-----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, QZmp1mR8JCDQnmBAH8V0PuOF4St03WaUvNubnY3LzhlRS/FR8yV4al0Aidh8q64h NWcwrMWRpVBJUgvskL4l1Q== /in/edgar/work/20000814/0000950134-00-007026/0000950134-00-007026.txt : 20000921 0000950134-00-007026.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-007026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAISYTEK INTERNATIONAL CORPORATION /DE/ CENTRAL INDEX KEY: 0000887403 STANDARD INDUSTRIAL CLASSIFICATION: [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: 699097 BUSINESS ADDRESS: STREET 1: 500 N CENTRAL EXPRWY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9728814700 MAIL ADDRESS: STREET 1: 500 N CENTRAL EXPWY CITY: PLANO STATE: TX ZIP: 75074 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 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, 2000 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 August 11, 2000 there were 16,142,273 shares of the registrant's common stock outstanding. 2 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q JUNE 30, 2000 INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and March 31, 2000.......................................................... 3 Unaudited Interim Consolidated Statements of Operations for the Three Months Ended June 30, 2000 and 1999 .............................. 4 Unaudited Interim Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000 and 1999............................... 5 Notes to Unaudited Interim Consolidated Financial Statements.............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 20 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 CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
JUNE 30, MARCH 31, ASSETS 2000 2000 ----------- --------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents .................................... $ 26,118 $ 28,186 Accounts receivable, net of allowance for doubtful accounts of $6,236 and $6,031 at June 30, 2000 and March 31, 2000, respectively ............................................. 160,003 167,705 Inventories, net ............................................. 123,690 96,371 Prepaid expenses and other current assets .................... 13,156 7,812 Income taxes receivable ...................................... 2,668 3,714 Deferred tax asset, net ...................................... 6 249 --------- --------- Total current assets ........................... 325,641 304,037 --------- --------- PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment ............................ 55,446 52,491 Leasehold improvements ....................................... 5,690 5,692 --------- --------- 61,136 58,183 Less - Accumulated depreciation and amortization ............. (29,512) (27,523) --------- --------- Net property and equipment ..................... 31,624 30,660 OTHER ASSETS ..................................................... 501 528 EMPLOYEE RECEIVABLE .............................................. 528 518 EXCESS OF COST OVER NET ASSETS ACQUIRED, net ..................... 39,539 37,003 --------- --------- Total assets ................................... $ 397,833 $ 372,746 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ............................ $ 45,502 $ 42,392 Trade accounts payable ....................................... 113,331 92,978 Accrued expenses ............................................. 13,250 14,746 --------- --------- Total current liabilities ...................... 172,083 150,116 --------- --------- LONG-TERM DEBT, less current portion ............................. 2,356 2,431 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST ................................................ 9,466 9,513 SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at June 30, 2000 and March 31, 2000; none issued and outstanding .......................................... -- -- Common stock, $0.01 par value; 30,000,000 shares authorized at June 30, 2000 and March 31, 2000; 17,643,711 and 17,600,164 shares issued and outstanding at June 30, 2000 and March 31, 2000, respectively ............................................. 176 176 Additional paid-in capital ................................... 137,240 136,736 Retained earnings ............................................ 79,320 76,340 Accumulated other comprehensive income ....................... (2,808) (2,566) --------- --------- Total shareholders' equity ..................... 213,928 210,686 --------- --------- Total liabilities and shareholders' equity ..... $ 397,833 $ 372,746 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. -3- 4 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, --------------------- 2000 1999 -------- -------- Net revenues ..................................... $284,926 $233,237 Cost of revenues ................................. 253,140 205,971 -------- -------- Gross profit ............................. 31,786 27,266 Selling, general and administrative expenses ..... 25,701 19,288 Acquisition related costs ........................ -- 370 -------- -------- Income from operations ................... 6,085 7,608 Interest expense, net ............................ 691 750 -------- -------- Income before income taxes ............... 5,394 6,858 Provision for income taxes ....................... 2,461 2,675 -------- -------- Income before minority interest .......... 2,933 4,183 Minority interest ................................ 47 -- -------- -------- Net income ............................... $ 2,980 $ 4,183 ======== ======== Net income per common share: Basic .................................... $ 0.17 $ 0.24 ======== ======== Diluted .................................. $ 0.17 $ 0.24 ======== ======== Weighted average common and common share equivalents outstanding: Basic .................................... 17,639 17,166 Diluted .................................. 17,720 17,760
The accompanying notes are an integral part of these unaudited interim consolidated statements. -4- 5 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, ---------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................ $ 2,980 $ 4,183 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization ...................................... 2,768 1,804 Provision for doubtful accounts .................................... 850 879 Minority interest .................................................. (47) -- Non-cash compensation expense ...................................... 16 -- Deferred income tax benefit (provision) ............................ 243 (301) Changes in operating assets and liabilities -- Accounts receivable ............................................ 10,714 (3,034) Inventories, net ............................................... (20,875) (2,979) Prepaid expenses and other current assets ...................... (6,487) 1,456 Trade accounts payable and accrued expenses .................... 13,903 (10,007) Income tax receivable .......................................... 1,058 2,000 -------- -------- Net cash provided by (used in) operating activities ....... 5,123 (5,999) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ................................... (3,210) (2,612) Acquisitions of businesses, net of cash acquired ...................... (2,614) (2,320) Advances to employees, net ............................................ (115) (32) Decrease (increase) in note receivable and other assets ............... 1,655 (163) -------- -------- Net cash used in investing activities ..................... (4,284) (5,127) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit, net ........................... 3,258 12,901 Payments on capital leases and notes payable .......................... (6,593) (59) Net proceeds from exercise of stock options and issuance of common stock ..................................................... 519 106 -------- -------- Net cash provided by (used in) financing activities ....... (2,816) 12,948 EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS .................... (91) (291) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (2,068) 1,531 CASH AND CASH EQUIVALENTS, beginning of period ............................ 28,186 1,551 -------- -------- CASH AND CASH EQUIVALENTS, end of period .................................. $ 26,118 $ 3,082 ======== ========
The accompanying notes are an integral part of these unaudited interim consolidated statements. -5- 6 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- OVERVIEW AND BASIS OF PRESENTATION Daisytek International Corporation and its subsidiaries ("the Company" or "Daisytek") is a leading wholesale distributor of non-paper computer and office automation supplies and accessories ("computer and office supplies") and professional-grade video and audio media products ("professional tape products") and also a leading provider of transaction management services to both traditional and electronic commerce, or e-commerce, companies. The Company's three reportable segments are strategic business units that offer different products and services and are managed separately based on fundamental differences in their operations. Computer and Office Supplies The computer and office supplies products include laser toner, inkjet cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage products, computer tape cartridges, accessories such as cleaning kits and media storage files, paper, envelopes and business forms, writing instruments, office machines and all desktop supplies. These products are used in a broad range of computers and office automation products including laser and inkjet printers, photocopiers, fax machines and data storage products. The Company's computer and office supplies customers include value-added resellers, computer supplies dealers, office product dealers, contract stationers, buying groups, computer and office product superstores, drug and convenience stores, .coms, direct marketers and other retailers who resell the products to end-users. The computer and office supplies segment distributes products primarily in the United States, Canada, Australia, Mexico and South America. Professional Tape Products In January 1998, the Company expanded its product line by acquiring Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of professional tape products and related hardware to the filmed entertainment and multimedia industries. The Company further expanded its operations in the distribution of pro-tape products through the acquisition of The Tape Company in June 1998 and the purchase of the professional tape division of Videotape Products, Inc. ("VTP") in March 1999. Through Steadi-Systems, The Tape Company, and VTP, the Company distributes a wide array of professional-grade audio and video media products to customers including production companies, post-production operations, broadcast stations, corporate in-house production facilities, advertising agencies, and cable television providers. PFSweb PFSweb, Inc.'s ("PFSweb") business unit was formed in 1991 and expanded in 1996 under the name "Priority Fulfillment Services." PFSweb is an international provider of transaction management services to both traditional and e-commerce companies and sells products and services primarily in the United States, Canada and Europe. PFSweb offers such services as professional consulting services, e-market place order management, web-enabled customer contact centers, customer lifecycle management, billing and collection services, information management and international distribution services. PFSweb provides its services under fee-based contracts where service fee revenue is based on either the sales value of the products or service activity volume. In December 1999, PFSweb completed an initial public offering ("IPO") of 3,565,000 shares of its common stock. At June 30, 2000, the Company owned approximately 80.1 percent of the outstanding shares of common stock of PFSweb. Minority interest represents minority shareholders proportionate share of the equity in PFSweb. On July 6, 2000, the Company completed the spin-off of PFSweb through a distribution to Daisytek shareholders of its remaining 80.1 percent ownership in PFSweb. See also Note 8 of these Notes to Unaudited Interim Consolidated Financial Statements. In the opinion of management, the Unaudited Interim 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, 2000, its results of operations and its results of cash flows for the three months ended June 30, 2000 and 1999. 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"). -6- 7 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Unaudited Interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes of the Company included in the Company's Form 10-K (File Number 0-25400) as filed with the SEC on June 29, 2000 (the "Company's Form 10-K"). Accounting policies used in the preparation of the Unaudited Interim 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. NOTE 2 - COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles, are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. Currency translation and other derivative foreign currency exchange contracts are the only items of other comprehensive income impacting the Company. The following table sets forth comprehensive income ( in thousands ):
THREE MONTHS ENDED JUNE 30, -------------------- 2000 1999 ------- ------- Net income ...................... $ 2,980 $ 4,183 Comprehensive income adjustments: Foreign currency translation adjustment .............. (242) 320 ------- ------- Comprehensive income ............ $ 2,738 $ 4,503 ======= =======
NOTE 3 - NET INCOME PER COMMON SHARE Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for each period. Diluted net income per share is calculated by dividing net income by the weighted average common shares and common share equivalents outstanding for each period. The difference between the Company's basic and diluted weighted average common shares outstanding is due to dilutive common stock options outstanding. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
THREE MONTHS ENDED JUNE 30, ------------------- 2000 1999 ------- ------- NUMERATOR: Net income ........................................ $ 2,980 $ 4,183 ======= ======= DENOMINATOR: Denominator for basic earnings per share - Weighted average shares.......................... 17,639 17,166 Effect of dilutive securities: Employee stock options .......................... 81 594 ------- ------- Denominator for diluted earnings per share - Adjusted weighted average shares and assumed conversions .......................... 17,720 17,760 ======= ======= Net income per common share: Basic ........................................... $ 0.17 $ 0.24 ======= ======= Diluted ......................................... $ 0.17 $ 0.24 ======= =======
-7- 8 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - BUSINESS COMBINATIONS On May 3, 2000, the Company acquired certain assets and liabilities of B.A. Pargh Company, LLC, a wholesaler of office products and customer of PFSweb, for approximately $3.0 million, of which approximately $1.0 million is subject to adjustment for realization of assets at lower than book value acquired. In addition, as part of this acquisition, the Company paid off approximately $6.5 million in assumed debt. The acquisition was accounted for by the purchase method of accounting for business combinations and resulted in approximately $3.0 million of goodwill, which is being amortized over 20 years. The entire cost of the acquisition was funded through the Company's availability under its credit facility. This acquisition is not material to the financial position or results of operations of the Company. NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, ------------------- 2000 1999 ---- ---- Cash paid during the period for: Interest .................. $692 $591 Income taxes .............. $843 $402
NOTE 6 - SEGMENT AND GEOGRAPHIC INFORMATION The Company's reportable segments are strategic business units that offer different products and services and they are managed separately based on the fundamental differences in their operations. PFSweb segment revenue includes revenue earned for certain services provided to the Computer and Office Supplies segment, which is eliminated as part of the intersegment elimination. In addition, PFSweb and Computer and Office Supplies net revenues are presented as management evaluates the businesses under its modified IBM distributor agreements. No single customer accounted for more than 10% of the Company's net revenues for the three month periods ended June 30, 2000 and 1999. The following tables set forth information as to the Company's reportable segments (in thousands):
COMPUTER PROFESSIONAL AND OFFICE TAPE INTERSEGMENT SUPPLIES PRODUCTS PFSWEB ELIMINATIONS TOTAL ---------- ------------ --------- ------------ --------- THREE MONTHS ENDED JUNE 30, 2000 Net revenues .................... $ 257,926 $ 20,919 $ 13,370 $ (7,289) $ 284,926 Operating contribution .......... 5,974 1,250 (505) -- 6,719 THREE MONTHS ENDED JUNE 30, 1999 Net revenues .................... $ 207,664 $ 22,561 $ 9,250 $ (6,238) $ 233,237 Operating contribution .......... 6,736 1,679 (437) -- 7,978 ASSETS June 30, 2000 ................... $ 300,147 $ 42,129 $ 55,557 $ -- $ 397,833 March 31, 2000 .................. 268,807 43,638 60,405 (104) 372,746
The Company's Computer and Office Supplies segment includes certain expenses and assets that relate to the Professional Tape Products segment but are not allocated by management to this segment. These expenses relate primarily to the Company's (i) centralized management information, warehouse and telephone systems, and (ii) executive, administrative and other corporate costs. These assets primarily relate to the Company's centralized management information, warehouse and telephone systems and leasehold improvements on shared facilities. Reconciliation of segment operating contribution to consolidated income before taxes is as follows (in thousands):
THREE MONTHS ENDED JUNE. 30, ---------------------------- 2000 1999 -------- -------- Segment operating contribution ................... $ 6,719 $ 7,978 Acquisition related costs (a) .................... -- (370) Transition costs (b) ............................. (634) -- Interest expense ................................. (691) (750) ------- ------- Consolidated income before income taxes .......... $ 5,394 $ 6,858 ======= =======
(a) These charges relate to the Professional Tape Products segment. -8- 9 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) Transition costs paid by the Company have not been allocated to the reportable segments. These costs relate to certain repositioning and separation activities associated with the spin-off of PFSweb and certain other charges as a result of these activities. NOTE 7 - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 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. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with initial application as of the beginning of an entity's fiscal quarter. The Company is currently evaluating the provisions of SFAS No. 133 and its effect, if any, on the Company's financial statements. During 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that revenue generally is realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured. SAB No. 101 is effective for the Company's fourth quarter ending March 31, 2001. The Company is currently evaluating the provisions of SAB No. 101 and its effect, if any, on the Company's financial statements. NOTE 8 - SUBSEQUENT EVENTS PFSweb Spin-off On July 7, 2000, the Company announced the completion of the spin-off of PFSweb by means of a tax-free distribution of the Company's remaining 80.1 percent ownership of PFSweb. The pro rata distribution of 14,305,000 shares of PFSweb was made at the close of business July 6, 2000 to Daisytek shareholders of record as of June 19, 2000 (the "Record Date"). Based on the shares outstanding of each company on the Record Date, Daisytek shareholders received approximately 0.81 shares of PFSweb stock for each share of Daisytek stock they owned on the Record Date. In June, 2000, the Company received a favorable private letter ruling from the Internal Revenue Service regarding the tax-free treatment of the distribution of Daisytek's remaining ownership in PFSweb. The spin-off is intended to establish PFSweb as a stand-alone entity with objectives separate from those of the Company. In connection with the completion of the spin-off, as of July 6, 2000, all outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb options (the "PFSweb Post-spin Options," and together with the Daisytek Post-spin Options, the "Replacement Options"). In general, the exercise price and the number of shares subject to each of the Replacement Options was established pursuant to a formula designed to ensure that: (1) the aggregate "intrinsic value" (i.e. the difference between the exercise price of the option and the market price of the common stock underlying the option) of the Replacement Option did not exceed the aggregate intrinsic value of the outstanding Daisytek Pre-spin Option which is replaced by such Replacement Option immediately prior to the spin-off, and (2) the ratio of the exercise price of each option to the market value of the underlying stock immediately before and after the spin-off was preserved. Substantially all of the other terms and conditions of each Replacement Option, including the time or times when, and the manner in which, each option is exercisable, the duration of the exercise period, the permitted method of exercise, settlement and payment, the rules that apply in the event of the termination of employment of the employee, the events, if any, that may give rise to an employee's right to accelerate the vesting or the time or exercise thereof and the vesting provisions, is the same as those of the replaced Daisytek Pre-spin Option, except that option holders who are employed by one company are permitted to exercise, and are subject to all of the terms and provisions of, options to acquire shares in the other company as if such holder was an employee of such other company. -9- 10 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company will continue to have significant ongoing relationships with PFSweb. Both companies are parties to various agreements providing for the separation of their respective business operations. The agreements govern various ongoing relationships between the companies including the transaction management services that PFSweb provides for Daisytek and the transitional services that Daisytek provides to PFSweb and a tax indemnification and allocation agreement which governs the allocation of tax liabilities and sets forth provisions with respect to other tax matters. All of the agreements between the Company and PFSweb were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the spin-off. The Company believes that the terms of these agreements are consistent with fair market values. However, there can be no assurances that the prices charged to, or by, each company under these agreements are not higher or lower than the prices that may be charged to, or by, unaffiliated third parties for similar services. Stock Repurchase On July 10, 2000, the Company's Board of Directors announced the authorization of the repurchase of up to 10% of the outstanding shares of its common stock. This repurchase program will occur periodically, through open market transactions, subject to prevailing market conditions and other considerations. Based upon the number of outstanding shares on the date of authorization, the Company was authorized to repurchase up to approximately 1.8 million shares. As of August 8, 2000, the Company had repurchased approximately 1.5 million of its outstanding shares. Stock Options Subsequent to June 30, 2000, the Company granted approximately 1.8 million stock options under terms of its stock option compensation plans. The purpose of this grant is to benefit and advance the interests of Daisytek by rewarding directors, officers and certain key employees for their contributions to Daisytek and thereby motivating them to continue to make such contributions in the future. The stock options, which were granted at market price, generally vest over a three year period from the date of the grant and expire 10 years after the date of the grant. -10- 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Unaudited Interim Consolidated Financial Statements and related notes appearing elsewhere in this document. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This document contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate strictly to historical or current facts, but rather reflect our current expectations concerning future results and events. They include words such as "anticipate," "will," "expect," "estimate," "believe," "intend," "plan," "could," "may," "future," "target," and similar expressions and variations thereof. Forward-looking statements relating to such matters as our financial condition and operations are based on our management's current intent, belief or expectations regarding us or our industry. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. In addition, some forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Certain factors, including, but not limited to, 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) could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. There may be additional risks that we do not currently view as material or that are not presently known. OVERVIEW Daisytek is a leading wholesale distributor of computer, copier, fax and office supplies products, professional audio and video tape products and also a leading provider of transaction management services to both traditional and e-commerce companies with operations in three business segments: (1) Computer and Office Supplies; (2) Professional Tape Products; and (3) transaction management services conducted by our majority owned subsidiary, PFSweb, Inc. ("PFSweb".) These reportable segments are strategic business units that offer different products and services and are managed separately, based on fundamental differences in their operations. We sell our products and services in the United States, Canada, Australia, Mexico, South America, the Pacific Rim and Europe. Our Computer and Office Supplies segment began operations in the United States in the 1980's and expanded internationally into Canada in 1989, Mexico in 1994 and Australia/Asia in 1996. This segment distributes over 10,000 nationally known, name-brand computer supplies products to over 30,000 customers. These products are manufactured by over 150 original equipment manufacturers, including Hewlett-Packard, Canon, Sharp, Lexmark, IBM, Okidata, Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. We believe we are one of the world's largest wholesale distributors of computer supplies, office products, and film and tape media. The B.A. Pargh acquisition has added to the above, more than 7,000 additional office products and supplies which are shipped to over 20,000 customer locations. Our Professional Tape Products segment began in 1998 and currently distributes more than 3,000 professional tape products to over 26,000 customers. Our customers primarily include production and broadcast companies, advertising and governmental agencies, cable television providers, educational institutions and healthcare providers. Our professional tape products include videotape, audiotape, motion picture film and data storage media. PFSweb is an international provider of business infrastructure solutions for manufacturers, distributors and retailers that enables the rapid development and deployment of traditional and e-business strategies. PFSweb offers a complete array of services to support its clients' current and future business initiatives. PFSweb's solutions include professional consulting services, order management, web-enabled customer contact services, billing and collection services, information management and international fulfillment and distribution services. PFSweb currently provides traditional and e-business infrastructure solutions to over 30 clients that are positioned as market leaders in a range of industries, including apparel, computer products, printers, sporting goods, cosmetics and consumer electronics, among others. -11- 12 During December 1999, we completed the first phase in our plan to spin-off PFSweb through the completion of an initial public offering of 19.9% of PFSweb stock. On July 6, 2000 we completed the tax-free spin-off of PFSweb through a distribution to Daisytek shareholders of our 80.1% ownership interest in PFSweb. See also Note 8 of the accompanying Notes to Unaudited Interim Consolidated Financial Statements. Subsequent to the spin-off, PFSweb operates as a separate company and Daisytek does not retain any ownership in PFSweb. As a result of the PFSweb spin-off, the following business strategy discussion relates only to the Daisytek business, excluding PFSweb. BUSINESS STRATEGY Daisytek's focus is as a low cost distributor in the growing computer and office supplies industry in the United States and international markets. We base our continued growth on the following strategies: 1) Expansion of our existing product offering to include a full line of office products; 2) Growth of our customer base by investing in the development of emerging customer channels, particularly in electronic commerce; 3) Development of client services related to our competencies in customer care and demand generation; 4) Expansion of our product and service offerings into new international markets; and 5) Actively pursue acquisitions, where appropriate, to support both operating and financial strategies. Our Computer and Office Supplies segment specializes in computer supplies that have longer life cycles and lower risk of technological obsolescence than hardware and software products. We believe that the demand for these products remains strong due to the advancement and reduction in price points of printer and computer technologies, which in turn grows the installed base of equipment that consumes the products we distribute. Continuing automation of the workplace and the tremendous growth in color printing technologies that use consumable supplies at higher rates also fuel the demand for the computer supplies product offering. We offer these products to our domestic customers using value-added services such as next-business-day delivery, the latest order cutoff times in the industry, order confirmation, product drop-shipping, and customized product catalogs. We plan to expand sales to existing customers including those in the contract stationer, VAR, computer and office-product dealer, and superstore channels, as well as develop newer customer channels. We began our expansion of products to include a full line of office products through the acquisition of B.A. Pargh, which was completed in May 2000. This acquisition adds over 7,000 products to our existing product lines. In addition, it brings new customers that previously have not purchased from us. The consolidation in the office products industry has required dealers to focus on gaining efficiencies in their business. As a result, there is an emerging segment of office product dealers, particularly large contract stationers, who possess their own distribution and delivery infrastructure and who are aggressively seeking a lower cost alternative to the traditional higher cost office products wholesale model. Our low cost distribution model, coupled with our relationship with PFSweb, positions us to take advantage of the demand for a lower cost distributor. B.A. Pargh's primary markets are in the Central and Eastern United States and in Puerto Rico. We are also focusing on new customer channels such as mass merchants, grocery and convenience stores, direct mail marketers and internet business sites. We have dedicated an internal team to leverage our experience in e-commerce, telemarketing and computer supplies to assist these customers in including our growing line of products into their own offerings. We intend to use our suite of electronic services, our lower cost distribution model, our expanding offering of products, along with our experience in selling computer and office consumables to aggressively market to these new and emerging channels. Daisytek has been testing new service programs with various suppliers and business partners. These programs build on Daisytek's core competencies in customer service and proactive demand generation. In these programs, Daisytek takes over, on behalf of the supplier, the management of customer relationships in defined parts of the supplier's or partner's existing business, or possibly in new business areas. Services provided fall under categories including database management, proactive outbound telemarketing, high level customer support and proactive e-marketing. These services will be provided by a newly established, wholly-owned subsidiary of Daisytek, under the -12- 13 name Virtual Demand, which will charge fees on a transaction basis to our clients. A dedicated sales team has been formed and is currently marketing these service programs to a variety of companies. We continue to research new markets to expand our international computer supplies business. Many international markets have exponentially higher growth opportunities for consumable computer supplies than the United States. Presently, we operate sales and distribution centers in Canada, Mexico and Australia and export products into Latin America, the Pacific Rim and throughout much of the rest of the world. Our computer supplies experience and broad product range place us in a competitive position in emerging international markets. We plan to enhance growth by seeking strategic acquisition opportunities in our computer and office supplies business, or to add selected product lines and customers that can capitalize on Daisytek's expertise in distribution and call-center management, or that may add technology and service offerings to our business. In this regard, on October 1, 1999, we acquired certain assets and liabilities of Arlington Industries, Inc., a domestic based specialty wholesaler primarily focused on copier and fax consumable supplies. Additionally, on May 3, 2000, we acquired certain assets and liabilities of B.A. Pargh LLC, discussed previously. Daisytek Stand Alone (Excluding PFSweb, Inc.) The following is an unaudited adjusted historical financial presentation of the Daisytek business units, excluding PFSweb, for the first fiscal quarter of 2001 and 2000. This information is supplemental and is not intended to be presented in accordance with generally accepted accounting principles. The presentation takes into account certain one-time costs of reorganization activities as a result of the planned separation of Daisytek and PFSweb of approximately $0.6 million during the first quarter of fiscal 2001, which management believes are incremental to normal operations. This presentation also includes the estimated impact of the transaction management services agreement between Daisytek and PFSweb for all periods presented. The presentation excludes acquisition related costs and minority interest. We based the following data on available information and certain assumptions. We believe that such assumptions provide a reasonable basis for presenting our results, excluding PFSweb and adjusting for the transactions described above. This financial information does not reflect what our results of operations may be in the future. Adjusted Statements of Income Data:
THREE MONTHS ENDED JUNE 30, --------------------------- 2000 1999 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Net revenues ....................................... $278,845 $230,046 Cost of revenues ................................... 248,644 203,883 -------- -------- Gross profit ..................................... 30,201 26,163 Selling, general and administrative expenses ....... 22,935 19,552 -------- -------- Income from operations ........................... 7,266 6,611 Interest expense, net............................... 1,007 652 -------- -------- Income before income taxes ....................... 6,259 5,959 Provision for income taxes ......................... 2,406 2,324 -------- -------- Net income ......................................... $ 3,853 $ 3,635 ======== ======== Net income per common share: Basic ............................................ $ 0.22 $ 0.21 ======== ======== Diluted .......................................... $ 0.22 $ 0.20 Weighted average common and common share equivalents ======== ======== outstanding: Basic ............................................ 17,639 17,166 Diluted .......................................... 17,720 17,760
-13- 14 Adjusted Balance Sheet Data:
AS OF AS OF JUNE 30, 2000 MARCH 31, 2000 ------------- -------------- (IN THOUSANDS) (UNAUDITED) Working capital, excluding debt ........ $171,174 $168,067 Total assets ........................... 342,276 317,155 Total debt ............................. 45,235 42,144 Shareholders' equity ................... 176,072 172,549
CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth consolidated results of operations and other financial data from Daisytek's unaudited interim consolidated statements of income, including our 80.1% ownership of PFSweb, Inc.
THREE MONTHS ENDED JUNE 30, --------------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME DATA: Net revenues ......................................... $284,926 $233,237 Cost of revenues ..................................... 253,140 205,971 -------- -------- Gross profit ......................................... 31,786 27,266 Selling, general and administrative expenses ......... 25,701 19,288 Acquisition related costs ............................ -- 370 -------- -------- Income from operations ............................... 6,085 7,608 Interest expense, net................................. 691 750 -------- -------- Income before income taxes ........................... 5,394 6,858 Provision for income taxes ........................... 2,461 2,675 -------- -------- Income before minority interest ...................... 2,933 4,183 Minority interest .................................... 47 -- -------- -------- Net income ........................................... $ 2,980 $ 4,183 ======== ======== NET INCOME PER COMMON SHARE: Basic .............................................. $ 0.17 $ 0.24 ======== ======== Diluted ............................................ $ 0.17 $ 0.24 ======== ======== Weighted average common and common share equivalents outstanding: Basic ........................................... 17,639 17,166 Diluted ......................................... 17,720 17,760
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 The following discussion relates to Daisytek, including its majority-owned subsidiary, PFSweb. These are historical results and may not be representative of our results after the spin-off of PFSweb. Net Revenues. Net revenues for the three months ended June 30, 2000 increased $51.7 million, or 22.2%, to $284.9 million as compared to $233.2 million for the three months ended June 30, 1999. Computer and Office Supplies net revenues increased 24.2% for the three months ended June 30, 2000, compared to the three months ended June 30, 1999. The Computer and Office Supplies business includes our domestic and international computer and office supplies operations and IBM product sales. The net revenue increase in the Computer and Office Supplies business compared to the prior year is primarily attributable to the Arlington and B.A. Pargh acquisitions (which were not a part of the Daisytek business last year), growth in the international computer supplies business, and growth in IBM product sales. Over the last two years, the growth in sales for the domestic computer supplies business has slowed from previously realized levels. We believe this reduction is due, in large part, to slower industry growth, large channel shifts, turmoil in certain customer segments and slower printer placements. In addition, we have focused on certain margin initiatives that have improved profitability but reduced the amount of lower margin revenue opportunities. Net revenue in the international computer supplies operations increased by 16.5% for the three months ended June 30, 2000 compared to the prior year. Growth in this business was impacted by the closing of our Singapore operations, which were consolidated into our Asia Pacific headquarters in Australia at the end of March 2000. Additionally, the strong U.S dollar during the period relative to the Canadian and Australian dollars had a negative -14- 15 impact on U.S. dollar growth rates in this business. The international business grew by over 21% for the three months ended June 30, 2000 compared to the prior year when calculated using only local currencies. Excluding Singapore, we experienced growth in all international subsidiaries within this segment, with particularly strong growth rates in Mexico and Australia. Net revenues related to our IBM product sales increased due to higher sales volumes under both our North American and European distributor agreements. Professional Tape Products net revenue decreased 7.3% for the three months ended June 30, 2000 compared to the prior year due primarily to price degradation in certain product lines throughout fiscal year 2000. We may continue to experience price degradation in our Professional Tape Products segment in the future, which might have a negative impact on future growth rates. We continually evaluate the business plans and future operating prospects within this segment. PFSweb also experienced an increase in its service fee-based activity primarily as a result of new contracts and expansion of existing contracts. Gross Profit. Gross profit as a percent of net revenues was 11.2% for the three months ended June 30, 2000 as compared to 11.7% for the prior year. In the U.S. business, the decrease in our gross profit as a percent of net revenues was primarily due to our previously announced focus on inventory levels during the latter half of fiscal 2000 which continued into the first quarter of 2001. In order to make ongoing working capital improvements, we avoided certain vendor incentive programs, that for comparative purposes have been previously reflected in our prior year results. Additionally, the gross profit percentage declined in the international computer supplies business due primarily to growth in international retail business, which typically carries lower margins. Also contributing to the overall decline in gross profit percentage was the revenue growth in IBM product sales, which are also at lower margins. We believe that competitive pressures in the Computer and Office Supplies operations and potential price degradation in the Professional Tape Products business may continue to impact gross margins during the next year. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2000 were $25.7 million or 9.0% of net revenues, as compared to $19.3 million or 8.3% for the three months ended June 30, 1999. Our SG&A expense for the three months ended June 30, 2000 was negatively impacted by certain non-recurring transition costs of approximately $0.6 million associated with the PFSweb spin-off. Excluding these costs, our SG&A expense as a percentage of revenues would be 8.8% for the current quarter. The increase in SG&A expenses and the related increase in SG&A as a percentage of net revenues is primarily attributable to (i) the acquisitions of Arlington in October 1999 and B.A. Pargh in May, 2000, (ii) the investments in resources and technology to implement new contracts and further develop infrastructure for PFSweb and, iii) a reduction in net revenues to large office superstores, which typically have lower SG&A expense ratios. This impact on the SG&A percentage was partially offset by an increase in IBM product sales and international retail sales, which typically have lower SG&A expense ratios. Acquisition Related Costs. In June 1998, we completed the acquisition of the Tape Company through a stock-for stock merger, which was accounted for as a pooling of interest in the accompanying Unaudited Interim Consolidated Financial Statements and notes thereto. During the first quarter of fiscal 2000, we recorded costs of $0.4 million applicable to transition, integration and merger activities within our Professional Tape Products segment. Interest Expense, net. Interest expense for the three months ended June 30, 2000 was $0.7 million as compared to $0.8 million for the three months ended June 30, 1999. Interest expense was lower for the three months ended June 30, 2000 primarily due to interest income earned by PFSweb on its remaining proceeds from its initial public offering, which was completed in December 1999. This impact was offset by an increase in interest rates during the last year. Our weighted average interest rate was 8.0% for the three months ended June 30, 2000 compared to 6.0% for the three months ended June 30, 1999. Income Taxes. Our effective tax rate was approximately 45.6% for the three months ended June 30, 2000 compared to 39.0% for the three months ended June 30, 1999. The income tax provision was negatively impacted during the quarter primarily due to losses generated by our PFSweb European subsidiary for which no income tax benefit has been recorded. Due to PFSweb's limited operating history in Europe, it is uncertain whether it is "more likely than not" that we will be able to utilize our cumulative tax losses and therefore no tax benefit has been recorded related to these losses. Additionally, upon completion of the spin-off, PFSweb will cease to be included in Daisytek's consolidated tax return. Accordingly, because a sufficient history of earnings has not been established by PFSweb on a stand-alone basis, a valuation allowance has been provided for the net deferred income tax asset related to PFSweb as of June 30, 2000. -15- 16 LIQUIDITY AND CAPITAL RESOURCES We expect to fund our anticipated cash requirements, including the anticipated cash requirement of our capital expenditures and acquisition activity, if any, with internally generated funds and other various external sources of funds that may be available to us. The external sources of funds include our credit agreements and amendments thereto and may include the future issuance of debt, equity or other securities. However, we cannot assure you that we will be able to access capital markets in the future on terms that will be satisfactory to us. We believe that such internally and externally generated funds will provide us with adequate liquidity and capital necessary for fiscal 2001. Our cash at June 30, 2000 is primarily related to the remaining proceeds from the PFSweb Offering, which are intended to be used for PFSweb's anticipated capital expenditures, future PFSweb working capital needs, and possible acquisitions by PFSweb. The remaining proceeds from the Offering cannot be utilized by us to pay down our outstanding balance under our credit facility. Subsequent to the Offering, PFSweb has been prohibited from borrowing from Daisytek, except in the normal course of business, and no longer participated in Daisytek's centralized cash management system. Historically, our primary source of cash has been from financing activities. Net cash used in financing activities was $2.8 million for the three months ended June 30, 2000 compared to net cash provided by financing activities of $12.9 million for the three months ended June 30, 1999. In conjunction with the acquisition of B.A. Pargh during May 2000, certain acquired debt of approximately $6.5 million was paid in full. This impact was partially offset by proceeds received from the exercise of stock options and proceeds received on the issuance of stock under an employee stock purchase program. The entire cost of this acquisition was funded through our availability under our credit facility and cash provided by operating activities, which has resulted in a net use of funds for financing activities during this period. During the three months ended June 30, 1999, cash provided by financing activities was generated primarily from proceeds from revolving lines of credit. Net cash provided by operating activities was $5.1 million for the three months ended June 30, 2000 compared to net cash used in operating activities of $6.0 million for the three months ended June 30, 1999. Working capital declined to $153.6 million at June 30, 2000 from $153.9 million at March 31, 2000. This result was primarily attributable to 1) acquisition of the B.A. Pargh business, 2) an increase in inventory primarily related to the IBM product, which was offset by accounts payable associated with this inventory, and 3) a reduction in accounts receivable due to improved collection efforts in certain business units during the quarter. Our principal use of funds for investing activities was capital expenditures of $3.2 million and $2.6 million for the three months ended June 30, 2000 and 1999, respectively, and for acquisition of businesses of $2.6 million and $2.3 million for the three months ended June 30, 2000 and 1999, respectively. See Note 4 of Notes to Unaudited Interim Consolidated Financial Statements. The capital expenditures consisted primarily of additions to upgrade our management information systems and expansion of our PFSweb distribution facilities, both domestic and foreign. We anticipate that our total investment in upgrades and additions to facilities for fiscal 2001 will be approximately $10 million to $15 million, of which $7 million to $10 million will be incurred by PFSweb. The Company's PFSweb subsidiary has had a long-term contractual agreement with one of its clients pursuant to which, as part of the services that PFSweb provides, PFSweb finances certain of the client's inventory. During fiscal 2000, this client indicated to PFSweb that they would not have PFSweb finance this inventory in the future. This financing agreement provided net cash flows of $1.7 million for the three months ended June 30, 2000 and used net cash flows of $0.2 million for the three months ended June 30, 1999. At June 30, 2000, our unsecured revolving lines of credit provided for borrowings up to approximately $127.9 million. There were outstanding balances on the lines of credit totaling $45.6 million (including an outstanding letter of credit of $0.4 million) at June 30, 2000, leaving approximately $82.3 million available for additional borrowings. In October 1999, we amended one of our unsecured revolving line of credit agreements (the "Facility"), effective in November 1999, to increase the maximum borrowing availability from $85 million to $105 million. This amendment also provided for the release of PFSweb subsidiaries as guarantors of the Facility upon the occurrence of certain events, which have subsequently taken place. Additionally, this amendment also prohibits Daisytek from advancing funds to PFSweb, except in the normal course of business. The Facility was also amended to increase the interest rate, effective March 1, 2000, to Eurodollar rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%. The expiration date of the Facility was also extended to January 1, 2001. -16- 17 We are currently in negotiations regarding new credit facilities and we expect to finalize these negotiations and to contract for new facilities before the end of calendar year 2000. Management believes that any new facilities will be on substantially comparable terms to the current facilities. We believe that international markets represent further opportunities for growth. We attempt to protect ourselves from foreign currency fluctuations by denominating substantially all our non-Canadian and non-Australian international sales in U.S. dollars. In addition, we have entered into various forward Canadian and Australian currency exchange contracts in order to hedge our net investments in, and our intercompany payables applicable to, our Canadian and Australian subsidiaries. We have the following forward currency exchange contracts outstanding as of June 30, 2000:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION - ----------------- ------------------- ----------------------- ------------- Canadian Dollars $8.6 million Sell Canadian Dollars November 2000 Australian Dollars $7.0 million Sell Australian Dollars November 2000 Australian Dollars $2.9 million Sell Australian Dollars November 2000 Australian Dollars $2.5 million Sell Australian Dollars August 2000
As of June 30, 2000, we had incurred net unrealized gains of approximately $0.2 million on these outstanding Canadian and Australian forward exchange contracts, which are included as a component of shareholders' equity. We may consider entering into other forward exchange contracts in order to hedge our net investment in our Canadian, Australian and Mexican subsidiaries, although no assurance can be given that we will be able to do so on acceptable terms. In the future, we may attempt to acquire other businesses to expand our existing computer and office supplies businesses in the U.S. or internationally, expand our product lines (similar to our entry into the office supplies business) and expand our services or capabilities in connection with our efforts to grow our business. Subsequent to June 30, 2000, we have signed a non-binding letter of intent for one potential acquisition opportunity. We have no other binding agreements to acquire any material businesses. Should we be successful in acquiring other businesses, we may require additional financing to consummate such a transaction. Acquisitions involve certain risks and uncertainties, therefore, we can give no assurance with respect to whether we will be successful in identifying such a business to acquire, whether we will be able to obtain financing to complete such an acquisition, or whether we will be successful in operating the acquired business. We believe that we will be able to satisfy our working capital needs for the next twelve months, as well as business growth and planned capital expenditures, through funds available under our various line of credit facilities, trade credit, lease financing, internally generated funds and by increasing the amount available under our credit facilities. Further, depending on market conditions and the terms thereof, we 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. OTHER MATTERS Inventory Management Daisytek manages its inventories held for sale in its wholesale distribution business by maintaining sufficient quantities of product to achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory balances will fluctuate as we add new product lines and make large purchases from suppliers to take advantage of attractive terms. To reduce the risk of loss due to supplier price reductions and slow moving inventory, we have entered into purchasing agreements with many of our suppliers, including most of our major suppliers, which contain price protection and stock return privileges under which we receive credits if the supplier lowers prices on previously purchased inventory or if we return slow moving inventory in exchange for other products. Seasonality Although historically we have experienced our greatest sequential quarter revenue growth in our fourth fiscal quarter, our management has not been able to determine the specific or, if any, seasonal factors that may cause quarterly variability in operating results. Our 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 our computer supplies products due to a variety of factors, including sales increases resulting from the introduction -17- 18 of new products. We generally experience a relative slowness in sales during the summer months, which may adversely affect our first and second fiscal quarter results in relation to sequential quarter performance. The seasonality of PFSweb's business is dependent upon the seasonality of their clients' business and of their sale of their products. Accordingly, our management must rely upon the projections of PFSweb's customers in assessing quarterly variability. We believe that as the PFSweb business grows with consumer product clients, its business activity will be more significant in the quarters ending December 31. We believe results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. Memphis Facility The majority of our U.S. Computer and Office Supplies inventory and distribution activity is located in a centralized warehouse and distribution facility operated by PFSweb in Memphis, Tennessee. Although we have established certain disaster recovery procedures, which include other warehouse and distribution locations operated by Daisytek in the U.S., there can be no assurance that the loss of this Memphis facility for any extended period of time would not have a material effect on our business. Inflation Our management believes that inflation has not had a material effect on our operations. Stock Options In connection with the completion of the spin-off, as of July 6, 2000, all outstanding Daisytek options ("Daisytek Pre-Spin Options") were adjusted and/or replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb options (the "PFSweb Post-Spin Options," and together with the Daisytek Post-spin Options, the "Replacement Options.") In general, the exercise price and the number of shares subject to each of the Replacement Options was established pursuant to a formula designed to ensure that: (1) the aggregate "intrinsic value" (i.e. the difference between the exercise price of the option and the market price of the common stock underlying the option) of the Replacement Option does not exceed the aggregate intrinsic value of the outstanding Daisytek Pre-Spin Option which is replaced by such Replacement Option immediately prior to the spin-off, and (2) the ratio of the exercise price of each option to the market value of the underlying stock immediately before and after the spin-off is preserved. Substantially all of the other terms and conditions of each Replacement Option, including the time or times when, and the manner in which, each option is exercisable, the duration of the exercise period, the permitted method of exercise, settlement and payment, the rules that apply in the event of the termination of employment of the employee, the events, if any, that may give rise to an employee's right to accelerate the vesting or the time or exercise thereof and the vesting provisions, is the same as those of the replaced Daisytek Pre-spin Option, except that option holders who are employed by one company are permitted to exercise, and are subject to all of the terms and provisions of, options to acquire shares in the other company as if such holder was an employee of such other company. As of July 31, 2000, after giving effect to the issuance of the Daisytek Post-spin Options described above, combined with the additional options granted subsequent to June 30, 2000 discussed in Note 8 of the Unaudited Interim Consolidated Financial Statements, there were approximately 5.4 million options outstanding with an overall weighted average exercise price of $7.44. For purposes of the weighted average share count included in determining fully diluted earnings per share, using an average of the daily closing price for each day in the reported period (the "average share price"), and assuming no other changes, if the average share price of our stock is $7, the weighted average share count would increase by approximately 0.2 million. If the average share price was $10, the weighted average share count would increase by approximately 0.9 million. If the average share price was $13, the weighted average share count would increase by approximately 1.5 million. -18- 19 The following table summarizes information about the Company's outstanding stock options as of July 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE --------------- ----------- ---------------- $ 1.50 - $ 3.00 288 $ 1.65 $ 5.00 - $ 6.50 2,595,998 $ 6.16 $ 6.51 - $ 8.00 871,895 $ 7.75 $ 8.01 - $ 9.50 1,599,496 $ 8.08 $ 9.51 - $11.00 96,024 $ 9.72 $11.01 - $12.50 16,188 $11.57 $12.51 - $14.00 2,998 $13.22 $14.01 - $15.50 250,849 $14.31
Impact of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS 133") effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires companies to recognize all derivative financial instruments as either assets or liabilities in the balance sheet 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. SFAS No. 133 requires gains or losses on these financial instruments to be recognized in other comprehensive income as a part of the cumulative translation adjustment. In June 1999, the FASB approved the issuance of SFAS 137 deferring the effective date of SFAS 133 for one year. Consequently, Daisytek is required to adopt SFAS 133 by April 1, 2001. The impact of SFAS 133 on our financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of our hedging activities, the types of hedging instruments used and the effectiveness of such instruments. We presently utilize derivative financial instruments only to hedge our net investments in some of our foreign operations. The Company is currently evaluating the provisions of SFAS 133 and its effect on the accounting treatment of these financial instruments. Due to our limited use of derivative instruments, we do not anticipate that adoption of SFAS 133 will have a material effect on our financial statements. During 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that revenue generally is realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured. SAB No. 101 is effective for the Company's fourth quarter ended March 31, 2001. The Company is currently evaluating the provisions of SAB No. 101 and its effect, if any, on the Company's financial statements. -19- 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Daisytek is exposed to various market risks including interest rates on its debt and foreign exchange rates. In the normal course of business the Company employs established policies and procedures to manage these risks. INTEREST RATE RISK Our interest rate risk is limited to our outstanding balances on our revolving lines of credit which amounted to $45.2 million at June 30, 2000. A 50 basis point movement in interest rates would result in approximately $226,000 annualized increase or decrease in interest expense based on the outstanding balance of the revolving line of credit at June 30, 2000. We anticipate managing our future interest rate exposure by using a mix of fixed and floating interest rate debt and, if appropriate, financial derivative instruments. FOREIGN EXCHANGE RISK Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically also reflect economic growth, inflation, interest rates, government actions and other factors. As currency exchange rates fluctuate, translation of the statements of operations of our international businesses into U.S. dollars may affect year-over-year comparability and could cause us to adjust our financing and operating strategies. Accordingly, we utilize foreign currency forward contracts to hedge our net investments and long-term intercompany payable balances. We also monitor our foreign exchange exposures to ensure the overall effectiveness of our foreign currency hedge positions. Foreign currency instruments generally have maturities that do not exceed three months. We do not enter into foreign currency instruments for speculative purposes. Our current foreign currency exchange rate risk is primarily limited to Mexican Pesos, Canadian Dollars, Australian Dollars and the Euro. Other international sales and purchases are generally U.S. Dollar based. At June 30, 2000 we had four outstanding foreign currency forward contracts. If the foreign exchange rates of the Canadian and Australian currencies fluctuate 10% from the June 30, 2000 rates, gains or losses in fair value on the four outstanding contracts would be approximately $2.6 million. -20- 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits. 3.1(2) Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.1.1(2) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.2(1) Amended and Restated By-laws of Daisytek International Corporation. 3.3(3) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.4(4) Amendments to the Bylaws of the Company, adopted on October 15, 1999. 10.1(*) Lease agreement between Enterprise Business Park D-2, L.P. and Daisytek, Inc. dated May 3, 2000. 10.2(*) Asset purchase agreement between BAP Acquisition Corp., and B.A. Pargh Company, LLC dated May 3, 2000. 27.1(*) Financial Data Schedule for three months ended June 30, 2000. - ---------- (*) Filed herewith. (1) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1994 dated March 10, 1995. (2) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1996 dated June 26, 1996. (3) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1998 dated November 16, 1998. (4) Incorporated by reference from Current Report on Form 8-K dated October 19, 1999. b) Reports on Form 8-K: 1. On June 8, 2000, the Company filed a current report on Form 8-K to report under Item 5 the Company's press release dated June 8, 2000, announcing the separation of PFSweb, Inc. from Daisytek by means of a tax-free dividend of Daisytek's remaining 80.1% ownership of PFSweb. 2. On June 20, 2000, the Company filed a current report on Form 8-K to report under Item 5 the Company's Information Statement related to its spin-off of PFSweb, Inc. from Daisytek. -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, 2000 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Ralph Mitchell ------------------------------------ Ralph Mitchell Chief Financial Officer, Chief Accounting Officer, Executive Vice President - Finance -22- 23 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1(2) Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.1.1(2) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.2(1) Amended and Restated By-laws of Daisytek International Corporation. 3.3(3) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.4(4) Amendments to the Bylaws of the Company, adopted on October 15, 1999. 10.1(*) Lease agreement between Enterprise Business Park D-2, L.P. and Daisytek, Inc. dated May 3, 2000. 10.2(*) Asset purchase agreement between BAP Acquisition Corp., and B.A. Pargh Company, LLC dated May 3, 2000. 27.1(*) Financial Data Schedule for three months ended June 30, 2000.
- ---------- (*) Filed herewith. (1) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1994 dated March 10, 1995. (2) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1996 dated June 26, 1996. (3) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1998 dated November 16, 1998. (4) Incorporated by reference from Current Report on Form 8-K dated October 19, 1999. EX-10.1 2 ex10-1.txt LEASE AGREEMENT 1 EXHIBIT 10.1 LEASE AGREEMENT BETWEEN ENTERPRISE BUSINESS PARK D-2, L.P., AS LANDLORD, AND DAISYTEK, INCORPORATED, AS TENANT DATED MAY 3, 2000 ENTERPRISE OFFICE CENTER II ALLEN, TEXAS 2 BASIC LEASE INFORMATION Lease Date: May 3, 2000 Landlord: ENTERPRISE BUSINESS PARK D-2, L.P., a Delaware limited partnership Tenant: DAISYTEK, INCORPORATED, a Delaware corporation Premises: Suite No. 200 (subject to approval by the applicable governmental authority), containing 46,122 rentable square feet, in the office building commonly known as Enterprise Office Center II (the "BUILDING"), and whose street address is 1025 Central Expressway South, Allen, Texas 75013. The Premises are outlined on the plan attached to the Lease as Exhibit A. The land on which the Building is located (the "LAND") is described on Exhibit B. The term "Building" includes the related Land, driveways, parking facilities, and similar improvements. Term: Approximately 87 months, commencing on the Commencement Date and ending at 5:00 p.m. local time on the last day of the 87th full calendar month following the Commencement Date, subject to adjustment and earlier termination as provided in the Lease. Commencement Date: The earliest of (a) the date on which the Work (as defined in Exhibit D hereto) in the Premises is Substantially Completed (as defined in Exhibit D hereto), or (b) the date on which the Work in the Premises would have been Substantially Completed but for the occurrence of any Tenant Delay Days (as defined in Exhibit D hereto). Basic Rent: Subject to the conditional abatement of Basic Rent, Additional Rent, and Tenant's Proportionate Share of Taxes contained in Exhibit J attached hereto, Basic Rent shall be the following amounts for the following periods of time:
ANNUAL BASIC RENT PER RENTABLE MONTHLY BASIC RENT LEASE MONTH SQUARE FOOT ------------------------ -------------------------------------- ------------------------- 1 - 63 $14.90 $57,268.15 ------------------------ -------------------------------------- ------------------------- 64 - 87 $17.31 $66,530.99 ------------------------ -------------------------------------- -------------------------
As used herein, the term "LEASE MONTH" shall mean each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month shall be included in the first Lease Month for purposes of determining the duration of the Term and the monthly Basic Rent rate applicable for such partial month). i 3 Security Deposit: [Intentionally Deleted]. Rent: Basic Rent, Tenant's Proportionate Share of Taxes, and Electrical Costs, Tenant's share of Additional Rent, and all other sums that Tenant may owe to Landlord or otherwise be required to pay to Landlord under the Lease. Permitted Use: General office use and telemarketing. Tenant's Proportionate Share: 50.10%, which is the percentage obtained by dividing (a) the number of rentable square feet in the Premises as stated above by (b) the 92,066 rentable square feet in the Building. Landlord and Tenant stipulate that the number of rentable square feet in the Premises and in the Building set forth above shall be binding upon them. Initial Liability Insurance Amount: $3,000,000.
Prior to Commencement Date: Following Commencement Date: -------------------------- --------------------------- Tenant's Address: Daisytek, Incorporated Daisytek, Incorporated 500 North Central Expressway 1025 Central Expressway South, Suite 200 Plano, Texas Allen, Texas 75013 Attention: Ralph Mitchell Attention: Ralph Mitchell Telephone: 972-881-4700 Telephone: _________________________ Telecopy: 972-881-1200 Telecopy: __________________________ With a copy to: -------------- Wolff & Samson, P.A. 5 Becker Farm Road Roseland, New Jersey 07068 Attention: Morris Bienenfeld Telephone: 973-533-6532 Telecopy: 973-740-1407 Landlord's For all Notices: With a copy to: Address: --------------- -------------- Enterprise Business Park D-2, L.P. Enterprise Business Park D-2, L.P. c/o Trammell Crow Dallas/Fort Worth, Ltd. 2200 Ross Avenue, Suite 3700 2200 Ross Avenue, Suite 3700 Dallas, Texas 75201 Dallas, Texas 75039 Attention: Asset Manager Attention: Jim Wells Telephone: 214-979-6100 Telephone: 214-979-6100 Telecopy: 214-979-6355 Telecopy: 214-979-6134 With a copy to: -------------- Vinson & Elkins 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201 Attention: Joel Ross Telephone: 214-220-7700 Telecopy: 214-220-7716
ii 4 The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control. LANDLORD: ENTERPRISE BUSINESS PARK D-2, L.P., a Delaware limited partnership By: Trammell Crow DFW Development, Inc., a Delaware corporation, its sole general partner By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- TENANT: DAISYTEK, INCORPORATED, a Delaware corporation By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- iii 5 TABLE OF CONTENTS
Page 1. Definitions and Basic Provisions.........................................................................1 2. Lease Grant..............................................................................................1 3. Tender of Possession; Late Delivery; Acceptance of Premises..............................................1 (a) Tender of Possession............................................................................1 (b) Late Delivery...................................................................................1 (c) Acceptance of Premises..........................................................................2 (d) Early Entry by Tenant...........................................................................2 4. Rent.....................................................................................................3 (a) Payment.........................................................................................3 (b) Operating Costs; Taxes; Electrical Costs........................................................3 (c) Tenant Inspection Right.........................................................................5 5. Delinquent Payment; Handling Charges.....................................................................6 6. Security Deposit.........................................................................................6 7. Landlord's Obligations...................................................................................7 (a) Services........................................................................................7 (b) Excess Utility Use..............................................................................7 (c) Restoration of Services; Abatement..............................................................7 8. Improvements; Alterations; Repairs; Maintenance..........................................................8 (a) Improvements; Alterations.......................................................................8 (b) Repairs; Maintenance............................................................................9 (c) Performance of Work.............................................................................9 (d) Mechanic's Liens................................................................................9 9. Use.....................................................................................................10 10. Assignment and Subletting...............................................................................10 (a) Transfers......................................................................................10 (b) Consent Standards..............................................................................10 (c) Request for Consent............................................................................11 (d) Conditions to Consent..........................................................................11 (e) Cancellation...................................................................................11 (f) Additional Compensation........................................................................11 (g) Permitted Transfers............................................................................12 11. Insurance; Waivers; Subrogation; Indemnity..............................................................12 (a) Tenant's Insurance.............................................................................12
iv 6 (b) Landlord's Insurance...........................................................................13 (c) No Subrogation.................................................................................13 (d) Indemnity......................................................................................13 12. Subordination; Attornment; Notice to Landlord's Mortgagee...............................................14 (a) Subordination..................................................................................14 (b) Attornment.....................................................................................14 (c) Notice to Landlord's Mortgagee.................................................................14 (d) Landlord's Mortgagee's Protection Provisions...................................................14 Subordination, Non-Disturbance and Attornment Agreement.................................................15 13. Rules and Regulations...................................................................................15 14. Condemnation............................................................................................15 (a) Total Taking...................................................................................15 (b) Partial Taking - Tenant's Rights...............................................................15 (c) Partial Taking - Landlord's Rights.............................................................16 (d) Award..........................................................................................16 15. Fire or Other Casualty..................................................................................16 (a) Repair Estimate................................................................................16 (b) Tenant's Rights................................................................................16 (c) Landlord's Rights..............................................................................16 (d) Repair Obligation..............................................................................16 (e) Abatement of Rent..............................................................................17 16. Personal Property Taxes.................................................................................17 17. Events of Default.......................................................................................17 (a) Payment Default................................................................................17 (b) Abandonment....................................................................................17 (c) Estoppel.......................................................................................17 (d) Other Defaults.................................................................................18 (e) Insolvency.....................................................................................18 18. Remedies................................................................................................18 (a) Termination of Lease...........................................................................18 (b) Termination of Possession......................................................................18 (c) Alteration of Locks............................................................................19 19. Payment by Tenant; Non-Waiver; Cumulative Remedies......................................................19 (a) Payment by Tenant..............................................................................19 (b) No Waiver......................................................................................19 (c) Cumulative Remedies............................................................................19 20. Landlord's Lien.........................................................................................19 21. Surrender of Premises...................................................................................19
v 7 22. Holding Over............................................................................................20 23. Certain Rights Reserved by Landlord.....................................................................20 (a) Building Operations............................................................................20 (b) Security.......................................................................................20 (c) Prospective Purchasers and Lenders.............................................................20 (d) Prospective Tenants............................................................................21 24. Substitution Space......................................................................................21 25. Miscellaneous...........................................................................................21 (a) Landlord Transfer..............................................................................21 (b) Landlord's Liability...........................................................................21 (c) Force Majeure..................................................................................21 (d) Brokerage......................................................................................21 (e) Estoppel Certificates..........................................................................21 (f) Notices........................................................................................21 (g) Separability...................................................................................22 (h) Amendments; Binding Effect.....................................................................22 (i) Quiet Enjoyment................................................................................22 (j) No Merger......................................................................................22 (k) No Offer.......................................................................................22 (l) Entire Agreement...............................................................................22 (m) Waiver of Jury Trial...........................................................................22 (n) Governing Law..................................................................................22 (o) Recording......................................................................................23 (p) Joint and Several Liability....................................................................23 (q) Financial Reports..............................................................................23 (r) Landlord's Fees................................................................................23 (s) Telecommunications.............................................................................23 (t) Confidentiality................................................................................24 (u) Authority......................................................................................24 (v) Hazardous Materials............................................................................24 (w) List of Exhibits...............................................................................24 26. Other Provisions........................................................................................25 (a) ADA............................................................................................25 (b) Environmental Report...........................................................................25 (c) Signage........................................................................................25 (d) Satellite Dish.................................................................................26 (e) Smoking Area...................................................................................27
vi 8 LIST OF DEFINED TERMS
Page Additional Rent...................................................................................................3 Affiliate.........................................................................................................1 Architect.......................................................................................................D-2 Basic Lease Information...........................................................................................1 Basic Rent........................................................................................................i Building..........................................................................................................i Building's Structure..............................................................................................1 Building's Systems................................................................................................1 Casualty.........................................................................................................16 Commencement Date.................................................................................................i Comparable Buildings............................................................................................H-1 Completion Termination Date.......................................................................................2 Construction Allowance..........................................................................................D-5 Construction Drawings...........................................................................................D-1 Consultant.......................................................................................................25 Critical Services.................................................................................................8 Damage Notice....................................................................................................16 Disabilities Acts................................................................................................25 Electrical Costs..................................................................................................5 Essential Landlord Improvements.................................................................................D-1 Estimated Delivery Date...........................................................................................1 Event of Default.................................................................................................18 Force Majeure Delay Days..........................................................................................2 GAAP.............................................................................................................12 Guarantor.......................................................................................................N-1 Hazardous Materials..............................................................................................24 Holidays..........................................................................................................7 HVAC..............................................................................................................7 including.........................................................................................................1 Land..............................................................................................................i Landlord..........................................................................................................1 Landlord's Contribution..........................................................................................17 Landlord's Mortgagee.............................................................................................14 Law...............................................................................................................1 Laws..............................................................................................................1 Lease.............................................................................................................1 Lease Date........................................................................................................i Lease Month.......................................................................................................i Liquidated Damages Date...........................................................................................2 Loss.............................................................................................................13 Mortgage.........................................................................................................14 Offer Notice....................................................................................................I-1 Operating Costs...................................................................................................3 Operating Costs and Tax Statement.................................................................................5
vii 9 Parking Lot.....................................................................................................G-1 Permitted Transfer...............................................................................................12 Permitted Transferee.............................................................................................12 Permitted Use....................................................................................................ii Premises..........................................................................................................i Prevailing Rental Rate..........................................................................................H-1 Primary Lease....................................................................................................14 Refusal Space...................................................................................................I-1 Rent.............................................................................................................ii Repair Period....................................................................................................16 Report............................................................................................................25 Satellite Dish...................................................................................................26 Security Deposit..................................................................................................i Sign Requirements................................................................................................26 Signs............................................................................................................26 Space Plans.....................................................................................................D-2 Space Plans Delivery Deadline...................................................................................D-2 Substantial Completion..........................................................................................D-4 Substantially Completed.........................................................................................D-4 Supplemental Allowance..........................................................................................D-5 Taking...........................................................................................................16 Tangible Net Worth...............................................................................................12 Taxes.............................................................................................................4 Telecommunications Services......................................................................................24 Tenant............................................................................................................1 Tenant Delay Day................................................................................................D-4 Tenant Party......................................................................................................1 Tenant's Proportionate Share.....................................................................................ii Term..............................................................................................................i Third Party Offer...............................................................................................I-1 Total Construction Costs........................................................................................D-5 Transfer.........................................................................................................10 Work............................................................................................................D-3 Working Drawings................................................................................................D-3 Working Drawings Delivery Deadline..............................................................................D-2
viii 10 LEASE THIS LEASE AGREEMENT (this "LEASE") is entered into as of May 3, 2000, between ENTERPRISE BUSINESS PARK D-2, L.P., a Delaware limited partnership ("LANDLORD"), and DAISYTEK, INCORPORATED, a Delaware corporation ("TENANT"). 1. DEFINITIONS AND BASIC PROVISIONS. The definitions and basic provisions set forth in the Basic Lease Information (the "BASIC LEASE INFORMATION") executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes. Additionally, the following terms shall have the following meanings when used in this Lease: "AFFILIATE" means any person or entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question; "BUILDING'S STRUCTURE" means the Building's exterior walls, roof, elevator shafts, footings, foundations, structural portions of load-bearing walls, structural floors and subfloors, and structural columns and beams; "BUILDING'S SYSTEMS" means the Building's HVAC, life-safety, plumbing, electrical, and mechanical systems; "INCLUDING" means including, without limitation; "LAWS" means all federal, state, and local laws, rules and regulations, all court orders, governmental directives, and governmental orders, and all restrictive covenants affecting the Building as of the date hereof, and "LAW" shall mean any of the foregoing; and "TENANT PARTY" means any of the following persons: Tenant; any assignees claiming by, through, or under Tenant; any subtenants claiming by, through, or under Tenant; and any of their respective agents, contractors, employees, and invitees. 2. LEASE GRANT. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises. 3. TENDER OF POSSESSION; LATE DELIVERY; ACCEPTANCE OF PREMISES. (a) TENDER OF POSSESSION. Landlord and Tenant presently anticipate that possession of the Premises will be tendered to Tenant (with the Work to be performed by Landlord therein, if any, Substantially Completed) on or about August 15, 2000 (the "ESTIMATED DELIVERY DATE"). If Landlord is unable to tender possession of the Premises in such condition to Tenant by the Estimated Delivery Date, then, subject to Section 3.(b), (1) Landlord shall not be in default hereunder or be liable for damages therefor, and (2) Tenant shall accept possession of the Premises when Landlord tenders possession thereof to Tenant in such condition. (b) LATE DELIVERY. Notwithstanding the foregoing, (1) if the Work in the Premises is not Substantially Completed by the Liquidated Damages Date, Tenant may offset from its Basic Rent obligations first accruing following the Commencement Date, liquidated damages equal to the product of $1,882.79 multiplied by the number of days commencing on the Liquidated Damages Date and ending on the earlier of the 15th day following the Liquidated Damages Date or the day Landlord tenders possession of the Premises (with the Work to be performed by Landlord therein Substantially Completed); provided, if the Work in the Premises is not Substantially Completed by the 15th day following the 1 11 Liquidated Damages Date, Tenant may offset from its Basic Rent obligations first accruing following the Commencement Date, liquidated damages equal to the product of $3,765.58 multiplied by the number of days commencing on the 15th day following the Liquidated Damages Date and ending on the earlier of the 30th day following the Liquidated Damages Date or the day Landlord tenders possession of the Premises (with the Work to be performed by Landlord therein Substantially Completed); provided further, if the Work in the Premises is not Substantially Completed by the 30th day following the Liquidated Damages Date, Tenant may offset from its Basic Rent obligations first accruing following the Commencement Date, liquidated damages equal to the product of $5,648.37 multiplied by the number of days commencing on the 30th day following the Liquidated Damages Date and ending on the day Landlord tenders possession of the Premises (with the Work to be performed by Landlord therein Substantially Completed). Except as provided in Section 3.(b)(2), the abatement rights afforded to Tenant under this Section 3.(b)(1) shall be Tenant's sole remedy for Landlord's failure to timely Substantially Complete the Work; and (2) If the Work in the Premises is not Substantially Completed by the Completion Termination Date, Tenant may terminate this Lease by delivering to Landlord written notice thereof at any time before the earlier of (A) ten days following the Completion Termination Date or (B) the date on which the Work in the Premises is Substantially Completed. Except as provided in Section 3.(b)(1) or as set forth in the next paragraph, the termination right afforded to Tenant under this Section 3.(b)(2) shall be Tenant's sole remedy for Landlord's failure to timely Substantially Complete the Work. Time is of the essence for the delivery of Tenant's termination notice under this Section 3; accordingly, if Tenant fails timely to deliver any such notice, Tenant's right to terminate this Lease under this Section 3.(b)(2) shall expire. As used herein, "COMPLETION TERMINATION DATE" means December 31, 2000, plus the number of Tenant Delay Days and the number of Force Majeure Delay Days. As used herein, "LIQUIDATED DAMAGES DATE" means the Estimated Delivery Date, plus the number of Tenant Delay Days and the number of Force Majeure Delay Days. As used herein, "FORCE MAJEURE DELAY DAYS" means any delay in achieving Substantial Completion with respect to the Work due to the events specified in Section 25.(c) of this Lease provided such events are not reasonably (i) foreseeable and (ii) preventable, by Landlord. If this Lease is terminated by Tenant pursuant to this Section 3.(b)(2), Landlord shall refund to Tenant the first monthly installment of Basic Rent delivered to Landlord pursuant to Section 4.(a) and reimburse Tenant for all reasonable architectural and attorney fees incurred by Tenant in connection with this Lease and the Working Drawings, up to a maximum of $75,000, within 30 days after delivery to Landlord of a statement of such costs. (c) ACCEPTANCE OF PREMISES. By occupying the Premises on or any time after the Commencement Date, Tenant shall be deemed to have accepted the Premises in their condition as of the date of such occupancy, subject to the performance of punch-list items that remain to be performed by Landlord, if any. Within 30 days following the Commencement Date, Tenant and Landlord shall jointly execute and deliver a letter substantially in the form of Exhibit E hereto confirming (1) the Commencement Date and the expiration date of the initial Term, (2) that Tenant has accepted the Premises, (3) that Landlord has performed all of its obligations with respect to the Premises (except for punch-list items specified in such letter), and (4) the aggregate amount of offset against Basic Rent, in any, to which Tenant is entitled hereunder. (d) EARLY ENTRY BY TENANT. Tenant may enter the Premises before the Work in the Premises is Substantially Completed with Landlord's prior consent (which shall not be unreasonably withheld) to perform work therein, provided that (1) Landlord is given prior written notice of any such entry, (2) such 2 12 entry shall be coordinated with Landlord and shall not interfere with Landlord's work, and (3) Tenant shall deliver to Landlord evidence that the insurance required under Section 11 of this Lease has been obtained. Any such entry shall be on the terms of this Lease, but no rent shall accrue in respect of Basic Rent, Additional Rent, Taxes or Electrical Costs, during the period that Tenant so enters the Premises. Tenant shall conduct its activities therein so as not to interfere with Landlord's construction activities, and shall do so at its risk and expense. If, in Landlord's judgment, Tenant's activities therein interfere with Landlord's construction activities, Landlord may terminate Tenant's right to enter the Premises before the Commencement Date. 4. RENT. (a) PAYMENT. Tenant shall timely pay to Landlord Rent, without notice, demand, deduction or set off (except as otherwise expressly provided herein), at Landlord's address provided for in this Lease or as otherwise specified by Landlord in accordance with the notice provisions hereof and shall be accompanied by all applicable state and local sales or use taxes. Basic Rent, adjusted as herein provided, shall be payable monthly in advance. Subject to the terms hereof contained in Exhibit J hereto, the first monthly installment of Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable on the first day of each month beginning on the first day of the second full calendar month of the Term. The monthly Basic Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month from and after the Commencement Date, and shall be due on the Commencement Date. (b) OPERATING COSTS; TAXES; ELECTRICAL COSTS. (1) Tenant shall pay to Landlord the amount ("ADDITIONAL RENT") equal to Tenant's Proportionate Share of the annual Operating Costs (defined below). Landlord may make a good faith estimate of the Additional Rent to be due by Tenant for each calendar year or part thereof during the Term. During each calendar year or partial calendar year of the Term, Tenant shall pay to Landlord, in advance concurrently with each monthly installment of Basic Rent, an amount equal to the estimated Additional Rent for such calendar year or part thereof divided by the number of months therein. On an annual basis for each calendar year during the Term, Landlord may estimate the Additional Rent to be due by Tenant and deliver a copy of the estimate to Tenant. Thereafter, the monthly installments of Additional Rent payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of the Additional Rent as estimated by Landlord for such year. Any amounts paid based on such an estimate shall be subject to adjustment as herein provided when actual Operating Costs are available for each calendar year. (2) The term "OPERATING COSTS" shall mean all expenses and disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, and maintenance of the Building, determined in accordance with sound accounting principles consistently applied, including the following costs: (A) management fees equal to 3% of the Rent (excluding Electrical Costs and, from Operating Costs only, the cost of electricity for the common areas [all other Operating Costs shall be included in the calculation of management fees]) payable to Landlord under this Lease; (B) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the Building; (C) costs for improvements made to the Building which, although capital in nature, are reasonably expected to reduce the normal 3 13 operating costs (including all utility costs) of the Building (excluding any improvements arising as a result of the specific use of the Building by any tenant or occupant of the Building other than the Tenant), as amortized using a commercially reasonable interest rate over the time period reasonably estimated by Landlord to recover the costs thereof taking into consideration the anticipated cost savings, as determined by Landlord using its good faith, commercially reasonable judgment, as well as capital improvements made in order to comply with any Law hereafter promulgated by any governmental authority or any interpretation hereafter rendered with respect to any existing Law, as amortized using a commercially reasonable interest rate over the useful economic life of such improvements as determined by Landlord in its reasonable discretion; (D) cost of all utilities, including gas, electricity (but only for the common areas of the Building), water, sewer, and other services; (E) repairs, replacements, and general maintenance of the Building; and (F) service or maintenance contracts with independent contractors for the operation, maintenance, repair, replacement, or security of the Building (including alarm service, window cleaning, and elevator maintenance). Operating Costs shall not include costs for (i) capital improvements made to the Building, other than capital improvements described in Section 4.(b)(2)(C) and except for items which are generally considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; (ii) repair, replacements and general maintenance and any other costs paid by proceeds of insurance or by Tenant or other third parties; (iii) interest, amortization or other payments on loans to Landlord; (iv) depreciation; (v) leasing commissions, advertising and all other costs and expenses relating to the leasing of the Building; (vi) legal expenses and third party consultant expenses for services other than those that benefit the Building tenants generally (e.g., tax disputes); (vii) renovating or otherwise improving space for occupants of the Building or vacant space in the Building; (viii) Taxes; and (ix) federal, state and local income taxes imposed on or measured by the income of Landlord from the operation of the Building. (3) Tenant shall also pay its Proportionate Share of Taxes for each year and partial year falling within the Term. Tenant shall pay its Proportionate Share of Taxes in the same manner as provided above for Additional Rent with regard to Operating Costs. "TAXES" shall mean taxes, assessments, and governmental charges or fees whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments (including non-governmental assessments for common charges under a restrictive covenant or other private agreement existing as of the date hereof that are not treated as part of Operating Costs) now or hereafter attributable to the Building (or its operation), excluding, however, penalties and interest thereon and federal, state and local taxes on income (if the present method of taxation changes so that in lieu of the whole or any part of any Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Building, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "Taxes" for purposes hereof). Taxes shall include the costs of consultants retained in an effort to lower taxes and all costs incurred in disputing any taxes or in seeking to lower the tax valuation of the Building. For property tax purposes, Tenant waives all rights to protest or appeal the appraised value of the Premises, as well as the Building, and all rights to receive notices of reappraisement as set forth in Sections 41.413 and 42.015 of the Texas Tax Code. Landlord shall use good-faith reasonable efforts to pursue tax protests and appeals. 4 14 (4) To the extent Landlord is billed directly by the utility company furnishing electrical service to the Premises, Tenant shall also pay to Landlord the cost of all electricity used by Tenant ("ELECTRICAL COSTS"), which shall be determined by a separate submeter installed as part of the Work set forth in Exhibit D, and which shall be maintained and read by Landlord. The submeter shall be read by Landlord and Tenant shall pay to Landlord the cost of such electrical service based on rates charged for such service by the utility company furnishing such service, including all fuel adjustment charges, demand charges and taxes. Such amount, which shall be based on the meter reading for the prior month, shall be payable in monthly installments on the first day of each calendar month during the Term. To the extent Tenant is billed directly for Electrical Costs by the utility company furnishing electrical service to the Premises, Tenant shall promptly pay all electrical Costs to such utility company. (5) By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of (A) the actual Operating Costs for the previous year, adjusted as provided in Section 4.(b)(6), (B) the actual Taxes for the previous year, (C) the amount of Additional Rent and Taxes paid by Tenant during such previous year, and (D) Tenant's Proportionate Share of the actual Operating Costs and Taxes for such previous year (the "OPERATING COSTS AND TAX STATEMENT"). If Tenant's payments of Additional Rent or Taxes under this Section 4.(b) for the year covered by the Operating Costs and Tax Statement exceed Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Landlord shall promptly credit Tenant for such excess; likewise, if Tenant's payments of Additional Rent or Taxes under this Section 4.(b) for such year are less than Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Tenant shall promptly pay Landlord such deficiency. (6) With respect to any calendar year, or portion thereof, following the Commencement Date in which the Building is not occupied to the extent of 95% of the rentable area of the Building, then, for such period of time, the Operating Costs shall be increased to the amount which reasonably would have been incurred had the Building been occupied to the extent of 95% of the rentable area thereof. Operating Costs grossed-up under this Section 4.(b)(6) shall include only those Operating Costs that vary with occupancy of the Building. (7) Landlord's reasonable estimate of calendar year 2000 Operating Costs are $1.90 per rentable square foot in the Building (grossed up as provided in Section 4.(b)(6) of this Lease). Landlord's reasonable estimate of calendar year 2000 Taxes are $2.10 per rentable square foot in the Building . (c) TENANT INSPECTION RIGHT. Provided no Event of Default then exists, after receiving an annual Operating Costs and Tax Statement and giving Landlord 30-days' prior written notice thereof, Tenant may inspect or audit Landlord's records relating to Operating Costs and Taxes for the period of time covered by such Operating Costs and Tax Statement in accordance with the following provisions. If Tenant fails to request to inspect or audit Landlord's calculation of Operating Costs and Taxes on an annual Operating Costs and Tax Statement within 30 days after the statement has been delivered to Tenant, or if Tenant fails to conclude its audit or inspection within 90 days after making such request (which 90-day period shall be extended by one day for each day of delay caused solely by Landlord's failure to reasonably cooperate with Tenant in conducting such audit or inspection, then Tenant shall have waived its right to object to the calculation of Operating Costs and Taxes for the year in 5 15 question and the calculation of Operating Costs and Taxes set forth on such statement shall be final. Tenant's audit or inspection shall be conducted where Landlord maintains its books and records, shall not unreasonably interfere with the conduct of Landlord's business, and shall be conducted only during business hours reasonably designated by Landlord. To the extent Tenant's audit or inspection unreasonably interferes with Landlord's business, Tenant shall pay the cost of such audit or inspection, including $150 per hour of Landlord's or the building manager's employee time unreasonably devoted to such inspection or audit to reimburse Landlord for its overhead costs allocable to the inspection or audit, unless the total Operating Costs and Taxes for the period in question is determined to be in error by more than 5% in the aggregate, and, as a result thereof, Tenant paid to Landlord $0.20 per rentable square foot in the Premises more than the actual Operating Costs and Taxes due for such period, in which case Landlord shall pay the audit or inspection cost (not to exceed the amount Tenant was overcharged for the period in question). Tenant may not conduct an inspection or have an audit performed more than once during any calendar year. If such inspection or audit reveals that an error was made in the Operating Costs or Taxes previously charged to Tenant, then Landlord shall refund to Tenant any overpayment of any such costs, or Tenant shall pay to Landlord any underpayment of any such costs, as the case may be, within 30 days after notification thereof. Provided Landlord's accounting for Operating Costs and Taxes is consistent with the terms of this Lease, Landlord's good faith judgment regarding the proper interpretation of this Lease and the proper accounting for Operating Costs and Taxes shall be binding on Tenant in connection with any such audit or inspection. Tenant shall maintain the results of each such audit or inspection confidential and shall be permitted to use any third party to perform such audit or inspection which (1) is reasonably acceptable to Landlord (it being understood that Landlord shall not be entitled to withhold its consent to any firm solely on the basis of the fact that such party is compensated on a contingency fee basis or in any other manner which is dependent upon the results of such audit or inspection), and (2) agrees with Landlord in writing to maintain the results of such audit or inspection confidential. Nothing in this Section 4.(c) shall be construed to limit, suspend or abate Tenant's obligation to pay Rent when due, including Additional Rent. 5. DELINQUENT PAYMENT; HANDLING CHARGES. All past due payments required of Tenant hereunder shall bear interest from the date due until paid at the lesser of eighteen percent per annum or the maximum lawful rate of interest; additionally, in the event Tenant fails to pay Rent when due, Landlord may charge Tenant a fee equal to five percent of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant's delinquency. In no event, however, shall the charges permitted under this Section 5 or elsewhere in this Lease, to the extent they are considered to be interest under applicable Law, exceed the maximum lawful rate of interest. Notwithstanding the foregoing, (a) the late fee referenced above shall not be charged with respect to the first two occurrences (but not any subsequent occurrence) during any 12-month period that Tenant fails to make payment when due, until five days after Landlord delivers written notice of such delinquency to Tenant, and (b) past due payments (other than payments of Basic Rent, Additional Rent, Tenant's Proportionate Share of Taxes or Electrical Costs [to the extent Landlord is billed directly by the utility company electrical service to the Premises]) shall not bear interest with respect to the first two occurrences (but not any subsequent occurrence) during any 12-month period that Tenant fails to make payment when due, until ten days after landlord delivers written notice of such delinquency to Tenant. 6. SECURITY DEPOSIT. [Intentionally Deleted]. 6 16 7. LANDLORD'S OBLIGATIONS. (a) SERVICES. Landlord shall furnish to Tenant (1) hot and cold water at those points of supply set forth in the Construction Drawings and as provided for general use of tenants of the Building; (2) heated and refrigerated air conditioning ("HVAC") for the Premises with keypad access; (3) HVAC for the common areas of the Building as appropriate, at such temperatures and in such amounts as are standard for comparable buildings in the vicinity of the Building, provided that Landlord shall furnish HVAC to the common areas of the Building at a temperature of not more than 80(Degree) and not less than 65(Degree) between 8:01 p.m. and 5:59 a.m. on weekdays and between 7:01 p.m. and 7:59 a.m. on Saturdays, and all times on Sundays and Holidays; (4) janitorial service to the Premises and the Building on weekdays, other than Holidays, as more particularly described on Exhibit K and such window washing as may from time to time be reasonably required; (5) elevators for ingress and egress to the floor on which the Premises are located, in common with other tenants, provided that Landlord may reasonably limit the number of operating elevators (but not less than one) during non-business hours and Holidays; and (6) common use of the Building lobby and other common areas set forth in the Construction Drawings. Landlord shall maintain the common areas of the Building in reasonably good order and condition, except for damage caused by a Tenant Party. As used herein, "HOLIDAYS" means New Year's Day, Good Friday, Easter Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. (b) EXCESS UTILITY USE. Tenant shall not install any electrical equipment requiring special wiring or requiring voltage in excess of 110 volts or otherwise exceeding Building capacity unless approved in advance by Landlord or as part of the Working Drawing as described in Exhibit D hereto. The use of electricity in the Premises shall not exceed the capacity of the existing feeders and risers to or wiring in the Premises installed pursuant to the Construction Drawings as described in Exhibit D hereto. Any risers or wiring required to meet Tenant's excess electrical requirements shall, upon Tenant's written request, be installed by Landlord, at Tenant's cost, if, in Landlord's judgment, the same are necessary and shall not cause permanent damage to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations, repairs, or expenses, or unreasonably interfere with or disturb other tenants of the Building. If Tenant uses machines or equipment in the Premises which affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord may install supplemental air conditioning units or other supplemental equipment in the Premises, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within 30 days after Landlord has delivered to Tenant an invoice therefor. (c) RESTORATION OF SERVICES; ABATEMENT. Landlord shall use reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant's obligations hereunder. If, however, Tenant is prevented from using the Premises for more than ten consecutive days (as extended one day for each Holiday that occurs during such ten-day period) after Tenant advises Landlord in writing thereof because of the unavailability of any such service (or five consecutive days [as extended one day for each Holiday that occurs during such five-day period] because of the unavailability and the restoration of such services is within the reasonable control of Landlord) and such unavailability was not caused by a Tenant Party, then Tenant shall, as its exclusive remedy be entitled to an abatement of Basic Rent for each consecutive day (after such ten-day period [or after such five-day period as applicable]) that Tenant is so prevented from using the Premises. Landlord shall 7 17 exceed its reasonable efforts in restoring any service required of it if Tenant agrees in writing to reimburse Landlord for its extraordinary costs related to such restoration. (d) If at any time following the Commencement Date Landlord fails to deliver electrical service, elevator service, HVAC service, sewer service or water service to the Premises (the "CRITICAL SERVICES") for three consecutive business days after Tenant advises Landlord in writing that the Critical Services are not being provided to the Premises, the unavailability of such Critical Services prevents Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such unavailability, and Landlord has not commenced to cure such cessation of Critical Services or has failed to prosecute such cure with reasonable diligence, Tenant shall be entitled to restore such service in a commercially reasonable manner. Provided that such repairs are completed in a good and workmanlike manner, Landlord shall reimburse Tenant for its actual, out-of-pocket costs therefor within 30 days after delivery to Landlord of a reasonably detailed invoice and, if requested by Landlord, receipts, bills paid affidavits, and appropriate releases of liens, failing which default interest shall accrue thereon from the date due until the date paid at the maximum lawful rate. If the unavailability of such Critical Services is caused by a Taking (defined below) or a Casualty (defined below), then the provisions of this Section shall not be applicable thereto; rather, the provisions of Sections 14 and 15 (as the case may be) shall apply. 8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE. (a) IMPROVEMENTS; ALTERATIONS. Improvements to the Premises shall be installed at Tenant's expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, which approval shall be governed by standards in the following sentence. No alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld or delayed; however, Landlord may withhold its consent to any alteration or addition that would adversely affect (in the reasonable discretion of Landlord) (1) the Building's Structure or the Building's Systems (including the Building's restrooms or mechanical rooms), (2) the exterior appearance of the Building, or (3) the appearance of the Building's common areas or elevator lobby areas. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type on or about the Premises without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed; however, Landlord may withhold its consent to any such painting or installation which would affect the appearance of the exterior of the Building or of any common areas of the Building. Notwithstanding the foregoing, and subject to Section 21, Tenant shall not be required to obtain Landlord's consent for repainting, recarpeting, or other non-structural alterations, tenant improvements, or non-permanent temporary additions to the Premises which are cosmetic in nature totaling less than $20,000 in any single instance or series of related alternations performed during the Term of this Lease (provided that Tenant shall not perform any improvements, alterations or additions to the Premises in stages as a means to subvert this provision), in each case provided that (A) Tenant delivers to Landlord written notice thereof, a list of contractors and subcontractors to perform the work (and certificates of insurance for each such party) and any plans and specifications therefor prior to commencing any such alterations, additions, or improvements (for informational purposes only so long as no consent is required by Landlord as required by this Lease), (B) the installation thereof does not involve any core drilling or the reconfiguration or relocation of any exterior or interior load bearing walls of the Building, and (C) such alterations, additions and improvements will not affect (i) the Building's Structure or the Building's Systems, including the distribution of the HVAC under Section 7.(a), (ii) the provision of services to other Building tenants, or (iii) the appearance of the Building's common areas or the exterior of the Building. All alterations, 8 18 additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's consent to or approval of any alterations, additions or improvements (or the plans therefor) shall not constitute a representation or warranty by Landlord, nor Landlord's acceptance, that the same comply with sound architectural and/or engineering practices or with all applicable Laws, and Tenant shall be solely responsible for ensuring all such compliance. (b) REPAIRS; MAINTENANCE. Tenant shall maintain the Premises in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within 15 days after Landlord delivers written notice of the occurrence of such damage (except in the case of an emergency, in which case no notice is required), then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage. The cost of all repair or replacement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within 30 days after Landlord has invoiced Tenant therefor. (c) PERFORMANCE OF WORK. All work described in this Section 8 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord; provided, all work described in this Section 8 for which Landlord's consent is not required may be performed by any contractor or subcontractor on Landlord's approved list without obtaining Landlord's prior written approval, which list shall be provided upon Tenant's written request therefor. Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord as an additional insured against such risks, in such amounts, and with such companies as Landlord may reasonably require. All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Building (including the Premises, the Building's Structure and the Building's Systems). All such work which may affect the Building's Structure or the Building's Systems must be approved by the Building's engineer of record, at Tenant's expense and, at Landlord's election, must be performed by Landlord's usual contractor for such work. In consideration for Landlord's expenses in reviewing such plans and specifications and providing construction supervision services, Tenant shall reimburse Landlord for Landlord's reasonable, out-of-pocket costs payable to third parties and reasonably incurred by Landlord in reviewing such plans and specifications and providing such construction supervision services, and pay to Landlord a construction supervision fee equal to $150 per hour of Landlord employee time devoted to reviewing such plans and specifications and providing such construction supervision services; provided, no reimbursement shall be made nor shall a construction supervision fee shall be charged for the first $20,000 of cosmetic work as described in Section 8.(a) or for the initial tenant improvements described in Exhibit D attached hereto. (d) MECHANIC'S LIENS. Tenant shall not permit any mechanic's liens to be filed against the Premises or the Building for any work performed, materials furnished, or obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, within ten days after Landlord has delivered notice of the filing thereof to Tenant (or such earlier time period as may be necessary to prevent the forfeiture of the Building or any interest of Landlord therein or the imposition of a civil or criminal fine with respect thereto), either (1) pay the amount of the lien and cause the lien to be released of record, or (2) diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. All materialmen, contractors, artisans, mechanics, laborers 9 19 and any other persons now or hereafter contracting with Tenant or any contractor or subcontractor of Tenant for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Premises, at any time from the date hereof until the end of the Term, are hereby charged with notice that they look exclusively to Tenant to obtain payment for same. Nothing herein shall be deemed a consent by Landlord to any liens being placed upon the Building or Landlord's interest therein due to any work performed by or for Tenant. 9. USE. Tenant shall continuously occupy and use the Premises only for the Permitted Use and shall comply with all Laws relating to the use, condition, access to, and occupancy of the Premises. The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any Hazardous Materials (other than typical office supplies [e.g., photocopier toner] and then only in compliance with all Laws). If, because of a Tenant Party's acts, the rate of insurance on the Building or its contents increases, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of Landlord's other rights. If Tenant fails to cease or remediate such acts or pay to Landlord the amount of such increase within five days after Landlord's request that Tenant do so, then such acts shall be an Event of Default Tenant shall conduct its business and control each other Tenant Party so as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building. 10. ASSIGNMENT AND SUBLETTING. (a) TRANSFERS. Except as provided in Section 10.(g), Tenant shall not, without the prior written consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization (unless Tenant is the surviving entity thereof, in which event, any such merger consolidation or reorganization shall not be deemed a "Transfer" hereunder), (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant; provided, this clause (3) shall not apply to Tenant if the stock of Tenant or Tenant's parent corporation is publicly traded (or whose parent corporation stock), (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 10.(a)(1) through 10.(a)(6) being a "TRANSFER"). (b) CONSENT STANDARDS. Landlord shall not unreasonably withhold its consent to any assignment or subletting or other Transfer of the Premises, provided that the proposed transferee (1) has a net worth equal to or greater than the net worth of Tenant as of the Commencement Date; provided, this clause (1) shall not apply to any subletting, (2) has a good reputation in the business community, (3) will use the Premises for the Permitted Use and, as to any proposed assignment, will not use the Premises in any manner that would conflict with any exclusive use agreement or other similar agreement entered into by Landlord with any other tenant of the Building; provided, upon Tenant's written request therefor pursuant to a prospective Transfer, Landlord shall provide to Tenant a description of all of the exclusive use and similar agreements then existing between Landlord and the other tenants of the Building, (4) is not a governmental entity, or subdivision or agency thereof, (5) is not another occupant of the Building, and (6) is not a person or entity with whom Landlord is negotiating to lease space in the Building; otherwise, Landlord may withhold its consent in its sole discretion; provided, upon 10 20 Tenant's written request therefor pursuant to a prospective Transfer, Landlord shall provide to Tenant a list of all persons and entities with whom Landlord is negotiating to lease space in the Building. (c) REQUEST FOR CONSENT. If Tenant requests Landlord's consent to a Transfer, then, at least 15 business days prior to the effective date of the proposed Transfer, Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; with respect to any proposed assignment, banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee's character and, with respect to any proposed assignment, creditworthiness in accordance with the requirements contained herein. Concurrently with Tenant's notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $1,000 to defray Landlord's expenses in reviewing such request, and Tenant shall also reimburse Landlord immediately upon request for its reasonable attorneys' fees incurred in connection with considering any request for consent to a Transfer. (d) CONDITIONS TO CONSENT. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes Tenant's obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer. No Transfer shall release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so following the occurrence of an Event of Default hereunder. Tenant shall pay for the cost of any demising walls or other improvements necessitated by a proposed subletting or assignment. (e) CANCELLATION. Landlord may, within 30 days after submission of Tenant's written request for Landlord's consent to an assignment or subletting, cancel this Lease and release Tenant from all liability arising after the date of such cancellation as to the portion of the Premises proposed to be sublet or assigned as of the date the proposed Transfer is to be effective. If Landlord cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Tenant. Notwithstanding the foregoing, if Landlord provides written notification to Tenant of its election to cancel this Lease as to any portion of the Premises as provided above, Tenant may rescind its request for Landlord's consent to Tenant's proposed assignment or subletting of all or any portion of the Premises by notifying Landlord in writing within three business days following Landlord's written cancellation notice, in which event this Lease shall continue in full force and effect as if Tenant had not submitted such request for Landlord's consent to Tenant's proposed assignment or subletting. (f) ADDITIONAL COMPENSATION. While no Event of Default exists, Tenant shall pay to Landlord, immediately upon receipt thereof, fifty percent (50%) of the excess of (1) all compensation received by Tenant in consideration for a Transfer less the costs reasonably incurred by Tenant with 11 21 unaffiliated third parties in connection with such Transfer (i.e., brokerage commissions, tenant finish work, and the like) over (2) the Rent allocable to the portion of the Premises covered thereby. While any Event of Default exists, Tenant shall pay to Landlord, immediately upon receipt thereof, one hundred percent (100%) of the excess of (A) all compensation received by Tenant for a Transfer over (B) the Rent allocable to the portion of the Premises covered thereby. (g) PERMITTED TRANSFERS. Notwithstanding Section 10.(a), Tenant may Transfer all or part of its interest in this Lease or all or part of the Premises (a "PERMITTED TRANSFER") to the following types of entities (a "PERMITTED TRANSFEREE") without the written consent of Landlord: (1) an Affiliate of Tenant; (2) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as (A) Tenant's obligations hereunder are expressly assumed in writing by the entity surviving such merger or created by such consolidation; and (B) the Tangible Net Worth of the surviving or created entity is not less than the Tangible Net Worth of Tenant as of the Commencement Date; or (3) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of Tenant's assets if such entity's Tangible Net Worth after such acquisition is not less than the Tangible Net Worth of Tenant as of the Commencement Date. Tenant shall promptly notify Landlord of any such Permitted Transfer. Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder (except as set forth in Section 10.(g)(2) above). Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use, and the use of the Premises by the Permitted Transferee may not violate any other agreements affecting the Premises, the Building, Landlord or other tenants of the Building; provided, upon Tenant's written request therefor in connection with a Permitted Transfer, Landlord shall provide to Tenant a description of all agreements affecting the Premises, the Building, Landlord or other tenants of the Building which restrict such Permitted Transferee's use of the Premises. At least 30 days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with copies of the instrument effecting any of the foregoing Transfers and documentation establishing Tenant's satisfaction of the requirements set forth above applicable to any such Transfer. The occurrence of a Permitted Transfer shall not waive Landlord's rights as to any subsequent Transfers. "TANGIBLE NET WORTH" means the excess of total assets over total liabilities, in each case as determined in accordance with generally accepted accounting principles consistently applied ("GAAP"), excluding, however, from the determination of total assets all assets which would be classified as intangible assets under GAAP including goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee shall be subject to the terms of this Section 10. 11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY. (a) TENANT'S INSURANCE. Tenant shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in amounts of $3,000,000 per occurrence or, following the expiration of the initial Term, such other amounts as Landlord may from time to time 12 22 reasonably require (and, if the use and occupancy of the Premises include any activity or matter that is or may be excluded from coverage under a commercial general liability policy [e.g., the sale, service or consumption of alcoholic beverages], Tenant shall obtain such endorsements to the commercial general liability policy or otherwise obtain insurance to insure all liability arising from such activity or matter [including liquor liability, if applicable] in such amounts as Landlord may reasonably require), insuring Tenant, Landlord, Landlord's agents and their respective Affiliates against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises, (2) insurance covering the full value of Tenant's property and improvements, and other property (including property of others) in the Premises, (3) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder (but only if such contractual liability insurance is not already included in Tenant's commercial general liability insurance policy), (4) worker's compensation insurance, and (5) business interruption insurance. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies, reasonably satisfactory to Landlord. (b) LANDLORD'S INSURANCE. Throughout the Term of this Lease, Landlord shall maintain, as a minimum, the following insurance policies: (1) fire and extended risk insurance for the Building's replacement value and (2) commercial general liability insurance in an amount of not less than $3,000,000. The cost of all reasonable and customary insurance carried by Landlord with respect to the Building shall be included in Operating Costs. The foregoing insurance policies and any other insurance carried by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control, and Tenant shall have no right or claim to any proceeds thereof or any other rights thereunder. (c) NO SUBROGATION. Landlord and Tenant each waives any claim it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property (a "LOSS"), to the extent the same is insured against under any insurance policy that covers the Building, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, or is required to be insured against under the terms hereof, REGARDLESS OF WHETHER THE NEGLIGENCE OF THE OTHER PARTY CAUSED SUCH LOSS. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. (d) INDEMNITY. Subject to Section 11.(c), Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages, and expenses (including attorneys' fees) arising from any Loss arising from any occurrence on the Premises, EVEN THOUGH CAUSED OR ALLEGED TO BE CAUSED BY THE NEGLIGENCE OR FAULT OF LANDLORD OR ITS AGENTS (OTHER THAN A LOSS ARISING FROM THE SOLE OR GROSS NEGLIGENCE OF LANDLORD OR ITS AGENTS), AND EVEN THOUGH ANY SUCH CLAIM, CAUSE OF ACTION, OR SUIT IS BASED UPON OR ALLEGED TO BE BASED UPON THE STRICT LIABILITY OF LANDLORD OR ITS AGENTS. THIS INDEMNITY IS INTENDED TO INDEMNIFY LANDLORD AND ITS AGENTS AGAINST THE CONSEQUENCES OF THEIR OWN NEGLIGENCE OR FAULT AS PROVIDED ABOVE WHEN LANDLORD OR ITS AGENTS ARE JOINTLY, COMPARATIVELY, CONTRIBUTIVELY, OR CONCURRENTLY NEGLIGENT WITH TENANT. Subject to Section 11.(c), Landlord shall defend, indemnify, and hold harmless Tenant and its representative and agents from and against all claims, demands, 13 23 liabilities, causes of action, suits, judgments, damages and expenses (including attorneys' fees) arising from any Loss arising from any occurrence in the Building's common areas, EVEN THOUGH CAUSED OR ALLEGED TO BE CAUSED BY THE NEGLIGENCE OR FAULT OF TENANT OR ITS AGENTS (OTHER THAN A LOSS ARISING FROM THE SOLE OR GROSS NEGLIGENCE OF TENANT OR ITS AGENTS), AND EVEN THOUGH ANY SUCH CLAIM, CAUSE OF ACTION, OR SUIT IS BASED UPON OR ALLEGED TO BE BASED UPON THE STRICT LIABILITY OF TENANT OR ITS AGENTS. THIS INDEMNITY IS INTENDED TO INDEMNIFY TENANT AND ITS AGENTS AGAINST THE CONSEQUENCES OF THEIR OWN NEGLIGENCE OR FAULT AS PROVIDED ABOVE WHEN TENANT OR ITS AGENTS ARE JOINTLY, COMPARATIVELY, CONTRIBUTIVELY, OR CONCURRENTLY NEGLIGENT WITH LANDLORD. The indemnities set forth in this Section 11.(d) shall survive termination or expiration of this Lease and shall not terminate or be waived, diminished or affected in any manner by any abatement or apportionment of Rent under any provision of this Lease. If any proceeding is filed for which indemnity is required hereunder, the indemnifying party agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel satisfactory to the indemnified party. 12. SUBORDINATION; ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE. (a) SUBORDINATION. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument (each, a "MORTGAGE"), or any ground lease, master lease, or primary lease (each, a "PRIMARY LEASE"), that now or hereafter covers all or any part of the Premises (the mortgagee under any such Mortgage, beneficiary under any such deed of trust, or the lessor under any such Primary Lease is referred to herein as a "LANDLORD'S MORTGAGEE"). Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its Mortgage, Primary Lease, or other interest in the Premises by so notifying Tenant in writing. The provisions of this Section shall be self-operative and no further instrument of subordination shall be required; however, in confirmation of such subordination, Tenant shall execute and return to Landlord (or such other party designated by Landlord) within ten days after written request therefor such documentation, in recordable form if required, as a Landlord's Mortgagee may reasonably request to evidence the subordination of this Lease to such Landlord's Mortgagee's Mortgage or Primary Lease (including a subordination, non-disturbance and attornment agreement) or, if the Landlord's Mortgagee so elects, the subordination of such Landlord's Mortgagee's Mortgage or Primary Lease to this Lease. (b) ATTORNMENT. Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such party may reasonably request. (c) NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee a reasonable opportunity to perform Landlord's obligations hereunder. Notwithstanding the foregoing, nothing in this Section 12.(c) shall be construed to limit Tenant's rights to enforce any remedies it may have (other than termination of this Lease) that are expressly set forth elsewhere in this Lease. (d) LANDLORD'S MORTGAGEE'S PROTECTION PROVISIONS. If Landlord's Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord's Mortgagee shall not be: (1) liable for any act or omission of any prior lessor (including Landlord); (2) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior lessor (including 14 24 Landlord), and all such rent shall remain due and owing, notwithstanding such advance payment; (3) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord's Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (4) bound by any termination, amendment or modification of this Lease made without Landlord's Mortgagee's consent and written approval, except for those terminations, amendments and modifications permitted to be made by Landlord without Landlord's Mortgagee's consent pursuant to the terms of the loan documents between Landlord and Landlord's Mortgagee; (5) subject to the defenses which Tenant might have against any prior lessor (including Landlord); and (6) subject to the offsets which Tenant might have against any prior lessor (including Landlord) except for those offset rights which (A) are expressly provided in this Lease, (B) relate to periods of time following the acquisition of the Building by Landlord's Mortgagee, and (C) Tenant has provided written notice to Landlord's Mortgagee and provided Landlord's Mortgagee a reasonable opportunity to cure the event giving rise to such offset event. Landlord's Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Building. Nothing in this Lease shall be construed to require Landlord's Mortgagee to see to the application of the proceeds of any loan, and Tenant's agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan. (e) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT. Landlord shall use reasonable efforts to obtain a subordination, non-disturbance and attornment agreement from the current Landlord's Mortgagee, and Landlord shall use reasonable efforts to obtain a subordination, non-disturbance and attornment agreement from any future Landlord's Mortgagee, in the form of Exhibit O hereto or another form reasonably acceptable to Tenant and such Landlord's Mortgagee or other institutional lenders, within 30 days from the date hereof; however, Landlord's failure to obtain such agreement shall not constitute a default by Landlord hereunder or prohibit the mortgaging of the Building. The subordination of Tenant's rights hereunder to any Landlord's Mortgagee under Section 12.(a) shall be conditioned upon such Landlord's Mortgagee's execution and delivery of a subordination, non-disturbance and attornment agreement in the form of Exhibit O hereto or another form reasonably acceptable to Tenant and such Landlord's Mortgagee or other institutional lenders. 13. RULES AND REGULATIONS. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit C. Landlord shall (a) require that all tenants in the Building are subject to such rules and regulations and (b) enforce such rules and regulations in a non-discriminatory manner. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, provided that such changes are applicable to all tenants of the Building, will not unreasonably interfere with Tenant's use of the Premises and are enforced by Landlord in a non-discriminatory manner. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party. 14. CONDEMNATION. (a) TOTAL TAKING. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "TAKING"), this Lease shall terminate as of the date of the Taking. (b) PARTIAL TAKING - TENANT'S RIGHTS. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking for a period of more than 120 days, then Tenant may terminate this Lease as of the date of such Taking by giving written 15 25 notice to Landlord within 30 days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking. (c) PARTIAL TAKING - LANDLORD'S RIGHTS. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds arising from a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 14.(b). (d) AWARD. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Land, the Building, and other improvements taken; however, Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have. 15. FIRE OR OTHER CASUALTY. (a) REPAIR ESTIMATE. If the Premises or the Building are damaged by fire or other casualty (a "CASUALTY"), Landlord shall, within 60 days after such Casualty, deliver to Tenant a good faith estimate (the "DAMAGE NOTICE") of the time needed to repair the damage caused by such Casualty. (b) TENANT'S RIGHTS. If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 180 days after the Casualty (the "REPAIR PERIOD"), then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. (c) LANDLORD'S RIGHTS. If a Casualty damages the Premises or a material portion of the Building and (1) Landlord estimates that the damage to the Premises cannot be repaired within the Repair Period, (2) the damage to the Premises exceeds 50% of the replacement cost thereof (excluding foundations and footings), as estimated by Landlord, and such damage occurs during the last two years of the Term, (3) regardless of the extent of damage to the Premises, Landlord makes a good faith determination that restoring the Building would be uneconomical, or (4) Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. (d) REPAIR OBLIGATION. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Premises and shall proceed with reasonable diligence to restore the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall only be required to reconstruct the Premises to the extent of any improvements existing therein on the date of the damage that were installed by Landlord as part of the Work (if any) pursuant to Exhibit D ("LANDLORD'S CONTRIBUTION"), and Landlord's obligation to repair or restore the Premises (including the Essential Landlord Improvements [as defined in Exhibit D]) shall be limited to the extent of the insurance proceeds actually 16 26 received by Landlord for the Casualty in question. Tenant shall be responsible for repairing or replacing its furniture, equipment, fixtures, alterations and other improvements which Landlord is not obligated to restore, and shall use the proceeds of its insurance for such purpose. If Landlord does not complete the restoration of the Premises within 60 days after the time period estimated by Landlord to repair the damage caused by such Casualty as specified in the Damage Notice, as the same may be extended by Force Majeure Delay Days or delays caused by a Tenant Party, Tenant may terminate this Lease by delivering written notice to Landlord and Landlord's Mortgagee within ten days following the expiration of such 60-day period (as the same may be extended as set forth above) and prior to the date upon which Landlord Substantially Completes such restoration. Such termination shall be effective as of the date specified in Tenant's termination notice as if such date were the date fixed for the expiration of the Term. If Tenant fails to timely give such termination notice, Tenant shall be deemed to have waived its right to terminate this Lease, time being of the essence with respect thereto. (e) ABATEMENT OF RENT. If the Premises are damaged by Casualty, Rent for the portion of the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of Landlord's repairs (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be), unless a Tenant Party caused such damage, in which case, Tenant shall continue to pay Rent without abatement. 16. PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within 30 days following written request, the part of such taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with Law and if the non-payment thereof does not pose a threat of loss or seizure of the Building or interest of Landlord therein or impose any fee or penalty against Landlord. 17. EVENTS OF DEFAULT. Each of the following occurrences shall be an "EVENT OF DEFAULT": (a) PAYMENT DEFAULT. Tenant's failure to pay Rent within five business days after Landlord has delivered written notice to Tenant that the same is due; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Tenant fails to pay Rent when due and, during the 12 month interval preceding such failure, Landlord has given Tenant written notice of failure to pay Rent on two or more occasions; (b) ABANDONMENT. Without prior written notice to Landlord, Tenant (1) abandons or vacates the Premises or any substantial portion thereof or (2) fails to continuously operate its business in the Premises; (c) ESTOPPEL. Tenant fails to provide any estoppel certificate after Landlord's written request therefor pursuant to Section 25.(e) and such failure shall continue for five days after Landlord's second written notice thereof to Tenant; 17 27 (d) OTHER DEFAULTS. Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof; and (e) INSOLVENCY. The filing of a petition by or against Tenant (the term "TENANT" shall include, for the purpose of this Section 17.(e), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; or (4) for the reorganization or modification of Tenant's capital structure; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof. 18. REMEDIES. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any one or more of the following actions: (a) TERMINATION OF LEASE. Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 19.(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Southwest Edition, in its listing of "Money Rates" minus one percent, minus (B) the then present fair rental value of the Premises for such period, similarly discounted; (b) TERMINATION OF POSSESSION. Terminate Tenant's right to possess the Premises without terminating this Lease by giving written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession, (2) all amounts due from time to time under Section 19.(a), and (3) all Rent and other net sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period, after deducting all costs incurred by Landlord in reletting the Premises. If Landlord elects to proceed under this Section 18.(b), Landlord may remove all of Tenant's property from the Premises and store the same in a public warehouse or elsewhere at the cost of, and for the account of, Tenant, without becoming liable for any loss or damage which may be occasioned thereby. Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building. Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Rent due hereunder. Reentry by Landlord in the Premises shall not affect Tenant's obligations hereunder for the unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity of Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 18.(b). If Landlord elects to proceed under this Section 18.(b), it may at any time elect to terminate this Lease under Section 18.(a); or 18 28 (c) ALTERATION OF LOCKS. Additionally, with or without notice, and to the extent permitted by Law, Landlord may alter locks or other security devices at the Premises to deprive Tenant of access thereto, and Landlord shall not be required to provide a new key or right of access to Tenant. 19. PAYMENT BY TENANT; NON-WAIVER; CUMULATIVE REMEDIES. (a) PAYMENT BY TENANT. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into condition acceptable to a new tenant, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the Event of Default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of the state in which the Premises are located shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease. (b) NO WAIVER. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due. (c) CUMULATIVE REMEDIES. Any and all remedies set forth in this Lease: (1) shall be in addition to any and all other remedies Landlord may have at law or in equity, (2) shall be cumulative, and (3) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. 20. LANDLORD'S LIEN. [Intentionally Deleted]. 21. SURRENDER OF PREMISES. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, free of Hazardous Materials placed on the Premises during the Term, broom-clean, reasonable wear and tear (and condemnation and Casualty damage not caused by Tenant, as to which Sections 14 and 15 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises or elsewhere in the Building by Tenant. Additionally, at Landlord's option, Tenant shall remove such alterations, additions, improvements, trade fixtures, personal property, equipment, wiring, cabling, and furniture as Landlord may request; however, Tenant shall not be required to remove any addition or improvement to the Premises if Landlord has specifically agreed in writing that the improvement or addition in question need not be removed. Tenant shall repair all damage caused by 19 29 such removal and restore the Premises, reasonable wear and tear excepted, to the condition that existed as of the Commencement Date of this Lease. All items not so removed shall, at Landlord's option, be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items. Notwithstanding the foregoing, Landlord hereby acknowledges that Landlord will not require the removal of the Work (as described in Exhibit D hereto) at the expiration of the Term. The provisions of this Section 21 shall survive the end of the Term. 22. HOLDING OVER. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at sufferance and (a) Tenant shall pay, in addition to the other Rent, Basic Rent equal to the greater of (1) 150% of the Basic Rent payable during the last month of the Term, or (2) 125% of the prevailing rental rate in the Building for similar space, and (b) Tenant shall otherwise continue to be subject to all of Tenant's obligations under this Lease. If Tenant fails to surrender the Premises within 30 days following the termination or expiration of this Lease, then Landlord shall be entitled to all rights and remedies provided herein or at law (none of which shall be deemed limited or waived by the provisions of this Section 22), and, in such instance, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom. 23. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise of such rights does not unreasonably interfere with Tenant's occupancy of the Premises, Landlord shall have the following rights: (a) BUILDING OPERATIONS. To decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof; to enter upon the Premises during normal business hours and in a manner which does not unreasonably interfere with Tenant's operations (after giving Tenant reasonable prior notice thereof, which may be oral notice, except in cases of real or apparent emergency, in which case no notice shall be required) and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities; to change the name of the Building; and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, elevators, stairs, restrooms, or other public parts of the Building; (b) SECURITY. To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to the Building; and closing the Building after normal business hours and on Sundays and Holidays, subject, however, to Tenant's right to enter the Building twenty-four hours a day, seven days a week under such reasonable regulations as Landlord may prescribe from time to time; (c) PROSPECTIVE PURCHASERS AND LENDERS. To enter the Premises at all reasonable hours (upon prior notice, which may be oral notice, and during normal business hours and in a manner which does not unreasonably interfere with Tenant's operations) to show the Premises to prospective purchasers or lenders; and 20 30 (d) PROSPECTIVE TENANTS. At any time during the last 12 months of the Term or at any time following the occurrence of an Event of Default, to enter the Premises at all reasonable hours to show the Premises to prospective tenants. 24. SUBSTITUTION SPACE. [Intentionally Deleted]. 25. MISCELLANEOUS. (a) LANDLORD TRANSFER. Landlord may transfer any portion of the Building and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder arising after the date of transfer, provided that the assignee assumes Landlord's obligations hereunder in writing. (b) LANDLORD'S LIABILITY. The liability of Landlord (and its partners, shareholders or members) to Tenant (or any person or entity claiming by, through or under Tenant) for any default by Landlord under the terms of this Lease or any matter relating to or arising out of the occupancy or use of the Premises and/or other areas of the Building shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building, and Landlord (and its partners, shareholders or members) shall not be personally liable for any deficiency. Additionally, Tenant hereby waives its statutory lien under Section 91.004 of the Texas Property Code. (c) FORCE MAJEURE. Other than for Tenant's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, extreme weather, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party. (d) BROKERAGE. Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Trammell Crow Dallas/Fort Worth, Ltd. and Cushman & Wakefield of Texas, Inc., whose commissions shall be paid by Landlord pursuant to separate written agreements. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, liens and other liability for commissions or other compensation claimed by any other broker or agent claiming the same by, through, or under the indemnifying party. (e) ESTOPPEL CERTIFICATES. From time to time, Tenant shall furnish to any party designated by Landlord, within 15 days after Landlord has made a request therefor, a certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease as Landlord may reasonably request. Unless otherwise required by Landlord's Mortgagee or a prospective purchaser or mortgagee of the Building, the initial form of estoppel certificate to be signed by Tenant is attached hereto as Exhibit F. (f) NOTICES. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered to the intended address, (3) sent by a nationally recognized overnight 21 31 courier service, or (4) sent by facsimile transmission during normal business hours followed by a confirmatory letter sent in another manner permitted hereunder. All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision. (g) SEPARABILITY. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (h) AMENDMENTS; BINDING EFFECT. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof. (i) QUIET ENJOYMENT. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease. (j) NO MERGER. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate. (k) NO OFFER. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant. (l) ENTIRE AGREEMENT. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto. (m) WAIVER OF JURY TRIAL. To the maximum extent permitted by law, Landlord and Tenant each waive right to trial by jury in any litigation arising out of or with respect to this Lease. (n) GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located. 22 32 (o) RECORDING. Tenant shall not record this Lease or any memorandum of this Lease without the prior written consent of Landlord, which consent may be withheld or denied in the sole and absolute discretion of Landlord. Tenant grants to Landlord a power of attorney to execute and record a release releasing any such recorded instrument of record that was recorded without the prior written consent of Landlord. (p) JOINT AND SEVERAL LIABILITY. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. All unperformed obligations of Tenant at the end of the Term shall survive. (q) FINANCIAL REPORTS. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant's internally prepared financial statements. If Tenant or Tenant's parent corporation is a publicly traded corporation, Tenant may satisfy its obligations hereunder by providing to Landlord Tenant's or its parent corporation's most recent annual and quarterly reports. Tenant will discuss its financial statements with Landlord and, following the occurrence of an Event of Default hereunder, will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements that Tenant designates to Landlord as confidential except (1) to Landlord's Mortgagee or prospective mortgagees or purchasers of the Building, (2) in litigation between Landlord and Tenant, and (3) if required by court order. Tenant shall not be required to deliver the financial statements required under this Section 25.(q) more than once in any 12-month period unless requested by Landlord's Mortgagee or a prospective buyer or lender of the Building or an Event of Default occurs. (r) LANDLORD'S FEES. Whenever Tenant requests Landlord to take any action not required of it hereunder or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for Landlord's reasonable, out-of-pocket costs payable to third parties and reasonably incurred by Landlord in reviewing the proposed action or consent, including reasonable attorneys', engineers' or architects' fees, within 30 days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. (s) TELECOMMUNICATIONS. Tenant and its telecommunications companies, including local exchange telecommunications companies and alternative access vendor services companies, shall have no right of access to and within the Building, for the installation and operation of telecommunications systems, including voice, video, data, Internet, and any other services provided over wire, fiber optic, microwave, wireless, and any other transmission systems ("TELECOMMUNICATIONS SERVICES"), for part or all of Tenant's telecommunications within the Building and from the Building to any other location without Landlord's prior written consent; provided, such telecommunications companies shall have a right of access to and within the Building for the installation of telecommunication systems and services pursuant to the Working Drawings described in Exhibit D hereto. All providers of Telecommunications Services shall be required to comply with the rules and regulations of the Building, applicable Laws and Landlord's policies and practices for the Building. Except for providing conduits and related components thereto as set forth in the Construction Drawings, Tenant acknowledges that Landlord shall not be required to provide or arrange for any 23 33 Telecommunications Services and that Landlord shall have no liability to any Tenant Party in connection with the installation, operation or maintenance of Telecommunications Services or any equipment or facilities relating thereto. Tenant, at its cost and for its own account, shall be solely responsible for obtaining all Telecommunications Services. However, nothing in this Section 25.(s) shall prohibit Tenant's employees from accessing areas solely within the Premises that do not contain any equipment serving other tenants of the Building or the Building's Systems. (t) CONFIDENTIALITY. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord's benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord's prior written consent, except to the extent otherwise required by applicable law. The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure. (u) AUTHORITY. Tenant (if a corporation, partnership or other business entity) hereby represents and warrants to Landlord that Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Tenant has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Tenant is authorized to do so. Landlord hereby represents and warrants to Tenant that Landlord is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Landlord has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Landlord is authorized to do so. (v) HAZARDOUS MATERIALS. The term "HAZARDOUS MATERIALS" means any substance, material, or waste which is now or hereafter classified or considered to be hazardous, toxic, or dangerous under any Law relating to pollution or the protection or regulation of human health, natural resources or the environment, or poses or threatens to pose a hazard to the health or safety of persons on the Premises or in the Building. Tenant shall not use, generate, store, or dispose of, or permit the use, generation, storage or disposal of Hazardous Materials on or about the Premises or the Building except in a manner and quantity necessary for the ordinary performance of Tenant's business, and then in compliance with all Laws. If Tenant breaches its obligations under this Section 25.(v), Landlord may immediately take any and all action reasonably appropriate to remedy the same, including taking all appropriate action to clean up or remediate any contamination resulting from Tenant's use, generation, storage or disposal of Hazardous Materials. Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against any and all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees and cost of clean up and remediation) arising from Tenant's failure to comply with the provisions of this Section 25.(v). This indemnity provision shall survive termination or expiration of this Lease. (w) LIST OF EXHIBITS. All exhibits and attachments attached hereto are incorporated herein by this reference. Exhibit A - Outline of Premises Exhibit B - Description of the Land Exhibit C - Building Rules and Regulations Exhibit D - Tenant Finish-Work: Allowance Exhibit E - Form of Confirmation of Commencement Date Letter Exhibit F - Form of Tenant Estoppel Certificate Exhibit G - Parking Exhibit H - Renewal Option
24 34 Exhibit I - Right of First Refusal Exhibit J - Rent Abatement Provisions Exhibit K - Janitorial Services Exhibit L - Tenant's Signage Exhibit M - Designated Smoking Area Exhibit N - Guaranty Exhibit O - Form of Subordination, Non-Disturbance and Attornment Agreement
26. OTHER PROVISIONS. (a) ADA. Notwithstanding anything in this Lease to the contrary, as between Landlord and Tenant, (1) Tenant shall bear the risk of complying with Title III of the Americans With Disabilities Act of 1990, any state laws governing handicapped access or architectural barriers, including the Texas Elimination of Architectural Barriers Act, and all rules, regulations, and guidelines promulgated under such laws, as amended from time to time (the "DISABILITIES ACTS") in the Premises, and (2) Landlord shall bear the risk of complying with the Disabilities Acts in the common areas of the Building, other than compliance that is necessitated by the use of the Premises for other than the Permitted Use (which risk and responsibility shall be borne by Tenant). (b) ENVIRONMENTAL REPORT. Landlord has provided to Tenant a copy of an Environmental Site Assessment Update (HBC Report No. 94007086A) ("REPORT") with respect to the Land, dated February 24, 2000, prepared by HBC Engineering, Inc. ("CONSULTANT"). Tenant agrees not to release the Report, or a copy of it, or any part of it, or disclose any of the information contained in the Report to any third party (other than Tenant's counsel) without the express prior written consent of Landlord. Such consent shall not be unreasonably withheld as long as the proposed party to whom the report is given executes a letter agreement containing covenants similar to this Section 26.(b). Landlord represents to Tenant that, except as otherwise disclosed in the Report, to the best of Landlord's actual knowledge (without duty of inquiry), Landlord has not received written notice from any governmental entity or any other party of any Hazardous Materials on, in, under or adjacent to the Land or the Building in violation of any environmental law. Tenant releases Landlord for any inaccuracies, omissions, or errors contained in the Report. Tenant agrees that Landlord has no duty to provide it with the Report, to correct any inaccuracies, errors, or omission in the Report, to supplement the Report with any additional information, or to provide Tenant with any information concerning the environmental conditions of the Land. Tenant agrees that Landlord considers the Report to be confidential proprietary information and Tenant agrees to maintain the confidentiality and security of the Report information in accordance with the highest standards of confidentiality and security associated with the protection of "trade secrets." Landlord hereby expressly disclaims responsibility for the investigation of the Land by Tenant and further disclaims any responsibility for the contents of the Report. Tenant's obligations pursuant to this Section 26.(b) shall survive the expiration or termination of this Lease. (c) SIGNAGE. Subject to Landlord's prior approval of the location, design, size, color, material composition, and plans and specifications therefor, Tenant may, at its sole risk and expense, construct a building fascia sign on the Building and a monument sign on the Building grounds (collectively, the "SIGNS"). Landlord hereby consents to the sign described on Exhibit L hereto. If Landlord grants its approval, Tenant shall erect each Sign in accordance with the approved plans and specifications, in a good and workmanlike manner, in accordance with all laws, regulations, restrictions (governmental or otherwise), and architectural guidelines in effect for the area in which the Building is located and has received all requisite approvals thereunder (the "SIGN REQUIREMENTS"), and in a manner 25 35 so as not to unreasonably interfere with the use of the Building grounds while such construction is taking place; thereafter, Tenant shall maintain each Sign in a good, clean, and safe condition in accordance with the Sign Requirements. After the end of the Term or after Tenant's right to possess the Premises has been terminated, Landlord (1) may require that Tenant remove any Signs by delivering to Tenant written notice thereof within 30 days after the end of the Term or (2) may use any Sign, in which case such Sign shall become the property of Landlord without compensation to Tenant. If Landlord so requests, Tenant shall remove the Sign, repair all damage caused thereby, and restore the Building and, if applicable, the grounds on which such Sign was located to their condition before the installation of the Sign within ten days after Landlord's request therefor. If Tenant fails to timely do so, Landlord may, without compensation to Tenant, (A) use such Sign or (B) at Tenant's expense, remove such Sign, perform the related restoration and repair work and dispose of such Sign in any manner Landlord deems appropriate. NOTWITHSTANDING LANDLORD'S INDEMNITY CONTAINED IN SECTION 11.(D), IT IS THE INTENTION OF THE PARTIES THAT TENANT BEAR ALL RISKS RELATING TO THE INSTALLATION, USE, MAINTENANCE, OPERATION, AND REMOVAL OF THE SIGNS; THEREFORE, TENANT SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS LANDLORD, ITS AGENTS, AND THEIR RESPECTIVE AFFILIATES FROM ALL LOSSES, CLAIMS, COSTS, AND LIABILITIES ARISING IN CONNECTION WITH OR RELATING TO THE INSTALLATION, MAINTENANCE, USE, OPERATION, AND REMOVAL OF THE SIGNS, INCLUDING, WITHOUT LIMITATION, THAT ARISING FROM LANDLORD'S NEGLIGENCE (OTHER THAN ITS SOLE OR GROSS negligence). The rights granted to Tenant under this Section 26.(c) are personal to Daisytek, Incorporated, may not be assigned to any party, and may be revoked by Landlord if Tenant ceases to occupy at least 40,000 rentable square feet in the Building. (d) SATELLITE DISH. Provided that Tenant complies with the terms of this Section 26.(d), 26.(e), Tenant may, at its risk and expense, install a satellite dish, microwave antennae and other equipment and related wiring (collectively, the "SATELLITE DISH") on the roof of the Building at a location approved by Landlord. Except as set forth in the Working Drawings described in Exhibit D hereto, before installing the Satellite Dish, Tenant shall submit to Landlord for its approval (which approval shall not be unreasonably withheld or delayed) plans and specifications which (1) specify in detail the design, location, size, and frequency of the Satellite Dish and (2) are sufficiently detailed to allow for the installation of the Satellite Dish in a good and workmanlike manner and in accordance with all Laws. If Landlord approves of such plans, Tenant shall install (in a good and workmanlike manner), maintain and use the Satellite Dish in accordance with all Laws and shall obtain all permits required for the installation and operation thereof; copies of all such permits must be submitted to Landlord before Tenant begins to install the Satellite Dish. Tenant shall thereafter maintain all permits necessary for the maintenance and operation of the Satellite Dish while it is on the Building and operate and maintain the Satellite Dish in such a manner so as not to unreasonably interfere with any other satellite, antennae, or other transmission facility on the Building's roof or in the Building. Landlord may require that Tenant screen the Satellite Dish with a parapet wall or other screening device reasonably acceptable to Landlord provided it does not make the Satellite Dish inoperable. Tenant shall maintain the Satellite Dish and the screening therefor in good repair and condition. Tenant may only use the Satellite Dish in connection with Tenant's business. Tenant shall not allow any third party to use such equipment, whether by sublease, license, occupancy agreement or otherwise. Tenant shall, at its risk and expense, remove the Satellite Dish, within 15 days after the occurrence of any of the following events: (A) the termination of Tenant's right to possess the Premises; (B) the termination of the Lease; (C) the expiration of the Term; or (D) Tenant's vacating the Premises. If Tenant fails to do so, Landlord may remove the Satellite Dish and store or dispose of it in any manner Landlord deems appropriate without liability to Tenant; Tenant shall reimburse Landlord for all costs incurred by Landlord in connection therewith within ten days after Landlord's request therefor. Tenant shall repair any damage to the Building caused by or relating to the Satellite Dish, including that which is caused by its installation, maintenance, use, or removal. 26 36 NOTWITHSTANDING LANDLORD'S INDEMNITY CONTAINED IN SECTION 11.(D), IT IS THE INTENTION OF THE PARTIES THAT TENANT BEAR ALL RISKS RELATING TO THE INSTALLATION, USE, MAINTENANCE, OPERATION, AND REMOVAL OF THE SATELLITE DISH; THEREFORE, TENANT SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS LANDLORD, ITS AGENTS, AND THEIR RESPECTIVE AFFILIATES FROM ALL LOSSES, CLAIMS, COSTS, AND LIABILITIES ARISING IN CONNECTION WITH OR RELATING TO THE INSTALLATION, MAINTENANCE, USE, OPERATION, AND REMOVAL OF THE SATELLITE DISH, INCLUDING, WITHOUT LIMITATION, THAT ARISING FROM LANDLORD'S NEGLIGENCE (OTHER THAN ITS SOLE OR GROSS NEGLIGENCE). All work relating to the Satellite Dish shall, at Tenant's expense, be coordinated with Landlord's roofing contractor so as not to affect any warranty for the Building's roof. (e) SMOKING AREA. Tenant shall not permit its employees, invitees or guests to smoke in the lobbies, passages, corridors, elevators, vending rooms, rest rooms, stairways or any other area shared in common with other tenants in the Building. Nor shall Tenant permit its employees, invitees, or guests to loiter at the building entrances for the purposes of smoking. Tenant's employees, invitees and guests shall be permitted to smoke only in the designated smoking area, which is depicted on Exhibit M hereto. 27 37 LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND EXCEPT AS EXPRESSLY SET FORTH HEREIN, TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, DEMAND, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. NOTHING IN THIS PARAGRAPH SHALL BE CONSTRUED TO DIMINISH THE OBLIGATIONS OF LANDLORD THAT ARE EXPRESSLY SET FORTH ELSEWHERE IN THIS LEASE OR ANY ATTACHMENT HERETO. Dated as of the date first above written. LANDLORD: ENTERPRISE BUSINESS PARK D-2, L.P., a Delaware limited partnership By: Trammell Crow DFW Development, Inc., a Delaware corporation, its sole general partner By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- TENANT: DAISYTEK, INCORPORATED, a Delaware corporation By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 28 EX-10.2 3 ex10-2.txt ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.2 ASSET PURCHASE AGREEMENT dated as of May 3, 2000 (the "Agreement"), among BAP Acquisition Corp., a Delaware corporation ("Buyer"), B.A. Pargh Company, LLC, a Tennessee limited liability company ("Seller"), and the members of Seller listed on Annex I hereto (collectively, the "Members"). WITNESSETH: WHEREAS, Seller operates an office products wholesale distributor and reseller business in the Central and Eastern United States and Puerto Rico (the "Business"); WHEREAS, the Members own all of the issued and outstanding membership interests in the Seller and the Members listed on Annex II hereto (the "Officers") are actively engaged in the Business; WHEREAS, based upon the representations, covenants, agreements and warranties herein made by Seller and the Members, and subject to the terms and conditions contained in this Agreement, Buyer wishes to acquire the Business and all of Seller's assets, subject to certain liabilities, and to continue to operate the Business; WHEREAS, based upon the representations, covenants, agreements and warranties herein made by Buyer, and subject to the terms and conditions contained in this Agreement, Seller wishes to sell to Buyer the Business and all of Seller's assets, subject to certain liabilities, for the consideration set forth herein, including the assumption of such liabilities; WHEREAS, the Members, as owners of Seller, will benefit from the transactions contemplated hereby; and WHEREAS, Seller, the Members and Buyer wish to provide for the above-described acquisition and sale. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Buyer, Seller and the Members hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Defined Terms. As used herein, the terms below shall have the following meanings: "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation, in each case, by or before any Governmental Authority. "Affiliate" of a Person means any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person. The term "control" (including, 2 with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Ancillary Agreements" means the Employment Agreements, the Non-Compete Agreements, and all other agreements required hereunder to consummate the transactions contemplated hereby. "Code" means the Internal Revenue Code and Treasury Regulations thereunder. "Consents" means any and all Permits and any and all consents, approvals or waivers from third parties that are required for the consummation of the transactions contemplated by this Agreement. "Contracts" means all contracts, agreements, arrangements, understandings, licenses, leases, subleases and commitments of any kind. "Court Order" means any judgment, decision, consent decree, injunction, ruling or order of any foreign, federal, state or local court or governmental agency, department or authority that is binding on any Person or its property under applicable Law. "Default" means (a) a breach of or default under any Contract, (b) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any Contract or (c) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract. "Employment Agreements" means the Employment Agreements to be entered into by Buyer and the Officers, substantially in the form of Exhibit 1.1A hereof. "Encumbrance" means any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, conditional sales agreement, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof. "Financial Statements" means the balance sheet of Seller as of March 31, 2000 and the related statements of income of Seller for the one month and three months then ended, a copy of which is attached as Schedule 3.3A hereto. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within 2 3 the accounting profession), or in such other statements by such entity as may be in general use by significant segments of the U.S. accounting profession, which are applicable to the facts and circumstances on the date of determination. "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. "HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended. "Intellectual Property" means all trademarks, patents, copyrights, tradenames, Business identifiers, service marks, logos, domain names, URLs and all registrations and applications for registration thereof and all renewals or reissues thereof, and all intangible property which is proprietary to Seller or any Member and used or usable in the operation of the Business. "Knowledge" or "to the knowledge" or "to the best of the knowledge" of a party (or similar phrases) means to the extent of matters which are actually known by such party and, with respect to Seller, shall mean the actual knowledge of the Officers. "Liability" means any direct or indirect liability, indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or endorsement of or by any Person of any type, whether accrued, absolute, contingent, matured, unmatured, liquidated, unliquidated, known or unknown. "March 31 Balance Sheet" means the balance sheet of Seller as of March 31, 2000 included in the Financial Statements. "Material Adverse Effect" or "Material Adverse Change" or a similar phrase means, with respect to any Person, any material adverse effect on or change with respect to (i) the business, operations, assets (taken as a whole), liabilities (taken as a whole), condition (financial or otherwise) or results of operations, of such Person, or (ii) the right or ability of such Person to consummate any of the transactions contemplated hereby. "Non-Compete Agreements" means the Non-Compete Agreements to be entered into by Buyer, Seller and each of the Officers substantially in the form of Exhibit 1.1B hereof. "Permitted Encumbrances" means (a) liens for Taxes or governmental charges or claims (i) not yet due and payable, or (ii) being contested in good faith, if a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor, (b) statutory liens of landlords, liens of carriers, warehouse persons, mechanics and material persons and other liens imposed by law incurred in the ordinary course of business for sums (i) not yet due and payable, or (ii) being contested in good faith, if a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor, (c) liens incurred or deposits made in connection with workers' compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and 3 4 appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business, consistent with past practice, (d) easements, rights-of-way, restrictions and other liens or Encumbrances, in each case, which do not interfere with the ordinary conduct of business of Seller and do not materially detract from the value of the property upon which such lien or Encumbrance exists and (e) liens, claims and Encumbrances specifically identified and designated as a Permitted Encumbrance on any Schedule attached hereto. "Permits" means all licenses, permits, franchises, approvals, authorizations, consents or orders of, or filings with, any Governmental Authority, whether foreign, federal, state or local, necessary or desirable for the past, present or anticipated conduct or operation of the Business or ownership of the Assets. "Person" means any person or entity, whether an individual, trustee, corporation, limited liability company, general partnership, limited partnership, trust, unincorporated organization, business association, firm, joint venture, governmental agency or authority or any similar entity. "Pre-petition Liabilities" means the Liabilities of the Seller described on Schedule 3.3B hereto. "Regulations" means any laws, statutes, ordinances, regulations, rules, notice requirements, court decisions, agency guidelines, principles of law and orders of any foreign, federal, state or local government and any other governmental department or agency, including without limitation energy, motor vehicle safety, public utility, zoning, building and health codes, environmental Laws, occupational safety and health and laws respecting employment practices. "RMA Inventory" means merchandise returned from customers that is not suitable for resale or that is not returned to salable inventory. "Seller Material Adverse Effect" or "Seller Material Adverse Change" means a Material Adverse Effect with respect to Seller, the Business or the Assets. "Seller's Representative" means W. Alan Holman, as representative of the Seller and the Members, or his designee. "Services Agreement" means the contract dated July 15, 1999 identified in the non-binding letter of intent between Seller and Daisytek International Corporation. "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 4 5 gains Taxes; license, registration and documentation fees; and customs' duties, tariffs, and similar charges. 1.2 Interpretation Provisions. (a) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, schedule and exhibit references are to this Agreement unless otherwise specified. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. The term "or" is disjunctive but not necessarily exclusive. The terms "include" and "including" are not limiting and mean "including without limitation." (b) References to agreements and other documents shall be deemed to include all subsequent amendments and other modifications thereto. (c) References to statutes shall include all regulations promulgated thereunder and references to statutes or regulations shall be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation. (d) The captions and headings of this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. (e) The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against either party. (f) The annexes, schedules and exhibits to this Agreement are a material part hereof and shall be treated as if fully incorporated into the body of the Agreement. ARTICLE 2 SALE AND PURCHASE OF THE BUSINESS 2.1 Assets to be Sold. Subject to the terms and conditions set forth in this Agreement, at the Closing (as defined in Section 8.1 hereof) Seller shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase and acquire from Seller, all of Seller's right, title and interest in and to Seller's assets (wherever located, tangible and intangible, real, personal or mixed, whether known or unknown, accrued or contingent, and whether or not carried on the books and records of Seller) and the Business (and the goodwill associated therewith) as a going concern (collectively, the "Assets") (excluding only the assets specified in Section 2.2 hereof), including, but not limited to, the following: (a) all of Seller's cash and cash equivalents on hand or in banks; 5 6 (b) all machinery, equipment, furniture, furnishings, automobiles, trucks, vehicles, tools, dies, molds and parts and similar property (including, but not limited to, any of the foregoing purchased subject to any conditional sales or title retention agreement in favor of any other Person); (c) all inventories of raw materials, work in process, finished products, goods, spare parts, replacement and component parts, and office and other supplies, wherever located including any items in transit to Seller (the "Inventory"); (d) all rights in and to products sold or leased (including unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit); (e) all of the rights of the Seller under all Contracts, including the Services Agreement, and any right to receive payment for products sold or services rendered, and to receive goods and services, pursuant to such Contracts and to assert claims and take other rightful actions in respect of breaches, defaults and other violations of such Contracts; (f) all credits, prepaid expenses, deferred charges, advance payments, security deposits and prepaid items; (g) all notes and accounts receivable held by the Seller and all notes, bonds and other evidences of indebtedness of and rights to receive payments from any Person held by the Seller, including all rights to receive refunds, rebates and coop or promotional funds of any kind; (h) all Intellectual Property and all rights thereunder or in respect thereof relating to or used or held for use in connection with the Business, including rights to sue for and remedies against past, present and future infringements thereof, and rights of priority and protection of interests therein under the laws of any jurisdiction worldwide and all tangible embodiments thereof; (i) all books, records, manuals and other materials (in any form or medium), including all records and materials maintained at each office or place of business of Seller, advertising matter, catalogues, price lists, correspondence, mailing lists, lists of customers, distribution lists, photographs, production data, sales and promotional materials and records, purchasing materials and records, personnel records, manufacturing and quality control records and procedures, blueprints, research and development files, records, data and laboratory books, Intellectual Property disclosures, media materials and plates, accounting records, sales order files and litigation files; (j) to the extent their transfer is permitted by law, all Permits, including all applications therefor; (k) all rights to causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by the Seller with respect to the Business or any Contract, including the Services Agreement, whether arising prior to or following the date hereof, or the ownership, use, function or value of any Asset, whether arising by way of counterclaim or otherwise; and 6 7 (l) all guarantees, warranties, indemnities and similar rights in favor of the Seller with respect to any Asset. 2.2 Excluded Assets. The following assets (collectively, the "Excluded Assets") shall be retained by Seller and no interest in them shall be assigned, transferred, conveyed or delivered to Buyer: (a) the organizational documents, operating agreement and minutes of Member meetings of Seller; (b) all rights of the Seller under this Agreement; and (c) all Inventory which, as of the Closing Date, (i) is RMA Inventory, (ii) is in the aggregate in excess of 76 days cost of good sold determined on the basis of sales during the 12 month period prior to the Closing Date, (iii) has a "freshness dating" expiration date prior to the Closing Date, or (iv) is not included in Seller's then current catalogue, except for any of the foregoing which Buyer, in its sole discretion, elects to purchase and include in the Assets being transferred hereunder; and (d) the automobile and other assets listed on Schedule 2.2(d) hereto. 2.3 Assumed Liabilities. Subject to the terms and conditions set forth in this Agreement, at the Closing, Buyer shall assume and agree to pay, perform and discharge all of the following obligations and liabilities of Seller (collectively the "Assumed Liabilities"): (a) all liabilities of Seller set forth on the March 31 Balance Sheet in the amounts set forth therein, to the extent not paid, satisfied or discharged prior to or as of the Closing Date without violation or breach of the terms thereof; (b) all liabilities and obligations of Seller not set forth on the March 31 Balance Sheet and arising in the ordinary course of the Business after March 31, 2000, to the extent set forth on the Final Closing Balance Sheet (as defined in Section 2.7 below) in the amounts set forth therein; (c) all liabilities and obligation of Seller under the Services Agreement, whenever and however arising; and (d) to the extent arising after the Closing Date and relating to the period after the Closing Date, all liabilities and obligations of Seller under (i) the Contracts listed on Schedule 3.9(a) hereto, (ii) Contracts existing as of the date hereof that are not required to be listed on Schedule 3.9(a) hereto but that were entered into in the ordinary course of the Business and (iii) Contracts hereafter entered into by Seller in the ordinary course of the Business in compliance with Section 5.1 hereof and without violation of any other term or provision contained herein (collectively, the "Assumed Contracts"), other than damages, penalties or other 7 8 like liabilities or obligations arising from or as a result of a breach of any Assumed Contract by Seller or Seller's failure to satisfy any requirement which it was required to satisfy on or prior to the Closing, and provided further, that with respect to any Assumed Contract that is not consistent with the representations and warranties of Seller contained herein, Buyer shall have no liabilities or obligations thereunder except to the extent of any benefit thereunder provided to Buyer. 2.4 Excluded Liabilities. Except for the Assumed Liabilities, Buyer does not assume or agree to discharge or perform any Liabilities of Seller or any predecessor or affiliate thereto, it being expressly agreed and understood that, except for the Assumed Liabilities, Buyer does not agree to assume, nor shall have any responsibility, liability or obligation for any Liabilities of Seller or the Members, including the following (collectively, the "Retained Liabilities"): (a) any liability or obligation of Seller or any Member based upon, arising out of or otherwise in respect of the negotiation and preparation of this Agreement or any of the Schedules or Exhibits hereto, or the consummation of the transactions contemplated hereby, including without limitation, any Tax liability so arising; (b) except as otherwise set forth herein, any liability or obligation based upon, arising out of or otherwise in respect of, any accounts payable, trade payables, employee wages, employee benefits, product liability, product warranty, or any Contract to which Seller is a party; (c) any liability or obligation of Seller or any Member, or any consolidated group of which Seller is or has been a member, for any federal, state, county or local Taxes, or any interest, additions to and/or penalties thereon, accrued for, applicable to or arising during any period whether prior to or following the date hereof; (d) any liability or obligation of Seller or any Member for any cause of action, claim, demand, breach or violation of any kind or description, whether arising under any contract, agreement, law, rule or Regulation, or otherwise, including without limitation, any claim for or relating to personal injury, malpractice, negligence, fraud, discrimination, sexual harassment, wrongful termination, property damage, money laundering, racketeering, conspiracy or any environmental claim or remedial claim; (e) except as otherwise set forth herein, any liability or obligation, including any obligation to provide severance, retirement or post-retirement benefits, arising under any collective bargaining agreement, union contract, employment agreement or other agreement or understanding of any kind relating to employment of any employee or group of employees; and (f) any liability or obligation of Seller to any Member. 2.5 Consideration. Subject to the adjustment set forth below, as the total consideration (the "Purchase Price") for the Assets to be sold by Seller to Buyer pursuant hereto, Buyer shall: (a) at the Closing, pay Seller by wire transfer (to an account designated by Seller at least five business days prior to the Closing) the sum of $2,000,000 (the "Closing Cash Amount"); 8 9 (b) subject to the provisions hereof, on the first business day following the 150th day after the Closing Date (the "Second Payment Date"), pay Seller by wire transfer (to the account previously designated by Seller or as the Seller's Representative shall otherwise direct) the sum of $1,090,166 (the "Escrowed Consideration"); and (c) at the Closing, assume the Assumed Liabilities. 2.6 Escrowed Consideration. (a) The Buyer shall hold the Escrowed Consideration as collateral security for the obligations of Seller and the Members pursuant to Articles 9 and 10 hereof, and to facilitate the Purchase Price adjustments, if any, set forth below. Subject to the Purchase Price adjustments, if any, set forth below, and provided Seller and the Members have complied with all of their respective covenants and obligations hereunder, Buyer shall pay the Escrowed Consideration to Seller in accordance with Section 2.5 (b) above. (b) On the Second Payment Date, the Seller shall deposit $500,000 of the Escrowed Consideration (the "Escrow Amount") with Allen D. Lentz, as Escrow Agent (the "Escrow Agent") in accordance with that certain Escrow Agreement dated as of the date hereof by and among the Seller and the Members (the "Escrow Agreement"). The Escrow Amount shall be held in escrow by the Escrow Agent pursuant to the terms of the Escrow Agreement and shall be collateral security for the obligations of the Seller and the Members pursuant to Articles 9 and 10 hereof. During the one year period following the Closing Date (and thereafter if, and for so long as, the Buyer then has a pending claim for indemnification hereunder), the Escrow Amount shall not be distributed to the Seller or any of the Members, nor shall the Escrow Agreement be modified, amended or terminated, in each case, without the prior written consent of the Buyer. If on the Second Payment Date the then remaining Balance of the Escrowed Consideration is less than $500,000, the Seller and the Members shall deposit such difference with the Escrow Agent. 2.7 Price Adjustment. (a) As soon as practicable after the Closing, but not later than 120 days after the Closing, Buyer and Seller's Representative shall jointly prepare a balance sheet setting forth the Assets and the Assumed Liabilities as of the Closing Date (the "Closing Balance Sheet") and the Purchase Price adjustments set forth below. The Closing Balance Sheet shall be prepared (i) in accordance with GAAP and (ii) on a basis consistent with Schedule 2.7 hereto (notwithstanding that the provisions of such Schedule may not be in accordance with GAAP), and all Assets shall be valued at the lower of cost or fair market value as of the Closing Date. In addition, the Closing Balance Sheet shall reflect the parties' mutual agreement in respect of the Services Agreement as provided in Section 5.10 below. (b) In the event Buyer and Seller's Representative shall disagree upon any item to be set forth on the Closing Balance Sheet or any Purchase Price adjustment, Buyer and Seller's Representative shall use their good faith efforts to resolve such dispute. Failing such resolution, 9 10 Buyer and Seller's Representative shall submit the dispute for resolution to an independent accounting firm jointly selected by Buyer and Seller's Representative. Such firm shall decide such dispute in accordance with the terms and provisions of this Agreement. The decision of such firm shall be final and binding and the fees and expenses of such firm shall be apportioned by such firm between the Buyer and Seller on a basis that is proportionate to the extent to which such firm's decision conforms to the Buyer's and Seller's Representative's respective positions. Such Closing Balance Sheet and the Purchase Price adjustments, as agreed upon by the Buyer and Seller's Representative, or as determined by the independent accounting firm, are hereinafter referred to as the "Final Closing Balance Sheet" and the "Final Purchase Price Adjustments," respectively. (c) The Purchase Price will be adjusted as follows: (i) The Purchase Price will be decreased, dollar for dollar, by the amount which is the greatest of: (1) the amount by which the Closing Net Worth (as hereinafter defined) is less than $1,841,354, (2) the amount by which the Closing Net Working Capital (as hereinafter defined) is less than $1,736,655, (3) the amount of Excess Liabilities (as hereinafter defined) and (4) the amount of Current Ratio Excess Liabilities (as hereinafter defined); and (ii) [deleted] (d) As used herein, (i) "Closing Net Worth" shall mean the difference between the Assets (excluding goodwill) and the Assumed Liabilities as set forth on the Final Closing Balance Sheet, as calculated in accordance with the provisions of Schedule 2.7 attached hereto, (ii) "Closing Net Working Capital" shall mean the difference between the Assets (excluding goodwill, property and equipment) and the Assumed Liabilities as set forth on the Final Closing Balance Sheet, as calculated in accordance with the provisions of Schedule 2.7 attached hereto, (iii) "Excess Liabilities" shall mean any Liability or group of related Liabilities included in the Assumed Liabilities as set forth on the Final Closing Balance Sheet (other than the Pre-petition Liabilities), which in the aggregate is in excess of 38 days cost of goods sold determined on the basis of the 12 months of sales prior to the Closing Date and calculated in a manner consistent with the calculation set forth on Schedule 2.7 hereto and (iv) "Current Ratio Excess Liabilities" shall mean the amount by which the Assumed Liabilities set forth on the Final Closing Balance Sheet exceed the quotient obtained by dividing the Assets set forth on the Final Closing Balance Sheet (excluding goodwill, property and equipment) by 1.149, as calculated in accordance with the provisions of Schedule 2.7 attached hereto. (e) Promptly following the determination of the Final Purchase Price Adjustments, the Buyer shall deduct from the Escrowed Consideration and retain for itself the amount, if any, of any decrease in the Purchase Price and continue to hold the remaining balance in accordance with Section 2.5 (b) above. If the amount of the decrease in the Purchase Price exceeds the amount of the Escrowed Consideration, the Buyer shall retain the entire Escrowed Consideration for itself and the Seller shall promptly pay to the Buyer the amount of such shortfall. 10 11 2.8 Allocation of Purchase Price. The parties agree to allocate the Purchase Price (as adjusted pursuant to Section 2.7) and the Assumed Liabilities among the respective Assets and Assumed Liabilities in accordance with an allocation schedule to be prepared by the Buyer, which allocation schedule shall be prepared on a basis which is consistent with the Final Closing Balance Sheet and the applicable requirements, including Section 1060, of the Code. The parties will each report the federal, state and local and other Tax consequences of the purchase and sale contemplated hereby (including the filing of all applicable Internal Revenue Service forms) in a manner consistent with such allocation. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller and each Member hereby makes, jointly and severally, as of the date hereof and as of the Closing Date, the following representations and warranties to Buyer; provided, however, that for each Member other than the Officers, such representations are only made to the best of their knowledge. 3.1 Organization; Authorization; Etc. (a) Seller is a limited liability company, duly organized and validly existing and in good standing under the laws of the State of Tennessee. Seller (i) has all requisite power and authority to own all of its properties and assets and to carry on the Business as it is now being conducted, and (ii) is in good standing, and is duly licensed, authorized or qualified to transact business in each jurisdiction in which the ownership or lease of real property or the conduct of the Business requires it to be so qualified, except where the failure to be in good standing or to be duly licensed, authorized or qualified to transact business, would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. Seller has heretofore delivered or made available to Buyer complete and correct copies of its organizational documents as in effect of the date hereof. Each jurisdiction in which Seller is qualified to do business as a foreign corporation is set forth in Schedule 3.1.(a). (b) Each of the Members has full power, capacity and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which he or she may be a party and to perform his or her obligations hereunder and thereunder. This Agreement has been duly executed and delivered by and, assuming the due execution and delivery thereof by Buyer, is (and, upon the execution and delivery thereof, each of the Ancillary Agreements to which each Member may be a party will be) the legal, valid and binding obligation of each of the Members and, is (and will be) enforceable against each of the Members in accordance with its terms, except that enforceability may be limited by the effect of (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws relating to or affecting the rights of creditors or (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (c) The execution, delivery and performance by Seller of this Agreement and 11 12 each of the Ancillary Agreements to which it may be a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Members of Seller, and no additional proceedings (corporate or otherwise) on the part of any of the Members or Seller are necessary to authorize the execution, delivery and performance hereof or thereof and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by and, assuming the due execution and delivery thereof by Buyer, is (and, upon the execution and delivery thereof, each of the Ancillary Agreements to which Seller may be a party will be) the legal, valid and binding obligation of Seller and, is (and will be) enforceable against Seller in accordance with its terms, except that enforceability may be limited by the effect of (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws relating to or affecting the rights of creditors or (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (d) Except as set forth in Schedule 3.1(d), the execution and delivery of this Agreement and the Ancillary Agreements by Seller and the Members, to the extent each may be a party thereto, and the consummation by Seller and the Members of the transactions contemplated hereby and thereby will not (i) violate any provision of the certificate of formation or operating agreement or similar organizational instrument of Seller, (ii) result in a violation of any provision of, or constitute a default (with or without notice or lapse of time) under, or give rise to a right of termination, cancellation or acceleration of (or entitle any party to accelerate whether after the giving of notice or lapse of time or both) any obligation under, or result in the imposition of any lien upon or the creation of a security interest in any of Seller's assets or properties pursuant to, any agreement (whether written or oral), contract, commitment, note, bond, debt instrument, mortgage, indenture, lien, lease agreement or other instrument, or any judgment, injunction, order or decree to which Seller or any of the Members is a party or by which any of them or their respective properties are or is bound, or (iii) violate or conflict with any United States (federal, state or local) or foreign (federal, provincial or local) law, statute, ordinance, rule or regulation ("Law") or any Court Order applicable to Seller or any of the Members or their respective properties. (e) Except as set forth in Schedule 3.1(e), no consent, approval, order or authorization of, or registration, declaration or filing with (i) any governmental authority or (ii) any individual, corporation or other entity (including any holder of Seller's securities) is required by or with respect to Seller or any Member in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 3.2 Capitalization; Structure; No Investments. (a) The Members own all of the membership and equity interests in and of the Seller, and there are no securities of Seller convertible into or exchangeable for membership or equity interests or voting securities of Seller or any options, warrants or other rights to acquire from Seller, or obligations of Seller to issue, any membership or equity interests, voting securities or securities convertible into or exchangeable for membership or equity interests 12 13 or voting securities of Seller. Schedule 3.2(a) sets forth the respective membership interests of each Member. (b) Seller has no subsidiaries nor any equity investment of any kind in any corporation, partnership, limited liability company, joint venture or other legal entity. 3.3 Financial Statements. Schedule 3.3A sets forth a true, correct and complete copy of the Financial Statements. The Financial Statements were prepared in accordance with (i) GAAP consistently applied for all periods presented (except as otherwise expressly set forth in Schedule 3.3A and identified as an exception thereto) and (ii) the books of account and other financial records of the Seller. The Financial Statements present fairly the financial condition, Members' equity and results of operations of Seller as at the respective dates of and for the periods referred to therein. Schedule 3.3B sets forth a true, correct and complete copy of the Pre-petition Liabilities and all of such Liabilities are included in the March 31 Balance Sheet. 3.4 Title to Properties; Encumbrances. (a) Seller has good, valid and marketable title to, or holds by valid and existing lease or license, free and clear of all Encumbrances, all of the Assets and all other real or personal property set forth on the March 31, 2000 Balance Sheet or currently used by it in, or reasonably necessary to enable it to carry on, the Business as presently conducted, except for Permitted Encumbrances and except for properties disposed of in the ordinary course of business consistent with past practice. (b) The Assets comprise all assets and services required for the continued conduct of the Business as now being conducted. The Assets, taken as a whole, constitute all the properties and assets relating to or used or held for use in connection with the Business during the past twelve months (except Inventory sold, cash disposed of, accounts receivable collected, prepaid expenses realized, Contracts fully performed, properties or assets replaced by equivalent or superior properties or assets, in each case in the ordinary course of business, and the Excluded Assets). Except for Excluded Assets, there are no assets or properties used in the operation of the Business and owned by any Person other than the Seller. The Assets are in all material respects adequate for the purposes for which such assets are currently used or are held for use, and are in reasonably good repair and operating condition (subject to normal wear and tear) and, to the knowledge of the Seller, there are no facts or conditions affecting the Assets which could, individually or in the aggregate, interfere in any material respect with the use, occupancy or operation thereof as currently used, occupied or operated, or their adequacy for such use. 3.5 Intellectual Property. (a) Seller owns, or has a valid license to use, all of the Intellectual Property, if any, which are currently used by it in, and are reasonably necessary to enable it to carry on, its business as presently conducted. Schedule 3.5 lists (i) all material Intellectual Property, including jurisdictions in which each such material Intellectual Property right has been issued or registered, and (ii) all material licenses, sublicenses and other agreements, pursuant to which Seller has 13 14 received or given a right to use such Intellectual Property right from or to a third party. (b) Except as disclosed in Schedule 3.5, as to all Intellectual Property set forth therein: (i) such Intellectual Property is owned, licensed or leased by the Seller, free and clear of any Encumbrance, (ii) to the knowledge of the Seller, no Action has been made or asserted or are pending against the Seller based upon or challenging or seeking to deny or restrict the use by the Seller of any of such Intellectual Property; (iii) to the knowledge of the Seller, 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 the Seller therein; (iv) the Seller has not 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 Seller has delivered to the Buyer correct and complete copies of all licenses for all Intellectual Property set forth in Schedule 3.5 as to which the Seller is a licensor or licensee. Each such license is legal, valid, binding, enforceable and in full force and effect in all material respects with respect to the Seller and, to the knowledge of the Seller, with respect to all other parties thereto and is the entire agreement between the respective licenser and licensee with respect to such license and no Default currently exists thereunder. 3.6 Labor Matters. Except as set forth in Schedule 3.6, as of the date hereof, (i) Seller is not involved in or, to Seller's knowledge, threatened with any labor dispute, arbitration, lawsuit or administrative proceeding relating to labor matters involving the employees of Seller (excluding routine workers' compensation claims) that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on Seller; (ii) Seller is not a party to, bound by, or charged with any violation of, any collective bargaining agreement, contract or other understanding with a labor union or labor organization; (iii) Seller is not engaged in any unfair labor practices, or been charged or threatened with any charges of unfair labor practices; (iv) to the knowledge of Seller, there is no activity involving any labor union or similar organization of Seller seeking representation of any group of employees of Seller, to certify a collective bargaining unit or engaging in any other organizational activity and there are no strikes, shutdowns, work stoppages, lockouts, or threats thereof, by or with respect to any group of employees of Seller; (v) no executive or key employee of Seller has indicated that he or she is considering terminating his or her employment; (vi) no employee or former employee of Seller is entitled to any severance payment or similar payment, either by statute or by contract, upon the termination of his or her employment; (vii) 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 Seller and is not liable for any arrears of wages, Taxes, penalties or other sums for failure to comply with any of the foregoing; (viii) Seller has paid in full to all employees of Seller or adequately accrued for in accordance with GAAP consistently applied all wages, salaries, commissions, bonuses (to the extent declared or earned), benefits and other compensation due to or on behalf of such 14 15 employees; (ix) there is no material claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or, to the knowledge of the Seller, threatened before any Governmental Authority with respect to any persons currently or formerly employed by Seller; and (x) there is no charge of discrimination or unlawful conduct in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, or sexual harassment, which has been asserted in the past 12 months or is now pending or, to the knowledge of the Seller, threatened in writing. 3.7 Customers. Schedule 3.7 hereto sets forth a list of Seller's ten largest customers in order of dollar volume of sales for the seven month period ending March 31, 2000, showing the approximate total sales in dollars by Seller to each such customer during each such period. To the best of its knowledge, Seller is not engaged in any disputes with any such customers except for minor bill adjustments and similar disputes in the ordinary course of business and Seller has no knowledge of any facts that are reasonably likely to result in a material adverse change in the business relationship of Seller with such customers, nor has Seller received any written notice to the effect that any material adverse change may occur in the business relationship of Seller with any such customers. 3.8 Compliance with Regulations. Except as set forth in Schedule 3.8, to Seller's knowledge, the conduct of the business of Seller complies in all material respects with, and Seller is not currently in violation or breach of, all applicable Regulations and all Court Orders applicable thereto. 3.9 Material Contracts. (a) Schedule 3.9(a) identifies each of the following Contracts to which Seller is a party or otherwise is bound: (i) all Contracts evidencing indebtedness for money borrowed, including guarantees; (ii) all Contracts relating to employment, compensation of or benefits for officers, employees or consultants of Seller; (iii) all noncancellable Contracts for the purchase or supply of materials, supplies, services, merchandise or equipment involving the future payment to, or sale or provision of goods or services by, Seller of more than $10,000; (iv) any Contract not entered into in the ordinary course of the Business of Seller; (v) any Contract containing restrictions on the operations of Seller or any restrictions on its ability to compete in any geographic region or in any line of business; (vi) any lease of real property and all personal property leases calling for annual lease payments after the date hereof in excess of $10,000; 15 16 (vii) all broker, distributor, dealer, manufacturer's representative, franchise, agency, consignment, sales promotion, marketing and advertising Contracts; (viii) all Contracts with any Governmental Authority; (ix) all Contracts pursuant to which Seller is appointed or designated as the exclusive distributor of any product or services; (x) all Contracts between the Seller and any Member or any Affiliate of any Member, to the extent such Contract will remain in force and effect following the Closing hereunder; and (xi) each and every other Contract which is material to the financial condition, earnings, operations or business of Seller. The Contracts identified in Schedule 3.9(a) are collectively referred to herein as the " Material Contracts". (b) Except as expressly set forth and identified in Schedule 3.9(a): (i) Seller has delivered to Buyer true, correct and complete copies of all Material Contracts; (ii) Neither the execution, delivery and performance of this Agreement or the Ancillary Agreements nor the consummation of the transactions contemplated hereby or thereby will conflict in any respect with or result in a breach of, or give rise to a right of termination of, or accelerate the performance required by, any terms of any Material Contracts or constitute a Default thereunder; and (iii) Each of the Material Contracts is valid and existing in full force and effect; Seller has, in all material respects, performed all obligations required to be performed by it under and is not in Default in any material respect under, in material conflict in any respect with, or in material violation in any respect of, any of the Material Contracts; and Seller has not received notice of noncompliance or alleged noncompliance with any of the Material Contracts; to the knowledge of the Seller, each other party to any Material Contract has, in all material respects, performed all obligations required to be performed by it under, and is not in Default in any material respect under, in material conflict in any respect with, or in material violation in any respect of, any of the Material Contracts. 3.10 Taxes. Seller has properly prepared and filed all Tax returns required to be filed by it in connection with its business, operations and assets and all Taxes due thereunder have been timely paid. True and complete copies of all such Tax returns for Seller have been delivered to the Buyer. Except as set forth on Schedule 3.10, Seller does not have any unpaid liability for any Taxes whatsoever that arose or otherwise was incurred in connection with the Business. No 16 17 proposed Taxes, additions to Tax, interest or penalties have been asserted or are pending against Seller and no such matters are under discussion with the applicable Taxing authorities. There are no agreements, waivers or other arrangements providing for extensions of time with respect to the assessment or collection of any unpaid Tax against Seller. Seller has withheld or otherwise collected all Taxes or amounts it was required to withhold or collect under any applicable law, including, without limitation any amounts required to be withheld or collected with respect to employee income Tax withholding, social security, unemployment compensation, sales or use Taxes or workmen's compensation, and all such amounts have been timely remitted to the proper authorities. 3.11 Employee Benefit Matters. (a) Except as set forth in Schedule 3.11, Seller does not maintain, sponsor or contribute to any plans for pension, profit-sharing, deferred compensation, severance pay, bonuses, stock options, stock purchases, or any other retirement or deferred benefit, or for any health, accident or other welfare plan, or any other employee or retired employee benefits or incentive plan, program, contract, understanding or arrangement in which any of Seller's employees, former employees, retired employees or consultants (or beneficiaries of any of the foregoing) is entitled to participate. The plans, programs, contracts, understandings and arrangements listed in Schedule 3.11 are hereinafter referred to as the "Employee Plans." Seller has supplied Buyer with complete and accurate copies of each such Employee Plan. (b) None of the Employee 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 Seller could incur liability under Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). None of the Employee Plans provides for the payment of separation, severance, termination or similar type benefits to any Person or obligates 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. (c) Each Employee Plan is operated in all material respects in accordance with the requirements of all Regulations, including, without limitation, ERISA and the Code, and, to the knowledge of the Seller, all persons who participate in the operation of such Employee Plans and all Employee Plan "fiduciaries" (within the meaning of Section 3(21) of ERISA) have acted in all material respects in accordance with the provisions of all Regulations, including, without limitation, ERISA and the Code. 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 Employee Plan. No legal action, suit or claim is pending or, to the knowledge of the Seller, threatened with respect to any Employee Plan (other than claims for benefits in the ordinary course) and, to the knowledge of the Seller, no fact or event exists that could give rise to any such action, suit or claim. (d) To the best of Seller's knowledge, each Employee 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 17 18 connection with any Employee Plan which is intended to be exempt from federal income Taxation under Section 501(a) of the Code is so exempt and, to the knowledge of the Seller, 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 Employee Plan or the exempt status of any such trust. To the best of Seller's knowledge, each trust maintained or contributed to by 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 knowledge of the Seller, no fact or event has occurred since the date of such determination by the IRS to adversely affect such qualified or exempt status. (e) To the knowledge of the Seller, there has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan. To the knowledge of the Seller, the Seller has not incurred any liability for any excise Tax arising under Section 4971, 4972, 4980 or 4980B of the Code and, to the knowledge of the Seller, no fact or event exists which could give rise to any such liability. The Seller has not 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 knowledge of the Seller, 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 Employee 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 Employee Plan subject to Title IV of ERISA. No Employee Plan had an accumulated funding deficiency (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the most recently ended plan year of such Employee Plan. None of the assets of Seller is the subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code; Seller has not been required to post any security under Section 307 of ERISA or Section 401(a)(29) of the Code; and, to the knowledge of the Seller, no fact or event exists which could give rise to any such lien or requirement to post any such security. (f) All employer and employee contributions, premiums or payments required to be made with respect to any Employee 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 knowledge of the Seller, no fact or event exists which could give rise to any such challenge or disallowance. As of the date hereof and as of the Closing Date, no Employee Plan which is subject to Title IV of ERISA has or will have an "unfunded benefit liability" (within the meaning of Section 4001(a)(18) of ERISA). 3.12 No Material Adverse Change. Except as set forth in Schedule 3.12, since March 31, 2000, there has not been any event, occurrence or circumstance that has had, individually or in the aggregate, a Material Adverse Effect on Seller, or any event, occurrence or circumstance that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on Seller. 18 19 3.13 Brokers, Finders, Etc. Neither Seller nor any of the Members has employed, or is subject to any claim of, any broker, finder, or similar consultant or intermediary in connection with the transactions contemplated by this Agreement which might be entitled to a fee or commission upon the consummation of the transactions contemplated hereby. 3.14 Inventory. Except as set forth in Schedule 3.14, all of Seller's Inventory is located at the distribution center described in the Services Agreement. Seller has good and marketable title to all of its Inventory, free and clear of all Encumbrances. Except as set forth in Schedule 3.14, the Inventory does not include any items held on consignment for others, nor is any Inventory of Seller held by others on consignment and Seller is not 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. 3.15 Bank Accounts, Etc. Schedule 3.15 sets forth a list of all bank accounts, safe deposit boxes, and lock boxes of Seller including, with respect to each such account and lock box, identification of all authorized signatories. 3.16 Insurance. Schedule 3.16 sets forth a list of all general liability, product liability, fire, casualty, motor vehicle and other insurance or bonding maintained by or on behalf of Seller or any of its respective employees as of the date hereof. All requirements and provisions of all such policies are being substantially complied with. No notice of cancellation has been given to or received by Seller with respect to any such insurance policy. To the knowledge of Seller, no such policies are or will become subject to an assessment due to any retroactive rate or audit adjustments or coinsurance arrangements, other than under worker's compensation insurance policies in the ordinary course of business. 3.17 Recent Operations. Since March 31, 2000, the Business has been conducted in all material respects in the ordinary course and consistent with past practice, and, except as set forth in Schedule 3.17, since March 31, 2000, the Seller has not: (a) permitted or allowed any of its assets or properties (whether tangible or intangible) to be subjected to any Encumbrance, other than Encumbrances that will be released at or prior to the Closing; (b) amended, terminated, canceled or compromised any material claims or waived any other rights of value in excess of $10,000; (c) 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 19 20 Inventory and used machinery and equipment in the ordinary course of the Business consistent with past practice; (d) 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; (e) (i) 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 $250,000, or (ii) established or increased or promised or proposed to increase any benefits under any Employee Plan, in either case except as required by law and except for ordinary increases consistent with the past practice of the Business; (f) made any change in any method of accounting or accounting practice or policy, other than such changes required by GAAP; (g) made or changed any express or deemed election or settled or compromised any liability with respect to Taxes or prepaid any Taxes, except in the ordinary course of the Business consistent with past practice, or as may be required by any applicable law, rule or regulation; (h) failed to pay any material amount to any creditor which may cause or result in a Material Adverse Effect upon the Business; (i) redeemed any of its membership interests or declared, made or paid any dividends or distributions (whether in cash, securities or other property); (j) made any capital expenditure or commitment for any capital expenditure in excess of $50,000 individually or $250,000 in the aggregate; (k) 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 acquired any material assets other than in the ordinary course of the Business consistent with past practice; (l) entered into any Contract with any Member or any Affiliate thereof; (m) 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; (n) materially amended, modified or consented to the termination of any Material Contract or any of its rights therein; 20 21 (o) suffered any casualty loss or damage with respect to any of its assets, plant, property or equipment which would have a replacement cost of more than $100,000, whether or not such losses or damage shall have been covered by insurance; or (n) 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. 3.18 Suppliers. Listed in Schedule 3.18 are the names and addresses of all the suppliers from whom the Seller ordered materials, supplies, merchandise and other goods for the Business and to which Seller paid, or is obligated to pay, an aggregate purchase price of $25,000 or more during the seven month period ended on March 31, 2000 and the amount for which each such supplier invoiced Seller during such period. Except as disclosed in Schedule 3.18, to Seller's knowledge, none of the suppliers listed in Schedule 3.18 will not sell materials, supplies, merchandise and other goods to the Buyer at any time after the Closing Date on the same or similar terms and conditions as those applicable to Seller, subject to general price increases. 3.19 Disclosure. No representation or warranty made by Seller in this Agreement and no statement contained in any Schedule delivered by or on behalf of Seller pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading. 3.20 Litigation. Except as set forth on Schedule 3.20, there is no Action pending or, to Seller's knowledge, threatened against or affecting Seller, nor is there any judgment, decree, injunction, ruling or order of any Governmental Authority outstanding against Seller. 3.21 Absence of Undisclosed Liabilities. Seller has no Liabilities, except for Liabilities which (i) are disclosed, accrued or reserved against on the Financial Statements (including the financial statement notes thereto), (ii) were incurred after March 31, 2000 in the ordinary course of the Business and consistent with past practice and without violation or breach of any Material Contract or Regulation, (iii) are disclosed in Schedule 3.21 and expressly identified therein as a Liability, or (iv) arise under the Contracts in accordance with the terms thereof (other than Liabilities arising from any breach or violation by Seller of any of the terms or provisions thereof) . 3.22 Environmental Laws. To Seller's knowledge, Seller is currently, and has been in the past, in compliance in all material respects, with all applicable laws, rules, regulations, common law, ordinances, decrees, orders, permits, and other binding legal requirements relating to health, safety, pollution or protection of the environment ("Environmental Laws") and there are no outstanding allegations or claims by any person or Governmental Authority concerning Seller's compliance with Environmental Laws. To the knowledge of Seller, there are no asbestos containing materials or underground storage tanks located on any properties occupied by Seller 21 22 3.23 Manufacturer Transactions. Schedule 3.23 hereto sets forth a true, correct and complete description of all vendor rebates, refunds, coop arrangements and other promotional programs offered by manufacturers or vendors in which Seller is a participant and under which Seller currently expects to receive, or be entitled to receive, payments or credits of $50,000 or more (for any single manufacturer or vendor) for the seven month period ending March 31, 2000. 3.24 Accounts Receivable. To the best of Seller's knowledge, all of the accounts and notes receivable of Seller set forth on the Financial Statements (net of the applicable reserves reflected therein): (i) represent sales actually made in the ordinary course of business for goods or services delivered or rendered to unaffiliated customers in bona fide arm's length transactions, (ii) except as set forth on Schedule 3.24, constitute valid claims, and (iii) to Seller's knowledge, are good and collectible, in each case at the aggregate recorded amounts thereof without valid right of recourse, defense, deduction, return of goods, counterclaim, or offset and, as of the dates thereof, have been or will be collected in the ordinary course of business and consistent with past experience. 3.25 Restrictions on Business Activities. Except for this Agreement, there is no agreement, judgment, injunction, order or decree binding upon Seller which has or could reasonably be expected to have (after giving effect to the consummation of the transactions contemplated hereby) the effect of prohibiting or impairing the Business. 3.26 Real Property. The Seller does not own any real property. 3.27 Illegal Payments. To the knowledge of the Seller, neither Seller nor any of its officers or agents has made any illegal payments to, or provided any illegal benefit or inducement for, any supplier, customer or other person, in an attempt to influence any such person to take or to refrain from taking any action relating to Seller. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller and the Members that the statements contained in this Article 4 are true and correct as of the date hereof and as of the Closing Date. 4.1 Organization; Authorization; Etc. (a) Buyer is a corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware. Buyer (i) has all requisite power and authority to own all of its properties and assets and to carry on its business as it is now being conducted, and (ii) is in good standing, and is duly licensed, authorized or qualified to transact business in each jurisdiction in which the ownership or lease of real property or the conduct of its business requires it to be so qualified, except where the failure to be in good standing or to be duly licensed, authorized or qualified to transact business, would not reasonably be expected to, 22 23 individually or in the aggregate, have a Material Adverse Effect. Buyer is an indirect wholly-owned subsidiary of Daisytek International Corporation. (b) The execution, delivery and performance by Buyer of this Agreement and each of the Ancillary Agreements to which it may be a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors and stockholders of Buyer, and no additional proceedings (corporate or otherwise) on the part of Buyer are necessary to authorize the execution, delivery and performance hereof or thereof and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by and, assuming the due execution and delivery thereof by Seller, is (and, upon the execution and delivery thereof, each of the Ancillary Agreements to which Buyer may be a party will be) the legal, valid and binding obligation of Buyer and, is (and will be) enforceable against Buyer in accordance with its terms, except that enforceability may be limited by the effect of (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws relating to or affecting the rights of creditors or (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (c) The execution and delivery of this Agreement and the Ancillary Agreements by Buyer, and the consummation by Buyer of the transactions contemplated hereby and thereby will not (i) violate any provision of the certificate of incorporation or bylaws or similar organizational instrument of Buyer, (ii) result in a violation of any provision of, or constitute a default (with or without notice or lapse of time) under, or give rise to a right of termination, cancellation or acceleration of (or entitle any party to accelerate whether after the giving of notice or lapse of time or both) any obligation under, or result in the imposition of any lien upon or the creation of a security interest in any of Buyer's assets or properties pursuant to, any agreement (whether written or oral), contract, commitment, note, bond, debt instrument, mortgage, indenture, lien, lease agreement or other instrument, or any judgment, injunction, order or decree to which Buyer is a party or by which it or its properties are or is bound, or (iii) violate or conflict with any Regulation or any Court Order applicable to Buyer or its properties. (d) No consent, approval, order or authorization of, or registration, declaration or filing with (i) any governmental authority or (ii) any individual, corporation or other entity (including any holder of Buyer's securities) is required by or with respect to Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 4.2 Litigation; Orders. There is no Action pending nor, to the knowledge of Buyer, is any Action threatened against or involving Buyer or affecting any properties or assets of Buyer, which, in any such case, could reasonably be expected to (a) materially prevent or delay the ability of Buyer to consummate the transactions contemplated hereby, or (b) individually or in the aggregate, have a Material Adverse Effect on Buyer. Buyer is not subject to any Order which could reasonably be expected to materially prevent or delay the ability of Buyer to consummate the transactions contemplated hereby or, individually or in the aggregate, have a Material Adverse Effect on Buyer. 23 24 4.3 Brokers, Finders, Etc. Buyer has not employed, nor is subject to any claim of, any broker, finder, or similar consultant or intermediary in connection with the transactions contemplated by this Agreement which might be entitled to a fee or commission from Buyer upon the consummation of the transactions contemplated hereby. 4.4 Financial Ability. Buyer has the financial ability to consummate the transactions contemplated by this Agreement and the Ancillary Agreements to which it may be a party. 4.5 Disclosure. No representation or warranty made by the Buyer in this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading. ARTICLE 5 ACTIONS BY SELLER AND BUYER PRIOR TO THE CLOSING Seller and Buyer, as applicable, covenant and agree, and the Officers covenant and agree to cause the Seller, to comply with the following for the period from the date hereof through the Closing Date: 5.1 Conduct of Business. Seller shall, except as contemplated by this Agreement, or as consented to by Buyer in writing, operate the Business in the ordinary course of business and in accordance with past practice and will not take any action inconsistent with this Agreement, the Ancillary Agreements or the consummation of the Closing. Without limiting the generality of the foregoing, Seller shall not, except as specifically contemplated by this Agreement or as consented to by Buyer in writing: (a) other than in the ordinary course of the Business, consistent with past practice, incur any indebtedness for borrowed money, or assume, guarantee, endorse (other than endorsements for deposit or collection in the ordinary course of business), or otherwise become responsible for obligations of any other Person; (b) issue or commit to issue any membership interests or any other securities or any securities convertible into membership interests or any other securities; (c) except as set forth in Schedule 5.1 (c), pay or incur any obligation to pay any dividend or distribution in respect if any membership interest or redeem or incur any obligation to redeem any membership interest; (d) other than in the ordinary course of the Business, consistent with past practice, mortgage, pledge or otherwise encumber any Assets (except for Permitted Encumbrances) or sell, transfer, license or otherwise dispose of any Assets; (e) cancel, release or assign any indebtedness owed to it or any claims or rights held by it; 24 25 (f) make any investment of a capital nature either by purchase of stock or securities, contributions to capital, property transfer or otherwise, or by the purchase of any property or assets of any other Person; (g) modify, amend, supplement or terminate any Material Contract; (h) enter into or modify any employment Contract (except for Contracts which are cancelable by Seller without premium, penalty or severance and upon not more than 30 days prior notice), (ii) pay any compensation to or for any employee, officer or director other than pursuant to existing employment arrangements, (iii) pay or agree to pay any bonus, incentive compensation, service award or other like benefit or (iv) enter into or modify any other Employee Plan; (i) enter into or modify any Contract with any Member or any Affiliate of any Member; (j) make any change in any method of accounting or accounting practice; (k) fail to materially comply with all Regulations and Court Orders applicable to the Assets and the Business consistent with past practices; (l) fail to use its commercially reasonable efforts to (i) maintain the Business, (ii) retain the services of its employees so that such employees will remain available to Buyer on and after the Closing Date (provided that Seller shall not be required by this Section 5.1(l) to enter into any employment agreement with any Employee), (iii) maintain existing relationships with suppliers and customers and others having business dealings with Seller and (iv) otherwise to preserve the goodwill of the Business so that such relationships and goodwill will be preserved on and after the Closing Date; or (m) do any other act which would cause any representation or warranty of Seller in this Agreement to be or become untrue in any material respect or that is not in the ordinary course of business consistent with past practice. 5.2 Full Access. (a) Seller shall provide the Buyer and its officers, directors, employees, attorneys, accountants, consultants, agents and other representatives free and full access to, and the right to review and make extracts from, inspect and appraise during normal business hours, Seller's premises, properties, assets, records, Contracts and other documents, instruments and agreements and consult with the officers, directors, employees, attorneys, accountants, customers, suppliers, vendors, consultants, agents and other representatives of the Seller for the purpose of conducting such investigation and appraisal of the Business and the respective operations, assets, properties and 25 26 condition (financial or otherwise) of Seller as Buyer shall desire to conduct, provided that such investigation shall not unreasonably interfere with the Seller's business operations. (b) The Buyer agrees to comply with and be bound by the terms of that certain Confidentiality Agreement dated February 4, 2000 which shall remain in full force and effect in accordance with its terms. In addition, unless the Closing shall occur prior thereto, neither the Buyer nor any Affiliate thereof shall, for a period of one year from the date hereof, recruit or solicit to employ any person currently employed by the Seller. 5.3 Maintenance of Insurance. The Seller shall maintain in full force and effect and renew at their respective expiration dates all of the current insurance policies and binders covering the Business. 5.4 Standstill. Seller and the Officers shall neither discuss nor negotiate with nor enter into any letter of intent or agreement with any Person (other than the Buyer and its respective Affiliates, agents and representatives) with respect to any direct or indirect sale or disposition of the Assets or any direct or indirect sale or disposition of substantially all of the Business or any material part thereof. 5.5 Authorizations, Notices and Consents. (a) Each party will use its reasonable best efforts to obtain all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for his or its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Ancillary Agreements and will cooperate fully with each other party hereto in promptly seeking to obtain all such authorizations, consents, orders and approvals. Each party hereto, to the extent required thereunder, agrees to make the appropriate filing required under the HSR Act with respect to the transactions contemplated by this Agreement as promptly as possible following the execution and delivery hereof and to supply promptly to the appropriate Governmental Authorities any additional information and documentary material that may be lawfully requested pursuant to the HSR Act. (b) Each party hereto shall promptly give such notices to third parties, and use its reasonable best efforts to obtain such third party consents and estoppel certificates, as it may be required to deliver hereunder in order to consummate the transactions contemplated herein, including consents to the assignment of all Material Contracts, and each party hereto shall cooperate with the other as may be necessary in giving such notices or obtaining such consents or estoppels, provided, however, no party shall have any obligation to give any guaranty or other material consideration, or to consent to any change, modification or amendment to any Material Contract or any other material agreement, lease, license or other instrument, in connection with the obtaining of any consent or estoppel. 5.6 Notice of Developments. Prior to the Closing: (a) The Seller shall give prompt notice to the Buyer of (i) any circumstance, change in, or effect on the Business which has a Material Adverse Effect, (ii) any material 26 27 development affecting the ability of the Seller to consummate the transactions contemplated by this Agreement and (iii) all events, circumstances, facts and occurrences arising subsequent to the date hereof which would result in any breach of a representation or warranty or covenant of the Seller in this Agreement or which would have the effect of making any representation or warranty of the Seller in this Agreement false or misleading in any respect. (b) The Buyer shall give prompt notice to the Seller's Representative of (i) any material development affecting the ability of Buyer to consummate the transactions contemplated by this Agreement and (ii) all events, circumstances, facts and occurrences arising subsequent to the date hereof which would result in any breach of a representation or warranty or covenant of the Buyer in this Agreement or which would have the effect of making any representation or warranty of the Buyer in this Agreement false or misleading in any respect. (c) Any disclosure made pursuant to the preceding paragraphs (a) or (b) shall not be deemed to cure any breach of a representation, warranty, covenant or agreement or to satisfy any condition. 5.7 Further Assurances. Upon the terms and subject to the conditions contained herein, the parties agree, in each case both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder and thereunder and (iii) to cooperate with each other in connection with the foregoing. 5.8. Liability for Transfer Taxes. The Seller shall be responsible for the timely payment of, and shall indemnify and hold harmless the Buyer against, all sales (including, without limitation, bulk sales), use, value added, documentary, stamp, gross receipts, registration, transfer, conveyance, excise, recording, license and other similar Taxes and fees ("Transfer Taxes"), arising out of or in connection with or attributable to the transactions effected pursuant to this Agreement. The Seller shall prepare and timely file all Tax returns required to filed in respect of Transfer Taxes (including, without limitation, all notices required to be given with respect to bulk sales Taxes), provided that the Buyer shall be permitted to prepare any such Tax returns that are the primary responsibility of the Buyer under applicable law. 5.9. Certificates of Tax Authorities. On or before the Closing Date, the Seller shall provide to the Buyer copies of certificates from the appropriate Taxing authority stating that no Taxes are due to any state or other Taxing authority for which the Buyer could have liability to withhold or pay Taxes with respect to the transfer of the Assets or the Business, provided that if the Seller shall fail to provide such certificates, the Buyer shall withhold or, where appropriate, escrow such amount as necessary based upon the Buyer's reasonable estimate of the amount of such potential liability, or as determined by the appropriate Taxing authority, to cover such Taxes until such time as certificates are provided. 5.10 Physical Inventory. Prior to the Closing Date, Buyer and Seller shall conduct a 27 28 complete physical count of Seller's Inventory. Each party shall bear its own costs of such physical count. Prior to such count, and solely for purposes of consummating the transactions contemplated herein, Buyer and Seller's Representative shall mutually agree upon a methodology to determine the amount, if any, of Seller's payable under the Services Agreement and the amount, if any, of Seller's receivable under the Services Agreement. The amount of such payable and/or receivable under the Services Agreement, as so determined by Buyer and Seller's Representative, shall be conclusive solely and exclusively for purposes of this Agreement and shall be reflected on the Final Closing Balance Sheet. ARTICLE 6 CONDITIONS TO SELLER'S OBLIGATIONS The obligation of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by the Seller's Representative, prior to or at the Closing, of each of the following conditions precedent: 6.1 Representations and Warranties. The representations and warranties made by the Buyer 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). 6.2 Performance of Obligations. Buyer shall have performed and complied with all of the covenants, agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date. 6.3 Compliance Certificate. Buyer shall each have delivered to Seller's Representative on the Closing Date a certificate signed by an authorized officer thereof and dated as of the Closing Date to the effect that each of the representations and warranties of Buyer 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 Buyer 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. 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. Specifically, but without limiting the foregoing, if applicable, any waiting period (and any extension thereof) under the HSR Act shall have expired or shall have been terminated. 28 29 6.6 Resolutions. The Seller's Representative shall have received a true and complete copy, certified by an officer of the Buyer, of the resolutions duly adopted by the Board of Directors of the Buyer evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby. 6.7 Legal Opinion. The Seller's Representative shall have received a legal opinion, dated as of the Closing Date, of counsel to the Buyer, substantially in the form of Exhibit 6.7 hereto. 6.8 Additional Agreements. The Buyer shall have executed and delivered the Employment Agreements and the Non-Compete Agreements. 6.9 Services Agreement. The Buyer and the Seller's Representative shall have agreed upon the matters set forth in Section 5.10 above. 6.10 Closing Payment. The Buyer shall have made the payment of the Closing Cash Amount as set forth in Section 2.5 above. ARTICLE 7 CONDITIONS TO BUYER'S OBLIGATIONS The obligation of the Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by the Buyer, prior to or at the Closing, of each of the following conditions precedent: 7.1 Representations and Warranties. The representations and warranties made by Seller 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). 7.2 Performance of Obligations. Seller shall have performed and complied with all of the covenants, agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date. 7.3 Compliance Certificate. Seller shall have delivered to Buyer on the Closing Date a certificate signed by or on behalf of Seller and dated as of the Closing Date to the effect that each of the representations and warranties of Seller 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 Seller has complied with, fulfilled and performed each of the covenants, terms and conditions to be complied with, fulfilled or performed by Seller under this Agreement on or prior to the Closing Date. 29 30 7.4 Absence of Litigation. No Action shall be threatened or pending on the Closing Date in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such Action shall be pending or threatened. 7.5 Required Consents and Approvals; HSR. Each Governmental Authority and all other Persons whose approval, consent or waiver may be necessary or required with respect to the transactions contemplated herein shall have given or granted such approval, consent or waiver. Specifically, but without limiting the foregoing, if applicable, any waiting period (and any extension thereof) under the HSR Act shall have expired or shall have been terminated. 7.6 Good Standing Certificate. The Buyer shall have received a long form good standing certificate from the Secretary of State (or other similar official) of Seller's state of incorporation or organization and each other jurisdiction set forth in Schedule 3.1(a) hereof, in each case dated as of a date not earlier than five Business Days prior to the Closing Date and accompanied by "bring down" certificates or similar assurances dated as of the Closing Date. 7.7 Change of Name. The Buyer shall have received evidence that Seller shall have changed its name to a name which does not include "B.A. Pargh" or "Pargh" or any other name which is identified with the Business. 7.8 Legal Opinion. The Buyer shall have received a legal opinion, dated as of the Closing Date, of counsel to the Seller and the Members, substantially in the form of Exhibit 7.8 hereto. 7.9 Ancillary Agreements. The Officers shall have executed and delivered the Employment Agreements and the Seller and the Officers shall have executed and delivered the Non-compete Agreements. 7.10 Services Agreement. The Buyer and the Seller's Representative shall have agreed upon the matters set forth in Section 5.10 above. 7.11 Bank Debt. The Buyer shall have received a certificate or written statement of a duly authorized representative of First American National Bank (the "Bank"), dated as of a date no earlier than five Business Days prior to the Closing Date, setting forth, with respect to all indebtedness of the Seller to the Bank: (i) the amount necessary to repay the Bank in full (including all principal, interest, fees and other charges) together with a per diem amount for each day thereafter, (ii) the address (or wire transfer account) to which such payment should be delivered and (iii) the acknowledgment of the Bank that upon its receipt (and collection) of such amount, all amounts owing to the Bank will be satisfied and paid in full and all collateral and security given therefor will be released and such Bank will execute and deliver such further termination statements and similar releases as the Buyer may reasonably request in order to evidence the foregoing. 7.12 Due Diligence. The Buyer shall have completed to its satisfaction (in its sole and absolute discretion) its due diligence review and analysis of the Business and the Seller; provided, however, the Buyer shall have a period of five Business Days from the date hereof in 30 31 which to notify the Seller's Representative that it is not so satisfied and in the event the Buyer shall fail or elect not to so notify the Seller's Representative, this condition (but not any other condition) shall be deemed satisfied. 7.13 No Material Adverse Effect. No circumstance, change in, or effect on the Business (including any 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, 2000 which in the reasonable judgment of the Buyer has, or would have, a Material Adverse Effect upon the Business. 7.14 Board of Directors Approval. The transactions contemplated hereby shall have been approved by appropriate action of the Board of Directors of Daisytek International Corporation. 7.15 Bank Approval. Daisytek International Corporation shall have received the consent of its lenders to the consummation of the transactions contemplated herein. ARTICLE 8 CLOSING 8.1 Date of Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at 10:00 a.m. local time at the offices of counsel to the Seller on the first business day following the fulfillment or waiver of the conditions set forth in Articles 6 and 7 hereof or at such other time and place as the parties hereto may mutually agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." The following transactions shall take place at the Closing, all of which shall be deemed to have occurred simultaneously and none of which shall be deemed completed unless and until all of them shall have been completed (or waived in writing by the parties entitled to performance): 8.2 Deliveries by Seller. At the Closing, Seller shall deliver to Buyer the following: (i) such bills of sale, assignments or other instruments of transfer and assignment, in form and substance reasonably satisfactory to Buyer, as are effective to vest in Buyer title to the Assets; (ii) the Ancillary Agreements, duly executed by each party thereto other than Buyer; (iii) any Consents required to be obtained by Seller; (iv) the Seller Closing certificates set forth in Article 7 hereof; (v) an opinion of counsel to Seller dated as of the Closing Date, in the form annexed hereto as Exhibit 7.8; and (vi) such other documents and certificates duly executed as may reasonably be requested by Buyer prior to the Closing Date. 8.3 Deliveries by Buyer. At the Closing, Buyer shall deliver to Seller the following: (i) payment of the Closing Cash Amount; (ii) an Assumption Agreement in the form annexed hereto as Exhibit 8.3; (iii) the Ancillary Agreements to which Buyer is a party, duly executed by it; (iv) any Consents required to be obtained by Buyer; (v) the Buyer Closing certificate set forth in Article 6 hereof; (vi) an opinion of counsel to Buyer, dated as of the Closing Date, in the form annexed hereto as Exhibit 6.7; and (vii) such other documents and certificates duly executed as may reasonably be requested by Seller's Representative prior to the Closing Date. 31 32 8.4 Third Party Consents. Notwithstanding anything to the contrary in this Agreement, this Agreement shall not constitute an agreement to assign or transfer any Governmental Approval, Contract, or any claim, right or benefit arising thereunder or resulting therefrom if an assignment or transfer or an attempt to make such an assignment or transfer without the consent of a third party would constitute a breach or violation thereof or affect adversely the rights of the Buyer or Seller thereunder; and any transfer or assignment to the Buyer by Seller of any interest therein or thereunder that requires the consent of a third party shall be made subject to such consent or approval being obtained. In the event any such consent or approval is not obtained on or prior to the Closing Date, Seller shall continue to use all reasonable efforts to obtain any such approval or consent after the Closing Date until such time as such consent or approval has been obtained, and Seller will cooperate with the Buyer in any lawful and economically feasible arrangement to provide that the Buyer shall receive the interest of Seller in the benefits thereunder, including performance by Seller, as agent, if economically feasible, provided that the Buyer shall undertake to pay or satisfy the corresponding liabilities for the enjoyment of such benefit to the extent the Buyer would have been responsible therefor hereunder if such consent or approval had been obtained. Seller shall pay and discharge, and shall indemnify and hold the Buyer harmless from and against, any and all out-of-pocket costs of seeking to obtain or obtaining any such consent or approval whether before or after the Closing Date. Nothing in this Section shall be deemed a waiver by the Buyer of its right to have received on or before the Closing an effective assignment of all of the Assets nor shall this Section be deemed to constitute an agreement to exclude any assets from the Assets. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification of by Seller and Members. From and after the Closing, the Seller and the Members shall, jointly and severally, but subject to the limitations of Section 9.3 hereof, reimburse, indemnify and hold harmless the Buyer, and its parent corporation, officers, directors, employees, agents, representatives and successors and assigns from and against and in respect of each of the following (collectively, the "Buyer's Indemnification Events"): (a) any and all damages, losses, deficiencies, liabilities, claims, demands, charges, fines, penalties, costs and expenses of every nature and character whatsoever, including, without limitation, reasonable attorneys' fees and costs (collectively, the "Losses") that result from, relate to or arise out of: (i) any misrepresentation or breach of warranty of the Seller or any Member in this Agreement or any of the Schedules provided hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of the Seller in connection with the negotiation, execution or performance of this Agreement and the transactions contemplated herein; (ii) the failure of the Seller to perform any agreement or covenant on its part required to be performed on or before the Closing Date (except to the extent waived by Buyer 32 33 at or prior to the Closing) or the failure of Seller to perform any agreement or covenant on its part required to be performed after the Closing Date; (iii) any Retained Liabilities or Excluded Assets; (iv) any and all Taxes of Seller, including all Taxes arising from or related to the operation of the Business prior to the Closing Date and all Taxes arising from or related to the consummation of the transactions contemplated herein; (v) any product liability claim with respect to products sold by Seller prior to the Closing Date; and (vi) the failure of Seller to comply with all applicable bulk sales laws; 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. 9.2 Indemnification of Seller and Members. From and after the Closing, the Buyer shall, subject to the limitations of Section 9.3 hereof, reimburse, indemnify and hold harmless Seller and the Members and each of their respective heirs, estate, successors and assigns from and against and in respect of each of the following (collectively, the "Seller's Indemnification Events"): (a) any and all Losses that result from, relate to or arise out of: (i) any misrepresentation or breach of warranty of the Buyer in this Agreement or any of the Schedules provided hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of the Buyer in connection with the negotiation, execution or performance of this Agreement and the transactions contemplated herein; (ii) the failure of the Buyer to perform any agreement or covenant on its part required to be performed on or before the Closing Date (except to the extent waived by Seller's Representative at or prior to the Closing) or the failure of the Buyer to perform any agreement or covenant on its part required to be performed after the Closing Date; (iii) any Assumed Liabilities; (iv) any and all Taxes of Buyer, including all Taxes arising from or related to the operation of the Business after the Closing; and (v) any product liability claim with respect to products sold by Buyer after the Closing Date; 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. 33 34 9.3 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 benefit or savings realized by such party with respect thereto (net of any Tax cost attributable to the receipt of any indemnification payment hereunder) or (ii) any proceeds (net of deductibles, Taxes and collection costs) received by such party from any insurance policies maintained by or on behalf of such party with respect to losses (net of any increase in insurance premiums attributable to such recovery). The parties agree to submit a claim under any applicable insurance policies prior to or promptly following making a request for indemnification hereunder. (b) The aggregate liability of any party in respect of indemnification hereunder shall not exceed the Purchase Price, and the maximum liability of (i) any Member other than the Officers in respect of indemnification hereunder shall be equal to the cash portion of the Purchase Price (minus the amount, if any, paid or retained in respect of the guaranteed Receivables under Section 10.1(b) below), multiplied by such member's percentage ownership interest in the Seller as set forth in Schedule 3.2(a) hereto and (ii) any Officer in respect of indemnification hereunder shall be equal to the cash portion of the Purchase Price (minus the amount, if any, paid or retained in respect of the guaranteed Receivables under Section 10.1(b) below). (c) The sum of all Losses incurred by the Buyer, or the sum of all Losses incurred by the Seller and the Members in the aggregate, must exceed, on a cumulative basis, $150,000 before such parties shall be entitled to indemnification hereunder; provided, however, once such cumulative Losses exceed $150,000, such parties shall be entitled to indemnification for all Losses. The foregoing limitation shall not apply to any indemnification claim relating to Taxes for the period prior to the Closing Date. (d) No party shall have any liability in respect of indemnification under Section 9.1(a)(i) or Section 9.2(a)(i) hereunder following the one year anniversary date of the Closing Date; provided, however, the representations and warranties of the Seller relating to (i) title to the Assets shall survive indefinitely and (ii) Taxes and Tax 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. 9.4 Notice and Procedure. 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 34 35 party cannot, by reason of any actual or deemed conflict of interest, adequately represent the interests of the indemnified party. In the event that the indemnifying party fails to assume the defense, appeal or settlement of such claim within 20 days after receipt of notice thereof from the indemnified party, the indemnified party shall have the right to undertake the defense or appeal of, or settle or compromise, such claim on behalf of and for the account and risk of the indemnifying party. The indemnifying party shall not settle or compromise any such claim without the indemnified party's prior written consent, unless the terms of such settlement or compromise release the indemnified party from any and all liabilities with respect to such Third Party Claim. 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. 9.5 Nonexclusive Remedy. The indemnification rights of the parties hereto under this Agreement shall be subject to, and deemed effective as of, the Closing of the transactions contemplated hereunder and are independent of, and in addition to, such other rights and remedies as the parties may have at law or in equity for any fraud or willful failure to fulfill any agreement or covenant hereunder on the part of any party hereto, including without limitation, each party's right of, or to obtain, set-off, specific performance or rescission, none of which rights or remedies shall be affected or diminished hereby. The parties expressly agree that each party shall be entitled to rely upon the representations, warranties and agreements set forth herein notwithstanding (i) any investigation conducted, or information received (whether pursuant to the terms hereof or otherwise) prior to the Closing or (ii) the decision of any party to consummate the transactions described herein. 9.6 Escrowed Consideration. Subject to the limitations set forth in Section 9.3 above, and for so long as the Buyer is holding the Escrowed Consideration in accordance with the provisions hereof, the Buyer shall have the right to offset any indemnification claim against the Escrowed Consideration then being held by it; provided, however, that (i) such right of offset shall not limit or otherwise restrict the indemnification and other rights of Buyer hereunder or under applicable law, and (ii) Buyer shall give Seller's Representative not less than ten business days prior notice of such offset, and if Seller's Representative shall, within such ten day period, provide a notice of dispute to such offset, then Buyer shall not exercise such right of offset and shall continue to hold such Escrowed Consideration until such dispute shall be resolved in accordance with the provisions of Section 2.7(b) hereof. Subject to the provisions of Section 10.1 below, and provided Buyer has no outstanding indemnification claims then pending, Buyer shall pay the Escrowed Consideration to Seller in accordance with Section 2.5 (b) above. ARTICLE 10 FURTHER AGREEMENTS 10.1 Guarantee of Collectibility of Receivables of Seller. (a) Subject to the limitations set forth in this Section 10.1, Seller and the Members, jointly and severally, guarantee to Buyer that, except to the extent of the reserve for doubtful accounts shown on the Final Closing Balance Sheet, all accounts and notes receivable and other 35 36 receivables reflected on said balance sheet (the "Receivables") will be valid and legally binding obligations of the persons owing said amounts to Seller and that the full amount of the Receivables will be paid to Buyer within 120 days of the Closing Date. (b) If any part of the Receivables has not been paid within 120 days of the Closing Date, then to the extent that such unpaid part of the Receivables exceeds the reserve for doubtful accounts shown on the Final Closing Balance Sheet, Buyer shall reassign to Seller such unpaid part of the Receivables, free and clear of any Encumbrance arising on or after the Closing, and Buyer shall retain for itself from the Escrowed Consideration an amount equal to the face amount of such reassigned Receivables, and if there are insufficient funds therefor remaining in the Escrowed Consideration, Seller shall, within ten days of demand therefor, pay to Buyer the amount of such deficiency. (c) Buyer will use its good faith efforts to collect all of the Receivables in accordance with the same efforts it uses to collect its own accounts receivable; provided, however, that to the extent the Buyer commences any legal proceedings or retains or employs any collection agents to collect the Receivables, all expenses and costs of collection shall be reimbursed by Seller to the Buyer. (d) During the 120 day following the Closing Date, all monies received by the Buyer from the account debtors of the Receivables shall be applied in accordance with the payment instructions or designation of such account debtors. (e) Notwithstanding the foregoing, the maximum liability of the Seller and the Members under this Section 10.1 shall not exceed the cash portion of the Purchase Price. 10.2 Employment Matters. (a) Seller will use all reasonable efforts to cause the employees employed in the Business to make available their employment services to the Buyer. For a period of two years from the Closing Date, neither Seller nor any Member, nor any of their respective Affiliates, will solicit, offer to employ or retain the services of or otherwise interfere with the relationship of Buyer with any Person employed by or otherwise engaged to perform services for Buyer in connection with the operation of the Business. (b) Effective as of the Closing Date, Buyer shall, in its sole and absolute discretion, offer employment to those employees selected by Buyer who are employed by Seller in the operation of the Business at wage or salary levels, as applicable, and with employee benefits, as determined by Buyer. Those employees who accept such offers of employment effective as of the Closing Date shall be referred to herein as the "Transferred Employees". Effective as of the Closing Date, the Buyer shall assume the liability of Seller in respect of the Transferred Employees for accrued but unpaid salaries, wages, vacation and sick pay, and all payroll taxes related thereto, but only to the extent such liability is accrued and reflected on the Final Closing Balance Sheet. Seller shall remain responsible for payment of any and all retention, change in control or other similar compensation or benefits which are or may become payable in connection with the consummation 36 37 of the transactions contemplated by this Agreement. Attached hereto as Schedule 10.2(b) is a list of all employees of the Seller and their respective years of service. To the extent any of such employees shall be "Transferred Employees" hereunder, Buyer shall credit such employees with the same years of service as set forth on such Schedule. (c) Neither the Buyer nor any of its Affiliates shall have any Liability with respect to any employee of Seller or Employee Plan or any claim thereof or related thereto except to the extent expressly provided in this Section 10.2 with respect to the Transferred Employees. From and after the Closing, the Seller shall remain solely responsible for any and all Liabilities in respect of all of its employees, including the Transferred Employees and their beneficiaries and dependents, relating to or arising in connection with or as a result of (i) the employment or the actual or constructive termination of employment of any such employee by Seller (including, without limitation, in connection with the consummation of the transactions contemplated by this Agreement), (ii) the participation in or accrual of benefits or compensation under, or the failure to participate in or to accrue compensation or benefits under, any Employee Plan or other employee or retiree benefit or compensation plan, program, practice, policy, agreement or arrangement of Seller or (iii) accrued but unpaid salaries, wages, bonuses, incentive compensation, vacation or sick pay or other compensation or payroll items (including, without limitation, deferred compensation), except, in any such case, to the extent any such Liability is specifically assumed by Buyer pursuant to this Section 10.2. (d) [deleted] (e) Buyer shall provide the Transferred Employees and their dependents and beneficiaries coverage under any welfare and fringe benefit plans, programs, policies or arrangements established by the Buyer for such Persons, provided that, from and after the Closing Date, the Seller shall remain solely responsible for any and all Liabilities to or in respect of the Transferred Employees or their beneficiaries or dependents relating to or arising in connection with any claims, whether such claims are asserted before, on or after the Closing Date, for life, disability, accidental death or dismemberment, supplemental unemployment compensation, medical, dental, hospitalization, other health or other welfare or fringe benefits or expense reimbursements which claims relate to or are based upon an occurrence on or before the Closing Date (including claims for continuing treatment in respect of any illness, accident, disability, condition or confinement which occurs or commences on or before the Closing Date). (f) From and after the Closing Date, the Seller shall remain solely responsible for any and all Liabilities relating to or arising in connection with the requirements of section 4980B of the Code to provide continuation of health care coverage under any Employee Plan in respect of (i) all of its employees, other than the Transferred Employees and their covered dependents, and (ii) to the extent related to a qualifying event occurring on or before the Closing Date, Transferred Employees and their covered dependents. (g) From and after the Closing Date, the Seller shall remain solely responsible for any and all Liabilities to or in respect of any of its employees relating to or arising in connection 37 38 with any and all claims for workers' compensation benefits arising in connection with any occupational injury or disease occurring or existing on or prior to the Closing Date. (h) Seller and the Buyer will (i) treat the Buyer as a "successor employer" and Seller as a "predecessor," within the meaning of sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to Transferred Employees who are employed by the Buyer for purposes of Taxes imposed under the United States Federal Unemployment Tax Act ("FICA") or the United States Federal Insurance Contributions Act ("FUTA") and (ii) cooperate with each other to avoid, to the extent possible, the filing of more than one IRS Form W-2 with respect to each such Transferred Employee for the calendar year within which the Closing Date occurs. (i) At the request of the Buyer with respect to any particular applicable Tax law relating to employment, unemployment insurance, social security, disability, workers' compensation, payroll, health care or other similar Tax other than Taxes imposed under FICA and FUTA, Seller and the Buyer will (i) treat the Buyer as a successor employer and Seller as a predecessor employer, within the meaning of the relevant provisions of such Tax law, with respect to Transferred Employees who are employed by the Buyer and (ii) cooperate with each other to avoid, to the extent possible, the filing of more than one individual information reporting form pursuant to each such Tax law with respect to each such Transferred Employee for the calendar year within which the Closing Date occurs. ARTICLE 11 MISCELLANEOUS 11.1 Termination. (a) This Agreement may be terminated at any time prior to Closing: (i) by mutual written consent of Buyer and Seller; (ii) by Buyer or Seller if the Closing shall not have occurred on or before May 31 , 2000, other than due to a breach of this Agreement by the party seeking to terminate; (iii) by Buyer if there is a material breach of any representation or warranty set forth in Article 3 or any covenant or agreement to be complied with or performed by Seller or any Member pursuant to the terms of this Agreement; (iv) by Buyer if Buyer notifies Seller in writing prior to May 31, 2000 that it is not satisfied with its diligence review pursuant to Section 7.10; or (v) by Seller if there is a material breach of any representation or warranty set forth in Article 4 hereof or of any covenant or agreement to be complied with or performed by Buyer pursuant to the terms of this Agreement; (b) In the event of termination of this Agreement: 38 39 (i) The provisions of the Confidentiality Agreement shall continue in full force and effect; and (ii) No party hereto shall have any liability to any other party to this Agreement, except for any willful breach of, or knowing misrepresentation made in, this Agreement occurring prior to the proper termination of this Agreement. 11.2 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by Seller or any Member without the prior written consent of Buyer, or by Buyer without the prior written consent of Seller's representative; provided, however, that Buyer may assign this Agreement to any wholly-owned subsidiary of Daisytek International Corporation without such consent of Seller's Representative. 11.3 Notices. Unless otherwise provided herein, any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered in person or by courier, sent by facsimile transmission, sent via overnight delivery service or mailed by registered or certified mail (such notice to be effective upon receipt), as follows: If to a Member, to the address of such Member as set forth on Annex 1 hereto. If to Seller: c/o W. Alan Holman 245 Great Circle Road Nashville, TN 37228 With a copy to: Allen D. Lentz, Esq. Gullett, Sanford, Robinson & Martin, PLLC 230 Fourth Avenue, North Nashville, TN 37219 If to Buyer: Daisytek International Corporation 500 North Central Expressway Plano, Texas 75074 Attention: Jack Kearney Fax: With a copy to: Wolff & Samson, P.A. 5 Becker Farm Road Roseland, New Jersey 07068 Attn: Morris Bienenfeld, Esq. Fax: (973) 740-1407 39 40 or to such other place and with such other copies as either party may designate as to itself by written notice to the others. 11.4 Choice of Law. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Delaware except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. 11.5 Descriptive Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.6 Entire Agreement; Amendments and Waivers. This Agreement, together with all exhibits and schedules hereto, and the Ancillary Agreements and the Confidentiality Agreement, constitute the entire agreement among the parties pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the Buyer and the Seller's Representative. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 11.7 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.8 Invalidity. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. 11.9 Expenses. Except as otherwise provided in this Agreement, Buyer will be liable for its, and the Members will be liable for the Seller's expenses, incurred in connection with the negotiation, preparation and execution of this Agreement. 11.10 Publicity. Except as otherwise required by law, neither party shall issue any press release or make any public statement or filing regarding the transactions contemplated hereby without the prior approval of the other parties, and the parties hereto shall issue a mutually acceptable press release as soon as practicable after the Closing Date. 40 41 11.11 No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, including, without limitation, by way of subrogation, except as specifically set forth in Article 9 hereof. 41 42 IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be duly executed on its behalf by its officer thereunto duly authorized, as of the day and year first above written. BAP ACQUISITION CORP. By: ------------------------------- Name: Title: B.A. PARGH COMPANY, LLC By: ------------------------------- Name: Title: ----------------------------------- Bernard A. Pargh ----------------------------------- W. Alan Holman ----------------------------------- Christopher C. Tate ----------------------------------- Amanda F. Pargh ----------------------------------- Franklin A. Pargh ----------------------------------- Ted Feldman ----------------------------------- Scott Moskovitz ----------------------------------- John D. Lentz 43 ANNEX I - List of Members ANNEX II - Officers Exhibit 1.1A - Form of Employment Agreements Exhibit 1.1B - Form of Non-Compete Agreements Exhibit 6.7 - Form of Opinion of Counsel to Buyer Exhibit 7.8 - Form of Opinion of Counsel to Seller and Members Exhibit 8.3 - Form of Assumption Agreement Schedule 2.2(d) - Excluded Assets Schedule 2.7 - Price Adjustment Schedule 3.1(a) - Foreign Qualifications Schedule 3.1(d) - Violations Schedule 3.1(e) - Consents Schedule 3.2(a) - Membership Interests Schedule 3.5 - Intellectual Property Schedule 3.6 - Labor Matters Schedule 3.7 - Customers Schedule 3.8 - Compliance with Regulations Schedule 3.9(a) - Material Contracts Schedule 3.10 - Taxes Schedule 3.11 - Employee Benefits Schedule 3.12 - No Material Adverse Change Schedule 3.14 - Inventory Schedule 3.15 - Bank Accounts Schedule 3.16 - Insurance Schedule 3.17 - Recent Operations Schedule 3.18 - Suppliers Schedule 3.20 - Litigation Schedule 3.21 - Non-Disclosed Liabilities Schedule 3.23 - Manufacturer Transactions Schedule 3.24 - Accounts Receivable Schedule 5.1(c) - Conduct of Business Schedule 10.2(b) - Employee Years of Service
EX-27.1 4 ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-2001 APR-01-2000 JUN-30-2000 26,118 0 166,239 6,236 123,690 325,641 61,136 29,512 397,833 172,083 47,858 0 0 176 213,752 397,833 284,926 284,926 253,140 253,140 0 850 691 5,394 2,461 2,980 0 0 0 2,980 .17 .17
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