal year 1999, primarily to support the Company's growth. 16 17 During the three months ended June 30, 1998, $11.4 million was used in operating activities, while net cash of $1.1 million was provided by operating activities during the three months ended June 30, 1997. Increased working capital requirements during the three months ended June 30, 1998, were partially funded by cash generated by the Company's operations, with the remainder provided by financing activities. During the three months ended June 30, 1997, increased working capital required to support the Company's growth was funded by cash generated from operating activities. Funds used for investing activities during the three months ended June 30, 1998 included incremental costs of an acquired business and for capital expenditures. During May 1998, certain events occurred which were defined in the acquisition agreement for Steadi-Systems, which caused the Company to incur approximately $2.9 million in contingent cash payments for that acquisition. Capital expenditures of approximately $1.9 during the three months ended June 30, 1998 consisted primarily of additions to upgrade the Company's management information systems, including the Company's Internet based customer tools, including its on-line catalog and ordering tool (SOLOnet) and other methods of electronic commerce, and general expansion of its facilities, both domestic and foreign. The principal use of funds for investing activities were for capital expenditures of $0.8 million for the three months ended June 30, 1997. The Company anticipates that its total investment in upgrades and additions to facilities for fiscal year 1999 will be approximately $6 million to $7 million. Working capital increased to $143.0 million at June 30, 1998 from $124.0 million at March 31, 1998. This increase of $19.0 million was primarily attributable to an increase in inventory and a decrease in accounts payable, which were partially offset by a decrease in accounts receivable. During the three month periods ended June 30, 1998 and 1997, the Company generally maintained an accounts receivable balance of approximately 47 days of sales. Inventory turnover, excluding Priority Fulfillment Services Division, was approximately 7 and 10 turns for the three month periods ended June 30, 1998 and 1997, respectively. The Company generally maintains an inventory turnover of approximately 10 to 11 turns, however, inventory turnover was lower during the three months ended June 30, 1998 primarily due to increased inventory levels held by the Company's pro-tape business and due to inventory buy-in activity to take advantage of enhanced product sourcing opportunities. 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 June 30, 1998, the Company had borrowed $24.9 million, leaving $40.1 million available under the Facility for additional borrowings. The Facility accrues interest, at the Company's option, at the prime rate of a bank or a eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities of the Company, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, as amended in July 1998, expires on December 31, 2000 and allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $4.6 million (U.S.) at June 30, 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 June 30, 1998, the Company had borrowed approximately $3.8 million (U.S.), leaving approximately $0.8 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 December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $10.2 million (U.S.) at June 30, 1998. The Company had borrowed approximately $8.3 million (U.S.) under the Canadian Facility, leaving approximately $1.9 million (U.S.) available under the Canadian Facility for additional borrowings at June 30, 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. 17 18 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 $10.0 million. Amounts borrowed under this note agreement bear interest at the bank's discretion, primarily based on a money market borrowing rate plus an adjustment. The maturity date of any amounts borrowed will occur prior to January 1999, the expiration date of the note. The Company had no borrowings outstanding under this promissory note agreement at June 30, 1998. During the three months ended June 30, 1998, approximately 23% of the Company's net sales were sold through the Company's Canadian, Mexican, Australian, Singaporean and U.S. export operations, including Latin America. The Company believes that international markets represent further opportunities for growth. The Company attempts to protect itself from foreign currency fluctuations by denominating substantially all of its non-Canadian and non-Australian international sales in U.S. dollars. In addition, the Company has entered into various forward Canadian and Australian currency exchange contracts in order to hedge the Company's net investment in, and its intercompany payable applicable to, its Canadian and Australian subsidiaries. The Company has the following forward currency exchange contracts outstanding:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------- ------------------- ------------- ---------- Canadian Dollars $11.7 million Sell Canadian Dollars October 1998 Australian Dollars $1.8 million Sell Australian Dollars October 1998 Australian Dollars $0.5 million Sell Australian Dollars October 1998 Australian Dollars $3.7 million Sell Australian Dollars October 1998
As of June 30, 1998, the Company had incurred unrealized gains of approximately $0.3 million, net of income taxes, on these outstanding Canadian and Australian forward exchange contracts. The Company may consider entering into other forward exchange contracts in order to hedge the Company's net investment in its Canadian, Australian, Mexican, and Singaporean subsidiaries, although no assurance can be given that the Company will be able to do so on acceptable terms. The Company may attempt to acquire other businesses to expand its product line in its core wholesale business and/or in the call-center or public warehousing industries in connection with its efforts to grow its PFS subsidiary. The Company currently has no agreements to acquire any such businesses. Should the Company be successful in acquiring other businesses, the Company may require additional financing to consummate such a transaction. Acquisitions involve certain risks and uncertainties, therefore, the Company can give no assurance with respect to whether it will be successful in identifying such a business to acquire, whether it will be able to obtain financing to complete such an acquisition, or whether the Company will be successful in operating the acquired business. The Company believes it will be able to satisfy its working capital needs for fiscal year 1999, as well as business growth and planned capital expenditures, through funds available under the Company's various line of credit facilities, trade credit, lease financing, internally generated funds and by increasing the amount available under the Company's credit facilities. In addition, 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 "Year 2000" issue). The Company believes that with upgrades or modifications to existing software and conversion to new software, the impact of the Year 2000 issue can be mitigated. However, if such upgrades, modifications and conversions are not made, or are not made in a timely manner, the Year 2000 Issue could have a material impact on the Company's operations. The total cost of implementing these system upgrades and modifications is not expected to be material to the 18 19 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 will switch to providers capable of performing such processing. INVENTORY MANAGEMENT The Company manages its computer consumable supplies inventories held for sale in its wholesale distribution business by maintaining sufficient quantities of product to achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory balances will fluctuate as the Company adds new product lines and makes large purchases from suppliers to take advantage of attractive terms. To reduce the risk of loss to the Company due to supplier price reductions and slow moving inventory, the Company's purchasing agreements with many of its suppliers, including most of its major suppliers, contain price protection and stock return privileges under which the Company receives credits against future purchases if the supplier lowers prices on previously purchased inventory or the Company can return slow moving inventory in exchange for other products. During fiscal year 1997, the Company, through its PFS subsidiary, began providing product fulfillment and distribution services for third parties. Certain of these distribution agreements provide that the Company own the related inventory, some of which also allow for the third party to manage the levels of inventory held by the Company. As a result, the levels of inventory held by the Company under these contracts is 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 the specific event, if any, of 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-Q, other than historical information, and, in particular, information regarding future revenue, earnings and business plans and goals, consist of forward-looking information under the Private Securities Litigation Reform Act of 1995, and are subject to and involve risks and uncertainties which could cause actual results to differ materially from the forward-looking information. These risks and uncertainties include, but are not limited to, the 19 20 "Risk Factors" set forth in the Company's prospectus dated March 26, 1998, and the matters set forth in the Company's Report on Form 10-K filed on May 29, 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 The Company adopted SFAS No. 128, "Earnings per Share," during the quarter ended December 31, 1997. The statement establishes new standards for computing and presenting earnings per share ("EPS"). The Company restated its earnings per share data for all periods presented. The Company also adopted SFAS No. 130, "Reporting Comprehensive Income," during the quarter ended June 30, 1998. SFAS No. 130 requires companies to report comprehensive income, which is defined as all changes in equity during a period, except those resulting from investment by owners and distribution to owners. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal years beginning after December 15, 1997; however, earlier adoption is permitted. SFAS No. 131 requires the disclosure of financial and descriptive information about reportable operating segments. SFAS No. 131 modifies 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 standard and its potential impact on disclosures and will adopt these pronouncement in its fiscal year 1999 annual financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be used to hedge certain types of transactions, including foreign currency exposures of a net investment in a foreign operation. The Company presently utilizes derivative financial instruments only to hedge its net investment in certain of its foreign operations. SFAS No. 133 requires gains or losses on these financial instruments in other comprehensive income as a part of the cumulative translation adjustment. The Company currently complies with the provisions of SFAS No. 133 in its accounting treatment of these financial instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, with initial application as of the beginning of an entity's fiscal quarter. Early adoption of the standard is allowed, however, the statement cannot be applied retroactively to financial statements of prior periods. 20 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: EXHIBIT NO. DESCRIPTION OF EXHIBITS -------- ----------------------------------------------------------- 10.1 Agreement and Plan of Merger Among Daisytek International Corporation, Daisytek, Incorporated, TC Illinois Acquisition Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition Corp., TC Ohio Acquisition Corp., TC Pennsylvania Acquisition Corp., TC Texas Acquisition Corp., And TC Minnesota Acquisition Corp., The Tape Company, Inc., An Illinois Corporation, The Tape Company, Inc., A Michigan Corporation, The Tape Company, Inc., A Georgia Corporation, The Tape Company, Inc., An Ohio Corporation, Tape Distributors, Inc., A Pennsylvania Corporation, Tape Distributors Of Texas, Inc., A Texas Corporation, Tape Distributors Of Minnesota, Inc., A Minnesota Corporation, Michael Cullen and Robert Daly. 10.2 Registration Rights Agreement by and among Daisytek International Corporation, a Delaware corporation, Michael Cullen and Robert Daly, dated June 1, 1998. 11 Statement re: Computation of Earnings Per Share. 27.1 Financial Data Schedule for the three months ended June 30, 1998. 27.2 Financial Data Schedule for the three months ended June 30, 1997. b) Reports on Form 8-K: Form 8-K filed on May 5, 1998 reporting Item 5. the Company's press release dated May 5, 1998 announcing fourth quarter and fiscal year ended March 31, 1998 results. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1998 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Thomas J. Madden -------------------------------- Thomas J. Madden Chief Financial Officer, Chief Accounting Officer, Vice President - Finance 22 23 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBITS -------- ----------------------------------------------------------- 10.1 Agreement and Plan of Merger Among Daisytek International Corporation, Daisytek, Incorporated, TC Illinois Acquisition Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition Corp., TC Ohio Acquisition Corp., TC Pennsylvania Acquisition Corp., TC Texas Acquisition Corp., And TC Minnesota Acquisition Corp., The Tape Company, Inc., An Illinois Corporation, The Tape Company, Inc., A Michigan Corporation, The Tape Company, Inc., A Georgia Corporation, The Tape Company, Inc., An Ohio Corporation, Tape Distributors, Inc., A Pennsylvania Corporation, Tape Distributors Of Texas, Inc., A Texas Corporation, Tape Distributors Of Minnesota, Inc., A Minnesota Corporation, Michael Cullen and Robert Daly. 10.2 Registration Rights Agreement by and among Daisytek International Corporation, a Delaware corporation, Michael Cullen and Robert Daly, dated June 1, 1998. 11 Statement re: Computation of Earnings Per Share. 27.1 Financial Data Schedule for the three months ended June 30, 1998. 27.2 Financial Data Schedule for the three months ended June 30, 1997.
23 EX-10.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 10.1 AGREEMENT AND PLAN OF MERGER AMONG DAISYTEK INTERNATIONAL CORPORATION, DAISYTEK, INCORPORATED, TC ILLINOIS ACQUISITION CORP., TC MICHIGAN ACQUISITION CORP., TC GEORGIA ACQUISITION CORP., TC OHIO ACQUISITION CORP., TC PENNSYLVANIA ACQUISITION CORP., TC TEXAS ACQUISITION CORP., AND TC MINNESOTA ACQUISITION CORP. THE TAPE COMPANY, INC., AN ILLINOIS CORPORATION, THE TAPE COMPANY, INC., A MICHIGAN CORPORATION, THE TAPE COMPANY, INC., A GEORGIA CORPORATION, THE TAPE COMPANY, INC., AN OHIO CORPORATION, TAPE DISTRIBUTORS, INC., A PENNSYLVANIA CORPORATION, TAPE DISTRIBUTORS OF TEXAS, INC., A TEXAS CORPORATION, AND TAPE DISTRIBUTORS OF MINNESOTA, INC., A MINNESOTA CORPORATION AND MICHAEL CULLEN AND ROBERT DALY DATED AS OF JUNE 1, 1998 2 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER is dated as of June 1, 1998 (this "AGREEMENT") and is by and among Daisytek International Corporation, a Delaware corporation ("DAISYTEK"); Daisytek, Incorporated, a Delaware corporation (the "PURCHASER"); TC Illinois Acquisition Corp. ("TC ILLINOIS ACQUISITION"), TC Michigan Acquisition Corp. ("TC MICHIGAN ACQUISITION"), TC Georgia Acquisition Corp. ("TC GEORGIA ACQUISITION"), TC Ohio Acquisition Corp. ("TC OHIO ACQUISITION"), TC Pennsylvania Acquisition Corp. ("TC PENNSYLVANIA ACQUISITION"), TC Texas Acquisition Corp. ("TC TEXAS ACQUISITION"), and TC Minnesota Acquisition Corp. ("TC MINNESOTA ACQUISITION"), each, a Delaware corporation and wholly-owned subsidiary of the Purchaser (collectively, the "ACQUISITION SUBS" and individually, an "ACQUISITION SUB"); The Tape Company, Inc., an Illinois corporation ("TC ILLINOIS"), The Tape Company, Inc., a Michigan corporation ("TC MICHIGAN"), The Tape Company, Inc., a Georgia corporation ("TC GEORGIA"), The Tape Company, Inc., an Ohio corporation ("TC OHIO"), Tape Distributors, Inc., a Pennsylvania corporation ("TC PENNSYLVANIA"), Tape Distributors of Texas, Inc., a Texas corporation ("TC TEXAS"), and Tape Distributors of Minnesota, Inc., a Minnesota corporation ("TC MINNESOTA") (collectively, the "SELLERS" and individually, a "SELLER"); and Michael Cullen and Robert Daly, the stockholders of the Sellers (collectively, the "STOCKHOLDERS" and individually, a "STOCKHOLDER"). The parties wish to effect the acquisition of the Sellers by the Purchaser through a merger of the Acquisition Subs with and into the Sellers on the terms and conditions hereof. This Agreement is intended to be a "plan of reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), and the Merger described herein is intended to be treated as a "pooling of interests" for accounting purposes. Accordingly, in consideration of the mutual representations, warranties and covenants contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1. CERTAIN DEFINED TERMS. As used in this Agreement, (i) terms defined in the Preamble or elsewhere in this Agreement shall have the meaning set forth therein and (ii) the following terms shall have the following meanings: "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 Registration Rights Agreement, Restrictive Covenant Agreement and Affiliate Letter. 3 "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. "AFFILIATE LETTER" means the letter being executed and delivered concurrently herewith by the Stockholders to the Purchaser, as provided in Section 2.11 hereof. "BUSINESS" means the sale and distribution of professional video and audio recording tape and related products as conducted by the Sellers, taken as a whole. "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. "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. "DAISYTEK BUSINESS" means the business conducted by Daisytek and its subsidiaries, taken as a whole. "ENCUMBRANCE" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential 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 -2- 4 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. Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq. "ENVIRONMENTAL PERMITS" means all permits, written approvals, U.S. Environmental Protection Agency or state generator numbers, licenses and other authorizations from applicable Governmental Authorities required under any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "FINANCIAL STATEMENTS" has the meaning specified in Section 3.7. "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. "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. -3- 5 "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 obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Indebtedness of others referred to in clauses (a) through (g) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (1) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (2) 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, (3) 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 (4) otherwise to assure a creditor against loss, and (i) all Indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "INDEMNIFIED PARTY" means any Person having a right to indemnification from an Indemnifying Party under the terms and provisions of Article VII hereof. "INDEMNIFYING PARTY" means any Person responsible or obligated to provide indemnification to an Indemnified Party under the terms and provisions of Article VII hereof. "INTELLECTUAL PROPERTY" means (a) inventions, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (b) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (c) statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations and continuations-in-part) and all improvements to the inventions covered in each such registration, patent or application, (d) trademarks, service marks, trade dress, logos, trade names and -4- 6 corporate names and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the Trademark Offices of the States and Territories of the United States of America, and the Trademark Offices of other nations throughout the world, (e) copyrights (registered or otherwise) and registrations and applications for registration thereof, (f) moral rights (including, without limitation, rights of integrity), and waivers of such rights by others, (g) computer software and programs, data and documentation, (h) trade secrets and confidential business information (including ideas, formulas, compositions, inventions, and conceptions of inventions, whether patentable or unpatentable and whether or not reduced to practice), technology (including know-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data and copyrightable works, (i) copies and tangible embodiments of all of the foregoing, in whatever form or medium, (j) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (k) all rights to sue for present and past infringement of any of the intellectual property rights hereinabove set out. "INVENTORIES" and "INVENTORY" mean all inventory, merchandise, goods, raw materials, finished goods, packaging and supplies maintained, held (including, without limitation, on consignment) or stored by or for any Seller and any prepaid deposits for any of the same. "LEASED REAL PROPERTY" means the real property leased by any Seller, as landlord or tenant, together with, to the extent leased by such Seller, 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, (i) for purposes of the representations of the Stockholders hereunder, the Business or (ii) for purposes of the representations of Daisytek, the Purchaser and the Acquisition Subs hereunder, the Daisytek Business, in each case, that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Business or the Daisytek Business, as the case may be, 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 the Daisytek Business, as the case may be, or, as to the Business, 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 Sellers. "MATERIAL CONTRACTS" has the meaning specified in Section 3.8. -5- 7 "PERMITS" has the meaning specified in Section 3.17. "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 3.24. "PURCHASE PRICE" has the meaning specified in Section 2.2. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement being executed and delivered concurrently herewith by Daisytek and the Stockholders, as provided in Section 2.11 hereof. "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. "RESTRICTIVE COVENANT AGREEMENT" means the Restrictive Covenant Agreement being executed and delivered concurrently herewith by the Stockholders, as provided in Section 2.11 hereof. "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 investigations, feasibility studies, corrective actions, closures, and postremedial or postclosure studies, investigations, operations, maintenance and monitoring on, about or in any real property. "SEC" means the United States Securities and Exchange Commission. "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. -6- 8 ARTICLE II THE MERGER 2.1. THE MERGER. Upon the terms and subject to the conditions hereof, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL") (i) TC Illinois Acquisition shall be merged with and into TC Illinois, (ii) TC Michigan Acquisition shall be merged with and into TC Michigan, (iii) TC Georgia Acquisition shall be merged with and into TC Georgia, (iv) TC Ohio Acquisition shall be merged with and into TC Ohio, (v) TC Pennsylvania Acquisition shall be merged with and into TC Pennsylvania, (vi) TC Texas Acquisition shall be merged with and into TC Texas and (vii) TC Minnesota Acquisition shall be merged with and into TC Minnesota (all of the foregoing being collectively referred to herein as the "MERGER"). The Merger shall be deemed to occur and shall be effective for accounting and all other purposes as of June 1, 1998 (the "EFFECTIVE TIME"), except to the extent that the respective state corporation statutes of any Seller require, as a condition to the effectiveness of any Merger, the filing or issuance of a Certificate of Merger (as hereinafter defined), in which event, solely for purposes of such state corporation statutes, the Merger of such Seller shall be deemed effective as of the filing or issuance of such Certificate of Merger. Following the Merger, each of the Sellers shall continue as the surviving corporation (collectively, the "SURVIVING CORPORATIONS" and individually, a "SURVIVING CORPORATION") and be a wholly-owned subsidiary of the Purchaser, and the separate corporate existence of each Acquisition Sub shall cease. 2.2. MERGER CERTIFICATES. As of June 1, 1998, the parties shall cause certificates of merger (the "MERGER CERTIFICATES") to be filed and recorded in accordance with Section 252 of the DGCL and shall take all such further actions as may be required by law to make the Merger effective. The execution and delivery of this Agreement shall occur at a closing (the "CLOSING") which shall be deemed to have been held as of June 1, 1998 (the "CLOSING DATE") at the offices of the Purchaser (or such other place as the parties may agree) for the purpose of confirming satisfaction or waiver of all conditions to the Merger. 2.3. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 259 of the DGCL. 2.4. CERTIFICATE OR ARTICLES OF INCORPORATION AND BYLAWS. The Certificate or Articles of Incorporation and Bylaws of each Seller, in each case as in effect immediately prior to the Effective Time, shall be the Certificate or Articles of Incorporation and Bylaws of the applicable Surviving Corporation, as the case may be, immediately after the Effective Time. 2.5. DIRECTORS AND OFFICERS. The directors and officers of each Acquisition Sub immediately prior to the Effective Time shall be the directors and officers of the applicable Surviving Corporation immediately after the Effective Time, each to hold office in accordance with the Certificate or Articles of Incorporation and Bylaws of such Surviving Corporation. Each Surviving Corporation may designate such other officers as it determines. -7- 9 2.6. CONVERSION OF STOCK. (a) At the Effective Time, by virtue of the Merger and without any action on the part of the Purchaser, the Acquisition Subs or the Sellers: (i) All shares of common stock of each Seller (collectively, the "SELLER COMMON STOCK") outstanding immediately prior to the Effective Time, other than shares held by any Seller as treasury stock, shall be converted into and become the right to receive, in the aggregate, 974,864 shares of common stock, $.01 par value, of Daisytek ("DAISYTEK COMMON STOCK"), the same being that number of shares (rounded down to the nearest whole share and subject to the payment of cash for fractional shares as provided in Section 2.9) determined by dividing the Purchase Price (as defined below) by the Market Value (as defined below) of Daisytek Common Stock (such shares of Daisytek Common Stock are referred to hereinafter as the "MERGER CONSIDERATION"). (ii) All shares of Seller Common Stock held at the Effective Time by any Seller as treasury stock shall be canceled and no payment shall be made, nor shall any shares of Daisytek Common Stock be issued, with respect thereto. (iii) Each share of common stock of each Acquisition Sub outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, $.01 par value, of the applicable Surviving Corporation. (b) For the purpose of this Agreement: (i) The term "PURCHASE PRICE" means $24,127,900.45. (ii) The term "MARKET VALUE" of Daisytek Common Stock means $24.75. (c) The Merger Consideration shall be allocated equally between the Stockholders. 2.7. CLOSING OF SELLER TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Sellers shall be closed and no transfer of Seller Common Stock shall thereafter be made. If, after the Effective Time, certificates representing shares of Seller Common Stock are presented to a Surviving Corporation, they shall be canceled. 2.8. EXCHANGE OF CERTIFICATES. At the Closing and effective as of the Effective Time, the Stockholders shall deliver to the Purchaser their certificates representing Seller Common Stock, duly endorsed for transfer, in exchange for a certificate or certificates representing that number of whole shares of Daisytek Common Stock into which the shares of Seller Common Stock theretofore represented by such certificate or certificates so surrendered shall have been converted pursuant to the provisions of this Agreement, and the certificate or certificates so surrendered shall forthwith be canceled. No Daisytek Common Stock certificates -8- 10 are to be issued in a name other than that in which the Seller Common Stock certificate surrendered is registered. 2.9. NO FRACTIONAL SHARES. No certificates representing fractional shares of Daisytek Common Stock shall be issued upon the surrender for exchange of Seller Common Stock certificates. No fractional interest shall entitle the owner to vote or to any rights of a security holder. In lieu of fractional shares, each holder of shares of Seller Common Stock who would otherwise have been entitled to a fractional share of Daisytek Common Stock, will receive upon surrender of a Seller Common Stock certificate or certificates, as the case may be, an amount in cash (without interest) determined by multiplying such fraction by the Market Value of one share of Daisytek Common Stock. 2.10. [deleted] 2.11. OTHER CLOSING MATTERS. At the Closing (i) Daisytek and the Stockholders shall execute and deliver the Registration Rights Agreement pursuant to which the Stockholders shall be granted piggy-back registration rights with respect to the shares of Daisytek Common Stock issued hereunder and (ii) the Stockholders shall execute and deliver to the Purchaser the (a) Restrictive Covenant Agreement pursuant to which the Stockholders shall agree not to compete with the Business of the Surviving Corporations following the Effective Time and (b) Affiliate Letter pursuant to which the Stockholders shall agree to certain restrictions on transfer with respect to the shares of Daisytek Common Stock issued hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES The Stockholders hereby, jointly and severally, make the following representations and warranties to the Purchaser and Daisytek: 3.1. ORGANIZATION AND QUALIFICATION. Each Seller is a corporation, duly organized, validly existing and in good standing under the laws of its state or jurisdiction of incorporation with full corporate power and authority to own its properties and to carry on the Business as now conducted. Schedule 3.1 sets forth (i) the state or jurisdiction of incorporation of each Seller, and (ii) the states or jurisdictions in which each Seller is qualified or otherwise authorized to transact business as a foreign corporation. Each Seller is qualified or otherwise authorized to transact business as a foreign corporation, and is in good standing as a foreign corporation, in all jurisdictions in which such qualification or authorization is required by law, except for jurisdictions in which the failure to be so qualified or authorized will not have a Material Adverse Effect. 3.2. CAPITALIZATION. The total authorized and issued capital stock of each of the Sellers is set forth on Schedule 3.2. The Stockholders are the lawful record and beneficial owners of all of the issued and outstanding shares of the Seller Common Stock. Each of the Stockholders owns one-half of the issued and outstanding shares of Seller Common Stock and has owned such -9- 11 shares for not less than the thirty (30) day period prior to the date hereof. All of the issued and outstanding shares of Seller Common 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. The Sellers have no other shares or other securities which are authorized, issued and/or outstanding other than the Seller Common Stock owned by the Stockholders. Except as set forth on Schedule 3.2, there are no outstanding subscriptions, options, warrants, rights, calls, contracts, commitments, understandings or agreements to purchase or otherwise acquire or relating to the issuance of any shares or other securities of any Seller, including, without limitation, any rights of conversion or exchange under any outstanding securities or other instruments, nor are there any shareholder agreements, voting trusts, proxies or other agreements, instruments or understandings with respect to any shares of Seller Common Stock. None of the Sellers own any capital shares or other proprietary interests, including without limitation, any shares of stock, partnership interests, joint venture interests, limited liability company interests, membership interests or other equity interests, directly or indirectly, in any Person. None of the Sellers, nor any of the Stockholders, own any shares of Daisytek Common Stock, except as may be issued hereunder. 3.3. CHARTER DOCUMENTS; OFFICERS, DIRECTORS AND AFFILIATES. (a) The copies of the certificates or articles of incorporation and by-laws of each Seller, certified by the respective secretaries or assistant secretaries thereof, which have been delivered to Purchaser are complete and correct in all respects. The minute books of each Seller which have been delivered to Purchaser are complete in all material respects and correctly reflect all corporate action (including, without limitation, the issuance of any shares of capital stock) taken by the respective stockholders and boards of directors (and committees thereof) of each of the Sellers. (b) Schedule 3.3 sets forth for each Seller the name of each of its officers and directors and each Person who may be deemed an "affiliate" of such Seller, as such term is used in Rule 145 promulgated under the Act. 3.4. TITLE TO SELLER COMMON STOCK. Except as set forth in Schedule 3.4, the Stockholders are the lawful record and beneficial owners of all of the issued and outstanding shares of Seller Common Stock and have 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 any Stockholder at any time, or upon the happening of any stated event, any shares of Seller Common Stock. 3.5. AUTHORITY; BINDING OBLIGATION. The Stockholders and the Sellers have all requisite power and authority to execute, deliver and perform their respective obligations under this Agreement and the Additional Agreements to which they are a party and consummate the transactions contemplated herein and therein. The execution and delivery of this Agreement and the Additional Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors and stockholders of each Seller, and no other action on the part of any Seller or Stockholder is necessary to consummate the -10- 12 transactions contemplated hereby or thereby. This Agreement and the Additional Agreements have been duly executed and delivered by the Stockholders and Sellers (to the extent each is a party thereto) and constitute the legal, valid and binding obligation of the Stockholders and Sellers (to the extent each is a party thereto) 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. 3.6. NO VIOLATIONS. Except as set forth in Schedule 3.6, the execution, delivery and performance of this Agreement and the Additional Agreements and the consummation of the transactions contemplated herein and therein by the Stockholders and the Sellers (to the extent each is a party 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 or articles of incorporation, by-laws or other charter documents of any Seller, (ii) any statutes, laws, rules, regulations, ordinances or permits of any Governmental Authority applicable to any Stockholder or Seller or (iii) any Governmental Order binding upon any Seller or Stockholder or any of their respective properties or assets; (b) conflict with or result in the breach of any term or provision of, require any notice or consent under, give rise to a right of termination of, constitute a default under, result in the acceleration of, or give rise to a right to accelerate any obligation under, any loan agreement, mortgage, indenture, financing agreement, lease or any other contract, agreement or instrument to which any Seller or Stockholder is a party or by which any of their respective properties or assets are bound; or (c) result in any Encumbrance on any of the properties or assets of any Stockholder or Seller. 3.7. FINANCIAL STATEMENTS. The Sellers have furnished to the Purchaser the combined balance sheet of the Sellers as at March 31, 1998 and the related combined statement of operations for the twelve months then ended (the "FINANCIAL STATEMENTS"). The Financial Statements (i) were prepared in all material respects in accordance with the books of account and other financial records of the Sellers, (ii) fairly present the combined financial condition and results of operations for Sellers as of the dates and for the periods covered thereby and (iii) have been prepared in accordance with GAAP, except for the absence of footnotes thereto. 3.8. BOOKS OF ACCOUNTS. The books of account and other financial records of each Seller (i) reflect all items of income and expense and all assets and liabilities required to be reflected therein in accordance with GAAP consistently applied, (ii) are in all material respects complete and correct and do not contain or reflect any material inaccuracies or discrepancies and (iii) have been maintained in accordance with good business and accounting practices. 3.9. ABSENCE OF UNDISCLOSED LIABILITIES. No Seller has any Liabilities, except: (a) Liabilities that were reflected, disclosed or reserved against in the Financial Statements and not heretofore paid or discharged; (b) Liabilities specifically disclosed in Schedule 3.9; (c) Liabilities incurred in, or as a result of, the ordinary course of the Business consistent with past practice since March 31, 1998 which do not exceed $25,000 for any one transaction or $100,000 in the aggregate; and (d) Liabilities in respect of Inventory purchase orders in the ordinary course of Business consistent with past practice, except as set forth in Schedule 3.9. -11- 13 3.10. ACCOUNTS RECEIVABLE. Schedule 3.10 sets forth an aged list of accounts receivable arising from the sale of Inventory and the rendering of services in the ordinary course of the Business as of March 31, 1998 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 set forth therein, all accounts receivable reflected on the Financial Statements (a) have arisen only in the ordinary course of the Business consistent with past practice, (b) represent the legal, valid and binding obligation of the account debtor, and (c) are not subject to any valid defenses, set-offs or counterclaims (except for warranty claims arising in the ordinary course of business) and (d) to the Stockholders' knowledge, are good and collectible in full in the ordinary course of business without resort to litigation or extraordinary collection activity not later than 90 days after the applicable invoice date. Except as set forth in Schedule 3.10, each Seller has good and marketable title to all of its accounts receivable, free and clear of any Encumbrances. 3.11. INVENTORY. (a) Except as set forth in Schedule 3.11, all Inventories are in the physical possession of the Sellers at the facilities located on the Leased Real Property. Subject to amounts reserved therefor, the value at which all Inventories are carried in the Financial Statements reflect the historical inventory valuation policy of the Sellers of stating such Inventories at the lower of their cost or market value and all Inventories are valued in accordance with GAAP consistently applied. Except as set forth in Schedule 3.11, each Seller has good and marketable title to all of its Inventories, free and clear of all Encumbrances. Except as set forth in Schedule 3.11, the Inventory does not include any items held on consignment for others, and no Seller 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. All Inventory is of a quantity and quality which is usable in the ordinary course of the Business consistent with past practice and within a reasonable period of time and is in good and merchantable condition in all material respects. 3.12. ASSETS. The Sellers own and have good title to all of their assets and properties reflected as owned on the balance sheet included in the Financial Statements, free and clear of any and all Encumbrances, except for (i) the Encumbrances reflected in the Financial Statements, (ii) assets and properties disposed of, or subject to purchase or sale orders, in the ordinary course of Business consistent with past practice since March 31, 1998, (iii) Encumbrances securing the liens of materialmen, carriers, landlords and like persons, all of which are not yet due and payable, (iv) Encumbrances for Taxes not yet due and payable and (v) Encumbrances that, in the aggregate, are not material to the Business. Since March 31, 1998 all the assets of the Sellers (including, without limitation, the benefit of any licenses, leases or other agreements or arrangements) have been acquired for a consideration not more than the fair market value of such assets at the date of such acquisition. 3.13. [deleted] -12- 14 3.14. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES. (a) Since March 31, 1998, except as disclosed in Schedule 3.14 or in the Financial Statements, there has not been any change in the condition (financial or otherwise) of the Business or the Liabilities, assets, operations, results of operations or condition (financial or otherwise) of the Sellers, taken as a whole, or, to the Stockholders' knowledge, in the customer or supplier relations or prospects of the Sellers, 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 March 31, 1998, except as disclosed in Schedule 3.14 or in the Financial Statements, 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 3.14 or in the Financial Statements, since March 31, 1998, no Seller has: (i) permitted or allowed any of its assets or properties (whether tangible or intangible) to be subjected to any Encumbrance, other than Encumbrances that have been or will be released at or prior to the Closing; (ii) amended, terminated, canceled or compromised any material claims or waived any other rights of value in excess of $10,000; (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 $10,000, other than the sale of Inventories and used machinery and equipment in the ordinary course of the Business consistent with past practice; (iv) disclosed to a third party any material Intellectual Property to which, or under which, it has any right or license and which is confidential to the Business or permitted to lapse any material Intellectual Property (or any registration thereof or any application relating thereto), to which, or under which, it has any right or license; (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 increases which do not exceed $100,000, or (B) established or increased or promised or proposed to increase any benefits under any Plan (as defined below), in either case except as required by law and except for ordinary increases consistent with the past practice of the Business; (vi) made any 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 -13- 15 course of the Business consistent with past practice, or as may be required by any applicable law, rule or regulation; (viii) made any material changes, other than in accordance with prudent business practice, in its customary methods of operations of the Business, including, without limitation, material practices and policies relating to, purchasing, Inventories, marketing, selling and pricing; (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 for borrowings under revolving lines of credit reflected in the Financial Statements; (x) failed to pay any creditor any material amount owed to such creditor when due, which amount remains unpaid, except for amounts contested in good faith in the ordinary course of the Business consistent with past practice; (xi) redeemed any of its capital stock or, declared, made or paid any dividends or distributions (whether in cash, securities or other property); (xii) issued or sold any capital stock, notes, bonds or other securities, or any option or warrant to purchase the same; (xiii) amended or restated its charter or by-laws; (xiv) made any capital expenditure or commitment for any capital expenditure in excess of $25,000 individually or $100,000 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; (xvi) entered into any agreement, arrangement or transaction 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 Sellers; (xviii) materially amended, modified or consented to the termination of any Material Contract (as defined below) or any of its rights therein; -14- 16 (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; (xx) failed in the aggregate to maintain its plant, property and equipment in a general state of good repair and operating condition, ordinary wear and tear excepted; (xxi) terminated, discontinued, closed or disposed of any plant, facility or other business operation, or laid off any employees (other than part-time employees, within the meaning of 20 CFR Section 639.3(h), and other than layoffs of less than 50 employees who are not such part-time employees in any six-month period in the ordinary course of business consistent with past practice) or implemented any early retirement, separation or program providing early retirement window benefits within the meaning of Section 1.401(a)-4 of the Regulations or announced or planned any such action or program for the future; (xxii) made any charitable contribution in excess of $10,000 in any one instance or $50,000 in the aggregate; (xxiii) suffered any casualty loss or damage with respect to any of its assets, plant, property or equipment which has a replacement cost of more than $25,000, 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. 3.15. LITIGATION. Except as set forth in Schedule 3.15 (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), there are no Actions, pending or, to the Stockholders' knowledge, threatened, against any Seller, except for Actions as to which the Sellers are fully covered by insurance (except for the applicable deductible) and for which the insurer has not denied or disclaimed coverage. Except as set forth in Schedule 3.15, no Seller, nor any of their respective assets or properties, is subject to any Governmental Order (nor, to the knowledge of the Stockholders, are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or would have a Material Adverse Effect. 3.16. COMPLIANCE WITH LAWS. Except as set forth in Schedule 3.16, to the Stockholders' knowledge, each Seller has conducted and continues to conduct the Business 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, and no Seller is in violation of any such law, ordinance, statute, rule, regulation or Governmental Order, except for such failures and breaches which, in the aggregate, will not have a Material Adverse Effect. No -15- 17 Seller nor any officer, director, employee, agent or representative of any Seller has violated or is currently in violation of the Foreign Corrupt Practices Act of 1977, as amended. 3.17. ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS. (a) Except as disclosed in Schedule 3.17, to the Stockholders' knowledge, each Seller 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, and all such Permits and Environmental Permits are in full force and effect. Schedule 3.17 contains a true, correct and complete list of all Permits held by each Seller (setting forth the issuer thereof and any expiration or terminate date). Except as disclosed in Schedule 3.17, to the Stockholders' knowledge, there is no existing practice, action or activity of any Seller and no existing condition of the properties or assets of any Seller, 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. No Seller 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 3.17, to the Stockholders' knowledge, each Seller is in all material respects in compliance with all applicable Permits, all applicable Environmental Laws and the requirements of all applicable Environmental Permits. (b) Except as disclosed in Schedule 3.17, to the Stockholders' knowledge (i) Hazardous Materials have not been generated, used, treated, handled or stored on, or transported to or from, or released (as "release" is defined under any applicable Environmental Law) on any Leased Real Property; (ii) the Sellers 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 any basis for asserting the same, against any Seller, or any Leased Real Property; and (iv) no 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. 3.18. MATERIAL CONTRACTS. (a) Schedule 3.18 lists each of the following contracts and agreements to which any Seller is a party, other than leases of Leased Real Property (such contracts and agreements being collectively referred to herein as the "MATERIAL CONTRACTS"): -16- 18 (i) all contracts, agreements, invoices, purchase orders and other arrangements, whether oral or written, for the purchase of Inventory, merchandise, supplies, spare parts, other materials or personal property with any supplier or for the furnishing of services to any Seller or otherwise related to the Business; provided, however, that only such contracts, agreements, invoices, purchase orders and other arrangements under the terms of which any Seller, as to any individual item: (A) has paid more than $250,000 during the period beginning on April 1, 1997 and ending on March 31, 1998 or (B) is obligated to pay more than $250,000 over the remaining term thereof and, in each case, which was not, nor is not, terminable without penalty or further payment at any time upon less than 30 calendar days' notice shall be deemed a Material Contract; and provided, further, however, that Inventory purchase orders arising in the ordinary course of Business consistent with past practice shall not be deemed Material Contracts; (ii) all contracts, agreements, invoices, sales orders and other arrangements, whether oral or written, for the sale of Inventory, merchandise, other materials or personal property or for the furnishing of services by any Seller, or otherwise related to the Business; provided, however, that only such contracts, agreements, invoices, sales orders and other arrangements which, as to any individual item (A) involve consideration of more than $250,000 during the period beginning on April 1, 1997 and ending on March 31, 1998 or (B) involve consideration of more than $250,000 over the remaining term thereof and, in each case, which was not, nor is not, terminable without penalty or further payment at any time upon less than 30 calendar days' notice shall be deemed a Material Contract; and provided, further, however, that contracts and agreements relating to the sale of Inventory in ordinary course of Business consistent with past practice shall not be deemed Material Contracts; (iii) all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing and advertising contracts, management contracts and consulting contracts to which any Seller is a party and which involve payments, or the provision of goods or services having a value in excess of $250,000 and which are not cancelable without penalty or further payment within 30 calendar days of notice of such cancellation; (iv) all Indebtedness in excess of $250,000 principal amount (including without limitation, all promissory notes, bonds, debentures, credit agreements, letters of credit, acceptances and other similar items) as to which any Seller has any Liability; (v) all contracts and agreements with any Governmental Authority to which any Seller is a party; (vi) all contracts and agreements with manufacturers under which Seller is designated as an exclusive distributor; (vii) all contracts and agreements that limit the ability of any Seller to compete in any line of business or with any Person or entity or in any geographic area or during any period of time; -17- 19 (viii) all contracts, agreements and other arrangements (including without limitation those relating to employment) between or among any Seller and any Stockholder (or any member of any Stockholder's Immediate Family); (ix) [deleted] (x) all partnership agreements, joint venture agreements, stockholder agreements or operating agreements to which any Seller is a party; and (xi) all other contracts, agreements and other arrangements, whether or not 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 3.18 (which shall identify each such Material Contract), each Material Contract: (i) is valid and binding on the Seller that is a party to such Material Contract and, to the Stockholders' knowledge, 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. To the Stockholders' knowledge, no Seller is in material breach or default under the terms of any Material Contract. (c) Except as expressly set forth in Schedule 3.18 (which shall identify each such Material Contract), to the Stockholders' knowledge, no other party to any Material Contract is in material breach or default thereunder. (d) Except as expressly set forth in Schedule 3.18, 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 Seller. 3.19. INTELLECTUAL PROPERTY. (a) Schedule 3.19 sets forth a true and complete list and a brief description, including a description of any registration, license or sublicense thereof, of all Intellectual Property claimed to be unique or having a value in excess of $50,000 in which any Seller has any interest, whether as owner, licensor or licensee. Except as otherwise described in Schedule 3.19, in each case where a registration or application for registration listed in Schedule 3.19 is held by assignment, the assignment has been duly recorded with the applicable Trademark Office from which the original registration issued or before which the application for registration is pending. (b) Except as disclosed in Schedule 3.19, as to all Intellectual Property set forth therein which is owned by any Seller: (i) such Intellectual Property is owned by a Seller, free and clear of any Encumbrance, and (ii) to the Stockholders' knowledge, no Actions have been made or asserted or are pending against any Seller based upon or challenging or seeking to -18- 20 deny or restrict the use by any Seller of any of such Intellectual Property; (iii) to the Stockholders' knowledge, no Person is using any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that infringe upon such Intellectual Property or upon the rights of any Seller therein; (iv) no Seller has granted any license or other right currently outstanding to any other Person with respect to such Intellectual Property; and (v) the consummation of the transactions contemplated by this Agreement will not result in the termination or material impairment of any of such Intellectual Property. (c) The Stockholders have delivered to the Purchaser correct and complete copies of all licenses for all Intellectual Property set forth in Schedule 3.19 as to which any Seller is a licensor or licensee. With respect to each of these licenses: (i) such license is legal, valid, binding, enforceable and in full force and effect in all material respects with respect to the Seller that is a party thereto and, to the Stockholders' knowledge, with respect to all other parties thereto and is the entire agreement between the respective licenser and licensee with respect to such license; (ii) except as otherwise set forth in Schedule 3.19, such license will not cease to be legal, valid, binding, enforceable and in full force and effect in all material respects on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated hereby constitute a breach or default under such license or otherwise give the licenser or licensee a right to terminate such license; (iii) except as otherwise disclosed in Schedule 3.19, with respect to each such license: (A) no Seller has received any notice of cancellation or termination under such license and, to the Stockholders' knowledge, no licensor or licensee has any right of termination or cancellation under such license except in connection with any default thereunder, (B) no Seller has received any notice of a breach or default under such license, which breach or default has not been cured, and (C) no Seller has granted to any other Person any sublicense under such license; (iv) no Seller nor, to the Stockholders' knowledge, any other party to such license, is in breach or default in any material respect, and, to the Stockholders' knowledge, no event has occurred that, with notice or lapse of time would constitute such a breach or default by any Seller or permit termination, modification or acceleration under such license; (v) except as set forth in Schedule 3.19, to the Stockholders' knowledge, no Actions have been made or asserted or are pending or threatened against any Seller either (A) based upon or challenging or seeking to deny or restrict the use by any Seller of any of such licensed Intellectual Property or (B) alleging that any such licensed Intellectual Property is being licensed, sublicensed or used in violation of any patents or trademarks, or any other rights of any Person; and -19- 21 (vi) to the Stockholders' knowledge, no Person is using any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that infringe upon such licensed Intellectual Property or upon the rights of any Seller therein. 3.20. REAL PROPERTY. (a) No Seller currently owns or has ever owned any real property. (b) Schedule 3.20 lists: (i) the address of each parcel of Leased Real Property, (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Leased Real Property and (iii) the term (referencing applicable renewal periods) and rental payment terms of the leases (and any subleases) pertaining to each such parcel of Leased Real Property. (c) Except as described in Schedule 3.20 (i) to the Stockholders' knowledge, there is no material violation of any law, regulation or ordinance relating to the Leased Real Property and (ii) 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. The Stockholders have made available to the Purchaser true and correct copies of, to the extent available and in its possession, if any, all certificates of occupancy, environmental reports, appraisals, and other documents relating to or otherwise affecting the Leased Real Property. The Seller listed in Schedule 3.20 as the lessee of each parcel of Leased Real Property is in peaceful and undisturbed possession of such parcel of Leased Real Property, as the lessee, and, to the Stockholders' knowledge, there are no contractual or legal restrictions that preclude or restrict the ability to use the subject premises for the purposes for which they are currently being used. All existing utilities required for the use, occupancy, operation and maintenance of the Leased Real Property are adequate for the conduct of the Business as presently conducted. To the Stockholders' knowledge, there are no material latent defects or material adverse physical conditions affecting the Leased Real Property, other than ordinary wear and tear. Except as set forth in Schedule 3.20, no Seller has leased or subleased any parcel of Leased Real Property to any other Person, nor has any Seller assigned its interest under any lease or sublease set forth in Schedule 3.20 to any third party. (d) The Stockholders have delivered to the Purchaser correct and complete copies of all leases and subleases set forth in Schedule 3.20 and any and all material ancillary documents pertaining thereto (including, but not limited to, any amendments and evidence of commencement dates and expiration dates). With respect to each of these leases and subleases: (i) such lease or sublease is legal, valid, binding, enforceable and in full force and effect with respect to the Seller that is a party thereto, and, to the Stockholders' knowledge, with respect to all other parties thereto and is the entire agreement between the parties thereto with respect to such property; -20- 22 (ii) except as otherwise set forth in Schedule 3.20, such lease or sublease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated hereby constitute a breach or default under such lease or sublease or otherwise give the landlord a right to terminate, recapture or modify such lease or sublease; (iii) except as otherwise disclosed in Schedule 3.20, with respect to each such lease or sublease: (A) no Seller has received any notice of cancellation or termination under such lease or sublease and, to the Stockholders' knowledge, no lessor has any right of termination or cancellation under such lease or sublease except in connection with the default of a Seller thereunder, (B) no Seller has received any notice of a breach or default by any Seller under such lease or sublease, which breach or default has not been cured, and (C) no Seller has granted to any other Person any material rights, adverse or otherwise, under such lease or sublease; and (iv) except as set forth in Schedule 3.20, no Seller nor, to the Stockholders' knowledge, any other party to such lease or sublease is in breach or default in any material respect, and, to the Stockholders' knowledge, 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 or sublease. (e) To the Stockholders' knowledge, there are no condemnation proceedings or eminent domain proceedings of any kind pending or threatened against the Leased Real Property. (f) Except as set forth in Schedule 3.20, to the Stockholders' knowledge, all the Leased Real Property is occupied under a valid and current certificate of occupancy or similar permit, the transactions contemplated by this Agreement will not require the issuance of any new or amended certificate of occupancy and there are no facts that would prevent the Leased Real Property from being occupied after the Closing Date in the same manner as before. (g) To the Stockholders' knowledge, all improvements on the Leased Real Property constructed by or on behalf of any Seller were constructed in compliance with all applicable federal, state and local statutes, laws, ordinances, regulations, rules, codes, orders or requirements (including, but not limited to, any building or zoning laws or codes) affecting such Leased Real Property. 3.21. TANGIBLE PERSONAL PROPERTY. (a) Schedule 3.21 lists each item of machinery, equipment, tools, furniture, fixtures, personalty, vehicles and other tangible personal property (excluding Inventory) which (i) has an original cost or value of more than $100,000, (ii) as of March 31, 1998, had a -21- 23 useful life of more than one year, (iii) is used in the ordinary course of the Business and (iv) is owned or leased by any Seller (the "TANGIBLE PERSONAL PROPERTY"). (b) The Stockholders have delivered to the Purchaser correct and complete copies of all leases and subleases for Tangible Personal Property with remaining annual rental payments in excess of $100,000 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 and subleases: (i) such lease or sublease is legal, valid, binding, enforceable and in full force and effect in all material respects with respect to the Seller that is a party thereto and, to the Stockholders' knowledge, with respect to all other parties thereto and is the entire agreement between the parties thereto with respect to such property; (ii) except as set forth in Schedule 3.21, such lease or sublease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated hereby constitute a breach or default under such lease or sublease or otherwise give the lessor a right to terminate, recapture or modify such lease or sublease: (iii) except as otherwise disclosed in Schedule 3.21, with respect to each such lease or sublease: (A) no Seller has received any notice of cancellation or termination under such lease or sublease and, to the Stockholders' knowledge, no lessor has any right of termination or cancellation under such lease or sublease except in connection with the default of a Seller thereunder, (B) no Seller has received any notice of a breach or default under such lease or sublease, which breach or default has not been cured, and (C) no Seller has granted to any other Person any material rights still outstanding, adverse or otherwise, under such lease or sublease; and (iv) no Seller, nor, to the Stockholders' knowledge, any other party to such lease or sublease, is in breach or default in any material respect, and, to the Stockholders' knowledge, 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 or sublease. 3.22. CUSTOMERS. Listed in Schedule 3.22 are the names and addresses of (i) the top ten customers of the Business (by revenue) during the twelve (12) month period ended March 31, 1998 and (ii) each customer of the Business which ordered and has been shipped goods or merchandise with an aggregate purchase price of $500,000 or more during such twelve (12) month period, and, in each case, the amount for which each such customer was invoiced during such period. Except as disclosed in Schedule 3.22, no Seller has received any written notice that any customer listed in Schedule 3.22 has ceased, or will cease, to use the products, equipment, goods or services of the Sellers, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services following the Closing Date. -22- 24 3.23. SUPPLIERS. Listed in Schedule 3.23 are the names and addresses of (i) the top ten suppliers of the Business (by purchase order dollar amount) during the twelve (12) month period ended March 31, 1998 and (ii) each supplier from which any Seller ordered materials, supplies, merchandise and other goods for the Business and to which such Seller paid, or is obligated to pay, an aggregate purchase price of $500,000 or more during such twelve (12) month period and, in each case, the amount for which each such supplier invoiced such Seller during such period. Except as disclosed in Schedule 3.23, no Seller has received any written notice that any supplier listed in Schedule 3.23 will not sell materials, supplies, merchandise and other goods to the Sellers at any time after the Closing Date on terms and conditions similar to those imposed on current sales subject to general and customary price increases. 3.24. EMPLOYEE BENEFIT MATTERS. (a) Plans and Material Documents. Schedule 3.24 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, and all employment, termination, severance or other contracts or agreements to which any Seller is a party, with respect to which any Seller has any obligation or which are maintained, contributed to or sponsored by any Seller for the benefit of any current or former employee, officer or director of such member (excluding any confidentiality or restrictive covenant agreement entered into by any current or former employee for the benefit of any Seller) and (ii) each employee benefit plan for which any Seller could incur liability 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 3.24, each Plan is in writing and the Stockholders 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 3.24, there are no other employee benefit plans, programs, arrangements or agreements, whether formal or informal, whether in writing or not, to which any Seller is a party, with respect to which any Seller has any obligation or which are maintained, contributed to or sponsored by any Seller for the benefit of any current or former employee, officer or director of such Seller. (b) Absence of Certain Types of Plans. None of the Plans is a Multiemployer Plan (within the meaning of Section 3(37) of ERISA) or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which any Seller could incur liability under Section 4063 or 4064 of ERISA (a "MULTIPLE EMPLOYER PLAN"). Except as set forth in Schedule 3.24, none of the Plans provides for the payment of separation, severance, termination or similar type benefits to any Person or obligates any Seller to pay separation, severance, termination or similar type benefits solely as a result of any transaction contemplated by this Agreement or as a result of a "change in control", within the meaning of such term under Section 280G of the Code. Except as set forth in Schedule 3.24, none of the Plans provide for or -23- 25 promise medical, disability or life insurance benefits to be paid or provided by any Seller for any current or former employee, officer or director of any Seller after termination of employment with such member other than as required by Section 601 et seq. of ERISA. (c) Compliance with Applicable Law. Each Plan offered by any Seller 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 Stockholders' knowledge, 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. Each Seller 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. No legal action, suit or claim is pending or, to the knowledge of the Sellers, threatened with respect to any Plan (other than claims for benefits in the ordinary course) and, to the Stockholders' knowledge, no fact or event exists that could give rise to any such action, suit or claim. (d) Qualification of Certain Plans. Each Plan which is intended to be qualified under Section 401(a) of the Code or Section 401(k) of the Code has received a favorable determination letter from the IRS that it is so qualified and each trust established in connection with any Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code is so exempt and, to the Stockholders' knowledge, no fact or event has occurred since the date of such determination letter from the IRS to adversely affect the qualified status of any such Plan or the exempt status of any such trust. Each trust maintained or contributed to by any Seller which is intended to be qualified as a voluntary employees' beneficiary association and which is intended to be exempt from federal income taxation under Section 501(c)(9) of the Code has received a favorable determination letter from the IRS that it is so qualified and so exempt, and, to the Stockholders' knowledge, no fact or event has occurred since the date of such determination by the IRS to adversely affect such qualified or exempt status. (e) Absence of Certain Liabilities and Events. To the Stockholders' knowledge, 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 Stockholders' knowledge, no Seller has incurred any liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B of the Code and, to the Stockholders' knowledge, no fact or event exists which could give rise to any such liability. No Seller 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), including, without limitation, any material liability in connection with the termination or reorganization of any employee benefit plan subject to Title IV of ERISA or the withdrawal from any Multiemployer Plan or Multiple Employer Plan; and, to the Stockholders knowledge, no fact or event exists which could give rise to any such liability. No complete or partial termination has occurred within the five years preceding the date hereof with respect to any Plan subject to Title IV of ERISA. 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. 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 -24- 26 recently ended plan year of such Plan. None of the assets of any Seller is the subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code; no Seller has been required to post any security under Section 307 of ERISA or Section 401(a)(29) of the Code; and, to the Stockholders' knowledge, 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. 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. All such contributions have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any Governmental Authority and, to the Stockholders' knowledge, no fact or event exists which could give rise to any such challenge or disallowance. 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). 3.25. LABOR MATTERS. Except as set forth in Schedule 3.25, (a) no Seller is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by any Seller and currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit which could affect any Seller; (b) there are no strikes, slowdowns or work stoppages pending or, to the Stockholders' knowledge, threatened between any Seller and any of their respective employees, and no Seller has experienced any such strike, slowdown or work stoppage within the past three years; (c) no Seller has breached or otherwise failed to comply materially with the provisions of any collective bargaining or union contract and there are no grievances outstanding against any Seller under any such agreement or contract that would have a Material Adverse Effect; (d) there are no unfair labor practice complaints pending against any Seller before the National Labor Relations Board or any other Governmental Authority or any current union representation questions involving employees of any Seller which could have a Material Adverse Effect; (e) to the Stockholders' knowledge, each Seller is currently in 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 Seller and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing; (f) each Seller has paid in full to all employees of such Seller (or, as of March 31, 1998, adequately accrued for in accordance with GAAP) all wages, salaries, commissions, bonuses (to the extent declared or earned), benefits and other compensation due to or on behalf of such employees; (g) 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 Stockholders' knowledge, threatened before any Governmental Authority with respect to any persons currently or formerly employed by any Seller; (h) no Seller is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices; (i) 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, to the Stockholders' knowledge, threatened with respect to any Seller; (j) there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally -25- 27 protected category, which has been asserted in the past 12 months or is now pending or, to the Stockholders' knowledge, threatened in writing before the United States Equal Employment Opportunity Commission, or any other Governmental Authority in any jurisdiction in which any Seller has employed employees; and (k) no Seller has violated or otherwise failed to comply with the requirements of the Workers Adjustment and Retraining Notification Act. 3.26. KEY EMPLOYEES. Schedule 3.26 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 Seller whose annual compensation exceeds $100,000 for the twelve (12) month period ending March 31, 1998, except for that certain Nonqualified Incentive Compensation Plan dated March 31, 1998 of certain of the Sellers, a true and complete copy of which has been delivered to the Purchaser. 3.27. CERTAIN INTERESTS. (a) Except as disclosed in Schedule 3.27, no Stockholder or officer or director of any Seller or Immediate Family member thereof: (i) has any direct or indirect financial interest in any competitor, supplier or customer of any Seller, 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 Seller uses or proposes to use in the conduct of the Business; (iii) has outstanding any Indebtedness in excess of $10,000 to any Seller; or (iv) has any claim, demand or cause of action, direct or indirect, contingent or liquidated, accrued or inchoate, against any Seller. (b) Except as disclosed in Schedule 3.27, no Seller has any Liability or any other obligation of any nature whatsoever to any Stockholder, officer, director or shareholder of any Seller or Immediate Family member thereof, other than as an employee of such Seller. 3.28. TAX MATTERS; POOLING. (a) Except as set forth in Schedule 3.28, (i) all returns and reports in respect of Taxes required to be filed with respect to each Seller or the Business have been timely filed; (ii) all Taxes required to be shown on such returns and reports or otherwise due have been -26- 28 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 Stockholders' knowledge, no basis exists for any such adjustment; (v) there are no pending or, to the Stockholders' knowledge, threatened actions or proceedings for the assessment or collection of Taxes against any Seller or any corporation that was included in the filing of a return with any Seller on a consolidated or combined basis; (vi) no consent under Section 341(f) of the Code has been filed with respect to any Seller; (vii) there are no Tax liens on any assets of any Seller 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 Seller may be subject; (ix) there are no requests for information currently outstanding that could affect the Taxes of any Seller; (x) there are no proposed reassessments of any property owned by any Seller; (xi) no power of attorney that is currently in force has been granted with respect to any matter relating to Taxes; (xii) any provision for Taxes reflected in the balance sheet included in the Financial Statements is adequate for payment of any and all Tax liabilities for periods ending on or before March 31, 1998; and (xiii) there has not been any audit of any Tax return filed by any Seller and no audit of any such Tax return is in progress and no Seller has been notified by any Tax authority that any such audit is contemplated or pending. (b) None of the Sellers nor, to the Stockholders' knowledge, any Affiliate of any Seller has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" in accordance with GAAP and the rules and regulations of the SEC or from constituting a reorganization within the meaning of Section 368(a) of the Code. 3.29. INSURANCE. (a) Schedule 3.29 sets forth the following information with respect to each material insurance policy (including policies providing property, casualty, liability, workers' compensation, and bond and surety arrangements) under which any Seller is currently a named insured or otherwise the principal beneficiary of coverage: (i) the name of the insurer and the names of the principal insured and each named insured; (ii) the policy number and the period of coverage; (iii) the type, scope (including an indication of whether the coverage was on a claims made, occurrence or other basis) and amount (including a description of how deductibles, retentions and aggregates are calculated and operate) of coverage; and (iv) the premium charged for the policy, including, without limitation, a description of any retroactive premium adjustments or other loss-sharing arrangements. (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 Seller that is a -27- 29 party thereto and, to the Stockholders' knowledge, with respect to the other parties thereto and, except for policies that have expired under their terms in the ordinary course, is in full force and effect; (ii) no Seller 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; (iii) no party to the policy has repudiated, or given notice of an intent to repudiate, any provision thereof; and (iv) to the Stockholders' knowledge, no insurer on the policy has been declared insolvent or placed into receivership, conservatorship or liquidation. (c) Schedule 3.29 sets forth all risks against which any Seller is self-insured or which are covered under any risk retention program in which any Seller participates and details for the last five years loss experience of each Seller with respect to such risks. 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 Seller 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 Seller or the Seller bearing such risk of the Business, in each case, in such types and amounts and covering such risks as, to the Stockholders' knowledge, are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of the Sellers. (e) At no time during the past three years has any Seller (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 and except for increases in respect of health insurance. During the past three years, no insurance carrier has canceled, failed to renew or materially reduced any insurance coverage for any Seller or given any notice or other indication of its intention to cancel, not renew or reduce any such coverage. (f) All insurance policies of the Sellers are currently in effect and duly in force and no change thereto shall arise as the result of the consummation of the transactions contemplated by this Agreement. -28- 30 3.30. ACCOUNTS; LOCKBOXES; SAFE DEPOSIT BOXES; POWERS OF ATTORNEY. Schedule 3.30 is a true and complete list of (i) the names of each bank, savings and loan association, or other financial institution in which any Seller has an account, and the names of all persons authorized to draw thereon or have access thereto, (ii) the location of all lockboxes and safe deposit boxes of each Seller and the names of all Persons authorized to draw thereon or have access thereto and (iii) the names of all Persons, if any, holding powers of attorney from any Seller relating to the Business. No Seller has any such account, lockbox or safe deposit box other than those listed in Schedule 3.30, nor has any additional Person been authorized to draw thereon or have access thereto or to hold any such power of attorney. Except as disclosed in Schedule 3.30, no Seller has commingled monies or accounts of any Seller with other monies or accounts of the Stockholders. 3.31. BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Sellers or any Stockholder. 3.32. FULL DISCLOSURE. No Stockholder has knowledge of any facts pertaining to the Sellers or the Business which could have a Material Adverse Effect and which have not been disclosed in this Agreement or any of the Schedules hereto (except for general economic conditions or factors affecting the industry as a whole in which the Business operates). No representation or warranty of the Stockholders in this Agreement, or any Schedules hereto, or any certificate furnished to the Purchaser pursuant to this Agreement, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DAISYTEK, THE PURCHASER AND THE ACQUISITION SUBS Daisytek, the Purchaser and the Acquisition Subs, jointly and severally, represent and warrant to the Stockholders as follows: 4.1. ORGANIZATION AND QUALIFICATION. Each of Daisytek, the Purchaser and the Acquisition Subs 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 Daisytek, the Purchaser and the Acquisition Subs is duly qualified or authorized to transact business, and is in good standing as a foreign corporation, in all jurisdictions in which such qualification or authorization is required by law, except for jurisdictions in which the failure to be so qualified or authorized will not have a Material Adverse Effect. The Purchaser is a wholly owned subsidiary of Daisytek, and the Acquisition Subs are wholly owned subsidiaries of the Purchaser. 4.2. AUTHORITY; BINDING OBLIGATION. Each of Daisytek, the Purchaser and the Acquisition Subs have all requisite power and authority to execute, deliver and perform their -29- 31 respective obligations under this Agreement and the Additional Agreements to which they are a party and consummate the transactions contemplated herein and therein. The Purchaser's, Daisytek's and the Acquisition Subs' execution, delivery and performance of this Agreement and the Additional Agreements to which they are a party and the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no other action on the part of Daisytek, the Purchaser or any Acquisition Sub is necessary to consummate the transactions contemplated hereby and thereby. This Agreement and the Additional Agreements have been duly executed and delivered by the Purchaser, Daisytek and the Acquisition Subs (to the extent each is a party thereto) and constitute the legal, valid and binding obligation of the Purchaser, Daisytek and Acquisition Subs (to the extent each is a party thereto) 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. 4.3. 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, Daisytek and the Acquisition Subs 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, Daisytek or any Acquisition Sub, (ii) any statutes, laws, rules, regulations, ordinances or Permits of any Governmental Authority applicable to Purchaser, Daisytek or any Acquisition Sub or (iii) any Governmental Order binding upon the Purchaser, Daisytek or any Acquisition Sub 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, Daisytek or any Acquisition Sub 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, Daisytek or any Acquisition Sub. 4.4. DAISYTEK COMMON STOCK. The shares of Daisytek Common Stock to be issued hereunder have been duly authorized and, upon issuance thereof in accordance with the terms set forth herein, will be validly issued, fully paid, non-assessable and free of any pre-emptive rights in full compliance with the Act and all applicable federal and state securities laws, rules and regulations. 4.5. SEC DOCUMENTS. Daisytek has filed all required reports, schedules, forms, statements and other documents with the SEC the ("SEC DOCUMENTS"). Daisytek has made available to the Stockholders true, correct and complete copies of all Registration Statements on Form S-1, S-3 and S-8, 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, including without limitation, Daisytek's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and Daisytek's Prospectus dated March 26, 1998. 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 -30- 32 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. 4.6. FINANCIAL STATEMENTS. Daisytek's consolidated financial statements included in the SEC Documents (i) were prepared in all material respects in accordance with the books of account and other financial records of Daisytek and its subsidiaries, (ii) fairly present the consolidated financial condition, results of operations, changes in retained earnings and cash flow of Daisytek and its 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 (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q, and, with respect to interim statements, subject to year-end adjustments). 4.7. NO MATERIAL ADVERSE CHANGE. Since March 31, 1998, except as disclosed in the SEC Documents, there has not been any change in the condition (financial or otherwise) of the Daisytek Business or the liabilities, assets, customer or supplier relations, operations, results of operations, prospects or condition (financial or otherwise) of Daisytek and its subsidiaries, 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. 4.8. BROKERS AND FINDERS. 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 Daisytek or Purchaser. 4.9. ACQUISITION SUBS. Each Acquisition Sub was organized solely for the purpose of the transactions contemplated hereby and has not conducted any activities other than in connection with its organization, and negotiation and execution of this Agreement and the consummation of the transaction contemplated hereby. 4.10. POOLING. Neither Daisytek, the Purchaser nor any Acquisition Sub has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" in accordance with GAAP and the rules and regulations of the SEC or from constituting a reorganization within the meaning of Section 368(a) of the Code. 4.11 FULL DISCLOSURE. No representation or warranty of Daisytek, the Purchaser and the Acquisition Subs in this Agreement or any certificate furnished to the Stockholders pursuant to this Agreement contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. -31- 33 ARTICLE V CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS The obligation of the Sellers to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, prior to or at the Closing, of each of the following conditions precedent. The execution and delivery of this Agreement by the Sellers shall constitute confirmation that the following conditions precedent have been so satisfied. 5.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Daisytek, the Purchaser and the Acquisition Subs 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). 5.2. PERFORMANCE OF OBLIGATIONS. Daisytek, the Purchaser and the Acquisition Subs 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. 5.3. COMPLIANCE CERTIFICATE. Daisytek, the Purchaser and the Acquisition Subs, shall each have delivered to the Sellers 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 Daisytek, the Purchaser and the Acquisition Subs, 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 Daisytek, the Purchaser and the Acquisition Subs, 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 5.4. 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. 5.5. 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. 5.6. RESOLUTIONS. The Sellers shall have received a true and complete copy, certified by the Secretary or Assistant Secretary of each of Daisytek, the Purchaser and the Acquisition Subs, of the resolutions duly adopted by the Board of Directors of each of Daisytek, the Purchaser and the Acquisition Subs, evidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. -32- 34 5.7. INCUMBENCY CERTIFICATE. The Sellers shall have received a certificate of the Secretary or Assistant Secretary of each of Daisytek, the Purchaser and the Acquisition Subs, certifying the names and signatures of the officers of Daisytek, the Purchaser and the Acquisition Subs, authorized to sign this Agreement. 5.8. LEGAL OPINION. The Sellers shall have received a legal opinion, dated as of the Closing Date, of counsel to the Purchaser, Daisytek and the Acquisition Subs as to the matters set forth in Sections 4.1, 4.2, 4.3 and 4.4. 5.9. ADDITIONAL AGREEMENTS. The Stockholders shall have received duly executed copies of the Additional Agreements. 5.10. DAISYTEK COMMON STOCK. The Stockholders shall have received one or more certificates evidencing the shares of Daisytek Common Stock to be issued hereunder in accordance with the terms and provisions of Article II above. ARTICLE VI CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS The obligation of the Purchaser and Daisytek to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, prior to or at the Closing, of each of the following conditions precedent. The execution and delivery of this Agreement by the Purchaser and Daisytek shall constitute confirmation that the following conditions precedent have been so satisfied. 6.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Stockholders 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). 6.2. PERFORMANCE OF OBLIGATIONS. The Sellers and the Stockholders 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. 6.3. COMPLIANCE CERTIFICATE. The Stockholders shall have delivered to Purchaser on the Closing Date a certificate signed by or on behalf of the Stockholders and dated as of the Closing Date to the effect that each of the representations and warranties of the Stockholders 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 the Stockholders have complied with, fulfilled and performed each of the covenants, terms and conditions to be complied with, fulfilled or performed by the Stockholders under this Agreement on or prior to the Closing Date. -33- 35 6.4. 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. 6.5. 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, except for such consents as are set forth on Schedule 6.5 hereof. 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. 6.6. RESOLUTIONS. The Purchaser shall have received a true and complete copy, certified by Secretary or Assistant Secretary of each Seller, of the resolutions duly adopted by the Board of Directors and stockholders of each Seller evidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. 6.7. INCUMBENCY CERTIFICATE. The Purchaser shall have received a certificate of the Secretary or Assistant Secretary of each Seller certifying the names and signatures of the officers of each Seller authorized to sign this Agreement. 6.8. ORGANIZATIONAL DOCUMENTS; MINUTE BOOKS. The Purchaser shall have received for each Seller (i) its certificate or articles of incorporation, as amended, certified by the Secretary of State (or other similar official) of its state of incorporation, and accompanied by a certificate of the Secretary or Assistant Secretary of such Seller, dated as of the Closing Date, stating that no amendments have been made to such certificate or articles of incorporation since such date, (ii) a 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 3.1 hereof, (iii) a copy of its By-laws, certified by the Secretary or Assistant Secretary of such Seller, (iv) the original minute book and stock ledger or register, certified by the Secretary of such Seller and (v) the resignation of each officer and member of its Board of Directors. 6.9. LEGAL OPINION. The Purchaser shall have received a legal opinion, dated as of the Closing Date, of counsel to the Stockholders and the Sellers as to the matters set forth in Section 3.1, 3.2, 3.5, 3.6 and 3.15. 6.10. ADDITIONAL AGREEMENTS. The Purchaser shall have received duly executed copies of each of the Additional Agreements. 6.11. [deleted] 6.12. DUE DILIGENCE. The Purchaser shall have completed to its satisfaction (in its sole and absolute discretion) its due diligence review and analysis of the Business and the Sellers. 6.13. NO MATERIAL ADVERSE EFFECT. No circumstance, change in, or effect on the Business (including any material adverse change arising in connection with or as the result of any -34- 36 fire, explosion, earthquake, disaster, accident, labor dispute, loss of material customer or supplier, shortage, cessation or interruption of inventory shipments or any similar event, occurrence or circumstance) shall have occurred since March 31, 1998 which in the reasonable judgment of the Purchaser has, or would have, a Material Adverse Effect. 6.14. STOCK CERTIFICATES. The Purchaser shall have received original stock certificates evidencing all of the issued and outstanding shares of Seller Common Stock, 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. 6.15. [deleted] 6.16. [deleted] ARTICLE VII INDEMNIFICATION AND OTHER MATTERS 7.1. INDEMNIFICATION BY STOCKHOLDERS. From and after the Closing, the Stockholders shall, jointly and severally, but subject to the limitations hereof, reimburse, indemnify and hold harmless the Purchaser, Daisytek and their respective officers, directors, employees, agents, representatives and successors and assigns from and against and in respect of each of the following: (a) any and all damages, losses, deficiencies, liabilities, claims, demands, charges, costs and expenses of every nature and character whatsoever, including, without limitation, reasonable attorneys' fees and costs (collectively, the "LOSSES") that result from, relate to or arise out of any misrepresentation or breach of warranty or covenant of the Stockholders in this Agreement, the Additional Agreements or any of the Schedules provided hereunder or thereunder; 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. 7.2. INDEMNIFICATION OF STOCKHOLDERS. From and after the Closing, the Purchaser and Daisytek shall, jointly and severally, but subject to the limitations hereof, reimburse, indemnify and hold harmless the Stockholders and each of their respective heirs, estate, successors and assigns from and against and in respect of each of the following: (a) any and all Losses that result from, relate to or arise out of any misrepresentation or breach of warranty or covenant of the Purchaser or Daisytek in this Agreement, the Additional Agreements; 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. -35- 37 7.3. LIMITATIONS ON LOSSES. (a) In case any event shall occur that would otherwise entitle any party to assert a claim for indemnification hereunder, no Losses shall be deemed to have been sustained by such party to the extent of (i) any actual tax savings realized by such party with respect thereto or (ii) any proceeds (net of deductibles, taxes and collection costs) received by such party from any insurance policies maintained by or on behalf of such party with respect to such Losses. The parties agree to submit a claim under such insurance policies prior to or promptly following making a request for indemnification hereunder. (b) The aggregate liability of the Stockholders, on the one hand, or the Purchaser and Daisytek, on the other hand, shall not exceed the Purchase Price. (c) The sum of all Losses incurred by the Purchaser and Daisytek in the aggregate, or the sum of all Losses incurred by the Stockholders in the aggregate, must exceed $100,000 before such parties shall be entitled to indemnification hereunder; provided, however, once such Losses exceed $100,000, such parties shall be entitled to indemnification for all Losses. (d) No party shall have any liability hereunder in respect of claims asserted against any Indemnified Party on or after one year from the Closing Date; provided, however, the representations and warranties of the Stockholders relating to (i) title to the Seller Common Stock shall survive indefinitely and (ii) Taxes and Environmental matters shall survive until the applicable statute of limitations has expired. The limitation set forth in this paragraph shall not apply to any claim asserted on or before such one year anniversary. (e) The limitations set forth herein shall not apply in the case of a fraudulent or intentional misrepresentation or breach by any party. 7.4. NOTICE. (a) Promptly after receipt by an Indemnified Party of notice of the assertion of any claim by a Person not a party to this Agreement (a "THIRD PARTY CLAIM") with respect to which such Indemnified Party expects to make a request for indemnification hereunder, such Indemnified Party shall give the Indemnifying Party written notice describing such claim in reasonable detail. The Indemnifying Party shall, upon receipt of such notice, be entitled to participate in or, at the Indemnifying Party's option, assume the defense, appeal or settlement of, such claim with respect to which such indemnity has been invoked with counsel selected by it and approved by the Indemnified Party (such approval not to be unreasonably withheld), and the Indemnified Party will fully cooperate with the Indemnifying Party in connection therewith; provided, that the Indemnified Party shall be entitled to employ separate counsel (at the expense of the Indemnifying Party) to represent such Indemnified Party if counsel selected by the Indemnifying Party cannot, by reason of any actual or deemed conflict of interest, adequately represent the interests of the Indemnified Party. In the event that the Indemnifying Party fails to assume the defense, appeal or settlement of such claim within 20 days after receipt of notice thereof from the Indemnified Party, the Indemnified Party shall have the right to undertake the defense or appeal of, or settle or compromise, such claim on behalf of and for the account and risk of the Indemnifying Party. The Indemnifying Party shall not settle or compromise any -36- 38 such claim without the Indemnified Party's prior written consent(which shall not be unreasonably withheld), unless the terms of such settlement or compromise release the Indemnified Party from any and all liabilities with respect to such Third Party Claim. (b) Any indemnifiable claim that is not a Third Party Claim shall be asserted by written notice to the Indemnifying Party. If the Indemnifying Party does not respond to such notice within 30 days, it shall have no further right to contest the validity of such claim. 7.5. SURVIVAL; EXCLUSIVE REMEDY. Notwithstanding any right of any party to fully investigate the affairs of the other party and notwithstanding any knowledge of facts determined or determinable by such party pursuant to such investigation or right of investigation, each party has the right to rely fully upon the representations, warranties, covenants and agreements of each other party in this Agreement or in any certificate, financial statement or other document delivered by any party pursuant hereto. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the Closing hereunder, subject to the limitations set forth herein. No person shall have a right to recovery against any party (or any officer, director, employee or agent of a party) other than through the exercise of the indemnification rights set forth herein, which shall constitute the sole and exclusive remedy after the Closing for any breach by a party of any representation, warranty or covenant contained herein or in any certificate or other instrument delivered pursuant hereto, other than a fraudulent or intentional breach, as to which each party shall have all rights and remedies available at law or in equity. 7.6. RESTRICTION ON TRANSFER. The Stockholders acknowledge that the Merger Consideration shall be subject to certain restrictions on transfer pursuant to the terms of the Affiliate Letter. The existence of the Affiliate Letter and the terms and provisions thereof shall not limit or restrict the ability of the Purchaser or Daisytek from asserting claims for indemnification hereunder in excess of the value of the shares subject to the provisions thereof or from recovering from the Stockholders the full amount of any such claim, subject, however, to the limitations set forth herein. 7.7 S CORPORATION STATUS. The parties acknowledge that each Seller which has elected to be treated as an S corporation for federal and state income tax purposes shall terminate such election as of the Effective Time, and such Sellers shall close their books for tax purposes as of such date. 7.8 PAYMENT OF INDEBTEDNESS. As of the Effective Time and concurrently with the Closing, the Purchaser shall cause (i) that certain Promissory Note of TC Illinois dated July 25, 1997 in the original principal amount of $3,584,748 payable to Mark Rath and (ii) the Sellers' indebtedness for money borrowed owing to American National Bank and Trust Company of Chicago to be repaid in full. 7.9 PURCHASER GUARANTY. As of the Effective Time, the Purchaser does hereby irrevocably and absolutely guaranty all obligations of TC Illinois and certain of the Sellers to pay the Incentive Compensation described in that certain Nonqualified Incentive Compensation Plan -37- 39 of such Sellers dated March 31, 1998, and such guaranty shall remain in effect regardless of any modification, amendment or waiver of such Plan arising at any time following the date hereof. ARTICLE VIII MISCELLANEOUS 8.1. 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. 8.2. 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. 8.3. 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 Daisytek, in which event notice thereof shall be given to the Stockholders. 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. 8.4. 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 Stockholders. 8.5. 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. 8.6. 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 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 -38- 40 having been sent by certified or registered U.S. mail, return receipt requested, postage prepaid, addressed as follows: If to Sellers: Michael Cullen Robert Daly The Tape Company, Inc. 700 Creel Drive Wood Dale, Illinois 60191 Telecopier: 708-595-0052 - with a copy to - Chuhak & Tecson 225 West Washington Street Chicago, Illinois 60606 Attn: Donald J. Russ, Jr., Esq. Telecopier: 312-444-9027 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. 8.7. 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. -39- 41 8.8. GOVERNING LAW; PERSONAL JURISDICTION. This Agreement shall be governed by, and be construed in accordance with, the laws of the State of Illinois without regard to the conflicts of laws principles thereof. 8.9. 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. 8.10. 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. 8.11. 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. 8.12. 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. 8.13. PUBLICITY. Except as otherwise required by applicable laws or regulations, no party hereto nor any Affiliate thereof, shall issue any press release or make any other public statement regarding the transactions described in this Agreement without obtaining the prior approval of the other parties hereto to the contents and the manner of presentation and publication thereof, such consent not to be unreasonably delayed or withheld. 8.14 ARBITRATION. Any and all disputes or controversies arising hereunder shall be submitted to arbitration and shall be settled by arbitration by a panel of three (3) Arbitrators, in accordance with the rules then pertaining of the American Arbitration Association, and judgment upon the decision rendered may be enforced in any court of competent jurisdiction. The cost of such arbitration proceedings shall be borne equally by the parties, each of which shall bear its own attorney's fees, except as said arbitrators may otherwise determine to be fair and equitable under the circumstances. In any such arbitration, each party shall be entitled to discovery and evidentiary standards as provided in the Federal Rules of Civil Procedure as then in effect. The foregoing shall not restrict any party from seeking or obtaining equitable relief in any court of competent jurisdiction. -40- 42 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. DAISYTEK INTERNATIONAL CORPORATION By: --------------------------------------- Name: Tom Madden Title: Vice President (SIGNATURES CONTINUED ON NEXT PAGE) -41- 43 DAISYTEK, INCORPORATED By: --------------------------------------- Name: Tom Madden Title: Vice President TC ILLINOIS ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President TC MICHIGAN ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President TC GEORGIA ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President TC OHIO ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President TC PENNSYLVANIA ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President (SIGNATURES CONTINUED ON NEXT PAGE) -42- 44 TC TEXAS ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President TC MINNESOTA ACQUISITION CORP. By: --------------------------------------- Name: Tom Madden Title: Vice President THE TAPE COMPANY, INC., an Illinois corporation By: --------------------------------------- Name: Michael Cullen Title: President THE TAPE COMPANY, INC., a Michigan Corporation By: --------------------------------------- Name: Michael Cullen Title: President THE TAPE COMPANY, INC., a Georgia Corporation By: --------------------------------------- Name: Michael Cullen Title: President (SIGNATURES CONTINUED ON NEXT PAGE) -43- 45 THE TAPE COMPANY, INC., an Ohio Corporation By: --------------------------------------- Name: Michael Cullen Title: President TAPE DISTRIBUTORS, INC., a Pennsylvania Corporation By: --------------------------------------- Name: Michael Cullen Title: President TAPE DISTRIBUTORS OF TEXAS, INC., a Texas Corporation By: --------------------------------------- Name: Michael Cullen Title: President TAPE DISTRIBUTORS OF MINNESOTA, INC., a Minnesota corporation By: --------------------------------------- Name: Michael Cullen Title: President ------------------------------------------ MICHAEL CULLEN ------------------------------------------ ROBERT DALY -44- EX-10.2 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of June 1, 1998 by and among Daisytek International Corporation, a Delaware corporation ("DAISYTEK"), and Michael Cullen and Robert Daly (the "STOCKHOLDERS"). R E C I T A L S A. Concurrently herewith Daisytek, Daisytek, Incorporated, a wholly owned subsidiary of Daisytek (the "PURCHASER"), TC Illinois Acquisition Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition Corp., TC Ohio Acquisition Corp., TC Pennsylvania Acquisition Corp., TC Texas Acquisition Corp. and TC Minnesota Acquisition Corp., each a wholly owned subsidiary of the Purchaser (collectively, the "ACQUISITION SUBS"), The Tape Company, Inc., an Illinois corporation, The Tape Company, Inc., a Michigan corporation, The Tape Company, Inc., a Georgia corporation, The Tape Company, Inc., an Ohio corporation, Tape Distributors, Inc., a Pennsylvania corporation, Tape Distributors of Texas, Inc., a Texas corporation, and Tape Distributors of Minnesota, Inc., a Minnesota corporation (collectively, the "SELLERS") and the Stockholders are entering into that certain Agreement and Plan of Merger (the "MERGER AGREEMENT") pursuant to which the Acquisition Subs are merging (the "MERGER") with and into the Sellers, with the Sellers remaining as the surviving corporations thereof. B. Pursuant to the terms of the Merger Agreement and as a consequence of the Merger, all of the shares of Daisytek Common Stock of the Sellers issued and outstanding and held of record by the Stockholders are concurrently herewith being converted into shares of Daisytek Common Stock, $.01 par value (the "DAISYTEK COMMON STOCK"), of Daisytek. C. In connection with the transactions contemplated by the Merger Agreement, Daisytek has agreed to grant to the Stockholders certain piggy-back registration rights as more fully set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. DEFINITIONS. 1.1 DEFINITIONS. For purposes of this Agreement: (a) HOLDER. The term "HOLDER" means any person owning of record Registrable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the Securities Act or any assignee of record of such Registrable Securities to whom rights under this Agreement have been duly assigned in accordance with this Agreement. 2 (b) REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means: (1) all the shares of Daisytek Common Stock issued to the Stockholders pursuant to the terms of the Merger Agreement and (2) any shares of Daisytek Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Daisytek Common Stock described in clause (1) of this subsection (b); excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this Section 2 are not assigned in accordance with this Agreement or any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Securities Act. In addition, all shares of Daisytek Common Stock which are held in escrow under the terms of the Merger Agreement shall not be deemed Registrable Securities hereunder for so long as such shares are held in escrow. (c) REGISTRATION. The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement. (d) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities and Exchange Commission. (e) SECURITIES ACT. The term "SECURITIES ACT" means the Securities Act of 1933, as amended. 2. REGISTRATION RIGHTS. 2.1 PIGGYBACK REGISTRATIONS. Daisytek shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of Daisytek Common Stock (including, but not limited to, registration statements relating to secondary offerings of Daisytek Common Stock, but excluding registration statements on Form S-8 or S-4 or otherwise relating to relating to any employee benefit plan or a corporate reorganization) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder shall, within twenty (20) days after receipt of the above-described notice from Daisytek, so notify Daisytek in writing, and in such notice shall inform Daisytek of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by Daisytek, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by Daisytek with respect to offerings of Daisytek Common Stock (except as aforesaid), all upon the terms and conditions set forth herein. 2.2 UNDERWRITING. If a registration statement under which Daisytek gives notice under this Section is for an underwritten offering, then Daisytek shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable 2 3 Securities to be included in a registration pursuant to this Section shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. The selection of such underwriter(s), and the terms and provisions of any underwriting agreement to be entered into with such underwriter(s), shall be in the sole and absolute discretion of Daisytek, regardless of whether Daisytek is offering any shares of Daisytek Common Stock thereunder. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter(s) selected for such underwriting. 2.3 PRIORITY. Notwithstanding any other provision of this Agreement, if the managing underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter may exclude shares (including Registrable Securities) from the registration and the underwriting, and the number of shares that may be included in the registration and the underwriting shall be allocated, first, to Daisytek (to the extent Daisytek is offering any shares of Daisytek Common Stock thereunder), and second, to the Holders and other persons requesting inclusion of their Registrable Securities and Daisytek Common Stock in such registration statement on a pro rata basis based on the following formula (as applicable to each such Holder or other person): the number of shares of Registrable Securities or Daisytek Common Stock requested to be included in such registration statement by such Holder or person (the "REQUESTED SHARES"), multiplied by a fraction, the numerator of which is such Holder's or person's Requested Shares, and the denominator of which is the total number of Requested Shares of all Holders and other persons. If, as the result of such allocation, any Holder wishes to withdraw from such registration and underwriting, such Holder may elect to do so by written notice to Daisytek and the underwriter, delivered as promptly as possible following the determination of such allocation, but in no event later than five business days prior to the effective date of the registration statement. 2.4 EXPENSES. All expenses incurred in connection with a registration pursuant to this Section (excluding underwriters' and brokers' discounts and commissions), including, without limitation all federal and "blue sky" registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for Daisytek (but not counsel for any Holder) shall be borne by Daisytek. 2.5 OBLIGATIONS OF DAISYTEK. Whenever required to effect the registration of any Registrable Securities under this Agreement, Daisytek shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. 3 4 (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that Daisytek shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 2.6 FURNISH INFORMATION. It shall be a condition precedent to the obligations of Daisytek to take any action pursuant to Section 2.2 that the selling Holders shall complete any and all documents and furnish to Daisytek such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to timely effect the registration of their Registrable Securities. 2.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration in which Daisytek is registering shares of Daisytek Common Stock to be sold by it as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 2.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Agreement: (a) BY DAISYTEK. To the extent permitted by law, Daisytek will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended, (the "1934 ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): 4 5 (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Daisytek of the Securities Act, the 1934 Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any federal or state securities law in connection with the offering covered by such registration statement; and Daisytek will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Daisytek (which consent shall not be unreasonably withheld), nor shall Daisytek be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) BY SELLING HOLDERS. To the extent permitted by law, each selling Holder will indemnify and hold harmless Daisytek, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls Daisytek within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder within the meaning of the Securities Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which Daisytek or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by Daisytek or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which 5 6 consent shall not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a Holder under this Section in respect of any Violation shall not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) NOTICE. Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section. (d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing indemnity agreements of Daisytek and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (e) CONTRIBUTION. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section; then, and in each such case, Daisytek and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and Daisytek and other selling Holders are responsible for the 6 7 remaining portion; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (f) SURVIVAL. The obligations of Daisytek and Holders under this Section shall survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 2.9 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it shall not, to the extent requested by Daisytek or an underwriter of securities of Daisytek, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of Daisytek then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for up to 90 days following the effective date of a registration statement of Daisytek filed under the Securities Act; provided, however, that such agreement shall be applicable only to a registration statement of Daisytek which covers securities to be sold on its behalf to the public in an underwritten offering (and not to Registrable Securities sold pursuant to such registration statement). In order to enforce the foregoing covenant, Daisytek shall have the right to place restrictive legends on the certificates representing the shares subject to this Section and to impose stop transfer instructions with respect to the Registrable Securities and such other shares of stock of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 2.10 TERMINATION OF DAISYTEK'S OBLIGATIONS. Daisytek shall have no obligations pursuant to Section 2.2 with respect to: (i) any request or requests for registration made by any Holder on a date more than three years after the Closing Date under the Merger Agreement or (ii) any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 2.2 if, in the opinion of counsel to Daisytek, all such Registrable Securities proposed to be sold by a Holder may be sold in a three-month period without registration under the Securities Act pursuant to Rule 144 under the Securities Act. 3. ASSIGNMENT AND AMENDMENT. 3.1 ASSIGNMENT. Notwithstanding anything herein to the contrary, the registration rights of a Holder under Section 2 hereof may be assigned only to a party who acquires at least 250,000 shares of Registrable Securities from a Holder; provided, however that no party may be assigned any of the foregoing rights unless Daisytek is given written notice by the assigning party at the time of such assignment stating the name and address of the assignee and identifying the securities of Daisytek as to which the rights in question are being assigned; and provided further that any such assignee shall receive such assigned rights subject to all the terms and conditions of this Agreement, including without limitation the provisions of this Section 3. 3.2 AMENDMENT OF RIGHTS. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance 7 8 and either retroactively or prospectively), only with the written consent of Daisytek and the party to be charged with such amendment or waiver. Each Holder acknowledges and agrees that the grant of piggyback registration rights on a pari passu basis with the piggyback registration rights of the Holders under Section 2.2 shall not be deemed to be a material and adverse change to the piggyback registration rights of the Holders under this Agreement and, to the extent that such rights are granted to any person with respect to Daisytek Common Stock acquired after the date hereof, each Holder (and/or any of his permitted successors or assigns) shall be deemed to have consented to such grant. Any amendment or waiver effected in accordance with this Section 3.2 shall be binding upon each Holder, each permitted successor or assignee of such Holder and Daisytek. 4. GENERAL PROVISIONS. 4.1 NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if deposited with an overnight courier service or if deposited in the U.S. mail by registered or certified mail, return receipt requested, postage prepaid, as follows: (a) if to Daisytek, at 500 North Central Expressway, Plano, Texas 75074; (b) if to a Stockholder, at such Stockholder's address as set forth on the signature page hereof. Any party hereto (and such party's permitted assigns) may by notice so given change its address for future notices hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail in the manner set forth above. 4.2 ENTIRE AGREEMENT. This Agreement constitutes and contains the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties respecting the subject matter hereof. 4.3 GOVERNING LAW. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws and choice of law. 4.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, then such provision(s) shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. 4.5 THIRD PARTIES. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. 8 9 4.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 3.1, the provisions of this Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the parties hereto. 4.7 CAPTIONS. The captions to sections of this Agreement have been inserted for identification and reference purposes only and shall not be used to construe or interpret this Agreement. 4.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4.9 COSTS AND ATTORNEYS' FEES. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party shall recover all of such party's costs and attorneys' fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom. 4.10 ADJUSTMENTS FOR STOCK SPLITS, ETC. Wherever in this Agreement there is a reference to a specific number of shares of Daisytek Common Stock of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted to reflect the affect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend. 4.11 AGGREGATION OF STOCK. All shares held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 9 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. DAISYTEK INTERNATIONAL CORPORATION By: --------------------------------------- Tom Madden, Vice President ------------------------------------------ Michael Cullen 577 Lakeview Terrace Glen Ellen, Illinois 60137 ------------------------------------------ Robert Daly 242 Hillandale Bloomingdale, Illinois 60108 10 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)
Three Months Ended June 30, -------------------------- 1998 1997 --------- --------- Net income $ 5,393 $ 4,100 ========= ======== Net income per common share - diluted $ 0.30 $ 0.27 ========= ======== Pro forma data(2): Historical net income $ 5,393 $ 4,100 Pro forma adjustments: Provision for income taxes (291) (82) Acquisition related costs, net of tax 246 -- --------- -------- Pro forma net income 5,348 4,018 ========= ======== Pro forma net income per common share - diluted $ 0.30 $ 0.27 ========= ======== Weighted average of common shares outstanding 17,814 14,983 ========= ======== Calculation of weighted average common shares outstanding: Weighted average of common stock outstanding 17,005 14,339 Weighted average common stock options, utilizing the treasury stock method(1) 809 644 --------- -------- 17,814 14,983 ========= ========
(1) Utilizing the weighted average stock price of $24.38 and $15.88 per share for the three months ended June 30, 1998 and 1997, respectively. (2) Pro forma data is presented for informational purposes only and includes the following adjustments: (1) A business unit of a business combination with The Tape Company, Inc., which was accounted for as a pooling of interests, was organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. The pro forma provision for income tax adjustment is provided to reflect income tax under a corporate tax structure. (2) Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company. The pro forma adjustment for acquisition related costs, net of tax, excludes such costs from pro forma net income for the three months ended June 30, 1998. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-1999 JUN-30-1998 725 0 116,726 2,075 119,722 241,044 31,945 16,307 278,591 98,038 37,261 0 0 170 143,298 278,591 222,589 222,589 196,062 196,062 0 525 852 8,395 3,002 5,393 0 0 0 5,393 0.32 0.30
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RETROACTIVELY RESTATED TO COMBINE THE ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE TAPE COMPANY, INC., WHICH WAS ACQUIRED BY DAISYTEK DURING JUNE 1998 AND ACCOUNTED FOR AS A POOLING OF INTEREST 1,000 3-MOS MAR-31-1998 JUN-30-1997 1,085 0 97,385 2,124 76,278 175,278 23,745 11,526 193,382 87,549 33,779 0 0 146 75,475 193,382 182,777 182,777 163,154 163,154 0 418 586 6,515 2,415 4,100 0 0 0 4,100 0.29 0.27
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