-----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, WT0fCn0h0iJGqCpKDrgmoTgHeagAQumfnErfbuELIbM2x46xuxqQXioK936yuqVm N6s9v7c05DdOV7PpkPOYlw== 0000950134-01-001319.txt : 20010223 0000950134-01-001319.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950134-01-001319 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAISYTEK INTERNATIONAL CORPORATION /DE/ CENTRAL INDEX KEY: 0000887403 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752421746 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25400 FILM NUMBER: 1542114 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 d83940e10-q.txt FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 2000 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 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.) 1025 CENTRAL EXPRESSWAY SOUTH, SUITE 200, ALLEN, TX 75013 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 881-4700 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- At February 7, 2001 there were 17,678,159 shares of the registrant's common stock issued, including 3,013,600 shares of common stock in treasury. 2 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q DECEMBER 31, 2000 INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Financial Statements: Consolidated Balance Sheets as of December 31, 2000 (Unaudited) and March 31, 2000......................................................... 3 Unaudited Interim Consolidated Statements of Operations for the Three and Nine Month Periods Ended December 31, 2000 and 1999 ...................................................................... 4 Unaudited Interim Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 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 ............................................ 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................... 26 Item 6. Exhibits and Reports on Form 8-K ................................................... 26 SIGNATURES............................................................................................ 27
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31, ASSETS 2000 2000 ------------ ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents ............................................. $ 1,915 $ 28,186 Accounts receivable, net of allowance for doubtful accounts of $4,736 and $6,031 at December 31, 2000 and ........................ 161,025 167,705 March 31, 2000, respectively Inventories, net ...................................................... 130,215 96,371 Prepaid expenses and other current assets ............................. 12,384 12,352 Income taxes receivable ............................................... 414 3,714 Deferred tax asset, net ............................................... 131 249 ------------ ------------ Total current assets .................................... 306,084 308,577 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment ..................................... 22,444 52,491 Leasehold improvements ................................................ 2,473 5,692 ------------ ------------ 24,917 58,183 Less - Accumulated depreciation and amortization ...................... (14,596) (27,523) ------------ ------------ Net property and equipment .............................. 10,321 30,660 OTHER ASSETS .............................................................. -- 528 EMPLOYEE RECEIVABLES ...................................................... 558 518 EXCESS OF COST OVER NET ASSETS ACQUIRED, net .............................. 46,957 37,003 ------------ ------------ Total assets ............................................ $ 363,920 $ 377,286 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ..................................... $ 3,469 $ 42,392 Trade accounts payable ................................................ 128,534 97,518 Accrued expenses ...................................................... 13,310 14,746 ------------ ------------ Total current liabilities ............................... 145,313 154,656 ------------ ------------ LONG-TERM DEBT, less current portion ...................................... 56,389 2,431 COMMITMENTS AND CONTINGENCIES CONTRACT TO PURCHASE COMPANY'S STOCK ...................................... 494 -- MINORITY INTEREST ......................................................... -- 9,513 SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at December 31, 2000 and March 31, 2000; none issued and outstanding ................................................... -- -- Common stock, $0.01 par value; 30,000,000 shares authorized at December 31, 2000 and March 31, 2000; 17,671,101 and 17,600,164 shares issued, including shares in treasury, at December 31, 2000 and March 31, 2000, respectively ... 177 176 Additional paid-in capital ............................................ 94,137 136,736 Retained earnings ..................................................... 89,296 76,340 Accumulated other comprehensive income ................................ (3,091) (2,566) ------------ ------------ 180,519 210,686 Less cost of common stock held in treasury, 2,987,100 shares and zero shares at December 31, 2000 and March 31, 2000, respectively ...................................................... 18,795 -- ------------ ------------ Total shareholders' equity .............................. 161,724 210,686 ------------ ------------ Total liabilities and shareholders' equity .............. $ 363,920 $ 377,286 ============ ============
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 NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net revenues ..................................... $ 298,323 $ 283,087 $ 866,010 $ 763,013 Cost of revenues ................................. 266,782 258,491 771,992 685,224 ------------ ------------ ------------ ------------ Gross profit ............................. 31,541 24,596 94,018 77,789 Selling, general and administrative expenses ..... 26,331 26,501 76,248 69,887 Acquisition related costs ........................ -- -- -- 619 Reversal of loss on disposition of business ...... -- -- -- (1,000) ------------ ------------ ------------ ------------ Income (loss) from operations ............ 5,210 (1,905) 17,770 8,283 Interest expense, net ............................ 1,625 1,452 3,769 3,222 ------------ ------------ ------------ ------------ Income (loss) before income taxes ........ 3,585 (3,357) 14,001 5,061 Provision for income taxes ....................... 1,379 30 5,741 3,313 ------------ ------------ ------------ ------------ Income (loss) before minority interest ... 2,206 (3,387) 8,260 1,748 Minority interest ................................ -- 488 47 488 ------------ ------------ ------------ ------------ Net income (loss) ........................ $ 2,206 $ (2,899) $ 8,307 $ 2,236 ============ ============ ============ ============ Net income (loss) per common share: Basic ..................................... $ 0.15 $ (0.17) $ 0.51 $ 0.13 ============ ============ ============ ============ Diluted ................................... $ 0.15 $ (0.17) $ 0.50 $ 0.13 ============ ============ ============ ============ Weighted average common and common share equivalents outstanding: Basic ..................................... 14,989 17,200 16,356 17,179 Diluted ................................... 15,065 17,200 16,453 17,837
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)
NINE MONTHS ENDED DECEMBER 31, ---------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ......................................................... $ 8,307 $ 2,236 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization ................................... 5,733 6,575 Provision for doubtful accounts ................................. 2,749 6,706 Minority interest ............................................... (47) (488) Deferred income tax (benefit) provision ......................... 246 (477) Changes in operating assets and liabilities -- Accounts receivable ......................................... 4,613 (15,860) Inventories, net ............................................ (24,184) 16,602 Prepaid expenses and other current assets ................... (4,547) 1,820 Trade accounts payable and accrued expenses ................. 26,216 (6,528) Income tax receivable ....................................... 2,528 (3,754) ----------- ----------- Net cash provided by operating activities .............. 21,614 6,832 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ................................ (5,310) (12,072) Disposition of subsidiary .......................................... (22,113) -- Acquisitions of businesses, net of cash acquired ................... (10,205) (20,448) Advances to employees, net ......................................... (45) (144) Decrease in note receivable and other assets ....................... 1,655 3,446 ----------- ----------- Net cash used in investing activities .................. (36,018) (29,218) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit, net ........................ 14,505 8,825 Payments on capital leases and notes payable ....................... (7,842) (8,511) Purchase of treasury stock ......................................... (18,795) -- Net proceeds of PFSweb initial public offering ..................... -- 53,014 Net proceeds from exercise of stock options and issuance of common stock .................................................. 707 1,378 ----------- ----------- Net cash provided by (used in) financing activities .... (11,425) 54,706 EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS................... (442) (178) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (26,271) 32,142 CASH AND CASH EQUIVALENTS, beginning of period ......................... 28,186 1,551 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period ............................... $ 1,915 $ 33,693 =========== ===========
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 computer, copier, fax and office supplies products ("computer and office supplies") and professional audio and videotape products ("professional tape products"). Prior to the spin-off of PFSweb, Inc. ("PFSweb") on July 6, 2000, the Company was also a leading provider of transaction management services to both traditional and electronic commerce, or e-commerce, companies. The Company's two 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, dot-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, Argentina, certain other parts of South America, the Pacific Rim and Europe. 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 Spin-off In December 1999, PFSweb completed an initial public offering ("IPO") of 3,565,000 shares of its common stock. 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. See also Note 9 of these Notes to Unaudited Interim Consolidated Financial Statements. -6- 7 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table represents the balance sheet information for PFSweb as of the date of the spin-off, and is provided to assist in understanding the impact of the disposition on the consolidated balance sheet of the Company (amounts in thousands): ASSETS Cash......................................... $ 22,113 Accounts receivable, net..................... 10,879 Prepaid expenses and other current assets.... 3,420 Property and equipment, net.................. 21,557 Other assets................................. 501 -------- Total assets................................. $ 58,470 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current portion of long-term debt............ $ 281 Trade accounts payable....................... 5,190 Accrued expenses............................. 3,336 Long-term debt, less current portion......... 2,342 Shareholders' equity......................... 47,321 -------- Total liabilities and shareholders' equity... $ 58,470 ========
The 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. 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. Both PFSweb and Daisytek 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, although certain material terms and provisions of various agreements continue to be the subject of ongoing negotiations. 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. 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 December 31, 2000, its results of operations for the three and nine months ended December 31, 2000 and 1999, and its results of cash flows for the nine months ended December 31, 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"). 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 (LOSS) Comprehensive income 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 and foreign currency translation gains and losses. Currency translation and other -7- 8 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) derivative foreign currency exchange contracts are the only items of other comprehensive income impacting the Company. The following table sets forth comprehensive income (loss) (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net income (loss) ...................... $ 2,206 $ (2,899) $ 8,307 $ 2,236 Comprehensive income adjustments: Foreign currency translation adjustment ..................... 256 92 (525) 90 ------------ ------------ ------------ ------------ Comprehensive income (loss) ............ $ 2,462 $ (2,807) $ 7,782 $ 2,326 ============ ============ ============ ============
NOTE 3 - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT 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. During the three months ended December 31, 1999, outstanding options to purchase 4,266,988 common shares were anti-dilutive and have been excluded from the weighted average share calculation. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------------- --------------------------------- 2000 1999 2000 1999 -------------- -------------- -------------- -------------- NUMERATOR: Net income (loss) ............................. $ 2,206 $ (2,899) $ 8,307 $ 2,236 ============== ============== ============== ============== DENOMINATOR: Denominator for basic earnings per share - .... 14,989 17,200 16,356 17,179 Weighted average shares Effect of dilutive securities: Employee stock options ...................... 76 -- 97 658 -------------- -------------- -------------- -------------- Denominator for diluted earnings per share - Adjusted weighted average shares and assumed conversions..................... 15,065 17,200 16,453 17,837 ============== ============== ============== ============== NET INCOME (LOSS) PER COMMON SHARE: Basic ....................................... $ 0.15 $ (0.17) $ 0.51 $ 0.13 ============== ============== ============== ============== Diluted ..................................... $ 0.15 $ (0.17) $ 0.50 $ 0.13 ============== ============== ============== ==============
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 the related goodwill is being amortized over 20 years. The entire cost of the acquisition was funded through the Company's credit facility. This acquisition is not material to the financial position or results of operations of the Company. Effective October 1, 2000, the Company acquired the capital stock of Etertin y CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor of computer supplies and accessories, for approximately $5.8 million, of which $1.0 million is subject to adjustment for realization of assets at lower than book value acquired. In addition, the Company assumed approximately $4.7 million in debt. The acquisition was accounted for by the purchase method of accounting for business combinations and the related goodwill is being amortized over 20 years. The entire cost -8- 9 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of the acquisition was funded through the Company's credit facility. This acquisition is not material to the financial position or results of operations of the Company. On October 1, 1999, the Company acquired certain assets and liabilities of Arlington Industries, Inc. a specialty wholesaler of copier and fax consumables, for an initial price of approximately $19.5 million. This transaction was accounted for by the purchase method of accounting and the related goodwill is being amortized over 20 years. The purchase agreement provides for an adjustment to the purchase price based on certain performance criteria for each of the twelve-month periods ended September 30, 2000 and 2001. The first performance period has been achieved, and the Company has increased the original purchase price and goodwill by approximately $1.6 million, which will be amortized over the remaining life of the asset. NOTE 5 - DEBT In December 2000, the Company entered into an agreement with certain banks for a new revolving line of credit facility in the United States (the "Facility") that has a maximum borrowing availability of $120.0 million and expires on December 19, 2003. The Facility also includes an expandable feature to increase the maximum borrowing to $170 million, subject to various conditions precedent. Availability under the Facility is subject to certain borrowing base limitations, including eligible accounts receivable and inventory, as defined. The Facility replaces the Company's previous U.S. credit facility, which would have expired on January 1, 2001. The Facility accrues interest, at the Company's option, at the prime rate of the lead bank or a Eurodollar rate plus an adjustment ranging from 1.05% to 1.75% depending on the Company's financial performance. A facility fee of 0.20% to 0.375% is charged on the entire Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of net worth, and restrictions on certain activities, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. The Facility is secured by a pledge of 100% of the stock of the Company's U.S. subsidiaries and 65% of the stock of the Company's material foreign subsidiaries. Upon the occurrence of a default, the Facility will also be secured by the Company's other assets. This Facility is part of the Company's integrated cash management system in which accounts receivable collections are used to pay down the Facility and disbursements are paid from the Facility. This system allows the Company to optimize its cash flows. Additionally, in December 2000, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). This Australian Facility expires on January 1, 2002 and replaced the Company's previous Australian revolving line of credit facility, which would have expired on December 31, 2000. The Australian facility allows the Company to borrow Australian dollars up to a maximum of $15 million (Australian) or approximately $8.3 million (U.S.) at December 31, 2000. The Australian Facility accrues interest at the Australian Bill Rate plus an adjustment ranging from 1.3% to 2.0% depending on the Company's financial performance. A facility fee of 0.20% to 0.375% is charged on the entire amount of the Australian facility. Also, in December 2000, the Company's Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). This Canadian Facility expires on January 1, 2002 and replaced the Company's previous Canadian revolving line of credit facility, which would have expired on December 31, 2000. The Canadian Facility allows the Company to borrow Canadian or U.S. dollars up to a maximum of $5 million (Canadian) or approximately $3.3 million (U.S.) at December 31, 2000. For Canadian dollar borrowings, the Canadian Facility accrues interest at the bank's prime rate or the bank's cost of funds plus an adjustment ranging from 1.3% to 2.0% depending on the Company's financial performance. For U.S. dollar borrowings, the Canadian Facility accrues interest at the prime rate of the bank or a Eurodollar rate plus an adjustment ranging from 1.3% to 2.0% depending on the Company's financial performance. A facility fee of 0.20% to 0.375% is charged on the entire amount of the Canadian Facility. During August 1999, the Company's Canadian subsidiary entered into a separate agreement with a Canadian bank for a revolving term loan (the "Term Loan"). The Term Loan, which expires on August 31, 2001, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $10.0 million (Canadian), or approximately $6.7 million (U.S.) at December 31, 2000. The Term Loan accrues interest at the Company's option at either the bank's prime rate plus 0.10% or the bank's U.S. dollar commercial loan rate plus 0.10%. A commitment fee of 0.25% is charged on the unused portion of the Term Loan. -9- 10 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2000, the Company's consolidated unsecured revolving lines of credit, described above, provided for borrowings up to approximately $138.3 million (in US dollars). There were outstanding balances on the lines of credit totaling $56.4 million, leaving approximately $81.9 million available for additional borrowings. At December 31, 2000, the Company's current portion of long-term debt relates to liabilities assumed in connection with the acquisition of Etertin in Argentina, effective October 1, 2000. The Company is currently evaluating opportunities to obtain a separate financing arrangement in Argentina for this subsidiary and expects to either contract for a new facility in Argentina before the end of calendar year 2001 or to finance the working capital requirements of this subsidiary with availability under the Facility. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31, ----------------------------- 2000 1999 ------------ ------------ Cash paid during the period for: Interest ..................... $ 3,725 $ 3,035 Income taxes ................. $ 2,645 $ 6,835
NOTE 7 - 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 or nine-month periods ended December 31, 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 DECEMBER 31, 2000 Net revenues ........................... $ 278,560 $ 19,763 $ -- $ -- $ 298,323 Operating contribution ................. 7,324 730 -- -- 8,054 THREE MONTHS ENDED DECEMBER 31, 1999 Net revenues ........................... $ 253,363 $ 22,908 $ 10,868 $ (4,052) $ 283,087 Operating contribution ................. 4,456 1,011 (5,497) -- (30) NINE MONTHS ENDED DECEMBER 31, 2000 Net revenues ........................... $ 798,075 $ 61,854 $ 13,370 $ (7,289) $ 866,010 Operating contribution ................. 20,485 2,821 (505) -- 22,801 NINE MONTHS ENDED DECEMBER 31, 1999 Net revenues ........................... $ 679,271 $ 69,922 $ 20,342 $ (6,522) $ 763,013 Operating contribution ................. 19,160 4,340 (6,123) -- 17,377 ASSETS December 31, 2000 ...................... $ 323,350 $ 40,570 $ -- $ -- $ 363,920 March 31, 2000 ......................... 273,347 43,638 60,405 (104) 377,286
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 and telephone systems, and (ii) executive, administrative and other corporate costs. Certain corporate assets are also not allocated to Professional Tape Products, and primarily relate to the Company's centralized management information and telephone systems and leasehold improvements on shared facilities. Reconciliation of segment operating contribution (loss) to consolidated income (loss) before taxes is as follows (in thousands): -10- 11 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------- ----------- ------------ Segment operating contribution (loss) .............. $ 8,054 $ (30) $ 22,801 $ 17,377 Acquisition related costs(a) ....................... -- -- -- (619) Transition and other unallocated costs(b) .......... (2,844) (1,875) (5,031) (9,475) Reversal of loss on disposition of business ........ -- -- -- 1,000 Interest expense ................................... (1,625) (1,452) (3,769) (3,222) ----------- ----------- ----------- ----------- Consolidated income (loss) before income taxes ..... $ 3,585 $ (3,357) $ 14,001 $ 5,061 =========== =========== =========== ===========
(a) These charges relate to the Professional Tape Products segment. (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, and during the three and nine month periods ended December 31, 1999, to increase allowances for bad debts, legal and professional fees related to an unsolicited acquisition offer, and other operating charges. NOTE 8 - 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 133") effective for fiscal years beginning after June 15, 2000. SFAS 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 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 to hedge our net investments in some of our foreign operations and to hedge against interest rate increases. The Company is currently evaluating the provisions of SFAS 133 and its effect on the accounting treatment of these financial instruments. During 1999, the SEC 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 believes the impact of adopting SAB No. 101 will not be significant to its financial statements. NOTE 9 - STOCK OPTIONS PFSweb Spin-off 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. -11- 12 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. During July 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, vest over a three-year period from the date of the grant and expire 10 years after the date of the grant. As of December 31, 2000, after giving effect to the issuance of the Daisytek Post-spin Options, combined with the additional options granted during the second quarter of fiscal 2000, there were approximately 5.5 million options outstanding with an overall weighted average exercise price of $7.33. The following table summarizes information about the Company's outstanding stock options as of December 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE --------------- ----------- -------------- $ 1.50 - $ 3.00 288 $ 1.65 $ 5.00 - $ 6.50 2,706,498 $ 6.16 $ 6.51 - $ 8.00 862,336 $ 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 - $15.50 185,501 $14.31
As of December 31, 2000, using the outstanding shares of 14.7 million and information from the previous table, the following table summarizes the Company's diluted weighted average shares at various price points:
DILUTED WEIGHTED AVERAGE AVERAGE SHARES SHARE PRICE OUTSTANDING ----------- ----------- $ 7.00 14,895,251 $ 8.00 15,106,287 $ 9.00 15,423,414 $10.00 15,687,181 $11.00 15,907,075 $12.00 16,090,697 $13.00 16,246,531 $14.00 16,380,212
-12- 13 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - 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, and on September 13, 2000, announced the authorization of the repurchase of up to an additional 10% of the outstanding shares of common stock. These repurchase programs 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 each authorization, the Company was authorized to repurchase up to approximately 3.35 million shares. As of December 31, 2000, the Company had repurchased approximately 2.99 million of its outstanding shares. In connection with this program, the Company sold a nine-month option, which expires in July 2001, for a premium of $50,000, whereby the holder can sell 100,000 shares to the Company for $4.94 per share. -13- 14 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 publicly update 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 or material decline in service levels of strategic product shipping and handling 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 or information system difficulties, exchange rate and interest 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, and professional audio and videotape products. Prior to the spin-off of PFSweb, Inc. ("PFSweb") on July 6, 2000, we were also a leading provider of transaction management services to both traditional and e-commerce companies. Daisytek's remaining operations are separated into two business segments: (1) Computer and Office Supplies; and (2) Professional Tape Products. 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, Argentina, certain other parts of 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, Australia/Asia in 1996 and Argentina in 2000. 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 in May 2000 has since added to our Computer and Office Supply segment 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. -14- 15 BUSINESS STRATEGY Daisytek's focus is as a low cost distributor in the growing computer and office supplies industry and a provider of value-added supply chain and marketing services 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 through our new subsidiary, Virtual Demand; 4) Expansion of our product and service offerings into new international markets; and 5) Pursuit of acquisitions, where appropriate, to support both operating and financial strategies. Our Computer and Office Supplies segment traditionally specialized in computer supplies that have longer life cycles and lower risk of technological obsolescence than hardware and software products. This segment now includes a full line of traditional office products. We believe that the demand for computer supplies 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, late order cutoff times, 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 has added over 7,000 products to our existing product lines. In addition, it has brought new customers that previously had 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 and specialized buying groups, who are aggressively seeking a lower cost alternative to the traditional higher cost office products national wholesale model. Our low cost distribution model will allow us to service these customers. Currently, our primary markets are in the Central and Eastern United States and in Puerto Rico; however, we intend to roll-out in phases a national marketing and distribution model over the next twelve to eighteen months. 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 and office 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 and recently began implementing 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 are provided by a newly established, wholly-owned subsidiary of Daisytek, under the name Virtual Demand, which charges fees on a transaction basis to our clients. A sales team has been dedicated to this subsidiary and is currently marketing these service programs to a variety of companies. During the quarter ended December 31, 2000, two new client programs were established, which began to generate fee income for services provided. -15- 16 We continue to research new markets to expand our international computer supplies business. Many international markets have higher growth opportunities, for consumable computer supplies in particular, than the United States. Presently, we operate sales and distribution centers in Canada, Mexico, Australia and Argentina and export products into Latin America, the Pacific Rim and throughout much of the rest of the world. Our computer and office supplies experience and broad product range place us in a favorable competitive position in emerging international markets. During the quarter ended December 31, 2000, we opened additional offices and facilities in Perth, Australia, and Mexico City and Monterrey, Mexico. We plan to enhance growth by seeking strategic acquisition opportunities in our computer and office supplies business, or by adding 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. On May 3, 2000, we acquired certain assets and liabilities of B.A. Pargh Company LLC, discussed previously. Additionally, effective October 1, 2000, we acquired the capital stock of Etertin y CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor of computer supplies and accessories. Daisytek Stand Alone (Excluding PFSweb, Inc.) The following is an unaudited adjusted historical financial presentation of the Daisytek business units, excluding PFSweb, for the three and nine month periods ended December 31, 2000 and 1999. 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 separation of Daisytek and PFSweb of approximately $2.8 million and $5.0 million, respectively, for the three and nine month periods ended December 31, 2000, which management believes are incremental to normal operations. For the three and nine month periods ended December 31, 1999, the presentation excludes incremental costs of $1.9 million and $9.5 million, respectively, which included these reorganization and separation activities, increases in allowances for bad debts, and other charges. 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, reversal of loss on disposition of business 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 DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 ------------- ------------- ------------ ------------- (IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT PER SHARE DATA) PER SHARE DATA) (UNAUDITED) (UNAUDITED) Net revenues ....................................... $ 298,323 $ 276,271 $ 859,929 $ 749,193 Cost of revenues ................................... 266,782 248,947 767,496 667,480 ------------ ------------ ------------ ------------ Gross profit ..................................... 31,541 27,324 92,433 81,713 Selling, general and administrative expenses ....... 23,487 22,847 69,083 62,326 ------------ ------------ ------------ ------------ Income from operations ........................... 8,054 4,477 23,350 19,387 Interest expense, net .............................. 1,625 1,316 4,084 2,839 ------------ ------------ ------------ ------------ Income before income taxes ....................... 6,429 3,161 19,266 16,548 Provision for income taxes ......................... 2,475 1,228 7,372 6,453 ------------ ------------ ------------ ------------ Net income ......................................... $ 3,954 $ 1,933 $ 11,894 $ 10,095 ============ ============ ============ ============ NET INCOME PER COMMON SHARE: Basic ............................................ $ 0.26 $ 0.11 $ 0.73 $ 0.59 ============ ============ ============ ============ Diluted .......................................... $ 0.26 $ 0.11 $ 0.72 $ 0.57 ============ ============ ============ ============ Weighted average common and common share equivalents outstanding: Basic ............................................ 14,989 17,200 16,356 17,179 Diluted .......................................... 15,065 17,200 16,453 17,837
-16- 17 The following data reflects historical balance sheet information as of December 31, 2000. The balance sheet information as of March 31, 2000, is adjusted to exclude PFSweb, which was spun-off in July 2000. Adjusted Balance Sheet Data:
AS OF AS OF DECEMBER 31, MARCH 31, 2000 2000 ------------ ------------ (IN THOUSANDS) (UNAUDITED) Working capital, excluding debt .... $ 164,240 $ 168,067 Total assets ....................... 363,920 316,985 Total debt ......................... 59,858 42,144 Shareholders' equity ............... 161,724 172,549
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. during the periods prior to the spin-off of PFSweb.
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME DATA: Net revenues ......................................................... $ 298,323 $ 283,087 $ 866,010 $ 763,013 Cost of revenues ..................................................... 266,782 258,491 771,992 685,224 ---------- ---------- ---------- ---------- Gross profit ......................................................... 31,541 24,596 94,018 77,789 Selling, general and administrative expenses ......................... 26,331 26,501 76,248 69,887 Acquisition related costs ............................................ -- -- -- 619 Reversal of loss on disposition of business .......................... -- -- -- (1,000) ---------- ---------- ---------- ---------- Income (loss) from operations ........................................ 5,210 (1,905) 17,770 8,283 Interest expense, net ................................................ 1,625 1,452 3,769 3,222 ---------- ---------- ---------- ---------- Income (loss) before income taxes .................................... 3,585 (3,357) 14,001 5,061 Provision for income taxes ........................................... 1,379 30 5,741 3,313 ---------- ---------- ---------- ---------- Income (loss) before minority interest ............................... 2,206 (3,387) 8,260 1,748 Minority interest .................................................... -- 488 47 488 ---------- ---------- ---------- ---------- Net income (loss) .................................................... $ 2,206 $ (2,899) $ 8,307 $ 2,236 ========== ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE: Basic .............................................................. $ 0.15 $ (0.17) $ 0.51 $ 0.13 ========== ========== ========== ========== Diluted ............................................................ $ 0.15 $ (0.17) $ 0.50 $ 0.13 ========== ========== ========== ========== Weighted average common and common share equivalents outstanding: Basic ........................................................... 14,989 17,200 16,356 17,179 Diluted ......................................................... 15,065 17,200 16,453 17,837
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 2000 AND 1999. The following discussion relates to Daisytek, and includes the results of its former subsidiary, PFSweb for the first three months of fiscal year 2001 and for the entire nine months in fiscal year 2000. Since PFSweb was spun off from Daisytek on July 6, 2000, financial results for the three-month period ended December 31, 2000, and for the six months from July 1, 2000 through December 31, 2000, which are included in the nine months ended December 31, 2000, do not include the financial results of PFSweb. These are historical consolidated results, including costs associated with separation activities, and may not be representative of our results subsequent to both the spin-off of PFSweb and the completion of all related separation activities. Net Revenues. Net revenues for the three months ended December 31, 2000 were $298.3 million as compared to $283.1 million for the three months ended December 31, 1999, an increase of $15.2 million, or 5.4%. Excluding PFSweb revenues, which are included in the December 31, 1999 quarterly results, but not included in the December 31, 2000 quarterly results, net revenues increased by 8.0%. Net revenues for the nine months ended December 31, 2000 were $866.0 million as compared to $763.0 million for the nine months ended December 31, 1999, an increase of $103.0 million, or 13.5%. Excluding PFSweb revenues, which are included in the nine months ended December 31, 1999, but are included only through the spin-off date for the nine months ended December 31, 2000, net -17- 18 revenues increased by 14.8%. The Computer and Office Supplies business segment 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 reported levels. We believe this reduction is due, in large part, to slower industry growth and large channel shifts, and is also due to the fact that over the past year, we have specifically focused on certain margin initiatives that have improved profitability but reduced revenue opportunities. Additionally, as part of our ongoing focus on improving our balance sheet position, particularly the aging of accounts receivable, we have taken positions with certain customers, including placing them on credit hold, which has also affected revenue growth but favorably impacted overall financial performance. Net revenues in the international computer supplies operations increased by 24.2% (in U.S. dollars) in the quarter ended December 31, 2000 compared to the same prior year period. Excluding revenues from the acquisition of Etertin in Argentina, growth in this division was 13.8% (in US dollars) for the period. This result reflects a deterioration in both the Australian and Canadian dollars relative to the U.S. dollar during this period, compared to last year. Using local currencies and excluding the acquisition of Etertin, our international computer supplies operations increased approximately 25.5% this quarter compared to the same quarter in the prior year. The international division experienced growth in all regions but Latin America (due to a change in certain tariff restrictions, which has impacted the local market) and Singapore (whose operations were moved to our Asia Pacific headquarters in Australia during April 2000). We experienced particularly strong growth rates this quarter in Mexico and Australia. Net revenues related to our IBM product sales increased by approximately 31.0% in the quarter ended December 31, 2000, compared to the same prior year period due to higher sales volumes under both our North American and European distributor agreements. Professional Tape Products net revenue decreased 13.7% for the three months ended December 31, 2000 compared to the same prior year period primarily due to prior quarters' price degradation in certain product lines throughout fiscal year 2000. Although we have not experienced any additional price reduction during the past quarter, 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. During the quarter ended December 31, 2000, the Company began to implement a restructuring plan in this business unit, which included the closing of certain warehouse facilities, the termination of certain employees and the repositioning of inventory. We expect to complete this restructuring during the quarter ending March 31, 2001. We continually evaluate the business plans and future operating prospects within this business unit as part of our objective to improve profitability and growth opportunities in this segment. Gross Profit. Gross profit as a percent of net revenues was 10.6% for the three months ended December 31, 2000 as compared to 8.7% for the three months ended December 31, 1999. Our gross profit percentage for the quarter ended December 31, 1999 was negatively impacted by certain incremental charges of $1.0 million. Excluding the incremental charges, our gross profit percentage for the quarter ended December 31, 1999 was 9.0%. Gross profit as a percent of net revenues was 10.9% for the nine months ended December 31, 2000 as compared to 10.2% for the nine months ended December 31, 1999. Excluding charges for the nine-month period last year of $4.2 million, gross profit as a percentage of sales was 10.7%. The increase in gross profit percentage, on a basis adjusted for these incremental charges, was the result of several different factors. In the US and international business divisions, the prior year gross profit amounts for the quarter ended December 31, 1999 reflect the beginning of our intense focus on improving the key balance sheet areas of inventory and accounts receivable. In order to make improvements in this area, we avoided certain vendor incentive programs, which negatively impacted our gross margins during the three months ended December 31, 1999, that for comparative purposes had been previously reflected in our results. Since then, we have elected not to participate in certain of these programs, which are not considered to be in our long-term best interests. This is part of our focus on improving inventory levels to strengthen our balance sheet position and improve our overall return on invested capital. However, the impact to our gross profit percentage in quarters subsequent to December 31, 1999 has not been as significant. This increase in gross profit percentage was partially offset by a decline due to the relatively higher revenue growth in IBM product sales, which are typically at lower margins. Also, negatively impacting our gross profit percentage was the reduction in our Professional Tape Products revenue and PFSweb revenue (resulting from the spin-off), which typically carry higher margin percentages than the remainder of our business. -18- 19 We believe that ongoing competitive pressures in the Computer and Office Supplies operations, potential further price degradation in the Professional Tape Products business, and continuing sales increases in our IBM products 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 December 31, 2000 were $26.3 million, or 8.8% of net revenues, as compared to $26.5 million, or 9.4% of net revenues, for the three months ended December 31, 1999. SG&A expenses for the nine months ended December 31, 2000 were $76.2 million, or 8.8% of net revenues, as compared to $69.9 million, or 9.2% of net revenues, for the nine months ended December 31, 1999, excluding acquisition related costs and the reversal of loss on disposition of business in 1999. Our SG&A expenses for the three and nine month periods ended December 31, 2000 were negatively impacted by certain non-recurring separation costs of $2.8 million and $5.0 million, respectively, which are one-time charges primarily related to the spin-off of PFSweb. Our SG&A expenses for both the three and nine month periods ended December 31, 1999 were negatively impacted by incremental charges of $0.9 million and $5.3 million, respectively, primarily related to certain repositioning and separation activities associated with the PFSweb planned initial public offering, certain other charges as a result of these activities, and to increase allowances for bad debts related primarily to issues in our Latin American accounts receivable. Excluding these incremental charges for all periods, our SG&A percentages would be 7.9% and 9.1%, respectively, for the three months ended December 31, 2000 and 1999, and 8.2% and 8.5%, respectively, for the nine months ended December 31, 2000 and 1999. Excluding PFSweb SG&A expenses included in the prior year results, the increase in overall expenses for both the three and nine month periods ending December 31, 2000 is due to the acquisitions of Arlington in October 1999, B.A. Pargh in May 2000, and Etertin effective October 2000. The decline in SG&A as a percentage of net revenues is primarily attributable to the significant investments in resources and technology to implement new contracts and further develop infrastructure for PFSweb during the prior fiscal year. This impact was partially offset by a reduction in net revenues to certain large customers, which typically have lower SG&A expense ratios. However, we experienced a corresponding favorable impact on the increase in IBM product 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. In connection with the transition, integration and merger activities associated with our Professional Tape Products segment, we recorded costs of $0.6 million for the nine-month period ending December 31, 1999. Loss on Disposition of Business. In fiscal 1999, we recorded a charge of $2.8 million related to the disposition of our professional tape hardware business. In the quarter ended September 30, 1999, we reversed $1.0 million of this charge as we were able to avoid some of the costs associated with this disposition. Interest Expense. Interest expense for the three months ended December 31, 2000 was $1.6 million as compared to $1.5 million for the three months ended December 31, 1999. Interest expense for the nine months ended December 31, 2000 was $3.8 million as compared to $3.2 million for the nine months ended December 31, 1999. Interest expense increased over last year, for both the three and nine-month periods, due to interest rate increases experienced over the last twelve months, the acquisitions of Arlington, B.A. Pargh and Etertin, and activity under our share repurchase program. These impacts were partially offset by proceeds received from the PFSweb initial public offering in December 1999. The weighted average interest rate was 8.2% and 6.3% during the nine months ended December 31, 2000 and 1999, respectively. Income Taxes. Our effective tax rate was 38.5% and approximately zero for the three months ended December 31, 2000 and 1999, respectively. The effective tax rate for the nine months ended December 31, 2000 and 1999 was 41.0% and 65.5%, respectively. The effective tax rate is negatively impacted for the three and nine-month periods ending December 31, 1999, as well as the first quarter of fiscal 2001, due to losses generated by PFSweb for which no income tax benefit was recorded. Due to PFSweb's limited operating history in Europe, it was uncertain whether it was "more likely than not" that we would be able to utilize the cumulative tax losses and therefore no tax benefit was recorded related to these losses. Additionally, although PFSweb is included in our consolidated U.S. tax return through the date of spin-off, for the period between the IPO and the spin-off, any loss generated by PFSweb, in excess of established limits, may not be utilized at a consolidated level. Accordingly, no benefit was recorded related to PFSweb's U.S. operating loss subsequent to their initial public offering in December 1999. For future periods, we expect our effective tax rate to approximate the December 2000 quarter effective rate of 38.5%. -19- 20 LIQUIDITY AND CAPITAL RESOURCES We expect to fund our anticipated cash requirements, including the anticipated cash requirements 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 the next twelve months. Over the past year, our primary source of cash has been from operating activities. Net cash provided by operating activities was $21.6 million for the nine months ended December 31, 2000 compared to net cash provided by operating activities of $6.8 million for the nine months ended December 31, 1999. Working capital, excluding the current portion of long-term debt, decreased to $164.2 million at December 31, 2000 from $196.3 million at March 31, 2000. In December 2000, we entered into an agreement with certain banks for a new credit facility, which expires in December 2003 and replaces the previous credit facility, which would have expired on January 1, 2001, resulting in a reclassification of the outstanding amounts from current liabilities to long-term liabilities. The reduction in working capital was primarily attributable to the spin-off of PFSweb on July 6, 2000, which resulted in a reduction in net current assets, including cash. In addition, our working capital position was impacted during the period by (1) acquisitions of both the B.A. Pargh and Etertin businesses, (2) an increase in inventory primarily related to the IBM products, 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 this fiscal year. Our principal use of funds for investing activities was $22.1 million in cash related to the disposition of our investment in PFSweb in connection with the spin-off on July 6, 2000. Additionally, we have used funds for capital expenditures of $5.3 million and $12.1 million for the nine months ended December 31, 2000 and 1999, respectively, of which approximately $1.4 million and $10.8 million, respectively, reflects capital expenditures by PFSweb during these periods. In addition, we used funds for the acquisition of businesses of $10.2 million and $20.4 million for the nine months ended December 31, 2000 and 1999, respectively. The capital expenditures consisted primarily of additions to upgrade our management information systems, costs associated with new facilities, and historically have also included costs related to the expansion of PFSweb distribution facilities, both domestic and foreign. We anticipate that our total investment in upgrades and additions to facilities for fiscal 2001, excluding the $1.4 million relating to PFSweb during the first quarter, will be approximately $5 million to $7 million. The Company's former PFSweb subsidiary had a long-term contractual agreement with one of its clients pursuant to which PFSweb financed 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 and $3.4 million for the nine months ended December 31, 2000 and 1999, respectively. Effective with the spin-off of PFSweb on July 6, 2000, Daisytek no longer has this PFSweb client inventory in its financial results. Net cash used in financing activities was $11.4 million for the nine months ended December 31, 2000 compared to net cash provided by financing activities of $54.7 million for the nine months ended December 31, 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. In addition, we acquired debt of approximately $4.7 million in connection with the Etertin acquisition, of which approximately $1.2 was paid down during the quarter ended December 31, 2000. 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. Cash provided by financing activities for the nine months ended December 31, 1999, was primarily attributable to proceeds received from the PFSweb initial public offering. The entire cost of the B.A. Pargh and Etertin acquisitions was funded through our availability under our credit facility and cash provided by operating activities. Additionally, during the second quarter of fiscal year 2001, our Board of Directors initially authorized a share buyback program of up to 10% of the outstanding shares of common stock. That program was completed in September 2000 and, at that time, the Board of Directors authorized an additional 10% repurchase program. As of December 31, 2000 we had acquired approximately 2.99 million shares at a total cost of $18.8 million. In connection with this program, we sold a nine-month option, which expires in July 2001, for a premium of $50,000, whereby the holder can sell 100,000 shares to us for $4.94 per share. The combination of these factors has resulted in a net use of funds for financing activities during this period. At March 31, 2000, our cash balance was primarily related to remaining proceeds from the PFSweb initial public offering, which were intended to be used for PFSweb's anticipated capital expenditures and future PFSweb working capital needs. In connection with the spin-off, this cash balance was retained by PFSweb. -20- 21 In December 2000, we entered into an agreement with certain banks for a new revolving line of credit facility in the United States (the "Facility") that has a maximum borrowing availability of $120.0 million and expires on December 19, 2003. The Facility also includes an expandable feature to increase the maximum borrowing to $170 million, subject to various conditions precedent. Availability under the Facility is subject to certain borrowing base limitations, including eligible accounts receivable and inventory, as defined. The Facility replaces our previous U.S. credit facility, which would have expired on January 1, 2001. The Facility accrues interest, at our option, at the prime rate of the lead bank or a Eurodollar rate plus an adjustment ranging from 1.05% to 1.75% depending on our financial performance. A facility fee of 0.20% to 0.375% is charged on the entire Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of net worth, and restrictions on certain activities, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. This Facility is secured by a pledge of 100% of the stock of our U.S. subsidiaries and 65% of the stock of our material foreign subsidiaries. Upon the occurrence of a default, the Facility will also be secured by our other assets. This Facility is part of our integrated cash management system in which accounts receivable collections are used to pay down the Facility and disbursements are paid from the Facility. This system allows us to optimize our cash flows. Additionally, in December 2000, our Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). This Australian Facility expires on January 1, 2002 and replaced our previous Australian revolving line of credit facility, which would have expired on December 31, 2000. The Australian facility allows us to borrow Australian dollars up to a maximum of $15 million (Australian) or approximately $8.3 million (U.S.) at December 31, 2000. The Australian Facility accrues interest at the Australian Bill Rate plus an adjustment ranging from 1.3% to 2.0% depending on our financial performance. A facility fee of 0.20% to 0.375% is charged on the entire amount of the Australian facility. Also, in December 2000, our Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). This Canadian Facility expires on January 1, 2002 and replaced our previous Canadian revolving line of credit facility, which would have expired on December 31, 2000. The Canadian Facility allows the Company to borrow Canadian or U.S. dollars up to a maximum of $5 million (Canadian) or approximately $3.3 million (U.S.) at December 31, 2000. For Canadian dollar borrowings, the Canadian Facility accrues interest at the bank's prime rate or the bank's cost of funds plus an adjustment ranging from 1.3% to 2.0% depending on our financial performance. For U.S. dollar borrowings, the Canadian Facility accrues interest at the prime rate of the bank or a Eurodollar rate plus an adjustment ranging from 1.3% to 2.0% depending on our financial performance. A facility fee of 0.20% to 0.375% is charged on the entire amount of the Canadian Facility. During August 1999, our Canadian subsidiary entered into a separate agreement with a Canadian bank for a revolving term loan (the "Term Loan"). The Term Loan, which expires on August 31, 2001, allows us to borrow Canadian or U.S. dollars up to a maximum of $10.0 million (Canadian), or approximately $6.7 million (U.S.) at December 31, 2000. The Term Loan accrues interest at our option at either the bank's prime rate plus 0.10% or the bank's U.S. dollar commercial loan rate plus 0.10%. A commitment fee of 0.25% is charged on the unused portion of the Term Loan. At December 31, 2000, our consolidated unsecured revolving lines of credit, described above, provided for borrowings up to approximately $138.3 million (in US dollars). There were outstanding balances on the lines of credit totaling $56.4 million, leaving approximately $81.9 million available for additional borrowings. At December 31, 2000, our current portion of long-term debt relates to bank debt assumed in connection with the acquisition of Etertin in Argentina, effective October 1, 2000. We are currently evaluating opportunities to obtain a separate financing arrangement in Argentina for this subsidiary and expect to either contract for a new facility in Argentina before the end of calendar year 2001 or to finance the working capital requirements of this subsidiary with availability under the Facility. -21- 22 We believe that international markets represent further opportunities for growth. We attempt to protect ourselves from foreign currency fluctuations by denominating substantially all our non-Canadian and non-Australian international sales in U.S. dollars. In addition, we have entered into various forward Canadian and Australian currency exchange contracts in order to hedge our net investments in, and our intercompany payables applicable to, our Canadian and Australian subsidiaries. We have the following forward currency exchange contracts outstanding as of December 31, 2000:
US$ CONTRACT CURRENCY TYPE AMOUNT CONTRACT TYPE EXPIRATION ------------------- --------------------- ----------------------- -------------- Canadian Dollars $2.7 million Sell Canadian Dollars January 2001 Canadian Dollars $1.3 million Sell Canadian Dollars April 2001 Canadian Dollars $8.4 million Sell Canadian Dollars May 2001 Australian Dollars $2.1 million Sell Australian Dollars January 2001 Australian Dollars $2.1 million Sell Australian Dollars January 2001 Australian Dollars $6.3 million Sell Australian Dollars April 2001 Australian Dollars $2.6 million Sell Australian Dollars May 2001
As of December 31, 2000, we had incurred net unrealized losses of approximately $0.7 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, Mexican and Argentinean 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. We currently have no 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. CONTINGENCIES The Company is party from time to time to ordinary litigation incidental to its business, none of which is expected to have a material adverse effect on the results of operations, financial position or liquidity of the Company. 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 -22- 23 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 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. 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 or material diminution in performance 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, are 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 December 31, 2000, after giving effect to the issuance of the Daisytek Post-spin Options described above, combined with the additional options granted during the second quarter of fiscal 2000 discussed in Note 9 of the Unaudited Interim Consolidated Financial Statements, there were approximately 5.5 million options outstanding with an overall weighted average exercise price of $7.33. -23- 24 The following table summarizes information about the Company's outstanding stock options as of December 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE --------------- ----------- -------------- $ 1.50 - $ 3.00 288 $ 1.65 $ 5.00 - $ 6.50 2,706,498 $ 6.16 $ 6.51 - $ 8.00 862,336 $ 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 - $15.50 185,501 $14.31
As of December 31, 2000, using the outstanding shares of 14.7 million and information from the previous table, the following table summarizes the Company's diluted weighted average shares at various price points:
DILUTED WEIGHTED AVERAGE AVERAGE SHARES SHARE PRICE OUTSTANDING ----------- ---------------- $ 7.00 14,895,251 $ 8.00 15,106,287 $ 9.00 15,423,414 $10.00 15,687,181 $11.00 15,907,075 $12.00 16,090,697 $13.00 16,246,531 $14.00 16,380,212
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 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 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 to hedge our net investments in some of our foreign operations and to hedge against interest rate increases. The Company is currently evaluating the provisions of SFAS 133 and its effect on the accounting treatment of these financial instruments. 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 our fourth quarter ending March 31, 2001. We believe the impact of adopting SAB 101 will not be significant to our financial statements. 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. -24- 25 INTEREST RATE RISK Our interest rate risk is limited to our outstanding balances on our revolving lines of credit, which amounted to $59.9 million at December 31, 2000. To mitigate this risk, we converted $25.0 million of our outstanding balance from variable interest to a fixed rate of 5.93% for the three-year life of our new $120.0 million U.S. credit facility. A 50 basis point movement in interest rates would result in approximately $175,000 annualized increase or decrease in interest expense based on the outstanding balance of the revolving line of credit at December 31, 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, Argentinean Pesos, Canadian Dollars, Australian Dollars and the Euro. Other international sales and purchases are generally U.S. Dollar based. At December 31, 2000 we had seven outstanding foreign currency forward contracts. If the foreign exchange rates of the Canadian and Australian currencies fluctuate 10% from the December 31, 2000 rates, gains or losses in fair value on the three outstanding contracts would be approximately $4.0 million, which would offset an underlying opposite gain or loss in our net position with our hedged international businesses. -25- 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information pertaining to this item is incorporated herein from Part 1. Financial Information (Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies). ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) Exhibits. 10.1(*) Credit Facility dated December 14, 2000 from Bank One Canada, as Lender, to Daisytek Canada, as Borrower, and Daisytek, Inc. and Daisytek International Corporation, as Guarantors 10.2(*) Guaranty by Daisytek, Inc. and Daisytek International Corporation for the benefit of Bank One, NA under the Credit Facility dated December 14, 2000 10.3(*) Demand Note Agreement dated December 14, 2000, from Daisytek Canada, as Borrower, for the benefit of Bank One Canada. 10.4(*) Credit Agreement dated December 18, 2000 among Daisytek, Incorporated, as Borrower, Daisytek International Corporation, as Guarantor, with the banks listed therein as Lenders, Bank One, N.A., as an LC Issuer and Bank One, Texas, N.A., as Administrative Agent 10.5(*) Parent Guaranty dated December 18, 2000 by Daisytek International Corporation for the benefit of the Lenders and the LC Issuer under the Credit Agreement 10.6(*) Subsidiary Guaranty dated December 18, 2000 by Certain Subsidiaries of Daisytek International Corporation for the benefit of the Lenders and the LC Issuer under the Credit Agreement 10.7(*) Pledge and Security Agreement dated December 18, 2000 between Daisytek, Incorporated and Steadi-Systems, Ltd., as Co-Pledgors and Bank One, Texas, NA, as Administrative Agent for the LC Issuer and the Lenders under the Credit Agreement 10.8(*) Security Agreement dated December 18, 2000 by and among Daisytek, Incorporated and its domestic subsidiaries a party thereto and Bank One, Texas, NA 10.9(*) Credit Agreement dated December 18, 2000 between Daisytek Australia Pty Ltd., as Borrower, and Bank One, NA, as Lender - ---------- (*) Filed herewith b) Reports on Form 8-K: 1. On November 21, 2000, the Company filed a current report on Form 8-K to report, under Item 5, the resignations of Mark C. Layton, James F. Reilly and Timothy M. Murray as members of the Company's board of directors. In addition, the Company also reported the appointment of Nicholas A. Giordano to its board of directors. 2. On December 22, 2000, the Company filed a current report on Form 8-K to report, under Item 4, the dismissal of Arthur Andersen LLP as the Company's independent public accountants and the engagement of Ernst & Young LLP as the Company's independent public accountants for the fiscal year ending March 31, 2001. 3. On December 27, 2000, the Company filed a current report on Form 8-K to report, under Item 5, a new credit facility entered into by its wholly-owned subsidiary, Daisytek, Incorporated. -26- 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 14, 2001 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Ralph Mitchell ------------------------------------ Ralph Mitchell Chief Financial Officer, Chief Accounting Officer, Executive Vice President - Finance -27- 28 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTI0N - ------ ----------- 10.1(*) Credit Facility dated December 14, 2000 from Bank One Canada, as Lender, to Daisytek Canada, as Borrower, and Daisytek, Inc. and Daisytek International Corporation, as Guarantors 10.2(*) Guaranty by Daisytek, Inc. and Daisytek International Corporation for the benefit of Bank One, NA under the Credit Facility dated December 14, 2000 10.3(*) Demand Note Agreement dated December 14, 2000 from Daisytek Canada, as Borrower, for the benefit of Bank One Canada 10.4(*) Credit Agreement dated December 18, 2000 among Daisytek, Incorporated, as Borrower, Daisytek International Corporation, as Guarantor, with the banks listed therein as Lenders, Bank One, N.A., as an LC Issuer and Bank One, Texas, N.A., as Administrative Agent 10.5(*) Parent Guaranty dated December 18, 2000 by Daisytek International Corporation for the benefit of the Lenders and the LC Issuer under the Credit Agreement 10.6(*) Subsidiary Guaranty dated December 18, 2000 by Certain Subsidiaries of Daisytek International Corporation for the benefit of the Lenders and the LC Issuer under the Credit Agreement 10.7(*) Pledge and Security Agreement dated December 18, 2000 between Daisytek, Incorporated and Steadi-Systems, Ltd., as Co-Pledgors and Bank One, Texas, NA, as Administrative Agent for the LC Issuer and the Lenders under the Credit Agreement 10.8(*) Security Agreement dated December 18, 2000 by and among Daisytek, Incorporated and its domestic subsidiaries a party thereto and Bank One, Texas, NA 10.9(*) Credit Agreement dated December 18, 2000 between Daisytek Australia Pty Ltd., as Borrower, and Bank One, NA, as Lender
- ---------- (*) Filed herewith EX-10.1 2 d83940ex10-1.txt CREDIT FACILITY DATED DECEMBER 14, 2000 1 Exhibit 10.1 [Bank One Logo] [LETTERHEAD] December 14, 2000 Mr. Thomas Graham Director of Planning Daisytek, Inc. 500 North Central Expressway Plano, Texas. 75074-6763 Dear Tom: We are pleased to inform you that Bank One Canada (the "Bank") has approved the following credit facility for Daisytek Canada (the "Borrower") subject to the Bank's continuing satisfaction with the Borrower's and Guarantors' managerial and financial status. Disbursements under this facility are solely at the Bank's discretion. Any disbursement on one or more occasion shall not commit the Bank to make any subsequent disbursement. This facility is subject to the following terms and conditions:
BORROWER: Daisytek Canada (the "Borrower") GUARANTORS: Daisytek, Inc. Daisytek International Corporation (the "Guarantors") FACILITY: Segment (1) Revolving Credit Facility, to include the issuance of Standby Letters of Credit, expiring January 01, 2002. Segment (2) Foreign Exchange Facility AMOUNT: Segment (1) CAD $5,000,000 (or USD equivalent) Segment (2) USD $1,000,000 Foreign Exchange Facility PURPOSE: Segment (1) General Corporate Purposes Segment (2) To hedge against Foreign Exchange Rate fluctuations
2 [Bank One Logo] Daisytek, Inc. December 14, 2000 Page: 02
AVAILMENT: Segment (1) Available by way of: (a) Prime based loans which are advanced automatically in increments of CAD $10,000 to cover the Borrower's cheque issuances; or (b) Banker's Acceptances or Cost-of-Funds based loans. Surplus funds in the accounts would be automatically applied to the Prime based loans.
PRICING: At the Borrower's option: Segment (1): FOR CANADIAN DOLLARS BORROWINGS: (a) Bank One Canada's Prime Rate - Floating; (b) Bank One Canada's Banker's Acceptance Rate or Cost-of-Funds Rate (CDOR) plus the applicable spread, per the pricing grid in the proposed domestic facility (see Exhibit 1), plus 25 basis points (for Canadian dollar borrowings the reference rate will be CDOR instead of LIBOR); or (c) Applicable Margin (see Exhibit 1) for Standby Letters of Credit (minimum CAD $300.00 or USD $250.00). FOR UNITED STATES DOLLAR BORROWINGS: (a) Bank One Canada's USD Base Rate; (b) LIBOR plus the applicable spread, per the pricing grid in the proposed domestic facility (see Exhibit 1), plus 25 basis points; INCREMENTS: Banker's Acceptances, Cost-of-Funds Loans (CDOR) and LIBOR loans are available in minimum amounts of CAD $1,000,000 (or in the case of USD borrowings - USD $1,000,000) and in increments of CAD or USD $100,000 for periods of not less than 30 days and not greater than 180 days.
3 [Bank One Logo] Daisytek, Inc. December 14, 2000 Page: 03 PAYMENT OF INTEREST: Interest on Canadian Prime Based Loans and USD Base Rate Loans are due monthly, in arrears. Interest on Cost-of-Funds advances are due at maturity and not less frequently than every 90 days. REPAYMENT OF PRINCIPAL: Segment (1) The Revolving Credit matures and is due in full on or before Maturity Date of January 01, 2002. Segment (2) Any unutilized portion of this Segment may be cancelled at any time, from time to time, without notice. FACILITY FEE: Per the final pricing grid for the proposed domestic facility (see Exhibit 1) SECURITY: Unsecured. NEGATIVE PLEDGE: The Borrower will not pledge or otherwise encumber its assets as long as the revolving credit remains in place, with the exception of permitted encumbrances, which will be negotiated prior to closing. In the event that collateral is taken under the proposed domestic facility, the subject facility will become secured by all accounts receivable and inventory of the Borrower. SUPPORTING DOCUMENTS: 1. Guarantee of Daisytek, Inc. and Daisytek International Corporation, with Supporting Resolutions. 2. Letter Loan Agreement (enclosed). 3. Promissory Note (enclosed). 4. Complete Signing Authorization Package (Borrowing Resolution, Signature Cards, List of Officers and Directors) (enclosed). 5. Articles of Incorporation for the Borrower (held) 6. Forward Exchange Forward Contract Request (enclosed). 4 [Bank One Logo] Daisytek, Inc. December 14, 2000 Page: 04 SERVICING REQUIREMENTS: 1. Quarterly income statement and balance sheet of the Borrower within 60 days of each quarter-end. 2. Annual audited financial statements of the Guarantors within 120 days of fiscal year-end. 3. Quarterly financial statements of the Guarantors within 60 days of each quarter-end; and 4. Quarterly Certificate of Compliance from the Guarantors confirming they are not in breach of Covenants under any of their debts. CROSS-DEFAULT: The Borrower will be deemed to be in default of the Agreement if Daisytek, Inc. and/or Daisytek International Corporation are in default under any of their Loan Agreements. A copy of the current domestic revolver must be provided to the Bank, as well as any material amendments, waivers, extensions or replacement facilities. PRINCIPAL COVENANTS: The Borrower covenants and agrees to the following with the Bank while this Agreement is in effect or any advances are outstanding. 1. To pay all sums of many when due under this Agreement. 2. To file all material tax returns which are or will be required; to pay or make provision for payment of all material taxes which are or will become due and payable; and to provide adequate reserves for the payment of any tax. 3. To maintain its corporate existence as a valid subsisting corporate entity. 4. Other covenants, representations and warranties that are typical for a transaction of this nature shall be incorporated into the Loan Agreement. 5 [Bank One Logo] Daisytek, Inc. December 14, 2000 Page: 05 REIMBURSEMENT OF EXPENSES: The expenses of the Bank, whether incurred prior to or subsequent to closing, in investigation, preparation, negotiation, documentation, syndication, administration and collection will be for the account of the Borrower, including expenses of and fees for solicitors for the Bank (who may or may not be employees of the Bank) and other advisors and professionals engaged by the Bank. ENUREMENT: This agreement shall be binding upon and enure to the benefit of the Bank, the Borrower, the Guarantor and their respective successors and permitted assigns. All other terms and conditions of the Loan Agreement dated December 23, 1997 remain in effect and in full force. If the above terms and conditions are acceptable to you, as they are to the Bank, please sign and return the enclosed acceptance copy of this letter as soon as possible. Sincerely, BANK ONE CANADA ACCEPTED BY: /s/ illegible DAISYTEK CANADA - ----------------------------- Signature /s/ Ralph Mitchell ----------------------------- Signature :enc. Date: 12-20-00 6 [Bank One Logo] Daisytek, Inc. December 14, 2000 Page: 06 ACKNOWLEDGED BY: DAISYTEK, INC. /s/ Ralph Mitchell ------------------------------ Signature Date: 12-20-00 ACKNOWLEDGED BY: DAISYTEK INTERNATIONAL CORPORATION /s/ Ralph Mitchell ------------------------------ Signature Date: 12-20-00 EX-10.2 3 d83940ex10-2.txt GUARANTY BY DAISYTEK DATED DECEMBER 14, 2000 1 EXHIBIT 10.2 GUARANTY GUARANTY: To induce Bank One, NA, a national banking association having its principal office in Chicago, Illinois, directly or through any of its branches, offices, subsidiaries or affiliates (collectively, the "Lender"), in its sole discretion, to make loans or extend or continue credit, including letters of credit and Rate Management Transactions (as defined below), to DAISYTEK CANADA, a CORPORATION, and existing under the laws of CANADA (the "Borrower"), whether to the Borrower alone or to the Borrower and others, and because the undersigned (the "Guarantor") has determined that executing this Guaranty is in its interest and to its financial benefit, the Guarantor, as primary obligor and not merely as surety, absolutely and unconditionally guarantees to the Lender the prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of any and all existing and future indebtedness, obligation and liability of every kind, nature and character, direct or indirect, absolute or contingent (including, without limitation, all renewals, extensions and modifications thereof; and all interest, fees and other monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Borrower to the Lender howsoever and whensoever created, arising, evidenced or acquired (the "Obligations"). The Guarantor further agrees to pay all costs and expenses including, without limitation, all court costs and attorneys' and paralegals' fees (including allocated costs of in-house counsel and paralegals) and expenses paid or incurred by the Lender in endeavoring to collect all or any part of the Obligations from, or in prosecuting any action against, the Borrower, the Guarantor or any other guarantor of all or any part of the Obligations (such costs and expenses, together with the Obligations, collectively the "Guaranteed Debt"). The Guarantor further agrees that the Guaranteed Debt may be extended or renewed in whole or in part without notice to or further assent from it, and that it remains bound upon its guarantee notwithstanding any such extension or renewal. The term "Rate Management Transaction", as used herein, means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between Borrower and Lender which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. NATURE OF GUARANTY: This Guaranty is a guaranty of payment and not of collection. The Guarantor waives any right to require the Lender to sue the Borrower, any other guarantor, or any other person obligated for all or any part of the Guaranteed Debt, or otherwise to enforce its payment against any collateral securing all or any part of the Guaranteed Debt. NO DISCHARGE OR DIMINISHMENT OF GUARANTY: Except as otherwise provided herein and to the extent provided herein, the obligations of the Guarantor hereunder are unconditional and absolute and not subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Guaranteed Debt), including: any claim of waiver, release, extension, renewal, settlement, surrender, alteration, or compromise of any of the Guaranteed Debt, by operation of law or otherwise; any change in the corporate existence, structure or ownership of the Borrower or any other guarantor of or other person liable for any of the Guaranteed Debt, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower, or any other guarantor of or other person liable for any of the Guaranteed Debt, or their assets or any resulting release or discharge of any obligation of the Borrower, or any other guarantor of or other person liable for any of the Guaranteed Debt; or the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Borrower, any other guarantor of the Guaranteed 2 Debt, the Lender, or any other person, whether in connection herewith or in any unrelated transactions. The obligations of the Guarantor hereunder are not subject to any defense or setoff, counterclaim, recoupment, or termination whatsoever by reason of the invalidity, illegality, or unenforceability of any of the Guaranteed Debt or otherwise, or any provision of applicable law or regulation purporting to prohibit payment by Borrower or any other guarantor of or other person liable for any of the Guaranteed Debt of the Guaranteed Debt or any part thereof. Further, the obligations of the Guarantor hereunder are not discharged or impaired or otherwise affected by: the failure of the Lender to assert any claim or demand or to enforce any remedy with respect to all or any part of the Guaranteed Debt; any waiver or modification of or supplement to any provision of any agreement relating to the Guaranteed Debt; any release, non-perfection, or invalidity of any indirect or direct security for the obligations of the Borrower for all or any part of the Guaranteed Debt or any obligations of any other guarantor of or other person liable for any of the Guaranteed Debt, or any action or failure to act by Lender with respect to any collateral securing any part of the Guaranteed Debt; any default, failure or delay, willful or otherwise, in the payment or performance of any of the Guaranteed Debt; or any other circumstance, act, omission or delay that might in any manner or to any extent vary the risk of the Guarantor or that would otherwise operate as a discharge of the Guarantor as a matter of law or equity (other than the indefeasible payment in full in cash of the Guaranteed Debt). DEFENSES WAIVED: To the fullest extent permitted by applicable law, the Guarantor waives any defense based on or arising out of any defense of the Borrower or the unenforceability of all or any part of the Guaranteed Debt from any cause, or the cessation from any cause of the liability of the Borrower, other than the indefeasible payment in full in cash of the Guaranteed Debt. Without limiting the generality of the foregoing, the Guarantor irrevocably waives acceptance hereof; presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any person against the Borrower, any other guarantor of any of the Guaranteed Debt, or any other person. The Lender may, at its election, foreclose on any security held by it by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure or otherwise act or fail to act with respect to any collateral securing all or a part of the Guaranteed Debt, compromise or adjust any part of the Guaranteed Debt, make any other accommodation with the Borrower, any other guarantor or any other person liable on any of the Guaranteed Debt or exercise any other right or remedy available to it against the Borrower, any other guarantor or any other person liable on any of the Guaranteed Debt, without affecting or impairing in any way the liability of the Guarantor under this Guaranty except to the extent the Guaranteed Debt has been fully and indefeasibly paid in cash. To the fullest extent permitted by applicable law, the Guarantor waives any defense arising out of any such election even though that election may operate, pursuant to applicable law, to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantor against the Borrower, any other guarantor or any other person liable on any of the Guaranteed Debt, as the case may be, or any security. FOREIGN CURRENCY: The specification of payment in a specific currency at a specific place and time pursuant to the documentation relating to the Guaranteed Debt is essential. That currency or those currencies are also the currency of account and payment under this Guaranty. If the Guarantor is unable for any reason to effect payment of a specific currency (other than United States currency) as required by the preceding sentence or if the Guarantor defaults in the payment when due of any amount of a specific currency (other than United States currency) under this Guaranty, the Lender may, at its option, require such payment to be made to the Head Office of the Lender in the equivalent amount in United States currency at the Lender's then current selling rate for electronic transfers of that currency to the place or places where the Guaranteed Debt was payable. In the event that any payment, whether pursuant to a judgment or otherwise, does not result in payment of the amount of currency due under this Guaranty, upon 2 3 conversion to the currency of account and transfer to the place specified for payment, the Lender has an independent cause of action against the Guarantor for the deficiency. RIGHTS OF SUBROGATION: The Guarantor will not assert any right, claim or cause of action, including, without limitation, a claim of subrogation, contribution or indemnification that it has against the Borrower, any person liable on the Guaranteed Debt, or any collateral, until the Borrower and the Guarantor have fully performed all their obligations to the Lender. REINSTATEMENT; STAY OF ACCELERATION: If at any time any payment of any portion of the Guaranteed Debt is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, or reorganization of the Borrower or otherwise, the Guarantor's obligations under this Guaranty with respect to that payment shall be reinstated at such time as though the payment had not been made and whether or not the Lender is in possession of this Guaranty. If acceleration of the time for payment of any of the Guaranteed Debt is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of any agreement relating to the Guaranteed Debt shall nonetheless be payable by the Guarantor forthwith on demand by the Lender. INFORMATION: The Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Debt and the nature, scope and extent of the risks that the Guarantor assumes and incurs under this Guaranty, and agrees that the Lender does not have any duty to advise the Guarantor of information known to it regarding those circumstances or risks. TERMINATION: The Lender may continue to make loans or extend credit to the Borrower based on this Guaranty until five days after it receives written notice of termination from the Guarantor. Notwithstanding receipt of any such notice, the Guarantor will continue to be liable to the Lender for any Guaranteed Debt created, assumed or committed to prior to the fifth day after receipt of the notice, and all subsequent renewals, extensions, modifications and amendments with respect to, or substitutions for, all or any part of that Guaranteed Debt. TAXES: All payments of the Guaranteed Debt will be made by the Guarantor free and clear of and without deduction for or on account of any and all present or future taxes, levies, imposts, duties, charges, deductions or withholdings of whatever nature imposed by any governmental authority with respect to such payments, and any and all liabilities with respect to the foregoing, but excluding franchise taxes and taxes imposed on overall net income of the Lender by the United States of America or the jurisdiction in which Lender's applicable Lending Installation is located (collectively, "Taxes"). If the Guarantor is required by law to deduct any Taxes from or in respect of any sum payable to the Lender under this Guaranty, (a) the sum payable must be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this provision) the Lender receives an amount equal to the sum it would have received had no such deductions been made, (b) the Guarantor must then make such deductions, and must pay the full amount deducted to the relevant authority in accordance with applicable law, and (c) the Guarantor must furnish to the Lender within 45 days after their due date certified copies of all official receipts evidencing payment thereof. LIMITATION: Regardless of the amount of Guaranteed Debt outstanding at any time, the Guarantor's obligations under this Guaranty to the Lender shall not exceed the principal sum of C$ 5,000,000 (CANADIAN FIVE MILLION DOLLARS) FOR THE REVOLVING CREDIT FACILITY AND US$ 1,000,000 (US ONE MILLION DOLLARS) FOR THE FOREIGN EXCHANGE FACILITY plus accrued interest and all costs, fees and expenses (including attorneys' fees) incurred in collecting or enforcing the Guarantor's obligations under this Guaranty. 3 4 SEVERABILITY: The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of the Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of the Guarantor's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantor or the Lender, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding. This Section with respect to the maximum liability of the Guarantor is intended solely to preserve the rights of the Lender to the maximum extent not subject to avoidance under applicable law, and neither the Guarantor nor any other person or entity shall have any right or claim under this Section with respect to such maximum liability of Guarantor, except to the extent necessary so that the obligations of the Guarantor hereunder shall not be rendered voidable under applicable law. The Guarantor agrees that the Guaranteed Debt may at any time and from time to time exceed the maximum liability of the Guarantor without impairing this Guaranty or affecting the rights and remedies of the Lender hereunder, provided that, nothing in this sentence shall be construed to increase the Guarantor's obligations hereunder beyond its maximum liability. REPRESENTATIONS BY GUARANTOR: The Guarantor represents that: (a) it is duly organized, validly existing and in good standing (to the extent such concept applies to the Guarantor) under the laws where it is organized, and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted; (b) the execution and delivery of this Guaranty and the performance of the obligations it imposes (i) are within its powers; (ii) have been duly authorized by all necessary action of its governing body; and (iii) do not violate any law, conflict with the terms of its articles of incorporation or organization, its by-laws or any agreement by which it is bound or require the consent or approval of any governmental authority or any third party; (c) this Guaranty is a valid and binding agreement, enforceable according to its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditor's rights generally; and (d) all balance sheets, income statements, and other financial statements furnished to the Lender are accurate and fairly reflect the financial condition of the organizations and persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not changed materially and adversely since those dates. INCORPORATION: The Guarantor agrees that so long as all or any portion of the Guaranteed Debt remains outstanding, it will observe, for the benefit of the Lender, the covenants and events of default set forth in the Loan Agreement dated December 14, 2000 between BANK ONE CANADA and the Guarantor, as amended (the "Loan Agreement"), which provisions and related definitions are incorporated by reference, mutatis mutandis. Those provisions and definitions remain in effect until this Guaranty is no longer in force, notwithstanding any amendment, modification, or termination of the Loan Agreement. An event of default under and as defined in the Loan Agreement constitutes an event of default under this Guaranty, which entitles the Lender to accelerate the Guarantor's obligations under this Guaranty and to exercise any and all of the remedies set forth in this Guaranty. LENDING INSTALLATIONS; SETOFF: The Guaranteed Debt may be booked at any office, branch, subsidiary or affiliate of the Lender, as selected by the Lender (each a "Lending Installation"). All terms of this Guaranty apply to and may be enforced by or on behalf of any Lending Installation. Without limiting the rights of the Lender under applicable law, if either (i) the Guaranteed Debt is then due, whether pursuant to any agreement evidencing the Guaranteed Debt, an event of default under this Guaranty, or otherwise, or (ii) the Guarantor is insolvent (whether or not all or any part of the Guaranteed Debt is then due), then the Guarantor authorizes the Lender to apply any sums standing to the credit of the Guarantor with the Lender or any of its Lending Installations toward the payment of the Guaranteed Debt by the Guarantor under this Guaranty. 4 5 NOTICES: All notices, requests and other communications to any party under this Guaranty must be in writing (including bank wire, facsimile transmission or similar writing) and must be given to that party, in the case of the Guarantor, at its address or facsimile number set forth on the signature page hereof and, in the case of the Lender, at its Head Office or as otherwise specified in a notice by one party to the other. Each notice, request or other communication is effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified below and confirmation of receipt is received, (ii) if given by mail, 72 hours after the communication is deposited in the mails with first class postage prepaid, addressed as specified above, or (iii) if given by any other means, when delivered at the address specified above. MISCELLANEOUS: No provision of this Guaranty may be amended, supplemented or modified, or any of its terms and provisions waived, except by a written instrument executed by the Lender and the Guarantor. No failure on the part of the Lender to exercise, and no delay in exercising, any right under this Guaranty waives that right; nor does any single or partial exercise of any right under this Guaranty preclude any other or further exercise of that or any other right. The remedies provided in this Guaranty are cumulative and not exclusive of any remedies provided by law. This Guaranty binds the Guarantor and its successors and assigns, and benefits the Lender and its successors and assigns. The use of headings does not limit the provisions of this Guaranty. GOVERNING LAW: THIS GUARANTY IS TO BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO THE LENDER. CONSENT TO JURISDICTION: THE GUARANTOR IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY AND THE GUARANTOR IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR LATER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH A COURT IS AN INCONVENIENT FORUM. THIS PROVISION DOES NOT LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS AGAINST THE GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE GUARANTOR AGAINST THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS GUARANTY SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. WAIVER OF JURY TRIAL: THE GUARANTOR AND THE LENDER EACH WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS GUARANTY OR THE RELATIONSHIP IT ESTABLISHES. 5 6 Dated: , 2000 GUARANTOR: -------------------------- DAISYTEK, INC. Address for Notices: By: /s/ -------------------------------- Facsimile No. Title: --------------------------- ----------------------------- GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION Address for Notices: By: /s/ -------------------------------- Facsimile No. Title: --------------------------- ----------------------------- EX-10.3 4 d83940ex10-3.txt DEMAND NOTE AGREEMENT 1 EXHIBIT 10.3 DEMAND NOTE AGREEMENT (Fixed or Floating Rate, Canadian or U.S. Dollars) DATE: December 14, 2000 In consideration of BANK ONE CANADA (the "Bank") providing the Borrower with a DEMAND LOAN FACILITY (the "Loan Facility") in the principal amount of up to CANADIAN FIVE MILLION DOLLARS (CAD $5,000,000) in lawful currency of CANADA (or its equivalent in other currencies approved by the Bank), the Borrower agrees (and each of them, if more than one, jointly and severally agrees) with the Bank as follows: 1. The Borrower promises to pay to the Bank on demand in accordance with the terms and conditions required by the Bank from time to time at our office all amounts outstanding under the Loan Facility, including principal, which is the aggregate of all advances made, together with interest thereon at the rate of: NYL per annum above the rates announced from time to time by the Bank as its "Canadian Prime Rate" in the case of Canadian Dollar advances or is "U.S. Prime Rate" in the case of U.S. Dollar advances (the "Note Rate") and at the rate of 3.00% per annum above the Note Rate after maturity, whether by acceleration or otherwise; or such rate or rates as may be agreed to or confirmed in writing by the Bank from time to time. Interest shall be calculated monthly in arrears, both before and after maturity, default and judgement, on the daily balance outstanding based on the actual number of days clasped, divided by 365, in the case of a Canadian Dollar advances, or by 360, in the case of a U.S. Dollar advances, with interest on overdue interest at the same rate as on the principal, and shall be payable on the last day of each month. Any change in the Canadian Prime Rate or U.S. Prime Rate will be effective on the date such change is established without notice by the Bank to the Borrower. On the date hereof, Canadian Prime Rate is 7.500% per annum and U.S. Prime Rate is 9.500% per annum. 2. The Borrower authorizes the Bank, but the Bank is not obliged, from time to time to debit the account or accounts maintained by the Borrower with the Bank from time to time (collectively, the "Account") with the amount of interest accrued and unpaid by the Borrower and any other fees or charges of any kind. 3. Provided that the Bank has not demanded payment of any amount outstanding under the Loan Facility, or has not terminated this agreement, the Borrower may borrow, repay and reborrow up to the amount available under the Loan Facility at any time and from time to time in the following manner: 2 a. The Borrower will advise and direct the Bank as to the individual amounts the Borrower wishes to borrow, repay or reborrow under the Loan Facility OR b. The Borrower authorizes the Bank, daily or otherwise as and when determined by the Bank from time to time, to ascertain the position or net position (as the case may be) between the Borrower and the Bank in respect of the Account and that i) if such position is a credit in favour of the Borrower, the Bank will apply the amount of such credit or any part thereof, rounded to the nearest integral amount established by the Bank from time to time, as a repayment of the Loan Facility, and the Bank will debit the Account with the amount of such repayment, and ii) if such position or net position is a debit in favour of the Bank, the Bank will make an advance under the Loan Facility of such amount, rounded to the nearest integral amount established by the Bank from time to time, as is required to place the Account in such credit or net credit position as has been agreed between the Borrower and the Bank from time to time, provided that no time shall the balance owing exceed the amount of the Loan Facility. 4. The Bank shall maintain on the books of its unit of account, accounts and records evidencing the outstanding principal amount of the loan of the Bank to the Borrower under the Loan Facility together with any interest in respect thereof. The Bank shall maintain a record of the amount of the balance, each advance, and each payment of principal and interest on account of the loan. The Bank's accounts and records constitute in the absence of manifest error prima facie evidence of the indebtedness of the Borrower to the Bank under the Loan Facility. 5. Where a statement of account for the Account is to be rendered by the Bank, it is agreed that: a. the Borrower will verify the correctness and completeness of each statement of account received from the Bank. b. if a statement of account and relevant vouchers are not received on or before the 10th day after the end of the cycle agreed on for their preparation, the Borrower shall notify the Bank in writing not later than 5 days thereafter. c. the Borrower shall within 30 days and not thereafter following the end of the cycle agreed on for the statement of account preparation, notify the Bank in writing, at the branch of account for the Account, of any alleged omissions from or inaccurate entries in the Account as so stated. 2 3 d. at the end of the said 30 days, the statement of account for the Account as kept by the Bank shall be conclusive evidence without any further proof that, provided that this shall not apply with respect to any credits to the Account made in error, any alleged errors of which the Bank has been so notified or any payments made in error, any alleged errors of which the Bank has been so notified or any payments made on forged or unauthorized endorsements, the Account contains all credits that should be contained therein and no debits that should not be contained therein and all the entries therein are correct and, subject to the above exception, the Bank shall be free from all claims in respect of the Account. 6. The Borrower acknowledges that the terms of this agreement are in addition to and not in substitution for any terms and conditions of any other agreements between the Borrower and the Bank. 7. This agreement is delivered in Toronto, Ontario and is governed by the laws of the Province of Ontario. ADDRESS: BORROWER: DAISYTEK CANADA - ------------------------------ By: /s/ - ------------------------------ -------------------------------- (Authorized Signature) By: /s/ - ------------------------------ -------------------------------- (Authorized Signature) EX-10.4 5 d83940ex10-4.txt CREDIT AGREEMENT DATED DECEMBER 18, 2000 1 EXHIBIT 10.4 CREDIT AGREEMENT This Agreement, dated as of December 18, 2000, is among Daisytek, Incorporated, a Delaware corporation, Daisytek International Corporation, a Delaware corporation, the Lenders as defined herein, Citizens Bank of Massachusetts, as Syndication Agent, Bank of America, N.A., as Documentation Agent, Bank One, NA, as an LC Issuer and Bank One, Texas, NA, a national banking association having its principal office in Chicago, Illinois, as an LC Issuer and as Administrative Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS As used in this Agreement: "Accounts" means all rights to payment for goods sold or leased or services rendered by the Borrower and its Domestic Subsidiaries, whether or not earned by performance, together with all security interests or other security held by or granted to the Borrower or its Domestic Subsidiaries to secure such rights to payment. "Acquired Person" means any Person which becomes a Wholly-Owned Subsidiary of the Borrower or any of its Subsidiaries as a result of a Permitted Acquisition. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which a Loan Party or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company. "Administrative Agent" means Bank One in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacities as an LC Issuer and a Lender, and any successor Administrative Agent appointed pursuant to Article X. "Advance" means (a) a borrowing hereunder, (i) made by the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period, (b) a Swing Line Advance, and (c) a payment under a Facility LC. 2 "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more (or in the case of the Guarantor, 15% or more) of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agents" means, collectively, the Administrative Agent, the Syndication Agent and the Documentation Agent. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Lenders. "Agreement" means this credit agreement, as it may be amended or modified and in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4(b). "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Applicable Fee Rate" means, at any time, the percentage rate per annum at which Facility Fees are accruing on the Aggregate Commitment (without regard to usage) at such time as set forth in the Pricing Schedule. "Applicable Margin" means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in the Pricing Schedule. "Arrangers" means Banc One Capital Markets, Inc., a Delaware corporation, Banc of America Securities LLC, a Delaware limited liability company, their successors, in their capacities as Co-Lead Arrangers and Co-Book Runners. "Article" means an article of this Agreement unless another document is specifically referenced. -2- 3 "Authorized Officer" means any of the chief executive officer, president, chief financial officer, or any other officer of the Borrower designated in writing by any of the foregoing to the Administrative Agent, acting singly. "Available Aggregate Commitment" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "Bank One" means Bank One, Texas, NA, a national banking association having its principal office in Dallas, Texas, in its individual capacity, and its successors. "Borrower" means Daisytek, Incorporated, a Delaware corporation, and its successors and assigns. "Borrowing Base" means, at any time, an amount equal to the sum of (a) 80% of Consolidated Eligible Accounts, plus (b) 50% of Consolidated Eligible Inventory. In the event the Borrower closes the financing transaction permitted under Section 6.13(iii), the amount of availability under the Borrowing Base shall be reduced by the amount of Indebtedness the Borrower and its Domestic Subsidiaries are permitted to incur in connection with such financing transaction. "Borrowing Base Certificate" means a certificate in the form of Exhibit F attached hereto. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.8. "BSD" means Business Supplies Distributors, Inc. "BSD Business" means the line of business conducted by BSD and related Subsidiaries. "BSD Facility" means an inventory and working capital financing agreement, as the same may be amended or modified and in effect from time to time, between a Wholly-Owned Subsidiary of the Guarantor formed to be the holding company of the BSD Business and a commercial lending institution, on terms and conditions satisfactory to the Administrative Agent in its sole discretion. "BSD Restructure Requirements" is defined in Section 6.12(y). "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Dallas and New York for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Dallas for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. -3- 4 "Capital Expenditures" means, without duplication, any expenditures for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a Person's balance sheet prepared in accordance with Agreement Accounting Principles. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalent Investments" means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts maintained in the ordinary course of business, and (iv) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest. "Change" is defined in Section 3.2. "Change in Control" means the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Guarantor; or (ii) the Guarantor shall cease to own, free and clear of all Liens or other encumbrances, 100% of the outstanding shares of voting stock of the Borrower on a fully diluted basis. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral Documents" means, collectively, the Pledge Agreement, the Parent Guarantee, the Subsidiary Guarantee, the pledge agreements pursuant to which 65% of the capital stock of the Borrower's Material Foreign Subsidiaries are pledged in favor of the Administrative Agent for the ratable benefit of the LC Issuer, the Lenders and the other holders of Secured Obligations, the Security Agreement, related UCC-1 financing statements and all documents hereafter executed as security for, or to ensure repayment of, the Secured Obligations. "Collateral Shortfall Amount" is defined in Section 8.1. "Commitment" means, for each Lender, the obligation of such Lender to make Loans to, and participate in Facility LCs issued upon the application of the Borrower, in an aggregate amount not exceeding the amount set forth opposite its signature below, as it may be modified as a result of any -4- 5 assignment that has become effective pursuant to Section 12.3.2 or as otherwise modified from time to time pursuant to the terms hereof. "Consolidated Capital Expenditures" means, with reference to any period, the Capital Expenditures of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated EBITDA" means Consolidated Net Income plus, to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) expense for taxes paid or accrued, (iii) depreciation, (iv) amortization, (v) $375,000 for the quarter ended December 31, 1999, $1,325,000 for the quarter ended March 31, 2000, $634,000 for the quarter ended June 30, 2000 and $1,555,000 for the quarter ended September 30, 2000; (vi) for the quarters ending December 31, 2000 and March 31, 2001, actual non-recurring charges, not to exceed $1,500,000 in the aggregate, related to the physical separation of assets and related activities resulting from the spinoff of PFSweb, Inc. and actual non-recurring, non-cash charges, not to exceed $500,000 in the aggregate, incurred as a result of the proposed restructure of the Tape Company line of business, (vii) extraordinary losses incurred other than in the ordinary course of business, to the extent approved by the Administrative Agent in its sole and absolute discretion, minus, to the extent included in Consolidated Net Income, extraordinary gains realized other than in the ordinary course of business, as determined by the Administrative Agent in its sole discretion, all calculated for the Borrower and its Subsidiaries on a consolidated basis. Notwithstanding anything herein to the contrary, Consolidated EBITDA shall be inclusive of the EBITDA (calculated on a basis consistent with this definition of Consolidated EBITDA) of any Acquired Person for the period of determination to the extent such EBITDA is (A) included in its four most recent audited fiscal quarters and (B) is reflected in audited financial statements of such Acquired Person. Consolidated EBITDA shall exclude all EBITDA of Foreign Subsidiaries with Qualified Foreign Financings. "Consolidated Eligible Accounts" means, at any time, Accounts created in the ordinary course of business that meet the following requirements at the time they come into existence and continue to meet the same until collected in full: (a) it complies with all applicable laws, rules, and regulations, including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z of the Board of Governors of the Federal Reserve System; (b) it is genuine and in all respects what it purports to be; (c) it has not been outstanding for more than ninety (90) days past the original date of invoice; (d) it was created in connection with (i) the sale of goods by the Loan Party in the ordinary course of business and such sale has been consummated and such goods have been shipped f.o.b. or delivered and received by the account debtor or its designee, or (ii) the performance of services by the Loan Party in the ordinary course of business and such services have been completed and accepted by the account debtor or its designee; -5- 6 (e) it arises from an enforceable contract, the performance of which has been completed by the Loan Party for the portion billed and included in Consolidated Eligible Accounts; (f) it does not arise from the sale of any good that is on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval, consignment, or any other repurchase or return basis that makes payment conditional; (g) the Loan Party has good and indefeasible title to the Account and the Account is not subject to any Lien except Liens in favor of the Administrative Agent; (h) it does not arise out of a contract with or order from, an account debtor that, by its terms, prohibits or makes void or unenforceable the grant of a security interest by the Loan Party to the Administrative Agent in and to such account; (i) except for return credits and disputed amounts deducted from the amount thereof included in Consolidated Eligible Accounts, it is not subject to any setoff, counterclaim, defense, dispute, recoupment, or adjustment other than normal discounts for prompt payment; (j) the account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs; (k) it is not evidenced by chattel paper or an instrument, except to the extent the same has been deposited with the Administrative Agent as collateral; (l) it is not owed by an Affiliate of the Loan Party; (m) it is payable in U. S. dollars by the account debtor; (n) the account debtor is located in the United States of America; (o) the aggregate balances then outstanding on accounts owed by such account debtor and its known Affiliates to any Loan Party comprise less than 10% of total Consolidated Eligible Accounts or such accounts shall be disqualified, to the extent of the excess; (p) at the time the account arose, fewer than 20% of the aggregate balances then outstanding on Accounts owed by such account debtor and its known Affiliates to the Loan Parties are ineligible hereunder, or all of the Accounts of such account debtor shall be considered ineligible; -6- 7 (q) there is no agreement on the part of any Loan Party to extend payment terms beyond 90 days with respect to such Account; and (r) The account debtor is not a governmental agency, authority, instrumentality, or political subdivision of any government. The amount of Consolidated Eligible Accounts owed by an account debtor to the Loan Party shall be reduced by the amount of all "contra accounts" and other obligations owed by the Loan Party to such account debtor. "Consolidated Eligible Inventory" means, at any time, all inventory of finished goods then owned by (and in the possession or under the control of) the Borrower and its Domestic Subsidiaries that strictly complies with all of the Loan Parties' representations and warranties contained in the Loan Documents, which is held for sale or disposition in the ordinary course of the Borrower's business, in which no party other than the Administrative Agent has a security interest, valued at the lower of actual cost or fair market value. Consolidated Eligible Inventory shall not include (a) inventory that has been shipped or delivered to a customer or other party on consignment, a sale-or-return basis, or on the basis of any similar understanding, (b) inventory with respect to which a claim exists disputing the Borrower's title to or right to possession of such inventory, (c) work-in-process inventory, (d) obsolete inventory, (e) inventory that is damaged or not otherwise in good condition, or is in the process of being returned to the Loan Party, (f) inventory which does not comply with any applicable law, rule, or regulation or any legal standard imposed by any governmental authority with respect to its manufacture, use, or sale, (g) inventory which is not located within the United States of America, and (h) inventory that for any other reason is not readily saleable in the ordinary course of business. "Consolidated Indebtedness" means at any time the Indebtedness of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time. "Consolidated Intangible Assets" means at any time goodwill (including any amounts, however designated, representing the excess of the purchase price paid for assets or stock acquired subsequent to the date of this Agreement over the value assigned thereto on the books of the Guarantor and its Subsidiaries), patents, trademarks, trade names, copyrights, and all other intangible assets of the Guarantor and its Subsidiaries calculated on a consolidated basis as of such time. "Consolidated Interest Expense" means, with reference to any period, (a) for purpose of determining Consolidated EBITDA, interest expense and (b) for purposes of determining Fixed Charge Coverage Ratio, cash interest expense, in each case of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. Consolidated Interest Expense shall exclude all interest expense of Foreign Subsidiaries attributable to Qualified Foreign Financings. "Consolidated Net Income" means, with reference to any period, the net income (or loss) of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. -7- 8 "Consolidated Net Worth" means at any time the consolidated stockholders' equity of the Guarantor and its Subsidiaries calculated on a consolidated basis as of such time. "Consolidated Tangible Net Worth" means at any time the difference between (i) Consolidated Net Worth and (ii) Consolidated Intangible Assets. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership; provided, however, that Contingent Obligations shall not include a Loan Party's guarantees of payment of its Wholly-Owned Subsidiary's accounts payable or Operating Leases arising in the ordinary course of such Wholly-Owned Subsidiary's business payable on terms customary in the trade. "Conversion/Continuation Notice" is defined in Section 2.9. "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Guarantor or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Credit Extension" means the making of an Advance or the issuance of a Facility LC hereunder. "Credit Extension Date" means the Borrowing Date for an Advance or the issuance date for a Facility LC. "Default" means an event described in Article VII. "Dollar" and "$" means lawful money of the United States of America. "Domestic Subsidiaries" means all Subsidiaries of the Borrower organized under the laws of the United States of America or a state thereof. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, -8- 9 treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate. "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, provided that, (i) if Reuters Screen FRBD is not available to the Administrative Agent for any reason, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, and (ii) if no such British Bankers' Association Interest Settlement Rate is available to the Administrative Agent, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the rate determined by the Administrative Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of Bank One's relevant Eurodollar Loan and having a maturity equal to such Interest Period. "Eurodollar Loan" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin. "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Administrative Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or the Administrative Agent is incorporated or organized or (ii) the jurisdiction in which the Administrative Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced. -9- 10 "Existing Credit Agreement" means that certain Credit Agreement dated as of May 22, 1995, among the Borrower, the Guarantor, the other Subsidiaries party thereto, Chase Bank of Texas, N.A., as Administrative Agent, and the Lenders party thereto, as amended. "Facility LC" is defined in Section 2.19.1. "Facility LC Application" is defined in Section 2.19.3. "Facility LC Collateral Account" is defined in Section 2.19.11. "Facility Termination Date" means December 19, 2003, or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Fee Letter" means the Fee Letter from Bank One, individually and as the Administrative Agent, to the Borrower dated September 12, 2000. "Financial Contract" of a Person means (i) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics or (ii) any Rate Management Transaction. "Fixed Charge Coverage Ratio" means, as of the end of each fiscal quarter of the Borrower, for the Borrower and its Subsidiaries on a consolidated basis for the four consecutive quarters ending on such date, the ratio of (i) Consolidated EBITDA for the applicable period minus cash expense for Taxes paid to (ii) the sum of (a) Consolidated Interest Expense for the applicable period, plus (b) all scheduled payments of principal of Indebtedness for the applicable period, plus (c) all dividends or other distributions paid by the Guarantor to its stockholders in cash during the applicable period, plus (d) Consolidated Capital Expenditures for the applicable period (net of any insurance proceeds, if applicable). "Floating Rate" means, for any day, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case changing when and as the Alternate Base Rate changes. "Floating Rate Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. -10- 11 "Floating Rate Loan" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. "Foreign Subsidiaries" means all Subsidiaries of the Borrower or the Guarantor organized under the laws of a jurisdiction located outside the United States. "Guarantor" means Daisytek International Corporation, a Delaware corporation. "Indebtedness" of a Person means such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) obligations of such Person to purchase securities or other Property arising out of or in connection with the sale of the same or substantially similar securities or Property, (vi) Capitalized Lease Obligations, (vii) Contingent Obligations, (viii) Off-Balance Sheet Liabilities, (ix) indebtedness incurred under the trade accounts receivable conduit financing arrangement permitted by Section 6.13(iii), (x) LC Obligations and (xi) any other obligation for borrowed money or other financial accommodation which in accordance with Agreement Accounting Principles would be shown as a liability on the consolidated balance sheet of such Person. For purposes of computing the financial covenants hereunder, Qualified Foreign Financings shall not be considered Indebtedness. "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade) or contribution of capital by such Person; stocks, bonds, mutual funds, partnership interests, notes, debentures or other securities owned by such Person; any deposit accounts and certificate of deposit owned by such Person; and structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person. "LC Fee" is defined in Section 2.19.4. -11- 12 "LC Issuer" means Bank One or Bank One, NA (or any subsidiary or Affiliate of Bank One designated by Bank One) in its capacity as issuer of Facility LCs hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" is defined in Section 2.19.5. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Administrative Agent, the office, branch, subsidiary or affiliate of such Lender or the Administrative Agent listed on the signature pages hereof or on a Schedule or otherwise selected by such Lender or the Administrative Agent pursuant to Section 2.17. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Loan" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof). "Loan Documents" means this Agreement, the Facility LC Applications, any Notes issued pursuant to Section 2.13, and the Collateral Documents. "Loan Party" means each of the Borrower, the Guarantor, each Subsidiary Guarantor and each Subsidiary that is required to guarantee the Secured Obligations pursuant to the requirements hereof and "Loan Parties" means all of the foregoing, collectively. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of any Loan Party to perform its obligations under the Loan Documents to which it is a party, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Administrative Agent, the LC Issuer or the Lenders thereunder. -12- 13 "Material Foreign Subsidiary" means Daisytek Australia Pty. Ltd., Daisytek Canada, Inc., Daisytek de Mexico S.A. de C.V., Business Supplies Distributors Europe B.V., and any other Foreign Subsidiary having, as of any date of determination, net assets in excess of $20,000,000. "Material Indebtedness" is defined in Section 7.5. "Maximum Rate" means, at any time and with respect to any Lender, the maximum rate of interest under applicable law that such Lender may charge the Borrower. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the Borrowers at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the weekly rate ceiling described in, and computed in accordance with, Chapter 303 of the Texas Finance Code, as amended from time to time. "Modify" and "Modification" are defined in Section 2.19.1. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Net Cash Proceeds" means, with respect to any sale, lease, transfer or disposition of any asset of any Person or issuance of any Indebtedness or equity of any Person, the aggregate amount of cash received by such Person in connection with such transaction minus reasonable fees, costs and expenses, related taxes paid or payable, and repayment of any Indebtedness secured by the assets sold, leased, transferred or disposed of which is required to be repaid as a result of such transaction. "Net Mark-to-Market Exposure" of a Person means, as of any date of determination, the excess (if any) of all unrealized losses over all unrealized profits of such Person arising from Rate Management Transactions. "Unrealized losses" means the fair market value of the cost to such Person of replacing such Rate Management Transaction as of the date of determination (assuming the Rate Management Transaction were to be terminated as of that date), and "unrealized profits" means the fair market value of the gain to such Person of replacing such Rate Management Transaction as of the date of determination (assuming such Rate Management Transaction were to be terminated as of that date). "Non-U.S. Lender" is defined in Section 3.5(iv). "Note" is defined in Section 2.13. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, the LC Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and -13- 14 other obligations of the Borrower or any Loan Party to the Lenders or to any Lender, the Administrative Agent, the LC Issuer or any indemnified party arising under the Loan Documents. "Off-Balance Sheet Liability" of a Person means (i) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (ii) any liability under any Sale and Leaseback Transaction which is not a Capitalized Lease, (iii) any liability under any so-called "synthetic lease" transaction entered into by such Person, or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheets of such Person, but excluding from this clause (iv) Operating Leases. "Operating Lease" of a Person means any lease of Property (other than a Capitalized Lease) by such Person as lessee which has an original term (including any required renewals and any renewals effective at the option of the lessor) of one year or more. "Operating Lease Obligations" means, as at any date of determination, the amount obtained by aggregating the present values, determined in the case of each particular Operating Lease by applying a discount rate (which discount rate shall equal the discount rate which would be applied under Agreement Accounting Principles if such Operating Lease were a Capitalized Lease) from the date on which each fixed lease payment is due under such Operating Lease to such date of determination, of all fixed lease payments due under all Operating Leases of the Borrower and its Subsidiaries. "Other Taxes" is defined in Section 3.5(ii). "Outstanding Credit Exposure" means, as to any Lender at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such time. "Parent Guaranty" means that certain Parent Guaranty dated the date hereof, executed by the Guarantor in favor of the Administrative Agent, for the ratable benefit of the holders of the Secured Obligations, as it may be amended or modified and in effect from time to time. "Participants" is defined in Section 12.2.1. "Payment Date" means the 1st day of each calendar quarter. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means an Acquisition which meets the following criteria: (i) the acquisition target is in the same line of business as the Borrower; -14- 15 (ii) the Borrower has completed due diligence on the acquisition target exercising reasonable business judgment; (iii) if the proposed Acquisition is of stock or other ownership interests, the Acquisition will be structured so that the acquisition target becomes a Subsidiary of the Borrower or of one of the Borrower's Subsidiaries and complies with Section 6.24 of this Agreement; (iv) the interests being acquired shall not be subject to any contingent liabilities, unsatisfied judgments, or any pending or threatened action, charge, claim, demand, suit, proceeding, or governmental investigation that could reasonably be expected to have a Material Adverse Effect; (v) the Borrower shall have provided to the Administrative Agent and each Lender (a) copies of the financial statements of the acquisition target received by it and (b) a pro forma financial statement as of the closing date of such Acquisition reflecting the consolidation of the acquired assets and liabilities which reflects pro forma compliance with the financial covenants contained in Section 6.21 together with a certificate of an Authorized Officer of the Borrower confirming such calculations both before and after giving effect to the Acquisition; (vi) the total purchase price (including cash consideration paid however classified, including noncompete payments and consulting payments and whether such amount is paid at closing or over time, and the dollar value of all assets to be transferred by the purchaser to the seller in connection with such Acquisition and assumed debt) to be paid to acquire the equity interests or assets in any single Acquisition does not exceed $20,000,000; (vii) the name of the acquisition target and a summary description of the terms of the Acquisition shall have been provided to the Lenders at least five Business Days prior to the date that the proposed Acquisition is to be consummated; (viii) no Unmatured Default or Default has occurred and is continuing immediately prior to the closing of such Acquisition or would arise as a result of such Acquisition; and (ix) if the target of such Acquisition is publicly traded, such Acquisition has been approved by the board of directors of the target. "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. -15- 16 "Pledge Agreement" means that certain Pledge and Security Agreement dated the date hereof executed by the Borrower and Steadi-Systems, Ltd. pursuant to which all of the outstanding capital stock of the Borrower's Domestic Subsidiaries are pledged in favor of the Administrative Agent to secure the Secured Obligations as it may be amended or modified and in effect from time to time. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Principal Lines of Business" is defined in Section 6.1(iii). "Pro Rata Share" means, with respect to a Lender, a portion equal to a fraction the numerator of which is such Lender's Commitment and the denominator of which is the Aggregate Commitment. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Purchasers" is defined in Section 12.3.1. "Qualified Foreign Financing" means Indebtedness of Foreign Subsidiaries for which there is no recourse to any Loan Party or any commitment by a Loan Party to contribute capital, provide a keep-well agreement or otherwise support such Person, except as otherwise expressly permitted hereunder. "Rate Management Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between the Borrower and any Lender or Affiliate thereof which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official -16- 17 interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Reimbursement Advances" is defined in Section 2.19.6. "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Borrower then outstanding under Section 2.19 to reimburse the LC Issuer for amounts paid by the LC Issuer in respect of any one or more drawings under Facility LCs. "Related Company" means a Person who, after the date of the initial Credit Extension, either (a) becomes a Subsidiary of the Borrower, or (b) whose financial statements shall be included in the preparation of the combined financial statements of the Borrowers for financial reporting purposes. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Reports" is defined in Section 9.6. "Required Lenders" means Lenders in the aggregate having at least 66 2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 66 2/3% of the Aggregate Outstanding Credit Exposure. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Response Date" is defined in Section 2.19. "Revolving Advance" means an Advance under the Revolving Facility. "Revolving Facility" means the revolving credit facility described in Section 2.1. "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee. -17- 18 "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Secured Obligations" means, collectively, (i) the Obligations and (ii) all Rate Management Obligations owing to one or more Lenders or their Affiliates. "Security Agreement" means that certain Security Agreement executed by the Borrower and its Domestic Subsidiaries pursuant to which such Loan Parties grant a springing security interest in all of the inventory and accounts receivable of such parties arising upon and after the occurrence of a Default and continuing thereafter until all of the Secured Obligations are paid in full and the Commitment of each Lender is terminated, as the same may be amended, supplemented or restated from time to time. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided herein, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower or the Guarantor (excluding (x) any Subsidiary conducting the BSD Business following the restructure of the BSD Business permitted pursuant to the provisions of Section 6.12(y) provided the BSD Restructure Requirements continue to be satisfied and (y) any Foreign Subsidiary which has incurred Qualified Foreign Financing Indebtedness and is not a Material Foreign Subsidiary). "Subsidiary Guarantor" means each Subsidiary which is a party to the Subsidiary Guaranty. "Subsidiary Guaranty" means that certain Subsidiary Guaranty dated the date hereof, executed by each Domestic Subsidiary of the Borrower in favor of the Administrative Agent, for the ratable benefit of the holders of the Secured Obligations, as it may be amended or modified and in effect from time to time. "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which, as of the date of determination, (i) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries, or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries as reflected in the latest financial statements. -18- 19 "Swing Line Advance" means any Advance under the Swing Line Subfacility. "Swing Line Subfacility" means a subfacility under the Revolving Facility described in Section 2.20. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes. "Transferee" is defined in Section 12.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE CREDITS 2.1. Commitment. From and including the date of this Agreement and prior to the Facility Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to (i) make Loans (other than Swing Line Advances) to the Borrower under the Revolving Facility and (ii) participate in Facility LCs issued upon the request of the Borrower, provided that, after giving effect to the making of each such Loan and the issuance of each such Facility LC, (x) such Lender's Outstanding Credit Exposure shall not exceed its Commitment and (y) and all Lenders' Outstanding Credit Exposure with respect to the Revolving Advances shall not -19- 20 exceed the Borrowing Base. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to extend credit hereunder shall expire on the Facility Termination Date. The LC Issuer will issue Facility LCs hereunder on the terms and conditions set forth in Section 2.19. 2.2. Required Payments; Termination. The Aggregate Outstanding Credit Exposure and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date. 2.3. Ratable Loans. Each Advance hereunder (other than Swing Line Advances) shall consist of Loans made from the several Lenders ratably in proportion to their respective Pro Rata Shares. 2.4. Types of Advances. The Advances (other than Swing Line Advances) may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9. 2.5. Facility Fee; Administrative Fee; Reductions in Aggregate Commitment. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee at a per annum rate equal to the Applicable Fee Rate on such Lender's Commitment from the date hereof to and including the Facility Termination Date, payable on each Payment Date hereafter and on the Facility Termination Date. The Borrower shall pay to the Administrative Agent the annual administrative fee set out in the Fee Letter. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $10,000,000, upon at least ten Business Days' written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued facility fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Credit Extensions hereunder. 2.6. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $1,000,000 (and in multiples of $1,000,000 if in excess thereof), and each Floating Rate Advance shall be in the minimum amount of $1,000,000 (and in multiples of $1,000,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the Available Aggregate Commitment. 2.7. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Floating Rate Advances, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Floating Rate Advances upon two Business Days' prior notice to the Administrative Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all outstanding Eurodollar Advances, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Eurodollar Advances upon three Business Days' prior notice to the Administrative Agent. -20- 21 2.8. Method of Selecting Types and Interest Periods for New Advances. Except with respect to Swing Line Advances, the Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time. The Borrower shall give the Administrative Agent irrevocable notice (a "Borrowing Notice") not later than 11:00 a.m. (Dallas time) at least one Business Day before the Borrowing Date of each Floating Rate Advance and not later than 11:00 a.m. three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto. Not later than noon (Dallas time) on each Borrowing Date, each Lender shall make available its Loan or Loans in funds immediately available in Chicago to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. 2.9. Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Administrative Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. The Borrower shall give the Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not later than 11:00 a.m. (Dallas time) at least three Business Days prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Advance which is to be converted or continued, and -21- 22 (iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto. 2.10. Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the lesser of (a) the Maximum Rate or (b) the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. If at any time the Floating Rate shall exceed the Maximum Rate, thereby causing the interest accruing on an Advance to be limited to the Maximum Rate, then any subsequent reduction in the Floating Rate for such Advance shall not reduce the rate of interest on such Advance below the Maximum Rate until the aggregate amount of interest accrued on such Advance equals the aggregate amount of interest which would have accrued on such Advance if the Floating Rate had at all times been in effect. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Administrative Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Sections 2.8 and 2.9 and otherwise in accordance with the terms hereof. No Interest Period may end after the Facility Termination Date. 2.11. Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.8 or 2.9, during the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower, declare that no Advance may be made as, converted into or continued as a Eurodollar Advance. During the continuance of a Default the Required Lenders may, at their option, by notice to the Borrower, declare that (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum, (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum, and (iii) the LC Fee shall be increased by 2% per annum, provided that, during the continuance of a Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i) and (ii) above and increase in the LC fee set forth in clause (iii) above shall be applicable to all Credit Extensions without any election or action on the part of the Administrative Agent or any Lender, subject in all events to the limitations of the Maximum Rate. 2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by noon (local time) on the date when due and shall (except in the case of Reimbursement Obligations for which the LC Issuer has not been fully indemnified by the Lenders, or as otherwise specifically required hereunder) be applied ratably by the Administrative Agent among the Lenders. Each payment delivered to the Administrative Agent for the account of any -22- 23 Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds that the Administrative Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Administrative Agent from such Lender. The Administrative Agent is hereby authorized to charge the account of the Borrower maintained with Bank One for each payment of principal, interest and fees as it becomes due hereunder. Each reference to the Administrative Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to the LC Issuer, in the case of payments required to be made by the Borrower to the LC Issuer pursuant to Section 2.19.6. 2.13. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (ii) The Administrative Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the original stated amounts of each Facility LC and the amount of LC Obligations outstanding at any time, and (d) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. (iv) Any Lender may request that its Loans be evidenced by a promissory note in substantially the form of Exhibit E (a "Note"). In such event, the Borrower shall prepare, execute and deliver to such Lender such Note payable to the order of such Lender. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to Section 12.3, except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above. 2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Administrative Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Administrative Agent or any Lender in good faith believes to be an Authorized Officer of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices -23- 24 to be given telephonically. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation, if such confirmation is requested by the Administrative Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the records of the Administrative Agent and the Lenders shall govern absent manifest error. 2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest, facility fees and LC Fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Promptly after notice from the LC Issuer, the Administrative Agent will notify each Lender of the contents of each request for issuance of a Facility LC hereunder. The Administrative Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.17. Lending Installations. Subject to Section 3.6, each Lender may book its Loans and its participation in any LC Obligations and the LC Issuer may book the Facility LCs at any Lending Installation selected by such Lender or the LC Issuer, as the case may be, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans, Facility LCs, participations in LC Obligations and any Notes issued hereunder shall be deemed held by each Lender or the LC Issuer, as the case may be, for the benefit of any such Lending Installation. Each Lender and the LC Issuer may, by written notice to the Administrative Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it or Facility LCs will be issued by it and for whose account Loan payments or payments with respect to Facility LCs are to be made. -24- 25 2.18. Non-Receipt of Funds by the Administrative Agent. Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the date on which it is scheduled to make payment to the Administrative Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.19. Facility LCs. 2.19.1. Issuance. The LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby and commercial letters of credit (each, a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action a "Modification"), from time to time from and including the date of this Agreement and prior to the Facility Termination Date upon the request of the Borrower; provided that immediately after each such Facility LC is issued or Modified, (i) the aggregate amount of the outstanding LC Obligations shall not exceed $10,000,000 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment. No Facility LC shall have an expiry date later than the earlier of (x) the fifth Business Day prior to the Facility Termination Date and (y) one year after its issuance; provided that any Facility LC with a one year tenor may provide for the renewal thereof for additional one year periods, so long as the ultimate expiry date is on or before the fifth Business Day prior to the Facility Termination Date . 2.19.2. Participations. Upon the issuance or Modification by the LC Issuer of a Facility LC in accordance with this Section 2.19, the LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from the LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Pro Rata Share. 2.19.3. Notice. Subject to Section 2.19.1, the Borrower shall give the LC Issuer notice prior to 10:00 a.m. (Dallas time) at least five Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, the LC Issuer shall promptly notify the Administrative Agent, and the -25- 26 Administrative Agent shall promptly notify each Lender, of the contents thereof and of the amount of such Lender's participation in such proposed Facility LC. The issuance or Modification by the LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article IV (the satisfaction of which the LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to the LC Issuer and that the Borrowers shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as the LC Issuer shall have reasonably requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 2.19.4. LC Fees. The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in accordance with their respective Pro Rata Shares, (i) with respect to each standby Facility LC, a letter of credit fee at a per annum rate equal to the Applicable Margin for Eurodollar Loans in effect from time to time on the average daily undrawn stated amount under such standby Facility LC, such fee to be payable in arrears on each Payment Date, and (ii) with respect to each commercial Facility LC, a letter of credit fee in an amount equal to the Applicable Margin for Eurodollar Loans in effect from time to time on the initial stated amount (or, with respect to a Modification of any such commercial Facility LC which increases the stated amount thereof, such increase in the stated amount) thereof, such fee to be payable on the date of such issuance or increase (each such fee described in this sentence an "LC Fee"). The Borrower shall also pay to the LC Issuer for its own account (x) at the time of issuance of each Facility LC, a fronting fee in an amount equal to 1/8% of the initial stated amount and (y) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with the LC Issuer's standard schedule for such charges as in effect from time to time. 2.19.5. Administration; Reimbursement by Lenders. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, the LC Issuer shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Lender as to the amount to be paid by the LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of the LC Issuer to the Borrower and each Lender shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by the LC Issuer, each Lender shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse the LC Issuer on demand for (i) such Lender's Pro Rata Share of the amount of each payment made by the LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.19.6 below, plus (ii) interest on the foregoing amount to be reimbursed by such Lender, for each day from the date of the LC Issuer's demand for such reimbursement (or, if such demand is made after 11:00 a.m. -26- 27 (Dallas time) on such date, from the next succeeding Business Day) to the date on which such Lender pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 2.19.6. Reimbursement by Borrower. The Borrower shall be irrevocably and unconditionally obligated to reimburse the LC Issuer on or before the applicable LC Payment Date for any amounts to be paid by the LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Lender shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Lender to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) the LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. In the event the Borrower does not reimburse the LC Issuer on or before the applicable LC Payment Date for any amounts to be paid by the LC Issuer upon any drawing under any Facility LC on the date when due pursuant to the preceding sentence, the LC Issuer shall give to the Lenders notice of the amount so due not later than 3:00 p.m. Chicago time on such date, which notice shall, on behalf of the Borrower (and for such purpose the Borrower hereby irrevocably directs the LC Issuer to act on its behalf), request each Lender to make, and each Lender hereby agrees to make, a Revolving Advance in an amount equal to such Lender's Pro Rata Share of the aggregate amount of the payment so due (the "Reimbursement Advances") on the date of such notice, to repay the LC Issuer. Each Lender shall make the amount of such Advance available to the Administrative Agent in immediately available funds, not later than 11:00 a.m. Dallas time one Business Day after the date of such notice. The proceeds of such Advance shall be immediately made available to the LC Issuer for application by the LC Issuer to the repayment of the Reimbursement Advances. The Borrower irrevocably authorizes the Administrative Agent to charge the Borrower's accounts with the Administrative Agent in order to immediately pay the amount of such Reimbursement Advances to the extent amounts received from the Lenders are not sufficient to repay in full such Reimbursement Advances (with notice of such charge being provided to the Borrower, provided that the failure to give such notice shall not affect the validity of such charge). All such Reimbursement Advances shall be subject to all provisions of this Agreement concerning Advances (including the requirement that there exist no Default or Unmatured Default on the date of such Advance). All such amounts paid by the LC Issuer and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the rate applicable to Floating Rate Advances for such day if such day falls on or before the applicable LC Payment Date and (y) the sum of 2% plus the rate applicable to Floating Rate Advances for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Lender ratably in accordance with its Pro Rata Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by the LC Issuer, but only to the extent such Lender has made payment to the LC Issuer in respect of such Facility LC pursuant to Section 2.19.5. Subject to the terms and conditions of this Agreement (including without -27- 28 limitation the submission of a Borrowing Notice in compliance with Section 2.8 and the satisfaction of the applicable conditions precedent set forth in Article IV), the Borrower may request an Advance hereunder for the purpose of satisfying any Reimbursement Obligation. 2.19.7. Obligations Absolute. The Borrower's obligations under this Section 2.19 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the LC Issuer, any Lender or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuer and the Lenders that the LC Issuer and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Borrower agrees that any action taken or omitted by the LC Issuer or any Lender under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put the LC Issuer or any Lender under any liability to the Borrower. Nothing in this Section 2.19.7 is intended to limit the right of the Borrower to make a claim against the LC Issuer for damages as contemplated by the proviso to the first sentence of Section 2.19.6. 2.19.8. Actions of LC Issuer. The LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Section 2.19, the LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and any future holders of a participation in any Facility LC. 2.19.9. Indemnification. The Borrower hereby agrees to indemnify and hold harmless each Lender, the LC Issuer and the Agents, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses -28- 29 which such Lender, the LC Issuer or the Agents may incur (or which may be claimed against such Lender, the LC Issuer or the Agents by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the LC Issuer may incur by reason of or in connection with (i) the failure of any other Lender to fulfill or comply with its obligations to the LC Issuer hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Lender) or (ii) by reason of or on account of the LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to the LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Borrower shall not be required to indemnify any Lender, the LC Issuer or the Agents for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.19.9 is intended to limit the obligations of the Borrower under any other provision of this Agreement. 2.19.10. Lenders' Indemnification. Each Lender shall, ratably in accordance with its Pro Rata Share, indemnify the LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.19 or any action taken or omitted by such indemnitees hereunder. 2.19.11. Facility LC Collateral Account. The Borrower agrees that it will, upon the request of the Administrative Agent or the Required Lenders and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to the LC Issuer or the Lenders in respect of any Facility LC, maintain a special collateral account pursuant to arrangements satisfactory to the Administrative Agent (the "Facility LC Collateral Account") at the Administrative Agent's office at the address specified pursuant to Article XIII, in the name of the Borrower but under the sole dominion and control of the Administrative Agent, for the benefit of the holders of Secured Obligations and in which the Borrower shall have no interest other than as set forth in Section 8.1. The Borrower hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Secured Parties, a security interest in all of the Borrower's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Obligations. The Administrative Agent will invest, any funds -29- 30 on deposit from time to time in the Facility LC Collateral Account in certificates of deposit of Bank One having a maturity not exceeding 30 days. Nothing in this Section 2.19.11 shall either obligate the Administrative Agent to require the Borrower to deposit any funds in the Facility LC Collateral Account or limit the right of the Administrative Agent to release any funds held in the Facility LC Collateral Account in each case other than as required by Section 8.1. The Borrower shall be required to deposit funds in the Facility LC Collateral Account only as required in Section 8.1. 2.19.12. Rights as a Lender. In its capacity as a Lender, the LC Issuer shall have the same rights and obligations as any other Lender. 2.20. Swing Line Subfacility. 2.20.1. Conditions. For the convenience of the parties, Administrative Agent, solely for its own account, may make any requested Advance under the Revolving Facility (which request must be made before 2:00 p.m. (Dallas time) on the Business Day the Advance is to be made and may be telephonic if confirmed in writing within two Business Days) directly to Borrower as a Swing Line Advance without requiring each other Lender to fund its Pro Rata Share thereof on such Business Day. Swing Line Advances are subject to the following conditions: (i) Each Swing Line Advance must occur on a Business Day before the Facility Termination Date; (ii) The aggregate principal outstanding of all Swing Line Advances may not exceed $15,000,000; the aggregate principal outstanding of all Swing Line Advances, all Revolving Advances under the Revolving Facility, and all LC Obligations may not exceed the Aggregate Commitment; and no Swing Line Advance shall be made which would cause the aggregate principal outstanding of all Loans (including Swing Line Advances) and LC Obligations of Bank One to exceed the Administrative Agent's Commitment; and (iii) Each Swing Line Advance shall be paid in full by the Borrower upon demand by the Swing Line Lender and in any event on the Termination Date; and (iv) Each Swing Line Advance is a Floating Rate Advance. 2.20.2. Lenders' Funding of Swing Line Advances as Revolving Advances. In the event the Borrower does not repay a Swingline Advance on the date when due pursuant to Section 2.20.1(iii), the Administrative Agent shall give to the Lenders notice of the amount of the Swing Line Advance not later than 3:00 p.m. Dallas time on such date, which notice shall, on behalf of the Borrower (and for such purpose the Borrower hereby irrevocably direct the Administrative Agent to act on its behalf), request each Lender to make, and each Lender hereby agrees to make, a Revolving Advance in an amount equal to such Lender's Pro Rata Share of the aggregate amount of the Swing Line Advance (the "Refunded Swing Line Advances") outstanding on the date of such notice, to repay the Administrative Agent. Each Lender shall make the amount of -30- 31 such Advance available to the Administrative Agent in immediately available funds, not later than 11:00 a.m. Chicago time one Business Day after the date of such notice. The proceeds of such Advance shall be immediately made available to the Administrative Agent for application by the Administrative Agent to the repayment of the Refunded Swing Line Advances. The Borrower irrevocably authorizes the Administrative Agent to charge the Borrowers' accounts with the Administrative Agent in order to immediately pay the amount of such Refunded Swing Line Advances to the extent amounts received from the Lenders are not sufficient to repay in full such Refunded Swing Line Advances (with notice of such charge being provided to the Borrower, provided that the failure to give such notice shall not affect the validity of such charge). All such Refunded Swing Line Advances shall be subject to all provisions of this Agreement concerning Advances, except that such Advances shall be made without regard to satisfaction of the conditions precedent to Advances (including the existence of a Default or Unmatured Default). If prior to the time an Advance would otherwise have been made pursuant to this paragraph, Advances may not be made as contemplated by this paragraph, each Lender shall irrevocably and unconditionally purchase and receive from Administrative Agent a ratable participation in such Swing Line Advance and shall make available to Administrative Agent in immediately available funds its Pro Rata Share of such unpaid amount, together with interest from the date when its payment was due to, but not including, the date of payment. If a Lender does not promptly pay its amount upon Administrative Agent's demand, and until such Lender makes the required payment, Administrative Agent is deemed to continue to have outstanding a Swing Line Advance in the amount of such Lender's unpaid obligation. The Borrower shall make each payment of all or any part of any Swing Line Advance to Administrative Agent for the ratable benefit of Administrative Agent and those Lenders who have funded their participations in Swing Line Advances under this section (but all interest accruing on Swing Line Advances before the funding date of any Advance to repay such Swing Line Advance or any participation is payable solely to Administrative Agent for its own account). 2.21. Prepayments from Sales of Assets. Concurrently with the receipt of Net Cash Proceeds by any Loan Party or any of their respective Subsidiaries from the sale or disposition of any assets which constitute 5% or more of the consolidated net assets of the Loan Parties and their Subsidiaries in the aggregate as of the date of sale and which are permitted to be sold or disposed of pursuant to Section 6.13(ii) of this Agreement, the Borrower shall prepay Advances in a principal amount equal to 100% of such Net Cash Proceeds, which prepayment shall be applied first to the Floating Rate Advances and second to the Eurodollar Advances (but such prepayment shall not reduce the Commitments in such amount). 2.22. Prepayment from Sales Of Capital Stock. Concurrently with the receipt of Net Cash Proceeds from the sale, issuance or disposition by any Loan Party or any of its Subsidiaries to any Person of any capital stock or other equity interests (excluding transactions under any employee benefit plans), the Borrower shall prepay Advances in an aggregate principal amount equal to 100% of such Net Cash Proceeds, which prepayment shall be applied first to the Floating Rate Advances and second to the Eurodollar Advances (but such prepayment shall not reduce the Commitments in such amount). -31- 32 2.23. Prepayment due to Revolving Advances Exceeding the Borrowing Base. Without notice or demand, if the outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing Base (whether due to a permitted adjustment of the Borrowing Base pursuant to the definition thereof or otherwise), the Borrower shall immediately prepay the Revolving Advances to the extent necessary to eliminate such excess. 2.24. Prepayments Generally. Any prepayments made under Sections 2.21, 2.22 and 2.23 shall (i) include accrued interest to the date of such prepayment on the principal amount prepaid, (ii) not be subject to the notice and minimum payment provisions of Section 2.7; provided that the Borrower shall be required to reimburse each Lender for any loss, cost or expense incurred by each Lender in connection with any such prepayment as set forth in Section 3.4 hereof if any prepayment results in a Eurodollar Advance being paid on a day other than the last day of an Interest Period for such Eurodollar Advance, and (iii) be applied first to Floating Rate Advances, if any, and then to Eurodollar Advances. 2.25. Replacement of Lender. If the Borrower is required pursuant to Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Advances into, Eurodollar Advances shall be suspended pursuant to Section 3.3 (any Lender so affected an "Affected Lender"), the Borrower may elect, if such amounts continue to be charged or such suspension is still effective, to replace such Affected Lender as a Lender party to this Agreement, provided that no Default or Unmatured Default shall have occurred and be continuing at the time of such replacement, and provided further that, concurrently with such replacement, (i) another bank or other entity which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Advances and other Obligations due to the Affected Lender pursuant to an assignment substantially in the form of Exhibit C and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in same day funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loans of such Affected Lender been prepaid on such date rather than sold to the replacement Lender. 2.26. Increase in Aggregate Commitment. (i) So long as (a) no Default or Unmatured Default has occurred and is continuing or will result therefrom, and (b) the Borrower has not terminated or reduced in part any unused portion of the Commitments at any time pursuant to Section 2.5, the Borrower may, at any time and from time to time, by notice to the Administrative Agent, request an increase in the aggregate amount of the Commitments within the limitations hereafter described, which notice shall set forth the amount of such increase. In accordance with Section 2.26(iv), the aggregate amount of the Commitments may be so increased either by having one or more new Lenders that have been approved by the Borrower become Lenders (the "New Lenders") and/or by having any one or more of the then existing Lenders (at their respective election in their sole discretion) increase the -32- 33 amount of their Commitment ("Increasing Lenders"), provided that (A) the Commitment of any New Lender shall not be less than $10,000,000 and the sum of the Commitments of the New Lenders and the increases in the Commitments of the Increasing Lenders shall not exceed $50,000,000; (B) the Borrower, each New Lender and/or each Increasing Lender shall have executed and delivered to the Administrative Agent a commitment and acceptance (the "Commitment and Acceptance") in the form approved by the Administrative Agent, and the Administrative Agent shall have accepted and executed the same, (C) the Borrower shall have executed and delivered to the Administrative Agent a Note or Notes payable to the order of each New Lender to the extent required pursuant to Section 2.13(iv) and/or each Increasing Lender, each such Note to be in the amount of such New Lender's Commitment or such Increasing Lender's Commitment (as applicable); (D) the Borrower shall have delivered to the Administrative Agent opinions of counsel (substantially similar to the forms of opinions provided for in Section 4.1(v), modified to apply to the increase in the Commitments and each new Note and Commitment and Acceptance executed and delivered in connection therewith); (E) the Loan Parties shall have consented in writing to the new Commitments or increases in Commitments (as applicable) and shall have agreed that the Collateral Documents to which each is a party continue in full force and effect, and (F) the Borrower, each New Lender and/or each Increasing Lender shall otherwise have executed and delivered such other instruments and documents as the Administrative Agent shall have reasonably requested in connection with such new Commitment or increase in the Commitment (as applicable). The form and substance of the documents required under clauses (B) through (F) above shall be reasonably acceptable to the Administrative Agent. The Administrative Agent shall provide written notice to all of the Lenders hereunder of the admission of any New Lender or the increase in the Commitment of any Increasing Lender hereunder and shall furnish to each of the Lenders copies of the documents required under clause (B) through (F) above. (ii) Upon the effective date of any increase in the aggregate amount of Commitments pursuant to the provisions hereof ("Increase Date"), which Increase Date shall be mutually agreed upon by the Borrower, each New Lender, each Increasing Lender and the Administrative Agent, each New Lender and/or Increasing Lender shall make a payment to the Administrative Agent in an amount sufficient, upon the application of such payments by all New Lenders and Increasing Lenders to the reduction of the Outstanding Credit Exposure held by the Lenders (including the Increasing Lenders) to cause the amount of Outstanding Credit Exposure made by each Lender to be equal to each Lender's Pro Rata Share of the aggregate amount of Commitments as so increased. The Borrower hereby irrevocably authorizes each New Lender and/or each Increasing Lender to fund to the Administrative Agent the payment required to be made pursuant to the immediately preceding sentence for application to the reduction of the Outstanding Credit Exposure held by the other Lenders, and each such payment shall constitute a Revolving Advance hereunder. If, as a result of the repayment of the Revolving Advance provided for in this Section 2.26(ii), any payment of a Eurodollar Advance occurs on a day which is not the last day of the applicable Interest Period, the Borrower will pay to the Administrative Agent for the benefit of any of the Lenders (including any Increasing Lender to the extent of Eurodollar Loans held by such Increasing Bank prior to such Increase Date) holding a Eurodollar Loan any loss or cost incurred by such Lender resulting therefrom in accordance with Section 3.4. -33- 34 Upon the Increase Date, all Revolving Advances outstanding hereunder (including any Revolving Advances made by the New Lenders and/or Increasing Lenders on the Increase Date) shall be Floating Rate Advances, subject to the Borrower's right to convert the same to Eurodollar Advances on or after such date in accordance with the provisions of Section 2.9. (iii) Upon the Increase Date and the making of the Revolving Loans by the New Lenders and/or Increasing Lenders in accordance with the provisions of Section 2.26(ii), each New Lender and/or each Increasing Lender shall also be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, from the Lenders immediately prior to the Increase Date, an undivided interest and participation in any Facility LC then outstanding, ratably, such that each Lender (including each New Lender) holds a participation interest in each such Facility LC in proportion to such Lender's Pro Rata Share. (iv) Upon the notice by the Borrower to the Administrative Agent pursuant to Section 2.26(i) hereof, each of the then existing Lenders shall have the right (at its election) to increase its Commitment by an amount equal to such Lender's Pro Rata Share of the proposed increase in the aggregate Commitments. If less than all of the proposed increase in aggregate Commitments is elected by the existing Lenders, then any of the then existing Lenders shall have the right to increase its Commitment in an amount greater than such Lender's Pro Rata Share of the proposed increase in the aggregate Commitments with the Administrative Agent's approval. If the entire amount of the proposed increase in aggregate Commitments is still not obtained, Administrative Agent shall use its best efforts with Borrower's full cooperation to add New Lenders, acceptable to the Borrower and to the Administrative Agent, with new Commitments which when added to the increase in Commitments of the Increasing Lenders, shall equal the requested increase in the aggregate amount of the Commitments. In the event the sum of each New Lender's Commitment and the increase in each Increasing Lender's Commitment is less than the requested increase in the aggregate amount of Commitments, the Borrower may elect to accept the increase in the aggregate amount of the Commitments to be equal to such lesser amount. Notwithstanding anything to the contrary, Administrative Agent shall not be liable for any failure to obtain Increasing Lenders or New Lenders hereunder or any failure to increase the aggregate amount of Commitments by the amount so requested by the Borrower pursuant to Section 2.26(i). (v) Nothing contained herein shall constitute, or otherwise be deemed to be a commitment or agreement on the part of any Lender to increase its Commitment hereunder at any time. No Lender (except only for itself) shall have the right to decline Borrower's request pursuant to Section 2.26(i) for an increase in the aggregate amount of Commitments. -34- 35 ARTICLE III YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation or the LC Issuer with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) subjects any Lender or any applicable Lending Installation or the LC Issuer to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender or the LC Issuer in respect of its Eurodollar Loans, Facility LCs or participations therein, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation or the LC Issuer (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation or the LC Issuer of making, funding or maintaining its Eurodollar Loans, or of issuing or participating in Facility LCs, or reduces any amount receivable by any Lender or any applicable Lending Installation or the LC Issuer in connection with its Eurodollar Loans, Facility LCs or participations therein, or requires any Lender or any applicable Lending Installation or the LC Issuer to make any payment calculated by reference to the amount of Eurodollar Loans, Facility LCs or participations therein held or interest or LC Fees received by it, by an amount deemed material by such Lender or the LC Issuer as the case may be, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation or the LC Issuer, as the case may be, of making or maintaining its Eurodollar Loans or Commitment or of issuing or participating in Facility LCs or to reduce the return received by such Lender or applicable Lending Installation or the LC Issuer, as the case may be, in connection with such Eurodollar Loans, Commitment, Facility LCs or participations therein, then, within 15 days of demand by such Lender or the LC Issuer, as the case may be, the Borrower shall pay such Lender or the LC Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the LC Issuer, as the case may be, for such increased cost or reduction in amount received. -35- 36 3.2. Changes in Capital Adequacy Regulations. If a Lender or the LC Issuer determines the amount of capital required or expected to be maintained by such Lender or the LC Issuer, any Lending Installation of such Lender or the LC Issuer, or any corporation controlling such Lender or the LC Issuer is increased as a result of a Change, then, within 15 days of demand by such Lender or the LC Issuer, the Borrower shall pay such Lender or the LC Issuer the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender or the LC Issuer determines is attributable to this Agreement, its Outstanding Credit Exposure or its Commitment to make Loans and issue or participate in Facility LCs, as the case may be, hereunder (after taking into account such Lender's or the LC Issuer's policies as to capital adequacy). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines, or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or the LC Issuer or any Lending Installation or any corporation controlling any Lender or the LC Issuer. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3. Availability of Types of Advances. If any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances, then the Administrative Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.4. 3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance. 3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender, the LC Issuer or the Administrative Agent hereunder or under any Note or Facility LC Application shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, the LC Issuer or the Administrative Agent, (a) the sum payable shall be increased as -36- 37 necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender, the LC Issuer or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Administrative Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made. (ii) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application ("Other Taxes"). (iii) The Borrower hereby agrees to indemnify the Administrative Agent, the LC Issuer and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Administrative Agent, the LC Issuer or such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Administrative Agent, the LC Issuer or such Lender makes demand therefor pursuant to Section 3.6. (iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not more than ten Business Days after the date of this Agreement, (i) deliver to each of the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Borrower and the Administrative Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Administrative Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. -37- 38 (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. (vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason not under the control of the Administrative Agent), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement. 3.6. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under Section 3.3, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Administrative Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in -38- 39 determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV CONDITIONS PRECEDENT 4.1. Initial Credit Extension. The Lenders shall not be required to make the initial Credit Extension hereunder unless the Borrower has furnished to the Administrative Agent with sufficient copies for the Lenders and/or the following has occurred: (i) Copies of the articles or certificate of incorporation or other organization document of the Borrower and the Guarantor, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation. (ii) Copies, certified by the Secretary or Assistant Secretary, of (a) a certificate of good standing of each Domestic Subsidiary which is a Loan Party and (b) of the Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which each Loan Party is a party. (iii) An incumbency certificate, executed by the Secretary or Assistant Secretary of each Loan Party which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of each Loan Party authorized to sign the Loan Documents to which the each is a party, upon which certificate the Administrative Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (iv) A certificate, signed by the chief financial officer of the Borrower, stating that on the initial Credit Extension Date no Default or Unmatured Default has occurred and is continuing. (v) A written opinion of counsel to the Loan Parties, addressed to the Lenders in substantially the form of Exhibit A. (vi) Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender. (vii) Written money transfer instructions, in substantially the form of Exhibit D, addressed to the Administrative Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Administrative Agent may have reasonably requested. -39- 40 (viii) Evidence that all outstanding obligations under the Existing Credit Agreement shall have been paid in full and the commitment thereunder terminated. (ix) The Collateral Documents executed by the parties thereto. (x) If the initial Credit Extension will be the issuance of a Facility LC, a properly completed Facility LC Application. (xi) A properly completed Borrowing Base Certificate. (xii) The Administrative Agent shall have received all fees due and payable under the Fee Letter or Section 2.5 hereof and Banc of America Securities LLC has received its fee as Co-Lead Arranger set forth in its separate fee letter to the Borrower. (xiii) The pro-forma financial statements for the period ended September 30, 2000, for the Borrower and its Subsidiaries excluding the PFSWeb business which shall be satisfactory to the Administrative Agent in its sole discretion. (xiv) Opinions of foreign counsel to the Borrower regarding the pledges of stock in the Material Foreign Subsidiaries. (xv) Tax, judgment and lien searches covering the Loan Parties and its Subsidiaries for each jurisdiction in which they have material assets, which shall be satisfactory to the Administrative Agent in its sole discretion. (xvi) Such other documents as any Lender or its counsel may have reasonably requested. 4.2. Each Credit Extension. The Lenders shall not be required to make any Credit Extension unless on the applicable Credit Extension Date: (i) There exists no Default or Unmatured Default. (ii) The representations and warranties contained in Article V are true and correct as of such Credit Extension Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date. (iii) All legal matters incident to the making of such Credit Extension shall be satisfactory to the Lenders and their counsel. (iv) If the Credit Extension will be the issuance of a Facility LC, a properly completed Facility LC Application shall have been executed and delivered to the LC Issuer. -40- 41 Each Borrowing Notice or request for issuance of a Facility LC with respect to each such Credit Extension shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit B as a condition to making a Credit Extension. ARTICLE V REPRESENTATIONS AND WARRANTIES Each of the Borrower and the Guarantor, jointly and severally, represents and warrants to the Lenders that: 5.1. Existence and Standing. Except as set forth in Schedule 1, each of the Loan Parties and each Subsidiary is a corporation or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.2. Authorization and Validity. Each Loan Party has the power and authority and legal right to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by each Loan Party of the Loan Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents to which each Loan Party is a party constitute legal, valid and binding obligations of each Loan Party enforceable against each Loan Party in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. 5.3. No Conflict; Government Consent. Neither the execution and delivery by each Loan Party of the Loan Documents to which it is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Loan Party or any of its Subsidiaries or (ii) the Loan Party's articles or certificate of incorporation, by-laws, or operating or other management agreement or organizational documents, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which such Loan Party or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of such Loan Party pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by such Loan Party, is required to be obtained by such Loan Party in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by such Loan Party of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents. -41- 42 5.4. Financial Statements. (a) The Borrower has delivered to the Lenders an unaudited historical financial presentation of the Borrower's principal lines of business, excluding PFSweb, Inc., 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 the Borrower and PFSweb, Inc., which the Borrower believes are incremental to normal operations. This presentation also included the estimated impact of the transaction management services agreement between the Borrower and PFSweb, Inc. for all periods presented. The presentation excludes acquisition related costs and minority interest and was based on available information and certain assumptions. The Borrower believes that such assumptions provide a reasonable basis for presenting such historical results, excluding PFSweb, Inc. and adjusting for such transactions. This financial information does not reflect what the Borrower's or any Loan Parties' results of operations may be in the future. (b) The September 30, 2000 consolidated financial statements of the Guarantor and its consolidated Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of each such Person at such date and the consolidated results of their operations for the period then ended. 5.5. Material Adverse Change. Since the date of the most recent financial statement delivered pursuant to Section 6.1, there has been no change in the business, Property, condition (financial or otherwise) or results of operations of any Loan Party and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. 5.6. Taxes. The Loan Parties and their Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Loan Parties and their Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and as to which no Lien exists. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of the Loan Parties and their Subsidiaries in respect of any taxes or other governmental charges are adequate as of date of most recent financial statement delivered pursuant to Section 6.1. 5.7. Litigation and Contingent Obligations. Except as set forth in Schedule 2, as of the date of this Agreement, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting any Loan Parties or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Credit Extension. Other than any liability incident to any litigation, arbitration or proceeding which (i) could not reasonably be expected to have a Material -42- 43 Adverse Effect or (ii) is set forth on Schedule 2, no Loan Party has material Contingent Obligations not provided for or disclosed in the most recent financial statements delivered pursuant to Section 6.1. 5.8. Subsidiaries. Schedule 1 contains an accurate list of all Subsidiaries of the Guarantor and the Borrower as of the date of this Agreement, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Guarantor, the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable. 5.9. ERISA. The Loan Parties have no Unfunded Liabilities of any Single Employer Plans. Neither any Loan Party nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, any withdrawal liability to Multiemployer Plans. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither any Loan Party nor any other member of the Controlled Group has withdrawn from any Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan. 5.10. Accuracy of Information. No information, exhibit or report furnished by any Loan Party to the Administrative Agent, the LC Issuer or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading; provided, however, that with respect to materials delivered by the Sellers in connection with Permitted Acquisitions, this Section constitutes only a warranty by the Borrower and the Guarantor. 5.11. Regulation U. Margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder. 5.12. Material Agreements. No Loan Party is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. No Loan Party is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 5.13. Compliance With Laws. The Loan Parties have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property except for any failure to comply with any of the foregoing which could not reasonably be expected to have a Material Adverse Effect. 5.14. Ownership of Properties. Except as set forth on Schedule 2, on the date of this Agreement, the Loan Parties will have good title, free of all Liens other than those permitted by -43- 44 Section 6.15, to all of the Property and assets reflected in the most recent consolidated financial statements provided to the Administrative Agent as owned by the Loan Parties. 5.15. Plan Assets; Prohibited Transactions. The Loan Parties are not entities deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Agreement nor the making of Credit Extensions hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. No Loan Party's or any Subsidiary's failure to comply with Environmental Laws will have a Material Adverse Effect. Neither the Guarantor, the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. 5.17. Investment Company Act. No Loan Party is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.18. Public Utility Holding Company Act. No Loan Party is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.19. Solvency. (i) Immediately after the consummation of the transactions to occur on the date hereof and immediately following the making of each Loan, if any, made on the date hereof and after giving effect to the application of the proceeds of such Loans, (a) the fair value of the assets of the Loan Parties on a consolidated basis, at a fair valuation, will exceed the debts and liabilities, subordinated, contingent or otherwise, of the Loan Parties on a consolidated basis; (b) the present fair saleable value of the Property of the Loan Parties on a consolidated basis will be greater than the amount that will be required to pay the probable liability of the Loan Parties on a consolidated basis on their debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Loan Parties on a consolidated basis will be able to pay their debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Loan Parties on a consolidated basis will not have unreasonably small capital with which to conduct the businesses in which they are engaged as such businesses are now conducted and are proposed to be conducted after the date hereof. -44- 45 (ii) The Loan Parties do not intend to, or to permit any of their Subsidiaries to, and no Loan Party believes that it or any of its Subsidiaries will, incur debts beyond its ability to pay such debts as they mature, taking into account the timing of and amounts of cash to be received by it or any such Subsidiary and the timing of the amounts of cash to be payable on or in respect of its Indebtedness or the Indebtedness of any such Subsidiary. ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. Each Loan Party will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and the Guarantor or the Borrower, as applicable, will furnish (or cause to be furnished) to the Lenders: (i) As soon as available, but in any event within 90 days after the close of each of its fiscal years (commencing with the fiscal year ended March 31, 2001), a copy of the consolidated balance sheet of the Guarantor and its consolidated Subsidiaries as at the end of such fiscal year and the related statements of income and retained earnings and of cash flows of the Guarantor and its consolidated Subsidiaries for such year plus consolidating balance sheet and income statements for the Borrower and its Principal Lines of Business, which consolidated statements will have been audited by a firm of independent certified public accountants of nationally recognized standing reasonably acceptable to the Administrative Agent, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification indicating that the scope of the audit was inadequate to permit such independent certified public accountants to certify such financial statements without such qualification, which report shall state that such consolidated financial statements present fairly the financial position of the Guarantor and its consolidated Subsidiaries for the period indicated in conformity with generally accepted accounting principles applied on a consistent basis. (ii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for the Guarantor and its Consolidated Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter plus consolidating balance sheets and income statements for the Borrower and its Principal Lines of Business, all certified by the chief financial officer of the Guarantor, together with (a) consolidated unaudited balance sheets as at the close of each such period for the prior fiscal year and consolidated profit and loss and reconciliation of surplus statements and a statement of cash flows for the same period of the prior fiscal year and (b) -45- 46 year-to-date actual results versus the plan and forecast most recently submitted for such quarter. (iii) As soon as available thereafter, but in any event within 30 days after the beginning of each of its fiscal years a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and funds flow statement) of the Loan Parties and their Subsidiaries for such fiscal year. Such plan and forecast must include relevant information concerning the projected business and operations of the Loan Parties and their Subsidiaries, including, without limitation, a detailed quarterly breakdown of projected financial results by major business segment encompassing at a minimum the following segments: U.S. Supplies, International Supplies, Pro-Tape, Virtual Demand, and any major new line of business added after the date hereof ("Principal Lines of Business"). (iv) Together with the financial statements required under Sections 6.1(i) and (ii), a compliance certificate in substantially the form of Exhibit B signed by the chief financial officer of the Borrower and the Guarantor showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (v) Within 30 days after the end of each fiscal month, a Borrowing Base Certificate, signed by an Authorized Officer of the Borrower. (vi) Within 90 days after the end of each fiscal year, a certificate of an Authorized Officer setting forth for the Loan Parties and their Subsidiaries for the prior fiscal year the aggregate amount of all asset dispositions made outside of the ordinary course of business, equity and debt issuances and the Net Cash Proceeds received in connection therewith. (vii) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA. (viii) As soon as possible and in any event within 10 days after it knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by its chief financial officer describing said Reportable Event and the action which it proposes to take with respect thereto. (ix) As soon as possible and in any event within 10 days after receipt, a copy of (a) any written notice or claim to the effect that the Loan Party or any of its Subsidiaries is or may be liable to any Person as a result of the release by it, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any written notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by it or any of its Subsidiaries, which, in either case, could reasonably be expected to have a Material Adverse Effect. (x) Promptly upon the furnishing thereof to its stockholders, copies of all financial statements, reports and proxy statements so furnished. -46- 47 (xi) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which any Loan Party files with the Securities and Exchange Commission. (xii) Such other information (including non-financial information) as the Administrative Agent or any Lender may from time to time reasonably request. 6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Credit Extensions for general corporate purposes including Permitted Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, (x) use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U) or (y) following the restructure of the BSD Business permitted pursuant to the provisions of Section 6.12(y), no proceeds of the Credit Extensions shall be used, directly or indirectly, for or in connection with the BSD Business, except as expressly permitted hereunder. 6.3. Notice of Default. Each Loan Party will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect. 6.4. Conduct of Business. Except as permitted in Section 6.12, each Loan Party will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 6.5. Taxes. Each Loan Party will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles. 6.6. Insurance. Each Loan Party will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. 6.7. Compliance with Laws. Each Loan Party will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject including, without limitation, all Environmental Laws, to the extent that the failure to so comply may reasonably be expected to have a Material Adverse Effect. -47- 48 6.8. Maintenance of Properties. Each Loan Party will, and will cause each of its Subsidiaries to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times. 6.9. Inspection. Each Loan Party will, and will cause each of its Subsidiaries to, permit the Administrative Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, books and financial records of such Loan Party and each Subsidiary, to examine and make copies of the books of accounts and other financial records of such Loan Party and each Subsidiary, and to discuss the affairs, finances and accounts of such Loan Party and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Administrative Agent or any Lender may designate upon reasonable prior notice; provided, however, that no advance notice shall be required during any period in which a Default or Unmatured Default has occurred and is continuing. 6.10. Dividends. No Loan Party will, nor will it permit any Subsidiary to, declare or pay any dividends or make any distributions on its capital stock (other than dividends payable in its own capital stock) or redeem, repurchase or otherwise acquire or retire any of its capital stock at any time outstanding, except (A) that any Subsidiary may declare and pay dividends or make distributions to the Borrower or to a Wholly-Owned Subsidiary of the Borrower and (B) the Borrower may declare and pay dividends to the Guarantor in order to provide funds to carry out its share repurchases permitted by the following clause of this Section 6.10, for Investments permitted under Section 6.14, and for ordinary and necessary expenses related to its status as a company with publicly traded securities; provided, however, that the Guarantor may purchase shares of its common stock, provided that the aggregate amount thereof on a cumulative basis commencing on June 30, 2000, does not exceed $25,000,000. 6.11. Indebtedness. No Loan Party will, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (i) The Loans and the Reimbursement Obligations. (ii) Indebtedness existing on the date hereof and described in Schedule 2. (iii) Indebtedness arising under Rate Management Transactions having a Net Mark-to-Market Exposure not exceeding $10,000,000. (iv) Indebtedness arising in connection with transactions permitted by Section 6.13(iii). (v) unsecured Indebtedness of Foreign Subsidiaries which, in the aggregate, does not exceed $40,000,000. (vi) Capitalized Lease Obligations and other unsecured Indebtedness of the Borrower and its Domestic Subsidiaries which, in the aggregate, does not exceed $20,000,000; provided, -48- 49 however, that none of the Indebtedness referred to in this clause (vi) may be used, directly or indirectly, for the benefit of Foreign Subsidiaries or for business activities outside the United States. (vii) Qualified Foreign Financings. (viii) Indebtedness owing to a Seller in connection with a Permitted Acquisition not to exceed $20,000,000 in the aggregate at any one time. (ix) Indebtedness secured as permitted by Section 6.15(ix) and (x). 6.12. Stock Transfers and Mergers. No Loan Party will, nor will it permit any Subsidiary to transfer its capital stock to, merge or consolidate with or into any other Person, except (x) that the capital stock of a Subsidiary may be transferred to and a Subsidiary may merge with or into the Borrower or a Wholly-Owned Subsidiary of the Borrower (other than a Foreign Subsidiary), (y) the Borrower may restructure the BSD Business such that all Subsidiaries conducting the BSD Business are transferred to a separate Wholly-Owned Subsidiary of the Guarantor incorporated to be the holding company of the BSD Business which is (A) separately financed pursuant to a BSD Facility and (B) no Loan Party has any contractual liability for the debts and obligations of such Subsidiary, except as expressly permitted hereunder (collectively, the "BSD Restructure Requirements") and (z) for Permitted Acquisitions, provided that the Borrower or a Subsidiary shall be the surviving entity thereof. 6.13. Sale of Assets. No Loan Party will, nor will it permit any Subsidiary to, lease, sell or otherwise dispose of its Property (which shall not be deemed to include any write-off of goodwill or other intangible assets) to any other Person, except: (i) Sales of inventory in the ordinary course of business. (ii) Leases, sales or other dispositions of its Property when no Default or Unmatured Default has occurred and is continuing or will result therefrom that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold , exchanged or disposed of (other than inventory in the ordinary course of business) as permitted by this Section during the twelve-month period ending with the month in which any such lease, sale or other disposition occurs, do not constitute a Substantial Portion of the Property of the Borrower and its Subsidiaries, and for which the Borrower provides to the Administrative Agent at least 30 days prior written notice to the closing thereof. (iii) Any transfer of an interest in accounts or notes receivable on a limited recourse basis made in connection with and pursuant to the terms and provisions of a trade accounts receivable conduit financing arrangement acceptable to the Administrative Agent, provided that such transfer qualifies as a sale under Agreement Accounting Principles and that the amount of such financing does not exceed $50,000,000 at any one time outstanding. (iv) Sales or other dispositions of used, worn-out or obsolete equipment in the -49- 50 ordinary course of business, when no Default has occurred and is continuing or will result therefrom. 6.14. Investments and Acquisitions. No Loan Party will, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except: (i) Cash Equivalent Investments. (ii) Existing Investments in Subsidiaries and other Investments in existence on the date hereof and described in Schedule 1. (iii) So long as no Default or Unmatured Default has occurred or will result therefrom, Permitted Acquisitions (subject to compliance with Section 6.24 hereof). (iv) The Guarantor may make Investments to capitalize a separate Wholly-Owned Subsidiary of the Guarantor incorporated to be the holding company of the BSD Business in the aggregate amount of $7,500,000 provided the BSD Restructure Requirements continue to be satisfied at the time of such Investment. (v) Other Investments in Foreign Subsidiaries of the Borrower in an aggregate amount made on or after the date hereof not to exceed the lesser of (x) 10% of Consolidated Tangible Net Worth or (y) $20,000,000. (vi) Investments in Domestic Subsidiaries that are or become Loan Parties. (vii) Loans or advances made to officers or employees, provided the aggregate amount outstanding at any time (excluding ordinary travel or similar advances) does not exceed $3,000,000. (viii) Other Investments not to exceed at any one time $1,000,000 in the aggregate. 6.15. Liens. No Loan Party will, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Loan Parties or any of their Subsidiaries, except: (i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books. (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations -50- 51 not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. (iii) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (iv) Utility easements, building restrictions and such other encumbrances or charges against real property of the Borrower and its Subsidiaries as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries. (v) Liens existing on the date hereof and described in Schedule 2. (vi) Liens in favor of the Administrative Agent, for the benefit of the LC Issuer and the Lenders, granted pursuant to any Collateral Document. (vii) Liens incurred in connection with any transfer of an interest in accounts or notes receivable which is permitted pursuant to Section 6.13(iii). (viii) Capitalized Lease Obligations, to the extent the same are Liens hereunder. (ix) Liens on real or tangible personal property securing the purchase price thereof or securing Indebtedness incurred to pay such purchase price or to finance the construction thereof or existing at the time of acquisition thereof; provided, however, (A) no such lien shall extend to any Property other than such Property and fixed improvements thereon and (B) the aggregate amounts of Indebtedness of all Loan Parties at any one time outstanding secured by all such Liens shall not exceed $5,000,000. (x) Liens on Property of a Subsidiary other than the Guarantor or the Borrower; provided, however, that (A) no such Lien shall extend to any Property other than such Property and fixed improvements thereon and (B) the aggregate amount of all such Indebtedness of all such Subsidiaries at any one time outstanding shall not exceed $1,000,000. (xi) Liens granted on assets of a Foreign Subsidiary to secure a Qualified Foreign Financing. 6.16. Affiliates. No Loan Party will, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Loan Party's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Loan Party or such Subsidiary than the Loan Party or such Subsidiary -51- 52 would obtain in a comparable arms-length transaction and except for transactions permitted by Section 6.14(vi). 6.17. Sale of Accounts. No Loan Party will, nor will it permit any Subsidiary to, sell or otherwise dispose of any notes receivable or accounts receivable, with or without recourse except (x) to the extent permitted by Section 6.13(iii) and (y) for the compromise, settlement, or discount thereof in the ordinary course of business. 6.18. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities. No Loan Party will, nor will it permit any Subsidiary to, enter into or suffer to exist any (i) Sale and Leaseback Transaction or (ii) any other transaction pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities, except for Rate Management Obligations permitted to be incurred under the terms of Section 6.11(iii). 6.19. Letters of Credit. No Loan Party will, nor will it permit any Subsidiary to, apply for or become liable upon or in respect of any Letter of Credit other than the Facility LCs. 6.20. Financial Contracts. No Loan Party will, nor will it permit any Subsidiary to, enter into or remain liable upon any Financial Contract, except Rate Management Transactions permitted under Section 6.11(iii) or as set forth on Schedule 2. 6.21. Financial Covenants. 6.21.1. Consolidated Indebtedness to Consolidated EBITDA. The Borrower will not permit the ratio of (i) Consolidated Indebtedness to (ii) Consolidated EBITDA, determined as of the last day of each fiscal quarter of the Borrower for the four consecutive fiscal quarters ending on such date, to be greater than 3.00 to 1.0. 6.21.2. Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as of the last day of each fiscal quarter of the Borrower, shall be greater than or equal to 1.50 to 1.00. 6.21.3. Minimum Net Worth. The Guarantor will for each of its fiscal quarters determined on the last day of each fiscal quarter maintain Consolidated Net Worth of not less than $148,955,000, plus (i) 75% of Consolidated Net Income of the Guarantor and its Subsidiaries on a cumulative basis beginning with the fiscal quarter ended December 31, 2000, plus (ii) the Guarantor's Net Cash Proceeds from the issuance of equity interests, minus (iii) the amount of the Guarantor's treasury stock purchases subsequent to September 30, 2000, to the extent permitted by Section 6.10. 6.22. Related Company. Within ten days after a Person becomes a Related Company following the date of the initial Credit Extension, each of the Borrower and Guarantor shall cause such Person to execute such documents, instruments, and agreements as the Administrative Agent deems necessary or appropriate, in form and substance satisfactory to the Administrative Agent, to (x) cause such Related Company to become a party to the Subsidiary Guaranty and the outstanding shares of such Related -52- 53 Company to be subject to the Pledge Agreement if the Related Person is a Domestic Subsidiary on a basis substantially the same as the existing Subsidiary Guarantors and (y) the Borrower will (and, as applicable, will cause such Related Person) to execute such documents or instruments as may be required to pledge 65% of the capital stock of the Related Person (if it is a Material Foreign Subsidiary) to the Administrative Agent for the ratable benefit of the LC Issuer and the Lenders as a first priority security interest as collateral security for the Secured Obligations. 6.23. Prohibition on Granting Negative Pledges. Except for this Agreement, neither the Borrower nor the Guarantor will enter into or become bound by any agreement, understanding or arrangement, nor permit its Domestic Subsidiaries to do so (other than this Agreement) that limits, restricts or impairs in any way the right of any Loan Party or its Domestic Subsidiaries to create, assume or suffer to exist any Lien on its Properties or assets in favor of the Administrative Agent (or any successor Administrative Agent) for the benefit of the Lenders. 6.24. Prohibition on Granting Restrictions on Distributions. Except for this Agreement, neither the Borrower nor the Guarantor will enter into or become bound by any agreement, arrangement or understanding or permit its Subsidiaries to do so (including, without limitation, their respective articles of incorporation, bylaws or other charter documents) that limits, restricts, subordinates or impairs in any way the right or ability of any of Subsidiaries to make dividends or distributions to or Investments in the Borrower or to repay any Indebtedness or obligation owed to the Borrower. 6.25. Inventory and Accounts Receivable Audit/Appraisal. Upon the request of the Administrative Agent, the Loan Parties shall procure and furnish the Administrative Agent an appraisal or audit of the inventory and/or accounts receivable of the Loan Parties, in scope and substance satisfactory to the Administrative Agent, by a qualified appraiser or auditor selected by the Administrative Agent; provided, however, that the Loan Parties shall only be required to pay (or reimburse the Administrative Agent for paying) the cost of appraisals or audits under this Section 6.27 if a Default or Unmatured Default has occurred and is continuing. 6.26. Further Assurances. Within ten days after the request of the Administrative Agent, the Loan Parties shall promptly perform or cause to be performed any and all acts and execute or cause to be executed any and all documents, instruments, and agreements which are necessary or advisable to carry out the provisions and purposes of this Agreement and the Collateral Documents, including, without limitation, the execution and delivery of any and all documents for filing under the provisions of the Uniform Commercial Code or any other applicable law which are necessary or advisable to create or maintain in favor of the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders, Liens on the collateral granted pursuant to the Collateral Documents that are perfected and of first priority in accordance with all applicable requirements of law. -53- 54 ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower or the Guarantor or any of its Subsidiaries to the Lenders or the Administrative Agent under or in connection with this Agreement, any Credit Extension, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made. 7.2. Nonpayment of principal of any Loan when due, nonpayment of any Reimbursement Obligation with one Business Day after the same becomes due, or nonpayment of interest upon any Loan or of any facility fee, LC Fee or other obligations under any of the Loan Documents within five days after the same becomes due. 7.3. The breach by any Loan Party of any of the terms or provisions of Sections 6.2, 6.3, 6.9, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.17, 6.18, 6.19, 6.20, 6.21, 6.23, or 6.24. 7.4. The breach by the Borrower or the Guarantor (other than a breach which constitutes a Default under another Section of this Article VII) of any of the terms or provisions of this Agreement which is not remedied within 30 days after written notice from the Administrative Agent or any Lender. 7.5. Failure of any Loan Party or any of its Subsidiaries to pay when due any Indebtedness aggregating in excess of $1,000,000 ("Material Indebtedness"); or the default by any Loan Party in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any agreement under which any such Material Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which default or event is to cause, or to permit the holder or holders of such Material Indebtedness to cause, such Material Indebtedness to become due prior to its stated maturity; or any Material Indebtedness of any Loan Party shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.6. Any Loan Party or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under any bankruptcy or debtor protection laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under bankruptcy or debtor protection laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, -54- 55 (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Without the application, approval or consent of any Loan Party or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for any Loan Party or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against any Loan Party or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days. 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of any Loan Party and its Subsidiaries which, when taken together with all other Property of such Loan Party so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, constitutes a Substantial Portion. 7.9. Any Loan Party or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $500,000 (or the equivalent thereof in currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, which judgment(s), in any such case, is/are not stayed on appeal or otherwise being appropriately contested in good faith. 7.10. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $250,000 or any Reportable Event shall occur in connection with any Plan. 7.11. Any Loan Party shall (i) be the subject of any proceeding or investigation pertaining to the release by the Borrower, any of its Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could reasonably be expected to have a Material Adverse Effect. 7.12. Any Change in Control shall occur. 7.13. The occurrence of any "default", as defined in any Loan Document (other than this Agreement) or the breach of any of the terms or provisions of any Loan Document (other than this Agreement), which default or breach continues beyond any period of grace therein provided. 7.14. The Subsidiary Guaranty or the Parent Guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Subsidiary Guaranty or the Parent Guaranty, or any guarantor under the Subsidiary Guaranty or the Parent Guaranty shall fail to comply with any of the terms or provisions set forth therein, or any guarantor thereunder shall deny that it has any further liability under the Subsidiary Guaranty or the Parent Guaranty to which it is a party, or shall give notice to such effect. -55- 56 7.15. Any Collateral Document shall for any reason fail to create a valid and perfected first priority security interest in any collateral purported to be covered thereby, except as permitted by the terms of any Collateral Document, or any Collateral Document shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of any Collateral Document, or any Loan Party shall fail to comply with any of the terms or provisions of any Collateral Document. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1. Acceleration; Facility LC Collateral Account. (i) If any Default described in Section 7.6 or 7.7 occurs, the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuer to issue Facility LCs shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent, the LC Issuer or any Lender and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay to the Administrative Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time, less (y) the amount on deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (such difference, the "Collateral Shortfall Amount"). If any other Default occurs, the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuer to issue Facility LCs, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives, and (b) upon notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (ii) If at any time while any Default is continuing, the Administrative Agent determines that the Collateral Shortfall Amount at such time is greater than zero, the Administrative Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (iii) The Administrative Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the -56- 57 Obligations and any other amounts as shall from time to time have become due and payable by the Borrower to the Lenders or the LC Issuer under the Loan Documents. (iv) At any time while any Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After all of the Obligations have been indefeasibly paid in full and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Administrative Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. (v) If, within 30 days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans and the obligation and power of the LC Issuer to issue Facility LCs hereunder as a result of action of the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) under Section 8.1(i) after any Default (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Administrative Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents (including modifying or amending any covenant herein) or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders: (i) Extend the final maturity of any Loan or postpone any regularly scheduled payment of principal of any Loan or forgive all or any portion of the principal amount thereof or any Reimbursement Obligation related thereto, or reduce the rate or extend the time of payment of interest or fees thereon. (ii) Reduce the percentage specified in the definition of Required Lenders. (iii) Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under Section 2.2, or increase the amount of the Aggregate Commitment or of the Commitment of any Lender hereunder or the commitment to issue Facility LCs, or permit the Borrower to assign its rights under this Agreement. (iv) Increase the Aggregate Commitments other than pursuant to Section 2.26. (v) Amend this Section 8.2. -57- 58 No amendment of any provision of this Agreement relating to the Administrative Agent shall be effective without the written consent of the Administrative Agent, and no amendment of any provision relating to the LC Issuer shall be effective without the consent of the LC Issuer. The Administrative Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders, the LC Issuer or the Administrative Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Administrative Agent, the LC Issuer and the Lenders until the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS 9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither the LC Issuer nor any Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.4. ENTIRE AGREEMENT. THE LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING AMONG THE LOAN PARTIES, THE AGENT, THE LC ISSUER AND THE LENDERS AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS AMONG THE BORROWER, THE AGENTS, THE LC ISSUER AND THE LENDERS RELATING TO THE SUBJECT MATTER THEREOF. THE LOAN DOCUMENTS MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. 9.5. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other -58- 59 (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Arrangers shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. 9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Administrative Agent and the Arrangers for any costs, and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent) paid or incurred by the Administrative Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Administrative Agent, the LC Issuer, the Arrangers and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Administrative Agent, the Arrangers and the Lenders, which attorneys may be employees of the Administrative Agent, the Arranger or the Lenders) paid or incurred by the Administrative Agent, the LC Issuer, the Arrangers or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section include, without limitation, costs and expenses incurred in connection with the Reports described in the following sentence that are prepared after Default. The Borrower acknowledges that from time to time Bank One may prepare and may distribute to the Lenders (but shall have no obligation or duty to prepare or to distribute to the Lenders) certain audit reports (the "Reports") pertaining to the Borrower's assets for internal use by Bank One from information furnished to it by or on behalf of the Borrower, after Bank One has exercised its rights of inspection pursuant to this Agreement. (ii) THE BORROWER HEREBY FURTHER AGREES TO INDEMNIFY THE AGENTS, THE LC ISSUER, THE ARRANGERS, EACH LENDER, THEIR RESPECTIVE AFFILIATES, AND EACH OF THEIR DIRECTORS, OFFICERS AND EMPLOYEES AGAINST ALL LOSSES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL EXPENSES OF LITIGATION OR PREPARATION THEREFOR WHETHER OR NOT THE AGENTS, THE LC ISSUER, THE ARRANGERS, ANY LENDER OR ANY AFFILIATE IS A PARTY THERETO) WHICH ANY OF THEM MAY PAY OR INCUR ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE TRANSACTIONS CONTEMPLATED HEREBY OR THE DIRECT OR INDIRECT APPLICATION OR PROPOSED APPLICATION OF THE PROCEEDS OF ANY EXTENSION OF CREDIT HEREUNDER EXCEPT TO THE EXTENT THAT THEY ARE DETERMINED IN A FINAL NON-APPEALABLE JUDGMENT BY A COURT OF -59- 60 COMPETENT JURISDICTION TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 9.6 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT. 9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Administrative Agent with sufficient counterparts so that the Administrative Agent may furnish one to each of the Lenders. 9.8. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles, except that any calculation or determination which is to be made on a consolidated basis shall be made for the Borrower and all its Subsidiaries, including those Subsidiaries, if any, which are unconsolidated on the Borrower's audited financial statements. 9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders, the LC Issuer, and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent, the LC Issuer, the Arrangers nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Administrative Agent, the LC Issuer, the Arrangers nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Administrative Agent, the LC Issuer, the Arrangers nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Administrative Agent, the LC Issuer, the Arrangers nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 9.11. Confidentiality. Each Lender agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and to other Lenders and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which such Lender is a party, (vi) to such Lender's direct or indirect -60- 61 contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) permitted by Section 12.4. 9.12. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Credit Extensions provided for herein. 9.13. Disclosure. The Borrower and each Lender hereby acknowledge and agree that Bank One and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates. 9.14. Maximum Interest Rate. No provision of this Agreement or of any other Loan Document shall require the payment or the collection of interest in excess of the maximum amount permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither the Borrower nor the sureties, guarantors, successors, or assigns of the Borrower shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event any Lender or the Administrative Agent ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness owing under this Agreement; and, if the principal owing has been paid in full, any remaining excess shall forthwith be paid to the Borrower. In determining whether or not the interest paid or payable exceeds the Maximum Rate, the Borrower, the Administrative Agent, and each Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness owing pursuant to this Agreement so that interest for the entire term does not exceed the Maximum Rate. 9.15. Non-Application of Chapter 346 of Texas Finance Code. The provisions of Chapter 346 of the Texas Credit Code, as amended from time to time, are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby. ARTICLE X THE AGENT 10.1. Appointment; Nature of Relationship. Bank One is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Administrative Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Administrative Agent agrees to act as such contractual -61- 62 representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "Administrative Agent," it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Administrative Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Administrative Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of the Lenders within the meaning of Section 9.105 of the Uniform Commercial Code as in effect in the State of Texas from time to time and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. 10.2. Powers. The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Administrative Agent. 10.3. General Immunity. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.4. No Responsibility for Loans, Recitals, etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. The Administrative Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Administrative Agent at such time, but is voluntarily furnished by the Borrower to the Administrative Agent (either in its capacity as Administrative Agent or in its individual capacity). -62- 63 10.5. Action on Instructions of Lenders. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. The Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6. Employment of Agents and Counsel. The Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Administrative Agent and the Lenders and all matters pertaining to the Administrative Agent's duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. The Administrative Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Administrative Agent, which counsel may be employees of the Administrative Agent. 10.8. Administrative Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent ratably according to their respective Pro Rata Shares (or, if the Commitments have been terminated, in proportion to their respective Pro Rata Shares immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Administrative Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Administrative Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have -63- 64 resulted from the gross negligence or willful misconduct of the Administrative Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Administrative Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event the Administrative Agent is a Lender, the Administrative Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" shall, at any time when the Administrative Agent is a Lender, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Administrative Agent, in its individual capacity, is not obligated to be a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the LC Issuer, the Arrangers or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the LC Issuer, the Arrangers or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five days after the retiring Administrative Agent gives notice of its intention to resign. The Administrative Agent may be removed at any time with or without cause by written notice received by the Administrative Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent, subject to the consent of the Borrower (so long as no Default or Unmatured Default then exists and is continuing), which consent shall not be unreasonably withheld or delayed. If no successor Administrative Agent shall have been so appointed by the Required Lenders within thirty days after the resigning -64- 65 Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. Notwithstanding the previous sentence, the Administrative Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. If the Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of the Administrative Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a U.S. commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article X shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. 10.13. Delegation to Affiliates. The Borrower and the Lenders agree that the Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Administrative Agent is entitled under Articles IX and X. 10.14. Administrative Agent and Arranger Fees. The Borrower agrees to pay to the Administrative Agent and the Arrangers, for their respective accounts, the fees agreed to by the Borrower, the Administrative Agent and the Arrangers pursuant to the Fee Letter, or as otherwise agreed from time to time. 10.15. Co-Agents, Documentation Agent, Syndication Agent, etc. Neither any of the Lenders identified in this Agreement as a "co-agent" nor the Documentation Agent or the Syndication Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Administrative Agent in Section 10.11. -65- 66 ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Secured Obligations owing to such Lender, whether or not the Secured Obligations, or any part thereof, shall then be due. 11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of the Aggregate Outstanding Credit Exposure. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3. The parties to this Agreement acknowledge that clause (ii) of this Section 12.1 relates only to absolute assignments and does not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank; provided, however, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3. The Administrative Agent may treat the Person which made any Credit Extension or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3; provided, however, that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Credit Extension or which holds any Note to direct payments relating to such -66- 67 Credit Extension or Note to another Person. Any assignee of the rights to any Credit Extension or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Credit Extension (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Credit Extension. 12.2. Participations. 12.2.1. Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Credit Extension owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Outstanding Credit Exposure and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Credit Extension or Commitment in which such Participant has an interest which forgives principal, interest, fees or any Reimbursement Obligation or reduces the interest rate or fees payable with respect to any such Credit Extension or Commitment, extends the Facility Termination Date, postpones any date fixed for any regularly-scheduled payment of principal of or interest on any Loan in which such Participant has an interest, or any regularly-scheduled payment of fees on any such Credit Extension or Commitment, releases any guarantor of any such Credit Extension or releases any collateral held in the Facility LC Collateral Account (except in accordance with the terms hereof) or all or substantially all of any other collateral, if any, securing any such Credit Extension. 12.2.3. Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each -67- 68 Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3. Assignments. 12.3.1. Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit C or in such other form as may be agreed to by the parties thereto. The consent of the Borrower, the Administrative Agent and the LC Issuer shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld or delayed. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate thereof shall (unless each of the Borrower and the Administrative Agent otherwise consents) be in an amount not less than the lesser of (i) $5,000,000 or (ii) the remaining amount of the assigning Lender's Commitment (calculated as at the date of such assignment) or outstanding Credit Extensions (if the applicable Commitment has been terminated). 12.3.2. Effect; Effective Date. Upon (i) delivery to the Administrative Agent of an assignment, together with any consents required by Section 12.3.1, and (ii) payment by the selling Lender of a $3,500 fee to the Administrative Agent for processing such assignment (unless such fee is waived by the Administrative Agent), such assignment shall become effective on the effective date specified in such assignment. The assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Outstanding Credit Exposure under the applicable assignment agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Administrative Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Outstanding Credit Exposure assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Administrative Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. -68- 69 12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv). ARTICLE XIII NOTICES 13.1. Notices. Except as otherwise permitted by Section 2.14 with respect to borrowing notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, the Administrative Agent, or the LC Issuer at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Lender, at its address or facsimile number set forth below its signature hereto or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower in accordance with the provisions of this Section 13.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section; provided that notices to the Administrative Agent under Article II shall not be effective until received. 13.2. Change of Address. The Borrower, the Administrative Agent, the LC Issuer and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XIV COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the -69- 70 Administrative Agent, the LC Issuer and the Lenders and each party has notified the Administrative Agent by facsimile transmission or telephone that it has taken such action. ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL 15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS ( WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS). 15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT, THE LC ISSUER OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT, THE LC ISSUER OR ANY LENDER OR ANY AFFILIATE OF THE AGENT, THE LC ISSUER OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. 15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE LC ISSUER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. {The Remainder of this Page Intentionally Left Blank} -70- 71 IN WITNESS WHEREOF, the Borrower, the LC Issuer, the Lenders and the Administrative Agent have executed this Agreement as of the date first above written. DAISYTEK, INCORPORATED By: /s/ Ralph Mitchell -------------------------------------------- Name: Ralph Mitchell Title: Executive Vice President-Finance 1025 Central Expressway Suite 200 Allen, Texas 75013 Attention: Ralph Mitchell Telephone: (972) 881-4700 FAX: (972) 423-1108 Commitments $25,000,000 BANK ONE, TEXAS, NA, as a Lender, LC Issuer and as Administrative Agent By: /s/ Katherine McCoy Turner -------------------------------------------- Name: Katherine McCoy Turner Title: First Vice President 1717 Main Street-3rd Floor Dallas, Texas 75201 Attention: Katherine M. Turner Telephone: (214) 290-4438 FAX: (214) 290-2765 72 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Ralph Mitchell -------------------------------------------- Name: Ralph Mitchell Title: Executive Vice President-Finance 1025 Central Expressway Suite 200 Allen, Texas 75013 Attention: Ralph Mitchell Telephone: (972) 881-4700 FAX: (972) 423-1108 73 BANK ONE, NA as an LC Issuer By: /s/ Katherine McCoy Turner -------------------------------------------- Name: Katherine McCoy Turner Title: Director 1717 Main Street-3rd Floor Dallas, Texas 75201 Attention: Katherine M. Turner Telephone: (214) 290-4438 FAX: (214) 290-2765 74 $25,000,000 BANK OF AMERICA, N.A., as a Lender and as Documentation Agent By: /s/ Curtis L. Anderson -------------------------------------------- Name: Curtis L. Anderson Title: Senior Vice President 901 Main Street, 7th Floor Dallas, TX 75202 Attention: Curtis Anderson Telephone: (214) 209-0310 FAX: (214) 209-3140 75 $10,000,000 COMERICA BANK By: /s/ Carol S. Geraghty -------------------------------------------- Name: Carol S. Geraghty Title: Vice President 4100 Spring Valley Road, Suite 400 Dallas, TX 75244 Attention: Carol S. Geraghty Telephone: (972) 361-2548 FAX: (972) 361-2550 76 $15,000,000 COMPASS BANK By: /s/ Paul Howell -------------------------------------------- Name: Paul Howell Title: 8080 N. Central Expressway, Suite 250 Dallas, Texas 75206 Attention: Paul Howell Telephone: (214) 706-8046 FAX: (214) 346-2746 77 $20,000,000 IBM CREDIT CORPORATION By: /s/ Thomas S. Curcio -------------------------------------------- Name: Thomas S. Curcio Title: Manager of Credit North Castle Drive Armonk, NY 10504 Attention: Brian O'Hara Telephone: (914) 765-6241 FAX: (914) 765-6271 78 $25,000,000 CITIZENS BANK OF MASSACHUSETTS, as a Lender and as Syndication Agent By: /s/ Michael St. Jean -------------------------------------------- Name: Michael St. Jean Title: Vice President 28 State Street, 13th Floor Boston, MA 02109 Attention: Michael St. Jean Telephone: (617) 994-7103 FAX: (617) 723-9431 EX-10.5 6 d83940ex10-5.txt PARENT GUARANTY DATED DECEMBER 18, 2000 1 Exhibit 10.5 PARENT GUARANTY THIS PARENT GUARANTY (this "Guaranty") is made as of the 18th day of December, 2000 by Daisytek International Corporation, a Delaware corporation (the "Guarantor") in favor of the Agent, for the benefit of the Lenders and the LC Issuer, under the Credit Agreement referred to below. WITNESSETH: WHEREAS, Daisytek, Incorporated, a Delaware corporation (the "Principal") and Bank One, Texas, NA, a national banking association having its principal office in Chicago, Illinois, as Administrative Agent (the "Agent"), the LC Issuer and certain other Lenders from time to time party thereto have entered into a certain Credit Agreement dated as of even date herewith (as same may be amended or modified from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders and the LC Issuer to the Principal; WHEREAS, it is a condition precedent to the Agent, LC Issuer and the Lenders executing the Credit Agreement that the Guarantor execute and deliver this Guaranty whereby the Guarantor shall guarantee the payment when due, of all Guaranteed Obligations, as defined below; and WHEREAS, in order to induce the Lenders, the LC Issuer and the Agent to enter into the Credit Agreement, and the Lenders and their Affiliates to enter into one or more Rate Management Transactions with the Principal, and because the Guarantor has determined that executing this Guaranty is in its interest, in furtherance of its business and to its financial benefit, and is necessary to the conduct, promotion and attainment of its business and that of the Principal, the Guarantor is willing to guarantee the obligations of the Principal under the Credit Agreement, any Note, any Rate Management Transaction, and the other Loan Documents; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1.1. Selected Terms Used Herein. "Guaranteed Obligations" is defined in Section 3 below. SECTION 1.2. Terms in Credit Agreement. Other capitalized terms used herein but not defined herein shall have the meaning set forth in the Credit Agreement. 2 SECTION 2.1. Representations and Warranties. The Guarantor represents and warrants (which representations and warranties shall be deemed to have been renewed upon each Credit Extension under the Credit Agreement) that: (a) It is a corporation, duly and properly incorporated, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of the State of Delaware and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (b) It has the power and authority and legal right to execute and deliver this Guaranty and to perform its obligations hereunder. The execution and delivery by it of this Guaranty and the performance of its obligations hereunder have been duly authorized by proper corporate proceedings, and this Guaranty constitutes a legal, valid and binding obligation of the Guarantor enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery by it of this Guaranty, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on it or any of its Subsidiaries or (ii) its certificate of incorporation, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which it or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Guarantor or any Subsidiary of the Guarantor pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by it or any of its Subsidiaries, is required to be obtained by it or any of its Subsidiaries in connection with the execution and delivery of this Guaranty or the performance by it of its obligations hereunder or the legality, validity, binding effect or enforceability of this Guaranty. SECTION 2.2. Covenants. The Guarantor covenants that, so long as any Lender or the LC Issuer has any Credit Extension outstanding under the Credit Agreement, any Rate Management Transaction remains in effect or any of the Guaranteed Obligations shall remain unpaid, that it will, and, if necessary, will enable or cause the Principal to, fully comply with those covenants and agreements set forth in the Credit Agreement. SECTION 3. The Guaranty. The Guarantor hereby absolutely and unconditionally guarantees, as primary obligor and not as surety, the full and punctual payment (whether at stated maturity, upon acceleration or early termination or otherwise, and at all times thereafter) and -2- 3 performance of the Secured Obligations, including without limitation any such Secured Obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, whether or not allowed or allowable in such proceeding (referred to collectively as the "Guaranteed Obligations"). Upon failure by the Principal to pay punctually any such amount, the Guarantor agrees that it shall forthwith on demand pay to the Agent for the benefit of the Lenders, the LC Issuer and, if applicable, their Affiliates, the amount not so paid at the place and in the manner specified in the Credit Agreement, any Note, the Pledge and Security Agreement, any Rate Management Transaction or the relevant Loan Document, as the case may be. This Guaranty is a guaranty of payment and not of collection. The Guarantor waives any right to require any Lender or the LC Issuer to sue the Principal, any other guarantor, or any other Person obligated for all or any part of the Guaranteed Obligations, or otherwise to enforce its payment against any collateral securing all or any part of the Guaranteed Obligations. SECTION 4. Guaranty Unconditional. The obligations of the Guarantor hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any of the Guaranteed Obligations, by operation of law or otherwise, or any obligation of any other guarantor of any of the Guaranteed Obligations, or any default, failure or delay, willful or otherwise, in the payment or performance of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document; (iii) any release, nonperfection or invalidity of any direct or indirect security for any obligation of the Principal under the Credit Agreement, any Note, the Pledge and Security Agreement, any Rate Management Transaction, any other Loan Document, or any obligations of any other guarantor of any of the Guaranteed Obligations, or any action or failure to act by the Agent, the LC Issuer, any Lender or any Affiliate of any Lender with respect to any collateral securing all or any part of the Guaranteed Obligations; (iv) any change in the corporate existence, structure or ownership of the Principal or any other guarantor or of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Principal, or any other guarantor of the Guaranteed Obligations, or its assets or any resulting release or discharge of any obligation of the Principal, or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Principal, any other guarantor of any of the Guaranteed Obligations, the Agent, the LC Issuer, any Lender or any other Person, whether in connection herewith or any unrelated transactions; -3- 4 (vi) any invalidity or unenforceability relating to or against the Principal, or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, the Pledge and Security Agreement, any Rate Management Transaction, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Principal, or any other guarantor of the Guaranteed Obligations, of the principal of or interest on any Note or any other amount payable by the Principal under the Credit Agreement, the Pledge and Security Agreement, any Note, any Rate Management Transaction or any other Loan Document; or (vii) any other act or omission to act or delay of any kind by the Principal, any other guarantor of the Guaranteed Obligations, the Agent, the LC Issuer, any Lender or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Guarantor's obligations hereunder. SECTION 5. Discharge Only Upon Payment In Full: Reinstatement In Certain Circumstances. The Guarantor's obligations hereunder shall remain in full force and effect until all Guaranteed Obligations shall have been indefeasibly paid in full, the Commitments under the Credit Agreement shall have terminated or expired and all Rate Management Transactions have terminated or expired. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Principal or any other party under the Credit Agreement, any Rate Management Transaction or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Principal or otherwise, the Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. Waivers. The Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Principal, any other guarantor of any of the Guaranteed Obligations, or any other Person. SECTION 7. Subrogation. The Guarantor hereby agrees not to assert any right, claim or cause of action, including, without limitation, a claim for subrogation, reimbursement, indemnification or otherwise, against the Principal arising out of or by reason of this Guaranty or the obligations hereunder, including, without limitation, the payment or securing or purchasing of any of the Guaranteed Obligations by any of the Subsidiary Guarantors or any other Person unless and until the Guaranteed Obligations are indefeasibly paid in full, any commitment to lend under the Credit Agreement and any other Loan Documents is terminated and all Rate Management Transactions have terminated or expired. SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Principal, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document shall nonetheless be payable by the Guarantor forthwith on demand by the Agent made at the request of the Required Lenders. -4- 5 SECTION 9. Application of Payments. All payments received by the Agent hereunder shall be applied by the Agent to payment of the Guaranteed Obligations in the following order unless a court of competent jurisdiction shall otherwise direct: (a) FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Guaranteed Obligations or of any security interest granted to the Agent in connection with any collateral securing the Guaranteed Obligations; (b) SECOND, to payment of that portion of the Guaranteed Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders, the LC Issuer and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (c) THIRD, to payment of the principal of the Guaranteed Obligations and the net early termination payments and any other Rate Management Obligations then due and unpaid from the Principal to any of the Lenders or their Affiliates, pro rata among the Lenders and their Affiliates in accordance with the amount of such principal and such net early termination payments and other Rate Management Obligations then due and unpaid owing to each of them; and (d) FOURTH, to payment of any Guaranteed Obligations (other than those listed above) pro rata among those parties to whom such Guaranteed Obligations are due in accordance with the amounts owing to each of them. SECTION 10. Notices. All notices, requests and other communications to any party hereunder shall be given or made by telecopier or other writing and telecopied, or mailed or delivered to the intended recipient at its address or telecopier number set forth in the Credit Agreement or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the Agent in accordance with the provisions of Article XIII of the Credit Agreement. Except as otherwise provided in this Guaranty, all such communications shall be deemed to have been duly given when transmitted by telecopier, or personally delivered or, in the case of a mailed notice sent by certified mail return-receipt requested, on the date set forth on the receipt (provided, that any refusal to accept any such notice shall be deemed to be notice thereof as of the time of any such refusal), in each case given or addressed as aforesaid. SECTION 11. No Waivers. No failure or delay by the Agent, the LC Issuer or any Lenders in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Note, any Rate Management Transaction and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. -5- 6 SECTION 12. No Duty to Advise. The Guarantor assumes all responsibility for being and keeping itself informed of the Principal's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that the Guarantor assumes and incurs under this Guaranty, and agrees that neither the Agent, the LC Issuer nor any Lender has any duty to advise the Guarantor of information known to it regarding those circumstances or risks. SECTION 13. Successors and Assigns. This Guaranty is for the benefit of the Agent, the LC Issuer and the Lenders and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Note, any Rate Management Transaction, or the other Loan Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. This Guaranty shall be binding upon the Guarantor and its respective successors and permitted assigns. SECTION 14. Changes in Writing. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Guarantor and the Agent with the consent of the Required Lenders. SECTION 15. Costs of Enforcement. The Guarantor agrees to pay all costs and expenses including, without limitation, all court costs and attorneys' fees and expenses paid or incurred by the Agent, the LC Issuer, any Lender or any Affiliate of any Lender in endeavoring to collect all or any part of the Guaranteed Obligations from, or in prosecuting any action against, the Principal, the Guarantor or any other guarantor of all or any part of the Guaranteed Obligations. SECTION 16. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS AND OF ANY TEXAS STATE COURT SITTING IN DALLAS, TEXAS AND FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY (INCLUDING, WITHOUT LIMITATION, ANY OF THE OTHER LOAN DOCUMENTS) OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE GUARANTOR AND THE AGENT, THE LC ISSUER, AND THE LENDERS ACCEPTING THIS GUARANTY, HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 17. Taxes. etc. All payments required to be made by the Guarantor hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or -6- 7 withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof (but excluding Excluded Taxes), provided, however, that if the Guarantor is required by law to make such deduction or withholding, the Guarantor shall forthwith (i) pay to the Agent, the LC Issuer or any Lender, as applicable, such additional amount as results in the net amount received by the Agent, the LC Issuer or any Lender, as applicable, equaling the full amount which would have been received by the Agent, the LC Issuer or any Lender, as applicable, had no such deduction or withholding been made, (ii) pay the full amount deducted to the relevant authority in accordance with applicable law, and (iii) furnish to the Agent, the LC Issuer or any Lender, as applicable, certified copies of official receipts evidencing payment of such withholding taxes within 30 days after such payment is made. SECTION 18. Setoff. Without limiting the rights of the Agent, the LC Issuer, or the Lenders under applicable law, if all or any part of the Guaranteed Obligations is then due, whether pursuant to the occurrence of a Default or otherwise, then the Guarantor authorizes the Agent, the LC Issuer, and the Lenders to apply any sums standing to the credit of the Guarantor with the Agent, the LC Issuer or any Lender or any Lending Installation of the Agent or any Lender toward the payment of the Guaranteed Obligations. SECTION 19. ENTIRE AGREEMENT. THIS AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -7- 8 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed, under seal, by its authorized officer as of the day and year first above written. DAISYTEK INTERNATIONAL CORPORATION By: /s/ Ralph Mitchell ------------------------------------- Name: Ralph Mitchell Title: Executive Vice President-Finance -8- EX-10.6 7 d83940ex10-6.txt SUBSIDIARY GUARANTY DATED DECEMBER 18, 2000 1 Exhibit 10.6 SUBSIDIARY GUARANTY THIS SUBSIDIARY GUARANTY (this "Guaranty") is made as of the 18th day of December, 2000 by STEADI-SYSTEMS, LTD., a California corporation; STEADI-SYSTEMS NEW YORK, LTD., a New York corporation; STEADI-SYSTEMS MIAMI, INC., a Florida corporation; THE TAPE COMPANY, INC., an Illinois corporation; THE TAPE COMPANY, INC., a Georgia corporation; THE TAPE COMPANY, INC., a Pennsylvania corporation; TAPE DISTRIBUTORS OF TEXAS, INC., a Texas corporation; TAPE DISTRIBUTORS OF MINNESOTA, INC., a Minnesota corporation; DAISYTEK LATIN AMERICA, INC., a Florida corporation; ARLINGTON INDUSTRIES, INC., a Delaware corporation; VIRTUAL DEMAND, INC., a Delaware corporation; TAPEBARGAINS.COM, INC., a Delaware corporation; B.A. PARGH COMPANY, a Delaware corporation; and BUSINESS SUPPLIES DISTRIBUTORS, INC., a Delaware corporation (collectively, the "Subsidiary Guarantors") in favor of the Agent, for the benefit of the Lenders and the LC Issuers, under the Credit Agreement referred to below. WITNESSETH: WHEREAS, Daisytek, Incorporated, a Delaware corporation (the "Principal"), Daisytek International Corporation, a Delaware corporation, Bank One, Texas, NA, a national banking association having its principal office in Chicago, Illinois, as an LC Issuer and as Administrative Agent (the "Agent"), Citizens Bank of Massachusetts, as Syndication Agent, Bank of America, N.A., as Documentation Agent, Bank One, NA, as an LC Issuer and certain other Lenders from time to time party thereto have entered into a certain Credit Agreement dated as of even date herewith (as same may be amended or modified from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders and the LC Issuers to the Principal; WHEREAS, it is a condition precedent to the Agent, LC Issuers and the Lenders executing the Credit Agreement that each of the Subsidiary Guarantors execute and deliver this Guaranty whereby each of the Subsidiary Guarantors shall guarantee the payment when due, subject to Section 9 hereof, of all Guaranteed Obligations, as defined below; and WHEREAS, in consideration of the financial and other support that the Principal has provided, and such financial and other support as the Principal may in the future provide, to the Subsidiary Guarantors, and in order to induce the Lenders, the LC Issuers and the Agent to enter into the Credit Agreement, and the Lenders and their Affiliates to enter into one or more Rate Management Transactions with the Principal, and because each Subsidiary Guarantor has determined that executing this Guaranty is in its interest, in furtherance of its business and to its financial benefit, and is necessary to the conduct, promotion and attainment of its business and that of Principal's, each 2 of the Subsidiary Guarantors is willing to guarantee the obligations of the Principal under the Credit Agreement, any Note, any Rate Management Transaction, and the other Loan Documents; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1.1. Selected Terms Used Herein. "Guaranteed Obligations" is defined in Section 3 below. SECTION 1.2. Terms in Credit Agreement. Other capitalized terms used herein but not defined herein shall have the meaning set forth in the Credit Agreement. SECTION 2.1. Representations and Warranties. Each of the Subsidiary Guarantors represents and warrants (which representations and warranties shall be deemed to have been renewed upon each Credit Extension under the Credit Agreement) that: (a) It is a corporation, duly and properly incorporated, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (b) It has the power and authority and legal right to execute and deliver this Guaranty and to perform its obligations hereunder. The execution and delivery by it of this Guaranty and the performance of its obligations hereunder have been duly authorized by proper corporate proceedings, and this Guaranty constitutes a legal, valid and binding obligation of such Subsidiary Guarantor enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery by it of this Guaranty, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on it or any of its Subsidiaries or (ii) its articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which it or any of its subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of such Subsidiary Guarantor or a subsidiary thereof pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any -2- 3 subdivision thereof, which has not been obtained by it or any of its subsidiaries, is required to be obtained by it or any of its subsidiaries in connection with the execution and delivery of this Guaranty or the performance by it of its obligations hereunder or the legality, validity, binding effect or enforceability of this Guaranty. (d) In the case of each Subsidiary Guarantor, the representations and warranties set forth in Article V of the Credit Agreement as they relate to such Subsidiary Guarantor or the Loan Documents to which such Subsidiary Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct, and the Agent, each LC Issuer and each Lender shall be entitled to rely upon them as if they were fully set forth herein; provided, however, that each reference in each such representation and warranty to the Borrower's or the Guarantor's knowledge shall, for the purposes of this Section 2.1, be deemed to be a reference to such Subsidiary Guarantor's knowledge. SECTION 2.2. Covenants. Each of the Subsidiary Guarantors covenants that, so long as any Lender or any LC Issuer has any Credit Extension outstanding under the Credit Agreement, any Rate Management Transaction remains in effect or any of the Guaranteed Obligations shall remain unpaid, that it will, and, if necessary, will enable the Principal to, fully comply with those covenants and agreements set forth in the Credit Agreement. SECTION 3. The Guaranty. Subject to Section 9 hereof, each of the Subsidiary Guarantors hereby absolutely and unconditionally guarantees, as primary obligor and not as surety, the full and punctual payment (whether at stated maturity, upon acceleration or early termination or otherwise, and at all times thereafter) and performance of the Secured Obligations, including without limitation any such Secured Obligations whatsoever incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, whether or not allowed or allowable in such proceeding (collectively, subject to the provisions of Section 9 hereof, being referred to collectively as the "Guaranteed Obligations"). Upon failure by the Principal to pay punctually any such amount, each of the Subsidiary Guarantors agrees that it shall forthwith on demand pay to the Agent for the benefit of the Lenders, the LC Issuers and, if applicable, their Affiliates, the amount not so paid at the place and in the manner specified in the Credit Agreement, any Note, the Pledge and Security Agreement, any Rate Management Transaction or the relevant Loan Document, as the case may be. This Guaranty is a guaranty of payment and not of collection. Each of the Subsidiary Guarantors waives any right to require the Lender or the LC Issuer to sue the Principal, any other guarantor, or any other Person obligated for all or any part of the Guaranteed Obligations, or otherwise to enforce its payment against any collateral securing all or any part of the Guaranteed Obligations. SECTION 4. Guaranty Unconditional. Subject to Section 9 hereof, the obligations of each of the Subsidiary Guarantors hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: -3- 4 (i) any extension, renewal, settlement, compromise, waiver or release in respect of any of the Guaranteed Obligations, by operation of law or otherwise, or any obligation of any other guarantor of any of the Guaranteed Obligations, or any default, failure or delay, willful or otherwise, in the payment or performance of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document; (iii) any release, nonperfection or invalidity of any direct or indirect security for any obligation of the Principal under the Credit Agreement, any Note, the Pledge and Security Agreement, any Rate Management Transaction, any other Loan Document, or any obligations of any other guarantor of any of the Guaranteed Obligations, or any action or failure to act by the Agent, any LC Issuer, any Lender or any Affiliate of any Lender with respect to any collateral securing all or any part of the Guaranteed Obligations; (iv) any change in the corporate existence, structure or ownership of the Principal or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Principal, or any other guarantor of the Guaranteed Obligations, or its assets or any resulting release or discharge of any obligation of the Principal, or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which the Subsidiary Guarantors may have at any time against the Principal, any other guarantor of any of the Guaranteed Obligations, the Agent, any LC Issuer, any Lender or any other Person, whether in connection herewith or any unrelated transactions; (vi) any invalidity or unenforceability relating to or against the Principal, or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, the Pledge and Security Agreement, any Rate Management Transaction, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Principal, or any other guarantor of the Guaranteed Obligations, of the principal of or interest on any Note or any other amount payable by the Principal under the Credit Agreement, the Pledge and Security Agreement, any Note, any Rate Management Transaction or any other Loan Document; or (vii) any other act or omission to act or delay of any kind by the Principal, any other guarantor of the Guaranteed Obligations, the Agent, any LC Issuer, any Lender or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of any Subsidiary Guarantor's obligations hereunder. SECTION 5. Discharge Only Upon Payment In Full: Reinstatement In Certain Circumstances. Each of the Subsidiary Guarantor's obligations hereunder shall remain in full force -4- 5 and effect until all Guaranteed Obligations shall have been indefeasibly paid in full, the Commitments under the Credit Agreement shall have terminated or expired and all Rate Management Transactions have terminated or expired. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Principal or any other party under the Credit Agreement, any Rate Management Transaction or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Principal or otherwise, each of the Subsidiary Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. Waivers. Each of the Subsidiary Guarantors irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Principal, any other guarantor of any of the Guaranteed Obligations, or any other Person. SECTION 7. Subrogation. Each of the Subsidiary Guarantors hereby agrees not to assert any right, claim or cause of action, including, without limitation, a claim for subrogation, reimbursement, indemnification or otherwise, against the Principal arising out of or by reason of this Guaranty or the obligations hereunder, including, without limitation, the payment or securing or purchasing of any of the Guaranteed Obligations by any of the Subsidiary Guarantors or any other Person unless and until the Guaranteed Obligations are indefeasibly paid in full, any commitment to lend under the Credit Agreement and any other Loan Documents is terminated and all Rate Management Transactions have terminated or expired. SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Principal, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document shall nonetheless be payable by each of the Subsidiary Guarantors hereunder forthwith on demand by the Agent made at the request of the Required Lenders. SECTION 9. Limitation on Obligations. (a) The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Subsidiary Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of such Subsidiary Guarantor's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Subsidiary Guarantors, the Agent, any LC Issuer or any Lender, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding (such highest amount determined hereunder being the relevant Subsidiary Guarantor's "Maximum Liability"). This Section 9(a) with respect to the Maximum -5- 6 Liability of the Subsidiary Guarantors is intended solely to preserve the rights of the Agent hereunder to the maximum extent not subject to avoidance under applicable law, and neither the Subsidiary Guarantor nor any other person or entity shall have any right or claim under this Section 9(a) with respect to the Maximum Liability, except to the extent necessary so that the obligations of the Subsidiary Guarantor hereunder shall not be rendered voidable under applicable law. (b) Each of the Subsidiary Guarantors agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Liability of each Subsidiary Guarantor, and may exceed the aggregate Maximum Liability of all other Subsidiary Guarantors, without impairing this Guaranty or affecting the rights and remedies of the Agent hereunder. Nothing in this Section 9(b) shall be construed to increase any Subsidiary Guarantor's obligations hereunder beyond its Maximum Liability. (c) In the event any Subsidiary Guarantor (a "Paying Subsidiary Guarantor") shall make any payment or payments under this Guaranty or shall suffer any loss as a result of any realization upon any collateral granted by it to secure its obligations under this Guaranty, each other Subsidiary Guarantor (each a "Non-Paying Subsidiary Guarantor") shall contribute to such Paying Subsidiary Guarantor an amount equal to such Non-Paying Subsidiary Guarantor's "Pro Rata Share" of such payment or payments made, or losses suffered, by such Paying Subsidiary Guarantor. For the purposes hereof, each Non-Paying Subsidiary Guarantor's "Pro Rata Share" with respect to any such payment or loss by a Paying Subsidiary Guarantor shall be determined as of the date on which such payment or loss was made by reference to the ratio of (i) such Non-Paying Subsidiary Guarantor's Maximum Liability as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder) or, if such Non-Paying Subsidiary Guarantor's Maximum Liability has not been determined, the aggregate amount of all monies received by such Non-Paying Subsidiary Guarantor from the Principal after the date hereof (whether by loan, capital infusion or by other means) to (ii) the aggregate Maximum Liability of all Subsidiary Guarantors hereunder (including such Paying Subsidiary Guarantor) as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder), or to the extent that a Maximum Liability has not been determined for any Subsidiary Guarantors, the aggregate amount of all monies received by such Subsidiary Guarantors from the Principal after the date hereof (whether by loan, capital infusion or by other means). Nothing in this Section 9(c) shall affect any Subsidiary Guarantor's several liability for the entire amount of the Guaranteed Obligations (up to such Subsidiary Guarantor's Maximum Liability). Each of the Subsidiary Guarantors covenants and agrees that its right to receive any contribution under this Guaranty from a Non-Paying Subsidiary Guarantor shall be subordinate and junior in right of payment to all the Guaranteed Obligations. The provisions of this Section 9(c) are for the benefit of both the Agent and the Subsidiary Guarantors and may be enforced by any one, or more, or all of them in accordance with the terms hereof. -6- 7 SECTION 10. Application of Payments. All payments received by the Agent hereunder shall be applied by the Agent to payment of the Guaranteed Obligations in the following order unless a court of competent jurisdiction shall otherwise direct: (a) FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Guaranteed Obligations or of any security interest granted to the Agent in connection with any collateral securing the Guaranteed Obligations; (b) SECOND, to payment of that portion of the Guaranteed Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders, the LC Issuers and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (c) THIRD, to payment of the principal of the Guaranteed Obligations and the net early termination payments and any other Rate Management Obligations then due and unpaid from the Principal to any of the Lenders or their Affiliates, pro rata among the Lenders and their Affiliates in accordance with the amount of such principal and such net early termination payments and other Rate Management Obligations then due and unpaid owing to each of them; and (d) FOURTH, to payment of any Guaranteed Obligations (other than those listed above) pro rata among those parties to whom such Guaranteed Obligations are due in accordance with the amounts owing to each of them. SECTION 11. Notices. All notices, requests and other communications to any party hereunder shall be given or made by telecopier or other writing and telecopied, or mailed or delivered to the intended recipient at its address or telecopier number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the Agent in accordance with the provisions of Article XIII of the Credit Agreement. Except as otherwise provided in this Guaranty, all such communications shall be deemed to have been duly given when transmitted by telecopier, or personally delivered or, in the case of a mailed notice sent by certified mail return-receipt requested, on the date set forth on the receipt (provided, that any refusal to accept any such notice shall be deemed to be notice thereof as of the time of any such refusal), in each case given or addressed as aforesaid. SECTION 12. No Waivers. No failure or delay by the Agent, any LC Issuer or any Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Note, any Rate Management Transaction and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. -7- 8 SECTION 13. No Duty to Advise. Each of the Subsidiary Guarantors assumes all responsibility for being and keeping itself informed of the Principal's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that each of the Subsidiary Guarantors assumes and incurs under this Guaranty, and agrees that neither the Agent, any LC Issuer nor any Lender has any duty to advise any of the Subsidiary Guarantors of information known to it regarding those circumstances or risks. SECTION 14. Successors and Assigns. This Guaranty is for the benefit of the Agent, the LC Issuers and the Lenders and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Note, any Rate Management Transaction, or the other Loan Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. This Guaranty shall be binding upon each of the Subsidiary Guarantors and their respective successors and permitted assigns. SECTION 15. Changes in Writing. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by each of the Subsidiary Guarantors and the Agent with the consent of the Required Lenders. SECTION 16. Costs of Enforcement. Each of the Subsidiary Guarantors agrees to pay all costs and expenses including, without limitation, all court costs and attorneys' fees and expenses paid or incurred by the Agent, any LC Issuer, any Lender or any Affiliate of any Lender in endeavoring to collect all or any part of the Guaranteed Obligations from, or in prosecuting any action against, the Principal, the Subsidiary Guarantors or any other guarantor of all or any part of the Guaranteed Obligations. SECTION 17. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS. EACH OF THE SUBSIDIARY GUARANTORS HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS AND OF ANY TEXAS STATE COURT SITTING IN DALLAS, TEXAS AND FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY (INCLUDING, WITHOUT LIMITATION, ANY OF THE OTHER LOAN DOCUMENTS) OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE SUBSIDIARY GUARANTORS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH ANY OF THEM MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE SUBSIDIARY GUARANTORS, AND THE AGENT, THE LC ISSUERS, AND THE LENDERS ACCEPTING THIS GUARANTY, HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. -8- 9 SECTION 18. Taxes. etc. All payments required to be made by any of the Subsidiary Guarantors hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof (but excluding Excluded Taxes), provided, however, that if any of the Subsidiary Guarantors is required by law to make such deduction or withholding, such Subsidiary Guarantor shall forthwith (i) pay to the Agent, any LC Issuer or any Lender, as applicable, such additional amount as results in the net amount received by the Agent, any LC Issuer or any Lender, as applicable, equaling the full amount which would have been received by the Agent, any LC Issuer or any Lender, as applicable, had no such deduction or withholding been made, (ii) pay the full amount deducted to the relevant authority in accordance with applicable law, and (iii) furnish to the Agent, any LC Issuer or any Lender, as applicable, certified copies of official receipts evidencing payment of such withholding taxes within 30 days after such payment is made. SECTION 19. Setoff. Without limiting the rights of the Agent, the LC Issuers or the Lenders under applicable law, if all or any part of the Guaranteed Obligations is then due, whether pursuant to the occurrence of a Default or otherwise, then each of the Subsidiary Guarantors authorizes the Agent, the LC Issuers, and the Lenders to apply any sums standing to the credit of the Subsidiary Guarantor with the Agent, the LC Issuers or any Lender or any Lending Installation of the Agent or any Lender toward the payment of the Guaranteed Obligations. SECTION 20. ENTIRE AGREEMENT. THIS AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -9- 10 IN WITNESS WHEREOF, each of the Subsidiary Guarantors has caused this Guaranty to be duly executed, under seal, by its authorized officer as of the day and year first above written. SUBSIDIARY GUARANTORS: STEADI-SYSTEMS, LTD. STEADI-SYSTEMS NEW YORK, LTD. STEADI-SYSTEMS MIAMI, INC. THE TAPE COMPANY, INC. (an Illinois corporation) THE TAPE COMPANY, INC. (a Georgia corporation) THE TAPE COMPANY, INC. (a Pennsylvania corporation) TAPE DISTRIBUTORS OF TEXAS, INC. TAPE DISTRIBUTORS OF MINNESOTA, INC. DAISYTEK LATIN AMERICA, INC. ARLINGTON INDUSTRIES, INC. VIRTUAL DEMAND, INC. TAPEBARGAINS.COM, INC. B.A. PARGH COMPANY BUSINESS SUPPLIES DISTRIBUTORS, INC. By: /s/ Ralph Mitchell ---------------------------------- Ralph Mitchell Executive Vice President-Finance of each subsidiary above listed Address for Notice: 1025 Central Expressway, Suite 200 Allen, Texas 75013 Attention: Ralph Mitchell Telephone: (972) 881-4700 Telecopier: (972) 423-1108 -10- EX-10.7 8 d83940ex10-7.txt PLEDGE AND SECURITY AGREEMENT DATED DEC 18, 2000 1 Exhibit 10.7 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (this "Pledge Agreement") is entered into as of December 18, 2000, by and between Daisytek, Incorporated, a Delaware corporation (the "Borrower"), Steadi-Systems, Ltd., a California corporation (the "Co-Pledgor"; and together with the Borrower, the "Pledgors") and Bank One, Texas, NA, a national banking association having its principal office in Chicago, Illinois, in its capacity as administrative agent (the "Agent") for the LC Issuer and the Lenders party to the Credit Agreement referred to below. PRELIMINARY STATEMENT The Borrower, the Agent, the Documentation Agent, Co-Lead Arrangers, the LC Issuer and the Lenders party thereto are entering into a Credit Agreement dated the date hereof (as the same may be amended, restated or modified from time to time, the "Credit Agreement"). The Pledgors are entering into this Pledge and Security Agreement (as it may be amended, restated or modified from time to time, the "Pledge Agreement") in order to induce the Lenders and the LC Issuer to enter into and extend credit to the Borrower under the Credit Agreement. ACCORDINGLY, the Pledgors and the Agent, on behalf of the LC Issuer and the Lenders, hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Terms Defined in Credit Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement. 1.2. Terms Defined in Texas Uniform Commercial Code. Terms defined in the Texas Uniform Commercial Code which are not otherwise defined in this Pledge Agreement are used herein as defined in the Texas Uniform Commercial Code as in effect from time to time. 1.3. Definitions of Certain Terms Used Herein. As used in this Pledge Agreement, in addition to the terms defined in the Preliminary Statement, the following terms shall have the following meanings: "Article" means a numbered article of this Pledge Agreement, unless another document is specifically referenced. "Capital Stock" means, as to any Person, the equity interests in such Person, including, without limitation, the shares of each class of capital stock in any Person that is a corporation, each class of partnership interest (including, without limitation, general, limited and preference units) in 2 any Person that is a partnership, and each class of member interest in any Person that is a limited liability company and any and all warrants to purchase any of the foregoing. "Collateral" means all of the following, whether now owned or existing or hereafter arising or acquired as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations: (a) the Pledged Stock and the certificates representing the Pledged Stock and any interest of the Pledgors or the Co-Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Stock, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Stock; (b) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock or other equity securities of any issuer of the Pledged Stock from time to time acquired by the Pledgors in any manner (which shares and other securities shall be deemed to be part of the Pledged Stock), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of the Pledgors in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; (c) to the extent not covered by clauses (a) and (b) above, all Proceeds of any or all of the foregoing Collateral. "Control" shall have the meaning set forth in Article 8 of the Texas Uniform Commercial Code as in effect from time to time. "Domestic Subsidiaries" means all Subsidiaries of the Pledgors and the Co-Pledgor organized under the laws of the United States of America or a State thereof and shall include those Subsidiaries set forth on Schedule 1 attached hereto, as the same may be amended or supplemented from time to time. "Investment Property" shall have the meaning set forth in the Texas Uniform Commercial Code as in effect from time to time. "Pledged Stock" means all Capital Stock in the Borrower's or the Co-Pledgor's Domestic Subsidiaries and 65% of the Borrower's Capital Stock in Daisytek (Canada) Inc., an Ontario company, and shall include the shares of Capital Stock listed on Schedule 1 together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by any issuer of the Pledged Stock to the Borrower or the Co-Pledgor in respect of the Pledged Stock while this Pledge Agreement is in effect. -2- 3 "Proceeds" shall have the meaning set forth in the Texas Uniform Commercial Code as in effect from time to time and, in any event, shall include, without limitation, all dividends or other income from the Collateral and all collections thereon and all distributions with respect thereto. "Section" means a numbered section of this Pledge Agreement, unless another document is specifically referenced. "Secured Obligations" is defined in the Credit Agreement. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II GRANT OF SECURITY INTEREST Each of the Borrower and the Co-Pledgor hereby pledges, assigns and grants to the Agent, on behalf of and for the ratable benefit of the LC Issuer and the Lenders and (to the extent specifically provided herein) their Affiliates, a security interest in all of their right, title and interest in and to the Collateral (whether now owned or hereafter acquired) to secure the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations. ARTICLE III REPRESENTATIONS AND WARRANTIES Each of the Borrower and the Co-Pledgor represents and warrants to the Agent, the LC Issuer and the Lenders that as of the date hereof and on the date of each Extension of Credit under the Credit Agreement: 3.1. Title, Authorization, Validity and Enforceability. Each has good and valid rights in and title to the Collateral with respect to which it has purported to grant a security interest hereunder, free and clear of all Liens (except Liens permitted under Section 6.15 of the Credit Agreement), and has full power and authority to grant to the Agent the security interest in such Collateral pursuant hereto. The execution and delivery of this Pledge Agreement has been duly authorized by proper proceedings, and this Pledge Agreement constitutes a legal, valid and binding obligation of such party and creates a first priority security interest which is enforceable against the Borrower and the Co-Pledgor, as applicable, in all now owned and hereafter acquired Collateral. 3.2. Conflicting Laws and Contracts. Neither the execution and delivery by the Pledgors of this Pledge Agreement, the creation and perfection of the security interest in the Collateral granted hereunder, nor compliance with the terms and provisions hereof will violate any law, rule, regulation, -3- 4 order, writ, judgment, injunction, decree or award binding on it, the provisions of any indenture, instrument or agreement to which it is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien pursuant to the terms of any such indenture, instrument or agreement (other than any Lien of the Agent on behalf of the LC Issuer and Lenders). 3.3. No Financing Statements. No financing statement describing all or any portion of the Collateral which has not lapsed or been terminated naming it as debtor has been filed in any jurisdiction. 3.4. Pledged Stock and Other Investment Property. Schedule 1 sets forth a complete and accurate list of the Pledged Stock delivered to the Agent on the date hereof. From time to time upon the Agent's request, stock powers shall be executed in blank for each security certificate representing the Capital Stock so delivered. The Pledged Stock listed on Schedule 1 constitutes all of the issued and outstanding shares of all classes of the Capital Stock of the Domestic Subsidiaries of the Borrower and the Co-Pledgor on the date hereof and constitutes 65% of the Capital Stock of Daisytek (Canada) Inc. The remaining 35% of the Capital Stock of Daisytek (Canada) Inc. is owned by the Borrower. ARTICLE IV COVENANTS From the date of this Pledge Agreement, and thereafter until this Pledge Agreement is terminated (except as otherwise permitted by the Credit Agreement): 4.1. General. 4.1.1. Taxes. The Pledgors will pay when due all taxes, assessments and governmental charges and levies upon the Collateral, except those which are being contested in good faith by appropriate proceedings and with respect to which no Lien exists. 4.1.2. Notification of Default. The Pledgors will give prompt notice in writing to the Agent and the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which might materially and adversely affect the Collateral. 4.1.3. Financing Statements and Other Actions; Defense of Title. The Pledgors will execute and deliver to the Agent all financing statements and other documents and take such other actions as may from time to time be requested by the Agent in order to maintain a first perfected security interest in and, in the case of Investment Property constituting Collateral, Control of, the Collateral. The Pledgors will take any and all actions necessary to defend title -4- 5 to the Collateral against all persons and to defend the security interest of the Agent in the Collateral and the priority thereof against any Lien not expressly permitted hereunder. 4.1.4. Disposition of Collateral. The Pledgors shall not sell, lease or otherwise dispose of the Collateral. 4.1.5. Liens. The Pledgors will not create, incur, or suffer to exist any Lien on the Collateral except the security interest created by this Pledge Agreement. 4.1.6. Other Financing Statements. The Pledgors authorize the Agent and any Lender to file financing statements covering the Collateral. The Pledgors will not sign or authorize the signing on its behalf of any financing statement naming it as debtor covering all or any portion of the Collateral. 4.2. Delivery of Collateral. All certificates or instruments representing or evidencing Collateral shall from time to time be delivered to and held by or on behalf of the Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by the Borrower's or the Co-Pledgor's endorsement, where necessary, or duly executed stock powers or other appropriate instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. 4.3. Stock and Other Ownership Interests. 4.3.1. Changes in Capital Structure of Issuers. Neither the Borrower nor the Co-Pledgor will (i) permit or suffer any of its Subsidiaries to dissolve, or liquidate, retire or issue any Capital Stock, or reduce its capital or merge or consolidate with any other entity, or (ii) vote any of the Collateral in favor of any of the foregoing. 4.3.2. Issuance of Additional Securities. Neither the Borrower nor the Co-Pledgor will issue any Capital Stock or other ownership interests, any right to receive the same or any right to receive earnings. 4.3.3. Registration of Pledged Stock and other Investment Property. After the occurrence of a Default or Unmatured Default, the Pledgors will permit any registrable Collateral to be registered in the name of the Agent or its nominee at any time at the option of the Agent or the Required Lenders. 4.3.4. Exercise of Rights in Pledged Stock and other Investment Property. The Pledgors will permit the Agent or its nominee at any time after the occurrence of a Default, without notice, to exercise all voting and corporate rights relating to the Collateral, including, without limitation, exchange, subscription or any other rights, privileges, or options pertaining to any Capital Stock or other ownership interests or Investment Property in or of a -5- 6 corporation, partnership, joint venture or limited liability company constituting Collateral as if it were the absolute owner thereof. ARTICLE V DEFAULT 5.1. Acceleration and Remedies. Upon the occurrence and during the continuation of a Default under the Credit Agreement, the Agent may exercise any or all of the following rights and remedies: 5.1.1. Those rights and remedies provided in this Pledge Agreement, the Credit Agreement, or any other Loan Document, provided that this Section 5.1.1 shall not be understood to limit any rights or remedies available to the Agent and the Lenders prior to a Default. 5.1.2. Those rights and remedies available to a secured party under the Texas Uniform Commercial Code (whether or not the Texas Uniform Commercial Code applies to the affected Collateral) as in effect from time to time or under any other applicable law (including, without limitation, any law governing the exercise of a bank's right of setoff or bankers' lien) when a debtor is in default under a security agreement. 5.1.3. Without notice, except as specifically provided in Section 8.1 of this Pledge Agreement or elsewhere herein, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. 5.1.4. The Agent may cause any or all of the Collateral held by it to be transferred into the name of the Agent or the name or names of the Agent's nominee or nominees. 5.1.5. The Agent may exercise or cause to be exercised all voting rights and corporate powers in respect of the Collateral. 5.1.6. The Pledgors hereby acknowledge and confirm that the Agent may be unable to effect a public sale of any or all of the Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers who will be obligated to agree, among other things, to acquire any shares of the Collateral for their own respective accounts for investment and not with a view to distribution or resale thereof. The Pledgors further acknowledge and confirm that any such private sale may result in prices or other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agree that any such private sale shall be deemed to have -6- 7 been made in a commercially reasonable manner, and the Agent shall be under no obligation to take any steps in order to permit the Collateral to be sold at a public sale. Agent shall be under no obligation to delay a sale of any of the Collateral for any period of time necessary to permit any issuer thereof to register such Collateral for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws. 5.1.7. On any sale of the Collateral, the Agent is hereby authorized to comply with any limitation or restriction with which compliance is necessary, in the view of the Agent's counsel, in order to avoid any violation of applicable law or in order to obtain any required approval of the purchaser or purchasers by any applicable governmental authority. 5.2. Obligations Upon Default. Upon the request of the Agent after the occurrence of a Default, the Pledgors will: 5.2.1. Assembly of Collateral. Assemble and make available to the Agent the Collateral and all records relating thereto at any place or places specified by the Agent. 5.2.2. Secured Party Access. Permit the Agent, by the Agent's representatives and agents, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral. ARTICLE VI WAIVERS, AMENDMENTS AND REMEDIES 6.1. Waivers, Remedies. No delay or omission of the Agent, the LC Issuer or any Lender to exercise any right or remedy granted under this Pledge Agreement shall impair such right or remedy or be construed to be a waiver of any Default or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Pledge Agreement whatsoever shall be valid unless in writing signed by the Agent with the concurrence or at the direction of the Lenders required under Section 8.2 of the Credit Agreement and then only to the extent in such writing specifically set forth. All rights and remedies contained in this Pledge Agreement or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Secured Obligations have been paid in full. 6.2. Power of Attorney. The Pledgors hereby irrevocably constitute and appoint the Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the name of the Pledgors or in its own name, when a Default exists, to take any and all action and to execute any and all documents and instruments which the Agent at any time and from time to time deems necessary or desirable to accomplish the purposes of this Pledge Agreement and, without limiting the generality of the foregoing, the Pledgors hereby -7- 8 give the Agent the power and right on their behalf and in their own name to do any of the following, without notice to or the consent of either of them: 6.2.1. to demand, sue for, collect, or receive in the name of the Pledgors, or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title, or any other instruments for the payment of money under the Collateral or any policy of insurance; 6.2.2. to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral; 6.2.3. (A) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Collateral; (B) to sign and endorse any assignments, proxies, stock powers, verifications, notices and other documents relating to the Collateral; (C) to commence and prosecute any suit, action, or proceeding at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (D) to defend any suit, action, or proceeding brought against the Pledgors or either of them with respect to any Collateral; (E) to settle, compromise, or adjust any suit, action, or proceeding described above and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; (F) to exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization, or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any committee, depositary, transfer agent, registrar, or other designated agency upon such terms as the Agent may determine; (G) to add or release any guarantor, endorser, surety, or other party to any of the Collateral or the Secured Obligations; (H) to insure, and to make, settle, compromise, or adjust claims under any insurance policy covering, any of the Collateral; and (I) to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do, at the Agent's option and Borrower's or the Co-Pledgor's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve, or realize upon the Collateral and the Agent's security interest therein. This power of attorney is a power coupled with an interest and shall be irrevocable. The Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges, and options expressly or implicitly granted to the Agent in this Pledge Agreement, and shall not be liable for any failure to do so or any delay in doing so. THE AGENT SHALL NOT BE LIABLE FOR ANY ACT OR OMISSION OR FOR ANY ERROR OF JUDGMENT OR ANY MISTAKE OF FACT OR LAW IN ITS INDIVIDUAL CAPACITY OR IN ITS CAPACITY AS ATTORNEY-IN-FACT EXCEPT ACTS OR OMISSIONS RESULTING FROM ITS WILLFUL MISCONDUCT. This power of attorney is conferred on the Agent solely to protect, preserve, and realize upon its security interest in the Collateral. The Agent shall not be responsible -8- 9 for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve, or maintain any security interest or lien given to secure the Collateral. 6.3. Setoff; Property Held by Secured Party. Following the occurrence and during the continuation of a Default, the Agent shall have the right to set off and apply against the Secured Obligations, at any time and without notice to the Pledgors, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from the Agent to Borrower or any Loan Party. As additional security for the Secured Obligations, Borrower hereby grants the Agent a security interest in all money, instruments, and other property of Borrower now or hereafter held by the Agent, including, without limitation, property held in safekeeping. In addition to the Agent's right of setoff and as further security for the Secured Obligations, Borrower hereby grants the Agent a security interest in all deposits (general or special, time or demand, provisional or final) and other accounts of Borrower now or hereafter deposited with or held by the Agent and all other sums at any time credited by or owing from the Agent to Borrower. The rights and remedies of the Agent hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Agent may have. 6.4. Assignment by Secured Party. The Agent may from time to time assign the Secured Obligations and any portion thereof and/or the Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of the Agent under this Pledge Agreement in relation thereto. ARTICLE VII PROCEEDS 7.1. Application of Proceeds. The proceeds of the Collateral shall be applied by the Agent to payment of the Secured Obligations in the following order unless a court of competent jurisdiction shall otherwise direct: (a) FIRST, to payment of all costs and expenses of the Agent (including reasonable attorneys fees) incurred in connection with the collection and enforcement of the Secured Obligations or of the security interest granted to the Agent pursuant to this Pledge Agreement; (b) SECOND, to payment of that portion of the Secured Obligations constituting accrued and unpaid interest and fees, pro rata among the Agent, LC Issuer, Lenders and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (c) THIRD, to payment of the principal of the Secured Obligations and the net early termination payments and any other Rate Management Obligations then due and unpaid -9- 10 from the Borrower to any of the Lenders or their Affiliates, pro rata among the Lenders and their Affiliates in accordance with the amount of such principal and such net early termination payments and other Rate Management Obligations then due and unpaid owing to each of them; (d) FOURTH, to payment of any Secured Obligations (other than those listed above) pro rata among those parties to whom such Secured Obligations are due in accordance with the amounts owing to each of them; and (e) FIFTH, the balance, if any, after all of the Secured Obligations have been satisfied, shall be deposited by the Agent into the Borrower's general deposit account with the Agent. ARTICLE VIII GENERAL PROVISIONS 8.1. Notice of Disposition of Collateral. The Pledgors hereby waive notice of the time and place of any public sale or the time after which any private sale or other disposition of all or any part of the Collateral may be made. To the extent such notice may not be waived under applicable law, any notice made shall be deemed reasonable if sent to the Borrower or the Co-Pledgor, addressed as set forth in Article IX hereof, at least ten days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made. 8.2. Secured Party Performance of Debtor Obligations. Without having any obligation to do so, the Agent may perform or pay any obligation which the Borrower or the Co-Pledgor has agreed to perform or pay in this Pledge Agreement and the Borrower or the Co-Pledgor shall reimburse the Agent for any amounts paid by the Agent pursuant to this Section 8.2. The Borrower's and Co-Pledgor's obligation to reimburse the Agent pursuant to the preceding sentence shall be payable on demand. 8.3. Authorization for Secured Party to Take Certain Action. The Pledgors irrevocably authorize the Agent at any time and from time to time in the sole discretion of the Agent and appoints the Agent as its attorney-in-fact (i) to execute on behalf of the Borrower and the Co-Pledgor as debtor and to file financing statements necessary or desirable in the Agent's sole discretion to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (ii) to indorse and collect any cash proceeds of the Collateral following the occurrence of a Default, (iii) to file a carbon, photographic or other reproduction of this Pledge Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (iv) to apply the proceeds of any Collateral received by the Agent to the Secured Obligations as provided in Article VII, and (v) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically -10- 11 permitted hereunder), and the Borrower and the Co-Pledgor agree to reimburse the Agent on demand for any payment made or any expense incurred by the Agent in connection therewith, provided that this authorization shall not relieve the Borrower or the Co-Pledgor of any of its obligations under this Pledge Agreement or under the Credit Agreement. 8.4. Specific Performance of Certain Covenants. The Pledgors acknowledge and agree that a breach of any of the covenants contained in Section 4.1 will cause irreparable injury to the Agent and the Lenders, that the Agent and Lenders have no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of the Agent or the Lenders to seek and obtain specific performance of other obligations of the Pledgors contained in this Pledge Agreement, that the covenants of the Pledgors contained in Section 4.1 shall be specifically enforceable against the Pledgors. 8.5. Dispositions Not Authorized. Except as otherwise permitted by the Credit Agreement, the Pledgors are not authorized to sell or otherwise dispose of the Collateral, and notwithstanding any course of dealing between the Borrower and the Agent or other conduct of the Agent, no authorization to sell or otherwise dispose of the Collateral shall be binding upon the Agent or the Lenders unless such authorization is in writing signed by the Agent with the consent or at the direction of the Required Lenders. 8.6. Benefit of Agreement. The terms and provisions of this Pledge Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent, the LC Issuer and the Lenders and their respective successors and assigns, except that the Pledgors shall not have the right to assign their rights or delegate their obligations under this Pledge Agreement or any interest herein, without the prior written consent of the Agent. 8.7. Survival of Representations. All representations and warranties of the Pledgors contained in this Pledge Agreement shall survive the execution and delivery of this Pledge Agreement. 8.8. Taxes and Expenses. Any taxes (including income taxes) payable or ruled payable by Federal or State authority in respect of this Pledge Agreement shall be paid by the Borrower or the Co-Pledgor, together with interest and penalties, if any. Subject to the terms of the Credit Agreement, the Borrower shall reimburse the Agent for any and all out-of-pocket expenses and internal charges (including reasonable attorneys', auditors' and accountants' fees and reasonable time charges of attorneys, paralegals, auditors and accountants who may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, execution, delivery, administration, collection and enforcement of this Pledge Agreement and in the audit, analysis, administration, collection, preservation or sale of the Collateral. Any and all costs and expenses incurred by the Pledgors in the performance of actions required pursuant to the terms hereof shall be borne solely by the Pledgors. -11- 12 8.9. Headings. The title of and section headings in this Pledge Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Pledge Agreement. 8.10. Termination. This Pledge Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until (i) the Credit Agreement has terminated pursuant to its express terms and (ii) all of the Secured Obligations have been indefeasibly paid and performed in full and no commitments of the Agent or the Lenders which would give rise to any Secured Obligations are outstanding. 8.11. CHOICE OF LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 8.12. Distribution of Reports. The Borrower authorizes the Agent, as the Agent may elect in its sole discretion, to discuss with and furnish to its affiliates and to the Lenders or to any other person or entity having an interest in the Secured Obligations (whether as a guarantor, Borrower of collateral, participant or otherwise) all financial statements, audit reports and other information pertaining to the Borrower and its Subsidiaries whether such information was provided by the Borrower or prepared or obtained by the Agent. Neither the Agent nor any of its employees, officers, directors or agents makes any representation or warranty regarding any audit reports or other analyses of the Borrower's and its Subsidiaries' condition which the Agent may in its sole discretion prepare and elect to distribute, nor shall the Agent or any of its employees, officers, directors or agents be liable to any person or entity receiving a copy of such reports or analyses for any inaccuracy or omission contained in or relating thereto. 8.13. Indemnity. The Borrower hereby agrees to indemnify the Agent and the Lenders, and their respective successors, assigns, agents and employees, from and against any and all liabilities, damages, penalties, suits, costs, and expenses of any kind and nature (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto) imposed on, incurred by or asserted against the Agent or the Lenders, or their respective successors, assigns, agents and employees, in any way relating to or arising out of this Pledge Agreement, or the purchase, acceptance, rejection, ownership, delivery, possession, use, operation, condition, sale, return or other disposition of any Collateral. 8.14. ENTIRE AGREEMENT. THIS AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES -12- 13 HERETO. The provisions of this Pledge Agreement may be amended or waived only by an instrument in writing signed by the parties hereto. ARTICLE IX NOTICES 9.1. Sending Notices. Any notice required or permitted to be given under this Pledge Agreement shall be sent (and deemed received) in the manner and to the addresses set forth in Article 13.1 of the Credit Agreement. For purposes of this Pledge Agreement, the Co-Pledgor's notice address shall be the same as the Borrower's as set forth in the Credit Agreement. 9.2. Change in Address for Notices. Each of the Borrower, the Co-Pledgor, the Agent and the Lenders may change the address for service of notice upon it by a notice in writing to the other parties. ARTICLE X THE AGENT Bank One, Texas, NA has been appointed Agent for the Lenders hereunder pursuant to Article 10 of the Credit Agreement. It is expressly understood and agreed by the parties to this Pledge Agreement that any authority conferred upon the Agent hereunder is subject to the terms of the delegation of authority made by the Lenders to the Agent pursuant to the Credit Agreement, and that the Agent has agreed to act (and any successor Agent shall act) as such hereunder only on the express conditions contained in such Article 10. Any successor Agent appointed pursuant to Article 10 of the Credit Agreement shall be entitled to all the rights, interests and benefits of the Agent hereunder. [The Remainder of This Page Intentionally Left Blank] -13- 14 IN WITNESS WHEREOF, the Borrower, Co-Pledgor and the Agent have executed this Pledge Agreement as of the date first above written. BORROWER: DAISYTEK, INCORPORATED By: /s/ Ralph Mitchell ------------------------------------ Name: Ralph Mitchell Title: Executive Vice President-Finance CO-PLEDGOR: STEADI-SYSTEMS, LTD. By: /s/ Ralph Mitchell ------------------------------------ Name: Ralph Mitchell Title: Executive Vice President-Finance AGENT: BANK ONE, TEXAS, NA By: /s/ Katherine M. Turner ------------------------------------ Name: Katherine M. Turner Title: First Vice President [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 15 Schedule 1
Other States # of Shares State of Qualified to # of Auth. Issued/ Name Incorp. do Business Shares Pledged Name of Stockholder - ---- ------- ----------- ------ ------- ------------------- Steadi-Systems, Ltd. CA None 15,000 8,820 Daisytek, Inc. Steadi-Systems New York, NY None 200 200 Steadi-Systems, Ltd. Ltd. Steadi-Systems Miami, Inc. FL None 200 200 Steadi-Systems, Ltd. The Tape Company, Inc. IL None 10,000 1 Daisytek, Incorporated The Tape Company, Inc. GA None 10,000 1 Daisytek, Incorporated The Tape Company, Inc. PA None 10,000 1 Daisytek, Incorporated Tape Distributors of Texas, TX None 10,000 1 Daisytek, Incorporated Inc. Tape Distributors of MN None 10,000 1 Daisytek, Incorporated Minnesota, Inc. Daisytek Latin America, Inc. FL None 100 100 Daisytek, Incorporated Arlington Industries, Inc. DE CA, FL, GA, 100 100 Daisytek, Incorporated IL, NJ Virtual Demand, Inc. DE TX 100 100 Daisytek, Incorporated Tapebargains.com, Inc. DE IL 100 100 Daisytek, Incorporated B.A. Pargh Company, Inc. DE TN, TX 100 100 Daisytek, Incorporated Business Supplies DE TX, TN 100 100 Daisytek, Incorporated Distributors, Inc. Daisytek Canada, Inc. Canada None 3,150,000 2,047,506(1) Daisytek, Incorporated
- ---------- (1) Represents the number of issued shares pledged. EX-10.8 9 d83940ex10-8.txt SECURITY AGREEMENT DATED DECEMBER 18, 2000 1 Exhibit 10.8 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Security Agreement") is entered into as of December 18, 2000 by and among DAISYTEK, INCORPORATED, a Delaware corporation (the "Borrower") and its domestic subsidiaries who are signatories hereto (the Borrower and such subsidiaries, together with any other entity that may become a party hereto as provided herein, the "Grantors") and Bank One, Texas, NA, a national banking association having its principal office in Dallas, Texas, in its capacity as administrative agent (the "Agent") for the LC Issuer and the lenders party to the Credit Agreement referred to below. PRELIMINARY STATEMENT The Borrower, Daisytek International Corporation, a Delaware corporation, the Agent, as a Lender and as LC Issuer, the Syndication Agent, the Documentation Agent, and the other Lenders are entering into a Credit Agreement dated the date hereof (as it may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). The Grantors are entering into this Security Agreement (as it may be amended restated, supplemented or otherwise modified from time to time, the "Security Agreement") in order to induce the Lenders and the LC Issuer to enter into and extend credit to the Borrower under the Credit Agreement. ACCORDINGLY, the Borrower and the Agent, on behalf of the Lenders and the LC Issuer, hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Terms Defined in Credit Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement. 1.2. Terms Defined in Texas Uniform Commercial Code. Terms defined in the Texas Uniform Commercial Code which are not otherwise defined in this Security Agreement are used herein as defined in the Texas Uniform Commercial Code as in effect from time to time. 1.3. Definitions of Certain Terms Used Herein. As used in this Security Agreement, in addition to the terms defined in the Preliminary Statement, the following terms shall have the following meanings: "Accounts" means all rights to payment for goods sold or leased or services rendered by the Grantors, whether or not earned by performance, together with all security interests or other security Page 1 2 held by or granted to the Grantors to secure such rights to payment and shall include without limitation an "account" as such term is defined in the UCC. "Article" means a numbered article of this Security Agreement, unless another document is specifically referenced. "Chattel Paper" means any writing or group of writings which evidences both a monetary obligation and a security interest in or a lease of specific goods and shall include without limitation "chattel paper" as such term is defined in the UCC. "Collateral" means all Accounts, Chattel Paper, Documents, General Intangibles, Instruments, and Inventory, wherever located, in which the Grantors now have or hereafter may acquire any right or interest, and the proceeds, insurance proceeds and products thereof, together with all books and records, customer lists, credit files, computer files, programs, printouts and other computer materials and records related thereto. "Default" means an event described in Section 5.1. "Documents" means all documents of title and goods evidenced thereby, including without limitation all bills of lading, dock warrants, dock receipts, warehouse receipts and orders for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. "Exhibit" refers to a specific exhibit to this Security Agreement, unless another document is specifically referenced. "General Intangibles" means all intangible personal property (other than Accounts) including, without limitation, all contract rights, rights to receive payments of money, choses in action, causes of action, judgments, tax refunds and tax refund claims, patents, trademarks, trade names, copyrights, licenses, franchises, computer programs, software, goodwill, customer and supplier contracts, interests in general or limited partnerships, joint ventures or limited liability companies, reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interests in trusts, leasehold interests in real or personal property, rights to receive rentals of real or personal property and guarantee and indemnity claims, including without limitation, all "general intangibles" as such term is defined in the UCC. "Instruments" means all "instruments" as such term is defined in the UCC. "Inventory" means all goods held for sale or lease, or furnished or to be furnished under contracts of service, or consumed in the business of the Grantors, including without limitation raw materials, intermediates, work in process, packaging materials, finished goods, semi-finished inventory, scrap inventory, manufacturing supplies and spare parts, all such goods that have been returned to or repossessed by or on behalf of a Grantor, and all such goods released to a Grantor or Page 2 3 to third parties under trust receipts or similar documents and shall include "inventory" as such term is defined in the UCC. "Lenders" means the lenders party to the Credit Agreement and their successors and assigns. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, the LC Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower or any Loan Party to the Lenders or to any Lender, the Administrative Agent, the LC Issuer or any indemnified party arising under the Loan Documents. "Rate Management Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between the Borrower and any Lender or Affiliate thereof which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Receivables" means the Accounts, Chattel Paper, Documents, Instruments, and any other rights or claims to receive money which are General Intangibles or which are otherwise included as Collateral. "Section" means a numbered section of this Security Agreement, unless another document is specifically referenced. "Secured Obligations" means, collectively, (i) the Obligations and (ii) all Rate Management Obligations owing to one or more Lenders or their Affiliates. "UCC" means the Texas Uniform Commercial Code as in effect from time to time. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Page 3 4 ARTICLE II GRANT OF SECURITY INTEREST Section 2.1 Grant of Security Interest. Subject to the provisions of Section 2.2, each Grantor hereby pledges, assigns and grants to the Agent, on behalf of and for the ratable benefit of the Lenders and the LC Issuer and (to the extent specifically provided herein) their Affiliates, a security interest in all of such Grantor's right, title and interest in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations. Section 2.2 Springing Security Interest. Section 2.1 shall not become effective unless and until a Default has occurred under the Credit Agreement at which time the security interest granted pursuant to Section 2.1 shall automatically become effective and shall attach to the Collateral and shall thereafter remain in effect until the Secured Obligations have been paid or otherwise satisfied in full and the Commitment of each Lender has terminated. Section 2.3 FIFO Treatment of Repayment of Obligations. To the extent the Grantors use the Credit Extensions to purchase Collateral, repayment of the Obligations shall apply on a "first-in-first-out" basis so that the portion of the Obligations used to purchase a particular item of Collateral shall be paid in the chronological order the Grantor purchased the Collateral. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Grantor represents and warrants to the Agent, the LC Issuer and each Lenders that: 3.1. General. In the case of each Grantor, the representations and warranties set forth in Article V of the Credit Agreement as they relate to such Grantor or to the Loan Documents to which such Grantor is a party, each of which is hereby incorporated herein by reference, are true and correct, and the Agent, the LC Issuer and each Lender shall be entitled to rely on each of them as if they were fully set forth herein, provided that each reference in each such representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 3.1, be deemed to be a reference to such Grantor's knowledge. 3.2. Title, Authorization, Validity and Enforceability. The Grantor has good and valid rights in and title to the Collateral with respect to which it has purported to grant a security interest hereunder, free and clear of all Liens except for Liens permitted under Section 4.1.6, and has full power and authority to grant to the Agent the security interest in such Collateral pursuant hereto. The execution and delivery by the Grantor of this Security Agreement has been duly authorized by proper corporate proceedings, and this Security Agreement constitutes a legal, valid and binding obligation of such Grantor and creates a security interest which is enforceable against such Grantor in all now owned and hereafter acquired Collateral, in accordance with the terms set forth herein. Page 4 5 When financing statements, duly completed and signed in accordance with the requirements of the UCC, have been filed in the appropriate offices in accordance with the then applicable requirements of the UCC as in effect in each applicable jurisdiction, the Agent will have a fully perfected first priority security interest in that Collateral in which a security interest may be perfected by filing, subject only to Liens permitted under Section 4.1.6. 3.3. Conflicting Laws and Contracts. Neither the execution and delivery by the Grantor of this Security Agreement, the creation and perfection of the security interest in the Collateral granted hereunder, nor compliance with the terms and provisions hereof will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Grantor or its articles or certificate of incorporation or by-laws, the provisions of any indenture, instrument or agreement to which such Grantor is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien pursuant to the terms of any such indenture, instrument or agreement (other than any Lien of the Agent on behalf of the Lenders). 3.4. Principal Location. As of the date hereof, the Grantor's jurisdiction of incorporation, mailing address, and the location of its chief executive office and of the books and records relating to the Receivables, are disclosed in Exhibit "A"; such Grantor has no other places of business except those set forth in Exhibit "A". 3.5. Property Locations. As of the date hereof, the Inventory of the Grantor is located solely at the locations described in Exhibit "A". 3.6. No Other Names. The Grantor has not conducted business under any name except the name in which it has executed this Security Agreement. 3.7. No Default. No Default or Unmatured Default exists. 3.8. Accounts and Chattel Paper. The names of the obligors, amounts owing, due dates and other information with respect to the Accounts and Chattel Paper are and will be correctly stated in all material respects in all records of the Grantor relating thereto and in all invoices and reports with respect thereto furnished to the Agent by such Grantor from time to time. 3.9. No Financing Statements. No financing statement describing all or any portion of the Collateral which has not lapsed or been terminated naming the Grantor as debtor has been filed in any jurisdiction except as described in Exhibit "B" or except as permitted under Section 4.1.6. Page 5 6 ARTICLE IV COVENANTS From the date of this Security Agreement, and thereafter until this Security Agreement is terminated, except as otherwise permitted under the Credit Agreement, each Grantor covenants and agrees with the Agent that: 4.1. General. 4.1.1. Inspection. The Grantor will permit the Agent or any Lender, by its representatives and agents (i) to inspect the Collateral, (ii) to examine and make copies of the records of the Grantor relating to the Collateral and (iii) to discuss the Collateral and the related records of the Grantor with, and to be advised as to the same by, the Grantor's officers and employees (and, in the case of any Receivable, upon the occurrence and during the continuation of a Default, with any person or entity which is or may be obligated thereon), all at such reasonable times and intervals as the Agent or such Lender may determine, and all at the Grantor's expense. 4.1.2. Taxes. The Grantor will pay when due all taxes, assessments and governmental charges and levies upon the Collateral, except those which are being contested in good faith by appropriate proceedings and with respect to which no Lien exists. 4.1.3. Records and Reports; Notification of Default. The Grantor will maintain complete and accurate books and records with respect to the Collateral, and furnish to the Agent, with sufficient copies for each of the Lenders, such reports relating to the Collateral as the Agent shall from time to time request. The Grantor will give prompt notice in writing to the Agent and the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which might materially and adversely affect the Collateral. 4.1.4. Financing Statements and Other Actions; Defense of Title. The Grantor will execute and deliver to the Agent all financing statements and other documents and take such other actions as may from time to time be requested by the Agent in order to maintain a first perfected security interest in the Collateral, subject only to Liens permitted under Section 4.1.6. The Grantor will take any and all actions necessary to defend title to the Collateral against all persons and to defend the security interest of the Agent in the Collateral and the priority thereof against any Lien not expressly permitted hereunder. 4.1.5. Disposition of Collateral. The Grantor will comply with the provisions of Section 6.13 of the Credit Agreement. Page 6 7 4.1.6. Liens. The Grantors will not create, incur, or suffer to exist any Lien on the Collateral except (i) the security interest created by this Security Agreement and (ii) other Liens permitted pursuant to Section 6.15 of the Credit Agreement. 4.1.7. Change in Location or Name. The Grantor will not (i) have any Inventory in material value at a location other than a location specified in Exhibit "A", (ii) maintain records relating to the Receivables at a location other than at the location specified on Exhibit "A", (iii) maintain a place of business at a location other than a location specified on Exhibit "A", (iv) change its corporate name, (v) change its jurisdiction of incorporation, (vi) change its chief executive office or (vii) change its mailing address, unless the Borrower shall have given the Agent not less than 30 days' prior written notice thereof. 4.1.8. Other Financing Statements. The Grantor will not sign or authorize the signing on its behalf of any financing statement naming it as debtor covering all or any portion of the Collateral, except as permitted by Section 4.1.6. 4.1.9. Credit Agreement Covenants. In the case of each Grantor such Grantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Unmatured Default is caused by the failure to take such action or to refrain from taking such action by such Grantor or any of its Subsidiaries. 4.2. Receivables. 4.2.1. Certain Agreements on Receivables. Except as otherwise permitted in the Credit Agreement, the Grantor will not make or agree to make any discount, credit, rebate or other reduction in the original amount owing on a Receivable or accept in satisfaction of a Receivable less than the original amount thereof, except that, prior to the occurrence of a Default, the Grantor may reduce the amount of Accounts arising from the sale of Inventory in the ordinary course of business. 4.2.2. Collection of Receivables. Except as otherwise permitted in the Credit Agreement or this Security Agreement, the Grantor will collect and enforce, at the Grantor's sole expense, all amounts due or hereafter due to the Grantor under the Receivables. 4.2.3. Delivery of Invoices. The Grantor will deliver to the Agent immediately upon its request after the occurrence of a Default duplicate invoices with respect to each Account bearing such language of assignment as the Agent shall specify. 4.2.4. Disclosure of Counterclaims on Receivables. If, other than in the ordinary course of business, and during any period in which a Default has occurred and is continuing, (i) any discount, credit or agreement to make a rebate or to otherwise reduce the amount owing on a Receivable exists or (ii) if, to the knowledge of the Grantor, any dispute, setoff, claim, counterclaim or defense exists or has been asserted or threatened with respect to a Page 7 8 Receivable, the Grantor will disclose such fact to the Agent in writing in connection with the inspection by the Agent of any record of the Grantor relating to such Receivable and in connection with any invoice or report furnished by the Grantor to the Agent relating to such Receivable. 4.3. Inventory. 4.3.1. Maintenance of Goods. The Grantor will do all things necessary in the ordinary course of business to maintain, preserve, protect and keep the Inventory in good repair and working and saleable condition. 4.3.2. Insurance. The Grantor will (i) maintain fire and extended coverage insurance on the Inventory which, upon the effectiveness of the security interest granted pursuant to Section 2.2, shall contain a lender's loss payable clause in favor of the Agent, on behalf of the Lenders, and providing that said insurance will not be terminated except after at least 30 days' written notice from the insurance company to the Agent, (ii) maintain such other insurance on the Collateral for the benefit of the Agent as the Agent shall from time to time request, (iii) furnish to the Agent upon the request of the Agent from time to time the originals of all policies of insurance on the Collateral and certificates with respect to such insurance and (iv) maintain general liability insurance naming the Agent, on behalf of the Lenders, as an additional insured. 4.4. Instruments, Chattel Paper, and Documents. The Grantor will (i) deliver to the Agent immediately upon the effectiveness of the security interest granted hereunder pursuant to Section 2.2 the originals of all Chattel Paper and Instruments (if any then exist), (ii) hold in trust for the Agent upon receipt after the effectiveness of the security interest granted hereunder pursuant to Section 2.2 any Chattel Paper and Instruments constituting Collateral, (iii) and upon the Agent's request after the effectiveness of the security interest granted hereunder pursuant to Section 2.2, deliver to the Agent (and thereafter hold in trust for the Agent upon receipt and immediately deliver to the Agent) any Document evidencing or constituting Collateral. Upon the effectiveness of the security interest granted pursuant to Section 2.2, the Grantor will not create any Chattel Paper without placing a legend thereon acceptable to the Agent indicating that the Agent has a security interest interest in the Chattel Paper. 4.5. Federal, State or Municipal Claims. Upon the occurrence and during the continuation of a Default, the Grantor will notify the Agent of any Collateral which constitutes a claim against the United States government or any state or local government or any instrumentality or agency thereof, the assignment of which claim is restricted by federal, state or municipal law. Page 8 9 ARTICLE V DEFAULT 5.1 Default. The occurrence of any one or more of the following events shall constitute a Default: 5.1.1. Any representation or warranty made by or on behalf of any Grantor under or in connection with this Security Agreement shall be materially false as of the date on which made. 5.1.3. The breach by any Grantor of any of the terms or provisions of this Security Agreement which is not remedied within 10 days after the giving of written notice to the Grantor by the Agent. 5.1.4. The occurrence of any "Default" under, and as defined in, the Credit Agreement. 5.2. Acceleration and Remedies. Upon the occurrence of a Default, the Agent may, with the concurrence or at the direction of the Required Lenders, exercise any or all of the following rights and remedies, provided that the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2: 5.2.1. Those rights and remedies provided in this Security Agreement, the Credit Agreement, or any other Loan Document, provided that this Section 5.2.1 shall not be understood to limit any rights or remedies available to the Agent and the Lenders prior to a Default. 5.2.3. Those rights and remedies available to a secured party under the UCC or under any other applicable law (including, without limitation, any law governing the exercise of a bank's right of setoff or bankers' lien) when a debtor is in default under a security agreement. 5.2.4. Without notice except as specifically provided in Section 8.1 or elsewhere herein, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. In connection with such sales, the Agent shall have no obligation to clean-up or otherwise prepare the Collateral for sale. The Agent may disclaim warranties of title, quiet enjoyment, possession and the like. 5.3. Debtor's Obligations Upon Default. Upon the request of the Agent after the occurrence of a Default, provided that the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, the Grantors will: Page 9 10 5.3.1. Assembly of Collateral. Assemble and make available to the Agent the Collateral and all records relating thereto at any place or places specified by the Agent. 5.3.3. Secured Party Access. Permit the Agent, by the Agent's representatives and agents, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral. 5.4. License. Provided that the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, the Agent is hereby granted a license or other right to use, following the occurrence and during the continuance of a Default, without charge, each Grantor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, customer lists and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral, and, following the occurrence and during the continuance of a Default, the Grantor's rights under all licenses and all franchise agreements shall inure to the Agent's benefit. In addition, provided that the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, each Grantor hereby irrevocably agrees that the Agent may, following the occurrence and during the continuance of a Default, sell any of the Grantor's Inventory directly to any person, including without limitation persons who have previously purchased the Grantor's Inventory from the Grantor and in connection with any such sale or other enforcement of the Agent's rights under this Agreement, may sell Inventory which bears any trademark owned by or licensed to the Grantor and any Inventory that is covered by any copyright owned by or licensed to the Grantor and the Agent may finish any work in process and affix any trademark owned by or licensed to the Grantor and sell such Inventory as provided herein. ARTICLE VI WAIVERS, AMENDMENTS AND REMEDIES No delay or omission of the Agent or any Lender to exercise any right or remedy granted under this Security Agreement shall impair such right or remedy or be construed to be a waiver of any Default or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Security Agreement whatsoever shall be valid unless in writing signed by the Agent with the concurrence or at the direction of the Required Lenders required under Section 8.2 of the Credit Agreement and then only to the extent in such writing specifically set forth. All rights and remedies contained in this Security Agreement or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Secured Obligations have been paid in full. Page 10 11 ARTICLE VII PROCEEDS; COLLECTION OF RECEIVABLES 7.1. Lockboxes. Upon request of the Agent after the occurrence of a Default, provided that the security interest granted hereunder has become effective pursuant to Section 2.2 hereof, the each Grantor shall execute and deliver to the Agent irrevocable lockbox agreements in the form provided by or otherwise acceptable to the Agent, which agreements shall be accompanied by an acknowledgment by the bank where the lockbox is located of the Lien of the Agent granted hereunder and of irrevocable instructions to wire all amounts collected therein to a special collateral account at the Agent. 7.2. Collection of Receivables. The Agent may at any time after the occurrence of a Default, provided that the security interest granted hereunder has become effective pursuant to Section 2.2 hereof, by giving the Grantors written notice, elect to require that the Receivables be paid directly to the Agent for the benefit of the Lenders and the LC Issuer. In such event, the Grantors shall, and shall permit the Agent to, promptly notify the account debtors or obligors under the Receivables of the Lenders' interest therein and direct such account debtors or obligors to make payment of all amounts then or thereafter due under the Receivables directly to the Agent. Upon receipt of any such notice from the Agent, the Grantors shall thereafter hold in trust for the Agent, on behalf of the Lenders, all amounts and proceeds received by it with respect to the Receivables and other Collateral and immediately and at all times thereafter deliver to the Agent all such amounts and proceeds in the same form as so received, whether by cash, check, draft or otherwise, with any necessary endorsements. The Agent shall hold and apply funds so received as provided by the terms of Sections 7.3 and 7.4. 7.3. Special Collateral Account. Provided that the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, the Agent may require all cash proceeds of the Collateral to be deposited in a special non-interest bearing cash collateral account with the Agent and held there as security for the Secured Obligations. The Grantors shall have no control whatsoever over said cash collateral account. If no Default has occurred or is continuing, the Agent shall from time to time deposit the collected balances in said cash collateral account into the Borrower's general operating account with the Agent. If any Default has occurred and is continuing, the Agent may (and shall, at the direction of the Required Lenders), from time to time, apply the collected balances in said cash collateral account to the payment of the Secured Obligations whether or not the Secured Obligations shall then be due. 7.4. Application of Proceeds. The proceeds of the Collateral shall be applied by the Agent to payment of the Secured Obligations in the following order unless a court of competent jurisdiction shall otherwise direct: (a) FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Secured Obligations or of the security interest granted to the Agent pursuant to this Security Agreement; Page 11 12 (b) SECOND, to payment of that portion of the Secured Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders, the LC Issuer and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (c) THIRD, to payment of the principal of the Secured Obligations and the net early termination payments and any other Rate Management Obligations then due and unpaid from the Borrower to any of the Lenders or their Affiliates, pro rata among the Lenders, the LC Issuer and their Affiliates in accordance with the amount of such principal and such net early termination payments and other Rate Management Obligations then due and unpaid owing to each of them; (d) FOURTH, to payment of any Secured Obligations (other than those listed above) pro rata among those parties to whom such Secured Obligations are due in accordance with the amounts owing to each of them; and (e) FIFTH, the balance, if any, after all of the Secured Obligations have been satisfied, shall be deposited by the Agent into the Borrower's general operating account with the Agent. If the Agent sells any of the Collateral upon credit, the Grantors will only be credited with payments actually made by the purchaser, received by the Agent and applied to the Secured Obligations. ARTICLE VIII GENERAL PROVISIONS 8.1. Notice of Disposition of Collateral. The Grantors hereby waive notice of the time and place of any public sale or the time after which any private sale or other disposition of all or any part of the Collateral may be made. To the extent such notice may not be waived under applicable law, any notice made shall be deemed reasonable if sent to the Grantors, addressed as set forth in Article IX, at least ten days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made. 8.2. Compromises and Collection of Collateral. The Grantors and the Agent recognize that setoffs, counterclaims, defenses and other claims may be asserted by obligors with respect to certain of the Receivables, that certain of the Receivables may be or become uncollectible in whole or in part and that the expense and probability of success in litigating a disputed Receivable may exceed the amount that reasonably may be expected to be recovered with respect to a Receivable. In view of the foregoing, the Grantors agree that the Agent may at any time and from time to time, if a Default has occurred and is continuing, compromise with the obligor on any Receivable, accept in full payment of any Receivable such amount as the Agent in its sole discretion shall determine or abandon Page 12 13 any Receivable, and any such action by the Agent shall be commercially reasonable so long as the Agent acts in good faith based on information known to it at the time it takes any such action. 8.3. Secured Party Performance of Debtor Obligations. Without having any obligation to do so, the Agent may perform or pay any obligation which the Grantors have agreed to perform or pay in this Security Agreement and the Grantors shall reimburse the Agent for any amounts paid by the Agent pursuant to this Section 8.3. The Grantors' obligation to reimburse the Agent pursuant to the preceding sentence shall be a Secured Obligation payable on demand. 8.4. Authorization for Secured Party to Take Certain Action. If the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, the Grantors irrevocably authorize the Agent at any time thereafter and from time to time in the sole discretion of the Agent and appoints the Agent as its attorney in fact (i) to execute on behalf of themselves as debtor and to file financing statements necessary or desirable in the Agent's sole discretion to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (ii) to indorse and collect any cash proceeds of the Collateral, (iii) to file a carbon, photographic or other reproduction of this Security Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (iv) to enforce payment of the Receivables in the name of the Agent or the Grantors, (v) to apply the proceeds of any Collateral received by the Agent to the Secured Obligations as provided in Article VII and (vi) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder), and the Grantors agree to reimburse the Agent on demand for any payment made or any expense incurred by the Agent in connection therewith, provided that this authorization shall not relieve the Grantors of any of their obligations under this Security Agreement or under the Credit Agreement. 8.5. Specific Performance of Certain Covenants. Each Grantor acknowledges and agrees that a breach of any of the covenants contained in Sections 4.1.5, 4.1.6, 4.4, 5.3, or 8.7 or in Article VII will cause irreparable injury to the Agent and the Lenders, that the Agent and Lenders have no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of the Agent or the Lenders to seek and obtain specific performance of other obligations of the Grantors contained in this Security Agreement, that the covenants of the Grantor contained in the Sections referred to in this Section 8.5 shall be specifically enforceable against the Grantor. 8.6. Use and Possession of Certain Premises. Upon the occurrence of a Default, provided the security interest granted pursuant to Section 2.1 has become effective pursuant to Section 2.2, the Agent shall be entitled to occupy and use any premises owned or leased by any Grantor where any of the Collateral or any records relating to the Collateral are located until the Secured Obligations are paid or the Collateral is removed therefrom, whichever first occurs, without any obligation to pay the Grantor for such use and occupancy. 8.7. Dispositions Not Authorized. The Grantors are not authorized to sell or otherwise dispose of the Collateral in violation of Section 6.13 of the Credit Agreement and notwithstanding Page 13 14 any course of dealing between the Grantors and the Agent or other conduct of the Agent, no authorization to sell or otherwise dispose of the Collateral in violation of Section 6.13 of the Credit Agreement shall be binding upon the Agent or the Lenders unless such authorization is in writing signed by the Agent with the consent or at the direction of the Required Lenders. 8.8. Benefit of Agreement. The terms and provisions of this Security Agreement shall be binding upon and inure to the benefit of the Grantors, the Agent, the LC Issuer and the Lenders and their respective successors and assigns, except that the Grantors shall not have the right to assign its rights or delegate its obligations under this Security Agreement or any interest herein, without the prior written consent of the Agent. 8.9. Survival of Representations. All representations and warranties of the Grantors contained in this Security Agreement shall survive the execution and delivery of this Security Agreement. 8.10. Taxes and Expenses. Any taxes (including income taxes) payable or ruled payable by Federal or State authority in respect of this Security Agreement shall be paid by the Borrower, together with interest and penalties, if any. Any and all costs and expenses incurred by the Grantors in the performance of actions required pursuant to the terms hereof shall be borne solely by the Grantors. 8.11. Headings. The title of and section headings in this Security Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Security Agreement. 8.12. Termination. This Security Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until (i) the Credit Agreement has terminated pursuant to its express terms and (ii) all of the Secured Obligations have been indefeasibly paid and performed in full and no commitments of the Agent or the Lenders which would give rise to any Secured Obligations are outstanding. 8.13. Entire Agreement. THIS AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 8.14. CHOICE OF LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. Page 14 15 8.15. Waiver of Jury Trial. THE GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF, BASED ON OR PERTAINING TO THIS SECURITY AGREEMENT. 8.16. Indemnity. Each Grantor hereby agrees to indemnify the Agent, the LC Issuer and the Lenders, and their respective successors, assigns, agents and employees, from and against any and all liabilities, damages, penalties, suits, costs, and expenses of any kind and nature (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto) imposed on, incurred by or asserted against the Agent, the LC Issuer or the Lenders, or their respective successors, assigns, agents and employees, in any way relating to or arising out of this Security Agreement, or the manufacture, purchase, acceptance, rejection, ownership, delivery, lease, possession, use, operation, condition, sale, return or other disposition of any Collateral (including, without limitation, latent and other defects, whether or not discoverable by the Agent, the LC Issuer or the Lenders or the Grantor, and any claim for patent, trademark or copyright infringement). ARTICLE IX NOTICES 9.1. Sending Notices. Any notice required or permitted to be given under this Security Agreement shall be sent by United States mail, telegraph, telex, FAX or nationally established overnight courier service, and shall be deemed received (i) when received by the addressee if sent via the United States mail, postage prepaid, (ii) when delivered to the appropriate office or machine operator for transmission, charges prepaid, if sent by telegraph or telex (answerback confirmed in the case of telexes), (iii) when receipt thereof by the addressee is confirmed by telephone if sent by FAX and (iv) one business day after delivery to an overnight courier service, if sent by such service, in each case addressed to a Grantor at the address set forth on Exhibit "A" as its mailing address and chief executive office, and to the Agent, the LC Issuer and the Lenders at the addresses set forth in the Credit Agreement. 9.2. Change in Address for Notices. Each of the Grantors, the Agent, the LC Issuer and the Lenders may change the address for service of notice upon it by a notice in writing to the other parties. Page 15 16 ARTICLE X THE AGENT Bank One, Texas, NA has been appointed Agent for the LC Issuer, the Lenders and their Affiliates, pursuant to Article X of the Credit Agreement. It is expressly understood and agreed by the parties to this Security Agreement that any authority conferred upon the Agent hereunder is subject to the terms of the delegation of authority made by the Lenders to the Agent pursuant to the Credit Agreement, and that the Agent has agreed to act (and any successor Agent shall act) as such hereunder only on the express conditions contained in such Article X. Any successor Agent appointed pursuant to Article X of the Credit Agreement shall be entitled to all the rights, interests and benefits of the Agent hereunder. {Remainder of this Page Intentionally Left Blank} Page 16 17 IN WITNESS WHEREOF, the Grantors and the Agent have executed this Security Agreement as of the date first above written. DAISYTEK, INCORPORATED DAISYTEK LATIN AMERICA, INC. STEADI-SYSTEMS, LTD. THE TAPE COMPANY, INC. (a Georgia corporation) THE TAPE COMPANY, INC. (an Illinois corporation) THE TAPE COMPANY, INC. (a Pennsylvania corporation) TAPE DISTRIBUTORS OF MINNESOTA, INC. TAPE DISTRIBUTORS, INC., TAPE DISTRIBUTORS OF TEXAS, INC., ARLINGTON INDUSTRIES, INC., B.A. PARGH COMPANY, INC. VIRTUALDEMAND, INC. STEADI SYSTEMS MIAMI, INC. STEADI SYSTEMS NEW YORK, LTD. TAPEBARGAINS.COM, INC. BUSINESS SUPPLIES DISTRIBUTORS, INC. By: /s/ Ralph Mitchell -------------------------------- Name: Ralph Mitchell Title: Executive Vice President-Finance BANK ONE, TEXAS, NA, as Agent By: /s/ Katherine M. Turner -------------------------------- Name: Katherine M. Turner Title: First Vice President Page 17 EX-10.9 10 d83940ex10-9.txt CREDIT AGREEMENT DATED DECEMBER 18, 2000 1 EXHIBIT 10.9 [BANK ONE LETTERHEAD] AGREEMENT made the 18th day of December 2000. BETWEEN: BANK ONE, NA (ARBN 064 474 102) of Level 32, 60 Margaret Street, Sydney NSW (the `Bank') AND: DAISYTEK AUSTRALIA PTY LTD (ACN 075 675 795) (the `Borrower') WHEREBY IT IS AGREED as follows: A. The Borrower has requested that the Bank provide or continue to provide certain financial accommodation to the Borrower. B. The Bank desires to provide or to continue to provide such financial accommodation to the Borrower upon and subject to the terms and conditions of this Agreement. C. The obligations of the Borrower under this Agreement (`Guaranteed Amount') are unconditionally guaranteed by the DAISYTEK, INC and DAISYTEK INTERNATIONAL CORPORATION (the `Guarantor'). 1. INTERPRETATION 1.1 DEFINITIONS In this Agreement unless the context otherwise requires: "ACCOMMODATION LIMIT" means $15,000,000 or such other amount (Australian Fifteen Million Dollars) which both parties may agree upon in writing from time to time. "ADVANCE" means any cash advance drawn under this Facility. "THIS AGREEMENT" means this Agreement and any other agreement expressed to be supplemental to this Agreement to which the parties to this Agreement are parties and any amendments to any such document. "APPROVED PURPOSES" means the working capital needs, acquisitions and other general corporate purposes of the Borrower. "AUTHORISED OFFICER" means: (a) in relation to the Borrower, all persons designated by the Borrower as an Authorised Officer from time to time, and notified in writing by the Borrower to the Bank and; (b) in relation to the Bank, persons designated by the Bank as Authorised Officers; "BANK" means its successors and permitted assigns. "BBSY" means in respect of any day and in respect of any Interest Period the rate per centum per annum quoted on the page numbered `BBSY' of the Reuters Monitor System under the heading `Average Bid Rate' for such Interest Period at or about 10.00am (Sydney time) on such day or on the first day if such Interest Period (rounded up if necessary, to the nearest four decimal places) PROVIDED THAT if in respect of any Interest Period BBSY cannot be determined in accordance with the foregoing procedures then BBSY for that Interest Period shall mean such rate as is agreed between the Bank and the Borrower having regard to comparable indices then available and in the absence of any such agreement shall be the rate stipulated by the Bank having regard to such comparable indices. "BILL" has the same meaning as in the Bills of Exchange Act 1909 (but does not include a cheque). 1 2 "THE BORROWER" includes it successors and permitted assigns. "BUSINESS DAY" means a day on which Australian trading banks are open for a full range of banking business in the metropolitan area of Adelaide, South Australia, Melbourne, Victoria and Sydney, New South Wales. "DRAWDOWN" means an Advance made by the Bank to the Borrower pursuant to this Agreement. "DRAWDOWN DATE" means a date upon which an Advance is made by the Bank to the Borrower pursuant to this Agreement. "DRAWDOWN NOTICE" means a notice of intention of the Borrower to borrow or redraw hereunder in the form or the effect of the form in Schedule I, signed by an Authorised Officer of the Borrower and received no later than 2.00pm (Eastern Standard Time) one (1) Business Day before the proposed date of such borrowing, redrawing by the Bank. "EVENT OF DEFAULT" means any of the events designated as such in this Agreement. "FACILITY" means the commitment to provide Advances under this Agreement. "FINANCIAL YEAR" means the period from 1 July to the next following 30 June or such other period of one (1) year as the parties may agree in writing from time to time. "FIXED RATE LOAN" means a Cash Advance made under the Facility for a term or more than 180 days with an interest rate fixed for the whole of the term of such advance. "GUARANTEED AMOUNT" means the aggregate of the Accommodation Limit and the Overdraft Limit specified in Schedule VII and any other agreed amount. "GUARANTOR" means its successors and permitted assigns. "INTEREST PERIOD" means each period of each Advance being a period of not less than 1 day nor more than 180 days or such other period as the Bank and the Borrower may agree provided that such period shall not extend beyond the Repayment Date. "LOANS" means the aggregate of all Principal Moneys which are from time to time owing (including contingently owing) or unpaid to the Bank and all other monies from time to time owing (including contingently owing) and unpaid to the Bank under this Agreement. "PRINCIPAL MONEYS" means the aggregate of the Advances outstanding. "QUARTER" means each quarter period ending on the last days of March, June, September and December in each year. "REFERENCE BANKS" means such banks as may from time to time be determined by the Bank to be "Reference Banks". "REPAYMENT DATE" means with respect to Advances the Termination Date. "SECURITY INTEREST" means any security or preferential interest or arrangement of any kind in any asset or other right of or arrangement of any kind with any creditor to have its claim satisfied before other creditors with or from the proceeds of any asset, any deposit of money by way of security and any retention of title other than in the ordinary course of day to day trading conducted at arms length not including a charge or lien arising in favor of a governmental agency by operation or statute unless there is a default in payment of money secured by that charge or lien. "SUBSIDIARY" means (a) a subsidiary as defined in the Corporations Law; or 2 3 (b) in respect of a person any entity of which that person owns or controls, or is in a position to own or control whether directly or indirectly, more than fifty per cent (50%) of the capital or voting rights; and includes any subsidiary formed or acquired after the date of this Agreement. "TERMINATION DATE" means January 1, 2002. 1.2 CONSTRUCTION In this Agreement unless the context otherwise requires: (a) A reference to any Act of Parliament or to any section or provision thereof shall be read as if the words "or any statutory modification or re-enactment thereof or any statutory provision substituted therefore" were added to such reference. (b) A reference to winding up shall when applied to individuals be deemed to refer to bankruptcy. (c) A reference to an accounting term or "Australian Accounting Standards" is to be interpreted in accordance with approved accounting standards and practices under the Corporations Law, and, where not inconsistent with those accounting standards and practices generally accepted principles and practices in Australia consistently applied to a body corporate or as between bodies corporate and over time. A reference to "consolidated" in relation to accounts or other financial information, data or statistics with respect to a person means treated for accounting purposes as if accounting standards and generally accepted accounting principles for the creation of consolidated accounts applicable to a holding company and its subsidiaries applied to the person. (d) References to sub-clauses, clauses and schedules are references to sub-clauses, clauses and schedules of this Agreement. (e) References to any agreement, license or other instrument shall be deemed to include references to such agreement, license or other instrument as varied or replaced from time to time. (f) Words importing any gender shall include all other genders; words importing individuals shall include partnerships and corporations and vice versa; words importing the singular number shall include the plural and vice versa; the index (if any) any headings are for convenience and shall not affect the interpretation of this Agreement. (g) Where under or pursuant to this Agreement or anything done under this Agreement the day on or by which any act, matter or thing is to be done is not a Business Day such act, matter or thing may be done on the next succeeding day which is a Business Day (except with respect to the payment of monies payable under this Agreement which shall be made on the immediately preceding day which is a Business Day). 2. THE FACILITY 2.1 The Bank agrees to furnish to the Borrower upon and subject to the terms and conditions of this Agreement Advances up to the Accommodation Limit in aggregate. 2.2 The Facility may be made available in Australian currency . 2.3 The Borrower may request that any part of the Facility be made available either in Australian currency or in a currency other than Australian currency. In the event that the Borrower shall request that any part of the Facility be made available in a currency other than Australian currency then the Bank shall not be required to so make that part of the Facility available in a currency other than Australian currency if: 3 4 2.3.1 the aggregate amount borrowed in Australian currency and the then Australian dollar countervalue of any currency other than Australian currency (calculated as provided in Clause 2.7) borrowed or to be borrowed shall be greater than the Accommodation Limit; or 2.3.2 the Bank is not satisfied with any designated period of borrowing or risk exposure; or 2.3.3 for any reason whatsoever it is impractical for the Bank to make available any accommodation under the Facility in a currency other than Australian currency; 2.4 Where any accommodation under the Facility is denominated in a currency other than Australian currency, repayment or payment in respect of such accommodation and payments of interest thereon and fees in respect thereof shall be made by the Borrower in the currency of such accommodation. 2.5 The Borrower agrees that currency fluctuations are to the account of the Borrower and that the Borrower bears the risk for the same. 2.6 All sums falling due hereunder by way of interest or fees on a per annum percentage basis shall be calculated on the basis of a 365 day year for Advances or fees payable in Australian currency and a 360 day year for all other currencies for the actual number of days elapsed. 2.7 The Australian dollar countervalue of any amount of any currency other than Australian currency to be determined for any purpose shall, as between the Bank and the Borrower, be calculated at the Bank's spot selling rate of exchange in respect of the same on the day any such calculation is required to be made at the particular time of the day determined by the Bank. A certificate signed by the Bank stating any such rate of exchange shall be conclusive evidence of such rate of exchange. 2.8 Subject to any specific provision to the contrary and to Clause 2.9, where the Borrower comprises two or more persons they are bound jointly, each of them severally and any two or more of them jointly and severally. 2.9 The only party liable as a principal debtor under this Agreement in relation to any Advances is the party that draws the Advance. 3. ACCOMMODATION LIMIT 3.1 At any one time the aggregate amount of Advances outstanding shall not exceed the Accommodation Limit. 3.2 The Bank shall not be obliged to make any Advance to the Borrower if to so do would result in a breach of Clause 3.1. 3.3 The Bank may act upon the oral instruction of any of the following persons in the position of: Chief Financial Officer, Treasurer, Controller, Director of Cash Management of the Guarantor or Financial Controller of the Borrower. 4. PURPOSE OF THE FACILITY Utilisation of this Facility by the Borrower under this Agreement shall be used solely for the Approved Purposes and no other purpose except with the prior written approval of the Bank to do otherwise. The Bank shall not have any responsibility to ensure that it is so utilised. 5. ADVANCES 5.1 Each Advance shall be repayable at the stated maturity date established by the Bank (from an overnight basis to a period not to exceed 180 days nor the Repayment Date) at or about the time of Advance or, if no such stated maturity is established, upon demand. All Advances must be repaid by the Repayment Date. 5.2 Interest for each Advance shall be calculated to be a margin as determined by the Pricing Grid in Appendix A plus BBSY as agreed to between the Bank and the Borrower. 4 5 5.3 Interest shall be calculated daily and be paid monthly in arrears, save that the last interest payment shall be made on the Repayment Date. 5.4 The Borrower may repay an Advance in whole (but not in part) before the maturity date if, but only if: 5.4.1 The Borrower gives the Bank at least 5 business days irrevocable notice in writing of the Borrower's intention to repay; 5.4.2 The Borrower makes payment to the Bank of all moneys payable pursuant to subparagraph 5.5; 5.4.3 The Borrower makes payment on the day of payment specified in the notice. 5.5 In the event that the Borrower wishes to make early repayment of an Advance or if for any reason early repayment of an Advance is demanded by the Bank as a result of an Event of Default, the Borrower shall pay to the Bank in addition to all other moneys then payable an amount sufficient to compensate and to indemnify the Bank for and against all losses (including loss of profits), costs, damages and expenses which the Bank determines that the Bank will or is likely to suffer or incur as a result of such early repayment. The Borrower acknowledges that the Bank may endeavour to arrange or enter into an interest rate swap agreement or other commitment and may as a consequence of this (whether directly or indirectly) suffer or incur losses, costs, damages or expenses in the event that all or part of the relevant advance is repaid prior to the due date of payment. 5.6 All notices of drawdown (whether verbal or written) shall be irrevocable. The obligations of the Borrower shall be absolute and unconditional and shall not be subject to any reduction, termination, or other impairment by any set-off, deduction, counterclaim, agreement, defence, suspension, deferment, or otherwise, and the Borrower shall not be released from any obligations under the Facility, nor shall such obligations be prejudiced or affected for any reason including without limitation: 5.6.1 by any falsity, inaccuracy, insufficiency or forgery which on its face purports to be signed or authorised pursuant to a Notice of Drawdown; 5.6.2 by any failure by the Bank to inquire whether any cable, fax or telex has been inaccurately transmitted or received, or has been sent by an unauthorised person. 5.7 Any Advance may, at the discretion of the Bank, be made by a nominated subsidiary of the Bank. In such event the Bank shall be agent of the nominated subsidiary in all matters dealing with payment and recovery. 5.8 Whenever the Borrower intends to borrow or redraw any of Advance amount under the Facility, it shall give the Bank a Drawdown Notice of such intent no later than 2.00pm (Eastern Standard Time) one (1) business day before the proposed date of such borrowing or redrawing. A Drawdown Notice for an Advance shall be in the form or the effect of the form in Schedule I. The Bank's acceptance of such Drawdown notice is subject to Clause 3. 6. LETTERS OF CREDIT - SECTION DELIBERATELY LEFT BLANK 7. SBLC - SECTION DELIBERATELY LEFT BLANK 8. INTEREST The Borrower shall pay to the Bank interest on all further monies (other than interest) due and unpaid by the Borrower to the Bank under or pursuant to this Agreement at the rate of five (5%) per cent above the rate of the Bank's Overdraft Reference Rate which applies as at the date such monies become due and payable. All interest which accrues under this sub-clause during any calendar month shall become due and payable by the Borrower to the Bank on the last Business Day of that calendar month and if not then paid shall be compounded and bear interest accordingly. 9. FEES 9.1 Establishment Fee: N/A. 5 6 9.2 Line Fee: The Borrower shall pay to the Bank a line fee as determined by the Pricing Grid in Appendix A, per annum calculated in respect of each Quarter on the Accommodation Limit and be payable Quarterly in arrears. The Line Fee shall accrue from the date of signing this Agreement. 9.3 Expenses: Whether or not the Borrower shall draw down under this Agreement the Borrower shall forthwith reimburse the Bank for the charges and expenses incurred by the Bank. 9.3.1 in contemplation of or in carrying out its duties under this Agreement; 9.3.2 in connection with the negotiation preparation or execution of this Agreement or the administration of this Agreement; and 9.3.3 in connection with the enforcement of, or the exercise or purported or attempted exercise of any right, authority or remedy conferred on the Bank under or by virtue of this Agreement; including in each case the fees and expenses of legal advisers on a solicitor and own client basis and all stamp duty (including financial institutions duty and duty passed on to the Bank by any bank or financial institution) levied on or in connection with this Agreement or any payment or the receipt of any payment under this Agreement. 9.4 The Borrower shall forthwith pay any and all stamp duty (including any financial institutions or other receipts duty) registration and similar taxes or charges imposed by governmental authorities which may have been paid or may be payable or determined to be payable in connection with: 9.4.1 the execution, delivery, performance or enforcement of this Agreement; 9.4.2 on or in respect of any transaction contemplated by this Agreement; 9.4.3 any other matter or thing done or arising out of or in connection with this Agreement; or 9.4.4 any transaction related to this Agreement; and shall indemnify the Bank against any and all liabilities with respect to or resulting from delay or omission to pay such taxes or charges including any fines or penalties (save those due to delay or negligence on the part of the Bank). 9.5 Increase in Costs by Government Action If any law, regulation or regulatory requirement or judgement, order or direction of any court, tribunal or authority binding on the Bank in any jurisdiction taking effect after the date of this Agreement, or if compliance by the Bank with any direction, request or requirement (whether or not having the force of law) or any competent governmental or other authority, shall: 9.5.1 subject the Bank to taxes or change the basis of taxation of the Bank with respect to any payment under this Agreement; or 9.5.2 impose, modify or deem applicable any reserve or prudential or capital adequacy requirement or require the making or the varying of terms of any special deposits against or in respect of any assets or liabilities (whether contingent or otherwise) of, deposits with or for the account of, or loans by, the Bank; or 9.5.3 impose on the Bank any other conditions with respect to this Agreement or its obligations under this Agreement; and if, as a result of any of the foregoing: 9.5.4 the cost to the Bank of making or keeping the Facility available or otherwise performing its obligations under this Agreement or allocating its capital resources is increased; or 9.5.5 the amount payable or the effective rate of return on its overall capital to the Bank under this Agreement is reduced; or 9.5.6 the Bank makes a payment or foregoes or suffers a reduction in a return on or calculated by reference to any amount payable to it under this Agreement; then, and in each such case, the Bank shall notify the Borrower and give the Borrower the option exercisable by notice in writing to the Bank within ten (10) Business Days of receipt of notice of the Bank of: 6 7 9.5.7 paying an amount or amounts to the Bank from time to time on demand to compensate the Bank in full for any cost or reduction of the kind referred to effective from the date on which the cost or reduction is actually incurred by the Bank; or 9.5.8 terminating this Agreement on the first to occur of the end of the then current Interest Period and the Repayment Date by paying to the Bank the debt owing to it on that date with accrued interest and all other monies payable under this Agreement, together with an amount determined by the Bank to compensate it up to that date for actual cost or reduction of the type referred to. If the Borrower fails to make an election the Borrower shall be deemed to have made the election in sub-clause 5.7 of this Clause. The Bank's certificate in respect of any cost or reduction of the kind referred to shall be prima facie evidence of the incurring of any such cost or reduction, except in the case of manifest error. 9.6 Gross Up 9.6.1 If at any time any applicable law, regulation or regulatory requirement of any government authority, monetary agency or central bank requires the Borrower to make any deduction or withholding in respect of taxes from any payment due under this Agreement: (a) the sum due from the Borrower in respect of the payment shall be increased to the extent necessary to ensure that, after the making of the deduction or withholding, the Bank receives a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made; and (b) the Borrower shall indemnify the Bank against any losses or costs incurred by the Bank by reason of any failure of the Borrower to make any such deduction or withholding. The Borrower shall promptly deliver to the Bank any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any such deduction or withholding, together with any other information which the Bank may reasonably require. 9.6.2 If the Bank or any person on its behalf is required by any applicable law regulation or regulatory requirement of any government authority, monetary agency or central bank to make any deduction or withholding from, or any payment on or calculated by reference to, any amount received or receivable under this Agreement (other than taxes payable on the overall net income of the Bank) then (without prejudice to sub-clause 6.1) the Borrower shall upon demand indemnify and hold harmless the Bank against any such deduction, withholding or payment together with any related cost, loss, expense, interest, penalties or other liability by payment to each such person of such amounts and in such currencies as the person concerned may certify are required to compensate it for any such deduction, withholding or payment together with any related cost, loss, expense, interest, penalties or other liability. 9.7 GST Gross Up In this clause, 9.7, GST means a goods and services or similar tax imposed in Australia, together with any related interest, penalties, fines or other charges. 9.7.1 Notwithstanding any other provision of this Agreement: (a) in the event that GST has application to any supply made under or in connection with this agreement by a party, that party may, in addition to any amount or consideration payable under this Agreement, recover from the Borrower an additional amount on account of GST, such amount to be calculated by multiplying the relevant amount or consideration payable by the Borrower for the relevant supply by the prevailing GST rate; and/or (b) without limiting the generality of the foregoing, in the event that a party (other than the Borrower) is not entitled to an input tax credit in respect of the amount of any GST charged to or recovered from that party by any person, or payable by that party, or in respect of any amount which is recovered from that 7 8 party by way of reimbursement of GST referable directly or indirectly to any supply made under or in connection with this Agreement, that party shall be entitled to increase any amount or consideration payable by the Borrower on account of such input tax and recover from the Borrower the amount of any such increase. 9.7.2 Any additional amount on account of GST, or on account of an amount for which a party is not entitled to an input tax credit, recoverable from the Borrower pursuant to sub-paragraph 9.7.1(a) or (b) of this clause shall be calculated without any deduction or set-off of any other amount and is payable by the Borrower upon demand by the party whether such demand is by means of an invoice or otherwise. 9.7.3 Each party will use its best endeavors to determine reasonably the extent (if any) to which any amount payable by the Borrower to that party for any supply made under this Agreement may be reduced as a direct consequence of the abolition of or reduction in any taxes, duties, or statutory charges paid or payable by that party (as part of the imposition of GST) which directly relate to the supply by that party, and the amount payable by the Borrower to that party shall be reduced only to the extent of the reduction (if any) so determined by the Bank. 9.7.4 Without limiting sub-paragraph 9.7.1(a), if requested by the Borrower in writing the relevant party will provide an invoice in relation to any supply to which sub paragraph 9.7.1(a) has been applied no later than 28 days after the request is made. 10. TERMINATION OF FACILITY Subject to any agreement in writing to the contrary entered into the Bank and the Borrower the Facility shall terminate on the Termination Date and the Borrower shall pay to the Bank the Advances forthwith. 11. CONDITIONS PRECEDENT 11.1 To the Facility The granting of this Facility is subject to the Bank receiving prior to any requests of the Borrower, all of the following in the form and substance satisfactory to the Bank: 11.1.1 There exists no Event of Default 11.1.2 A copy of the Board resolution of the Borrower authorising the Borrower to enter into this Agreement and appointing authorised persons to sign all applications notices and documents to be delivered hereunder and for the operation of the Facility; and specimen signatures of the authorised persons appointed under the Board resolution referred to herein. 11.1.3 A copy of this Agreement duly executed by the Borrower. 11.1.4 A Guarantee duly executed by the Guarantors in a form and substance acceptable to the Bank. 11.1.5 A copy of the Board resolution of the Guarantor authorising the issuance of the guarantee referred to in sub clause 11.1.5, and appointing authorised persons to sign all applications notices and documents to be delivered hereunder; and specimen signatures of the authorised persons appointed under the Board resolution referred to herein. 11.2 To a Drawdown The obligation of the Bank to make any Advance is subject to the fulfillment (to the reasonable satisfaction of the Bank) of the following conditions precedent: 11.2.1 The Bank has duly received from the Borrower a request for a Drawdown in the form of a Drawdown Notice; 11.2.2 All representations give to the Bank herein are true and correct as at the date of such Advance; 11.2.3 No Event of Default exists. 8 9 11.2.4 The Bank is satisfied that there has been no material or adverse change in the financial condition of the Borrower. 11.2.5 This Agreement is valid and binding on the Borrower and is enforceable in accordance with its terms. 11.2.6 The Bank has received the items outlined in sub clause 11.1 and such other things as it may reasonably require before drawdown. 12. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Bank as follows: 12.1 The Borrower is a limited liability corporation duly incorporated and validly existing under the laws of Australia and has the corporate power to own property and assets and to carry on business as it is now being conducted. 12.2 This Agreement constitutes a legal valid and immediately binding obligation on the Borrower and is enforceable in accordance with its express terms. 12.3 Third Party Rights The execution, delivery and performance of this Agreement by the Borrower shall not violate in any respect any provision of: 12.3.1 any law or regulation or any order or decree or any government authority, agency or court of the Commonwealth of Australia or of a State or Territory thereof; 12.3.2 the Memorandum or Articles of Association of the Borrower; nor 12.3.3 any mortgage, contract or other undertaking or instrument to which the Borrower is party or which is binding upon the Borrower or any of its assets. 12.4 All authorizations, approvals, consents, licenses, filings, registrations, notarizations and other requirements or any governmental judicial or public body, authority, bureau or agency in the Commonwealth of Australia or in a State or Territory thereof now obtainable and required in connection with the execution, delivery, performance, validity or enforceability of this Agreement have been obtained or effected and are in full force and effect and true copies thereof (where applicable) have been delivered to the Bank and all fees payable in connection therewith have been paid and there has been no default in the performance of any of the terms or conditions of any of the same. 12.5 The Borrower is not in default under any agreement undertaking or instrument to which it is a party or by which it is bound, such default being material in the context of this Agreement and no event has occurred which with the giving of notice or lapse of time or both would constitute such a default. 12.6 No litigation or governmental proceeding is pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which could have a material adverse effect on the condition, financial or otherwise, of the Borrower and its Subsidiaries on a consolidated basis 12.7 The Borrower and each of its Subsidiaries have duly filed all taxation returns required to be filed (none of which are so far as the Borrower is aware likely to be the subject of any dispute) and have paid all taxation levied or assessed upon it has complied with all assessments and notices in respect thereof of have established adequate reserves for payment thereof. 12.8 The obligations of the Borrower under this Agreement rank at least equally with all other unsecured and unsubordinated indebtedness of the Borrower except any liabilities mandatory preferred by law. 12.9 In entering into this Agreement the Borrower is not acting as a trustee of any trust or settlement. 12.10 The Borrower holds all necessary licenses permits consents approvals or authorities for its business and property and use of premises and such are valid in full force and effect in all respects and are in good standing and all fees due in respect thereof have been paid and all conditions relating thereto have been duly complied with and no notice of breach or termination thereof has been given or has been or is threatened and no circumstances have arisen or are in existence to the knowledge of the Borrower which would with the 9 10 giving of notice or lapse of time or both entitle any competent authority to call into question suspend cancel or terminate the same nor are there any circumstances to indicate that equivalent licenses permits consents approvals or authorizations would not be granted to the Borrower upon renewal on no less favorable terms than exist now. 12.11 All risks usually insured against according to sound commercial practice by persons carrying on activities similar to the Borrower's are fully insured against in amounts representing the present full replacement or reinstallation values or market values and in the name of and for the benefit of the Borrower absolutely. 12.12 The Borrower is not aware of any fact or circumstance which might reasonably be expected to affect in any material adverse way the financial position, operations, aspects, profitability, or prospects of the Borrower or the business of the Borrower or the value of the property of the Borrower other than those expressly disclosed in writing to the Bank or affecting as a whole the industry in which the Borrower participates. 12.13 All information provided by or on behalf of the Borrower whether prior to or after the date of this Agreement to the Bank is true and correct and is not, by the omission of information or otherwise, misleading and all projections contained therein were arrived at after the due and careful consideration and were based on the best information available and on fair assumptions. The representations and warranties in this clause shall be deemed to be repeated by the Borrower on and as of the date of each Advance or issue of Letter of Credit or Guarantee (as the case may be) as if made with reference to the facts and circumstances existing at such date. The Borrower acknowledges that the Bank relies on the representations and warranties made or given in this Agreement by the Borrower and that the Bank is induced by each such representation and warranty to enter into this Agreement and the rights of the Bank in respect of a breach of any such representation or warranty shall not be affected by investigation (if any) made by the Bank into the affairs of the Borrower. 13. GENERAL OBLIGATIONS The Borrower hereby so far as the following shall apply to the Borrower agrees that on and from the date of this Agreement and so long as any amount payable under this Agreement is outstanding: 13.1 The Borrower shall take all action necessary to obtain and promptly renew from time to time all authorizations, approvals, consents, licenses and exemptions as may be required under any applicable law or regulation to enable the Borrower to perform its obligations under this Agreement or required for the validity or enforceability of this Agreement or any transaction contemplated by this Agreement. 13.2 The Borrower shall prepare and maintain in accordance with Australian Accounting Standards proper and adequate books and records reflecting fully all transactions entered into by the Borrower and all its Subsidiaries. 13.3 The Borrower shall promptly notify the Bank in writing of the occurrence or pending or threatened occurrence of any event which may cause or constitute a breach of any of the representations or warranties or agreements of the Borrower in this Agreement including any event which may result in a material change in the business of the Borrower and any other event which constitutes or which may with the giving of notice or lapse of time or both or other conditions constitute an Event of Default. 13.4 The Borrower shall comply with all requirements of the Corporations Law or of the corresponding legislation of any other place applicable to the Borrower. 13.5 The Borrower shall permit representatives of the Bank (or any accountants or other experts designated by it) during normal business hours and upon reasonable notice to visit and inspect and examine the books of account records (excluding company minute books), reports and other papers (and to make copies and to take extracts therefrom) of the Borrower and to discuss its affairs, finances and accounts with its officers, accountants and auditors, all at such times and as often as may be reasonably requested by the Bank but only in so far as such matters relate to information as may reasonably be required by the Bank for any purpose connected with this Agreement. 10 11 13.6 Neither the Borrower nor any of its Subsidiaries shall, except as permitted in this Agreement, without the prior written consent of the Bank create or assume or permit to exist or arise any Security Interest whatsoever over any part of its present or future undertakings, property, assets uncalled capital or revenues. The Borrower and its Subsidiaries represent and warrant to the Bank that there is no such Security Interest over any part of their present or future undertakings, property, assets, uncalled capital or revenues in existence as at the date of this Agreement. 13.7 The Borrower shall permit the Bank upon written request of the Bank to from time to time inspect the register of the members of the Borrower at the Borrower's registered office or other place or places where the register or any branch register is so kept at any time during regular business hours and the Borrower shall furnish the Bank with any information which the Bank may consider reasonably necessary to enable it to determine whether or not there has been at any time after the date of this Agreement a transfer of the effective management and control of the Borrower. 13.8 The Borrower shall furnish to the Bank copies of all such accounts, documents, reports, notices, circulars, particulars and certificates which are required to be furnished by the Borrower to any stock exchange, corporate affairs office (or analogue office) or shareholder at the same time as they are furnished to that stock exchange, corporate affairs (or analogous office) or shareholder and when requested by the Bank copies of such documents, reports, notices, circulars, particulars or certificates which are required under the provision of any trust deed to which the Borrower is a party to be furnished to the trustee thereunder from time to time. 13.9 The Borrower shall comply in all material respects with all applicable laws, rules, regulations and orders including, without limitation, paying when due all taxation, assessments and governmental charges imposed upon it or its assets and all other claims which may become a lien upon any of its property except to the extent contested in good faith and by appropriate procedure unless the loss of such contested proceedings would have a material adverse effect on the ability of the Borrower to meet its obligations under this Agreement. 13.10 The Borrower shall provide updated signatory lists and specimen signatures from time to time of persons authorised to sign documents and operate the Facility. 14. FINANCIAL INFORMATION The Borrower shall supply the Bank with all financial or other information as the Bank may reasonably request in writing always including the following without request: 14.1 As soon as possible but in any event within 120 days of the end of each Financial Year copies of the audited annual profit and loss statement and balance sheet of the Guarantor and unaudited annual profit and loss statement and balance sheet of the Borrower along with corresponding accounting workpapers prepared in accordance with Guarantor audit. 14.2 As soon as possible but in any event within 60 days of the end of each quarterly period a copy of the management accounts and of the unaudited balance sheet and profit and loss statement of the Borrower and the Guarantor. 14.3 Quarterly certificate of compliance from the Guarantors that they are not in breach of any obligations or covenants under any of their debt. All of the financial information referred to above shall be prepared in accordance with applicable accounting standards. 15. FINANCIAL COVENANTS - SECTION DELIBERATELY LEFT BLANK 16. EVENTS OF DEFAULT If any of the following events occur ("Events of Default") the Loans shall at the option of the Bank and notwithstanding any delay or previous waiver of the right to exercise such option become immediately due and payable upon written demand by the Bank to the Borrower and the obligations to the Bank under this Agreement shall be cancelled on the occurrence of any of the following events; 11 12 16.1 If the Borrower fails to pay the Loans or any part thereof or any interest thereon or any other monies payable to the Bank at or before the due time on the due date in the manner specified in this Agreement and such default continues for more than three (3) days. 16.2 If the Borrower fails to observe or perform any obligations to be observed or performed by it under this Agreement or in connection with any transaction contemplated by this Agreement and if such default shall in the opinion of the Bank be capable of prompt remedy, the Borrower shall not have remedied such default within five (5) days after notification by the Bank to the Borrower requiring remedy of such default. 16.3 Any representation or statement made or deemed to be made by the Borrower in this Agreement or in writing pursuant to this Agreement shall not be complied with or shall prove to be untrue in any respect which materially adversely affects the interests of the Bank on any date as of which it was made or deemed made. 16.4 The Borrower fails to duly pay any debt constituting principal and interest owed by it to any other persons other than the Bank with respect to borrowed money or money otherwise owed under any note, bond, or similar instrument or fails to pay when the same becomes due and payable in excess of A$35,000 and which breach or default has not been waived and, with notice or the passage of time, or both, allows the maturity of such debt to be accelerated. 16.5 If all or any part of this Agreement becomes void, illegal, invalid, unenforceable, or of limited or reduced force or effect. 16.6 Any other present or future indebtedness of the Borrower, or any Subsidiary of the Borrower for borrowed money shall become due and payable prior to the stated maturity thereof as a result of a default or any such indebtedness shall not be paid on the due date thereof or upon the expiration of any applicable grace period therefor, or the Borrower, or any Subsidiary of the Borrower shall fail to pay when due or upon the expiration of any applicable grace period therefor any amount payable by it under any present or future guarantee for borrowed money or for the purchase of fixed assets on deferred terms or any encumbrance over any assets of the Borrower, or any Subsidiary of the Borrower shall be or become enforceable. 16.7 A distress or other execution is levied or enforced upon or against any part of the property of the Borrower for an amount exceeding A$500,000.00 and is not withdrawn or satisfied within fourteen (14) days of having been so levied or enforced and the Bank considers that such event is prejudicial to the interests of the Bank under this Agreement. 16.8 If the Borrower fails (as defined in Section 459F of the Corporations Law) to comply with a statutory demand (as defined in Section 9 of the Corporations Law) or is presumed to be insolvent pursuant to Section 459C(2)(a) of the Corporations Law or admits such fact in writing. 16.9 If the Borrower is wound up or if a petition is presented or an order is made for the winding up of the Borrower and is not withdrawn within fourteen (14) days or if a resolution is passed for the winding up of the Borrower otherwise than for the purpose of reconstruction or amalgamation the terms of which have previously been approved in writing by the Bank such approval not to be unreasonably withheld. 16.10 If a receiver or receiver and manager is appointed in respect of any part of the assets of the Borrower or an encumbrancer takes possession of the undertaking or the property of the Borrower or any part thereof. 16.11 If the Borrower makes default under any charge or security in favor or any person other than the Bank. 16.12 If an inspector of all or any part of the affairs of the Borrower is appointed pursuant to the Corporations Law (or the corresponding legislation of any place applicable to the Borrower). 16.13 If the Borrower suspends payment of its debts, which expression shall have the meaning that it has for the purposes of Section 40 of the Bankruptcy Act 1966 of Australia. 16.14 If a compromise or arrangement is proposed between the Borrower and its creditors or any class of them or if an application is made to a court for an order summoning of creditors or any class of them of the Borrower. 12 13 16.15 If without the prior written consent of the Bank the Borrower reduces or attempts to reduce its capital or buy back any of its shares. 16.16 If the Borrower stops payment generally. 16.17 If the Borrower is placed under voluntary administration pursuant to Part 5.3A of the Corporations Law or causes or propose to cause a meeting of its creditors to be summoned for the purposes of placing it under administration pursuant to Part 5.3A of the Corporations Law. 16.18 If any of the property of the Borrower or the ownership of which is in the opinion of the Bank material to the ability of the Borrower to perform its obligations under this Agreement is seized or otherwise expropriated nationalized confiscated or acquired through any governmental action or intervention or if custody or control of such property shall be assumed by any government or government agency. 16.19 If any governmental or semi-governmental authorization approval license consent or agreement which the Bank deems essential to the Borrower's performance of its obligations under this Agreement is revoked terminated cancelled or withheld. 16.20 If without the prior written consent of the Bank the Memorandum or Articles of Association of the Borrower is altered in a manner which in the reasonable opinion of the Bank is material to the performance by the Borrower of its obligations under this Agreement. 16.21 If a meeting of the Borrower is called for the purpose of considering and if thought fit passing any resolution the passing of which would constitute or give rise to an Event of Default. 16.22 If in the opinion of the Bank there is a material change in the ownership control or management of the Borrower which is likely to adversely affect the ability of the Borrower to conduct its business in a proper manner and to carry out its obligations under this Agreement 16.23 If the Borrower defaults in the performance or observance of any provision of any other indebtedness to or security of the Bank and the Borrower whether the indebtedness or security is collateral to this Agreement or whether it is a separate Agreement between the Bank and the Borrower and such default continues for more than seven (7) days after the due date. 16.24 If the Borrower shall do any act deed matter or thing or knowingly or willingly permit or suffer any act deed matter or thing to be done whereby directly or indirectly the security of the Bank shall in the opinion of the Bank become deteriorated or lessened in value. 16.25 If the Borrower shall at any time not have an auditor appointed pursuant to the provision of the Corporations Law. 16.26 If the Borrower makes any material change to the business it carries on without the prior written consent of the Bank or if the Borrower ceases or threatens to cease to carry on its business. 16.27 If the Borrower suffers any material adverse change in its financial condition which may materially affect the interest of the Bank unless such change is agreed to in writing by the Bank. 16.28 The Guarantor shall cease, directly or indirectly, to own free and clear of all liens or other encumbrances, 75% of the issued share capital of the Borrower. 16.29 If any of the above events of default occur in respect of the Guarantor. 16.30 If the Guarantor withdraws its Guarantee 16.31 If either Guarantor defaults under any of its credit agreements. 17. INDEMNITIES 13 14 The Borrower indemnifies the Bank from and against all actions, suits, claims, demands, losses, liabilities, damages, costs and expenses which may be made or brought against or suffered or incurred by the Bank arising out of or in connection with: 17.1 any Event of Default or any event which with the giving of notice, the passage of time or the fulfillment of any other condition would become an Event of Default; or 17.2 any failure by the Borrower to take an Advance in accordance with any request for a Drawdown. 18. CERTIFICATIONS 18.1 Any document or thing required to be certified by the Borrower shall be certified by a director or secretary of the Borrower or in such other manner as the Bank may approve. 18.2 A certificate signed by an Authorised Officer of the Bank stating any amount or rate for the purpose of this Agreement shall in the absence of manifest error be conclusive and binding on the Borrower. 19. POWER OF ATTORNEY If any Event of Default occurs, the Borrower hereby irrevocably appoints the Bank and each Authorised Officer severally its attorney to do all acts and things which may or ought to be done by the Borrower under this Agreement and without limiting the generality of the foregoing the attorney shall have power in the name of the Borrower to sign, draw, endorse, accept or negotiate any draft, order, cheque, promissory note or other instrument of a like nature or not as the attorney shall think fit. 20. UNLAWFULNESS If: 20.1 any law, regulation or regulatory requirement or judgment, order in direction of any court, tribunal or authority binding upon the Bank in the jurisdiction in which the Bank is formed or has its principal or lending office(s) or in which may action is required to be performed by it for the purposes of this Agreement; or 20.2 any change in the interpretation of any such law, regulation or regulatory requirement or judgment, order or direction of any court, tribunal or authority by any government or governmental agency charged with the administration thereof or by a court of competent jurisdiction or compliance by the Bank with any respect or direction (whether or not having the force of law) of the Reserve Bank of Australia or any government or other governmental agency in accordance with whose requests or directions the Bank is accustomed to act; renders it unlawful for the Bank to meet any of its obligations under the Facility, the Bank shall promptly notify the Borrower and the following provisions shall apply: 20.3 the Borrower and the Bank shall negotiate for a period not exceeding thirty (30) days with a view to the Bank making arrangements to be able to meet the relevant obligations under the Facility in whole or in part in a manner which is not unlawful; and 20.4 if no such arrangements have been made by the end of such period, thereupon the Bank shall be released from its obligations under this Agreement, the Facility shall be cancelled and the Borrower shall pay to the Bank the Loans under this Agreement. 21. AUTHORITY TO DEBIT ACCOUNTS The Borrower irrevocably authorizes and directs the Bank to debit any account or accounts of the Borrower with the Bank in respect of any amounts that are from time to time due and payable under this Agreement. 22. NO WAIVER No failure to exercise and no delay in exercising on the part of the Bank any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right power or privilege 14 15 preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies of the Bank provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law or equity or legislation or regulation. 23. MERGER 23.1 The representations and warranties of the Borrower in this Agreement shall survive the execution of this Agreement and the making of any Advance or issue of Letter of Credit or Guarantee under this Agreement and shall inure for the benefit of the Bank until the Loans have been paid in full by the Borrower to the Bank. 23.2 If the liability of the Borrower to pay to the Bank any moneys payable under this Agreement becomes merged in any deed, judgment, order or other thing the Borrower shall pay interest on the amount owing from time to time under this Agreement and that fixed by or payable under that deed, judgment, order or other thing. 24. TIME OF THE ESSENCE Time shall be of the essence as regards any date or period determined under this Agreement save only to the extent that any such date or period may be altered by mutual agreement between the parties whereupon time shall be of the essence as regards such altered date or period. 25. SET OFF 25.1 the Borrower and the Bank do expressly acknowledge and agree that: 25.1.1 Where the Bank now or at any time in the future is indebted on any account to the Borrower pursuant to arrangements made between them such arrangements are hereinafter referred to as the "Arrangements". 25.1.2 Notwithstanding the Arrangements and any other provision of this Agreement (and without prejudice to the Bank's other rights and remedies) any monies (whether by way of principal interest or otherwise and whether present future actual or contingent) which the Bank may now or may hereafter owe to the Borrower under the Arrangements may be applied to and set off by the Bank as and when the same may become due and payable pro rata against the Loans as and when they become due and payable to the intent and effect: (i) first that the Bank may at any time and from time to time deduct from and retain out of the monies otherwise payable by the Bank to the Borrower pursuant to the Arrangements such amounts as the Bank may think fit and apply or set off such amounts in or toward or against satisfaction of the Loans; and (ii) secondly that upon default by the Borrower hereunder the Bank shall not be obliged to pay any monies to the Borrower under the Arrangements until the obligations of the Borrower to the Bank to pay any monies to the Bank hereunder are paid and satisfied in full. 25.2 The contractual rights of set off conferred on the Bank under sub-clause 25.1 of this clause are in addition to, and not in substitution for, any rights of set off otherwise conferred on or available to the Bank at law or in equity including (without limitation) any banker's rights of set off or right of combination of accounts or banker's lien. 25.3 For the avoidance of doubt the Bank and the Borrower further declare and acknowledge that the debts and liabilities arising or created hereunder and pursuant hereto and under and pursuant to the Arrangements are mutual debts within the meaning of Section 86(1) of the Bankruptcy Act 1966 of the Commonwealth of Australia (as incorporated in the Corporations Law) and that upon the liquidation or bankruptcy of the Borrower the provisions of Section 86 of the said Bankruptcy Act shall apply so that any sum due from the Borrower to the Bank hereunder shall be set off against any sum due from the Bank to the Borrower under the Arrangements 25.4 The Borrower acknowledges and agrees that it will not and will not attempt to prevent the Bank from exercising its rights of set off as aforesaid in the circumstances contemplated in respect thereof. 15 16 26. APPROPRIATION The Bank may appropriate any payment towards the satisfaction of any moneys due by the Borrower in any way that the Bank thinks fit and notwithstanding any purported appropriation by the Borrower 27. SUCCESSORS This Agreement shall bind the parties and their respective heirs executors administrators successors and assigns. 28. ASSIGNMENT The Bank may at any time assign the benefits and obligations on its part to be enjoyed or performed under this Agreement. The Borrower shall not assign or purport to assign any of the benefits or obligations on its part to be enjoyed or performed under this Agreement without the consent in writing of the Bank. 29. NOTICES Any notice demand consent or other communication to be given under or in connection with this Agreement shall be in writing or if it is to be given by the Bank may be signed by any Authorised Officer of the Bank or any solicitor for the time being acting for the Bank and if it is to be given by the Borrower shall be under the common seal of the Borrower or the hand of an Authorised Officer of the Borrower and may be served either: 29.1 personally; or 29.2 by posing the same by registered or certified mail to the party to whom the notice is directed at its address appearing in this Agreement or at any other address of which prior notification shall have been given by post shall be deemed to have been received by the party to whom it is addressed at the expiration of forty eight (48) hours after the same has been properly posted; or 29.3 by facsimile transmission; To the Bank: BANK ONE, NA, LEVEL 32, 60 MARGARET STREET, SYDNEY NSW 2000 Attention: MR W H GIFFEN Facsimile: (02) 9223 1823 or by other facsimile number of which prior to notification shall have been given to the sender prior to the transmission of the facsimile and any facsimile transmission shall be deemed to have been served on the date of transmission by the sender if the sender shall receive confirmation of receipt from the recipient. The original of any facsimile transmission shall be posted in accordance with sub-clause 29.2 of this clause on the date of transmission or if transmitted after usual posting hours the next Business Day. If the date of dispatch is not a Business Day in the place to which such notice, request demand or other communication is sent it shall be deemed to have been received at the commencement of business on the next following Business Day in such place. Notice given to any one or more of the persons (if more than one) comprised in the expressions "the Borrower" shall be deemed notice to all such persons. Signatures may be manuscript or may be printed or reproduced by other mechanical means. 30. OTHER DOCUMENTS The Borrower shall either before or after the making of any Advance under this Agreement do all such acts matters and things and shall sign or execute and deliver all such documents or writing or assurances as may in the reasonable opinion of the Bank be necessary or expedient to further and more effectually carry into full effect the provisions of this Agreement and for conferring the full benefit thereof upon the Bank. 16 17 31. AMENDMENT No amendment of this Agreement shall bind the parties unless made in writing expressed to be supplemental to or in substitution for the whole or part of this Agreement 32. GOVERNING LAW AND JURISDICTION This Agreement and the rights and obligations of the parties shall be governed by and construed in accordance with the laws in force in the state of NEW SOUTH WALES and the parties agree by the execution of this Agreement to irrevocably submit to the non-exclusive jurisdiction of the Courts in the state of NEW SOUTH WALES in respect of all matters arising under or in connection with this Agreement provided always that the Bank may proceed in the Courts of any Territory State or country having or claiming jurisdiction in respect of the matter which is the subject of the proceedings. 33. SEVERANCE Any provision of this Agreement which is or becomes prohibited invalid unlawful void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective and capable of severance without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 34. COUNTERPARTS This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 35. ENTIRE AGREEMENT This Agreement contains all of the terms and conditions upon which the Bank will provide financial accommodation to the Borrower and supersedes any previous of extant arrangements with respect to the same. IN WITNESS whereof the parties have signed this Agreement on the day and year hereinbefore first mentioned. SIGNED for and on behalf of BANK ONE, NA /s/ William H. Giffen /s/ Ralph Mitchell - ---------------------------------------- ------------------------- Authorised Signatory (Name/Title) Signature First Vice President THE COMMON SEAL of ) DAISYTEK AUSTRALIA PTY LTD ) was hereunto affixed in the presence of: ) /s/ Kathryn Semon - ---------------------------------------- ------------------------- Authorised Signatory (Name/Title) Signature - ---------------------------------------- ------------------------- Authorised Signatory (Name/Title) Signature 17 18 APPENDIX A FACILITY PRICING: Facility pricing to be determined by the following grid of Total Debt to EBITDA with Total Debt to EBITDA definition to match leverage covenant included in the Term Sheet. Initial pricing shall be set at Level 3. The calculation of ratios is based on the accounts of Daisytek, Inc. as stipulated in the Credit agreement between Daisytek, Inc. and various banks dated December 18, 2000. PRICING GRID
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 - -------------------------------------------------------------------------------------------------------- TOTAL DEBT/EBITDA <1.0 >=1.0<1.50 >=1.50<2.0 >=2.0<2.5 >=2.5<3.0 - -------------------------------------------------------------------------------------------------------- FACILITY FEE 20.0 bps 25.0 bps 30.0 bps 37.5 bps 37.5 bps - -------------------------------------------------------------------------------------------------------- ADVANCE MARGIN 130.0 bps 137.5 bps 157.5 bps 175.0 bps 200.0 bps - -------------------------------------------------------------------------------------------------------- ALL-IN "COST 150.0 bps 162.5 bps 187.5 bps 212.5 bps 237.5 bps - --------------------------------------------------------------------------------------------------------
bps= basis points 18 19 SCHEDULE I ADVANCE DRAWDOWN NOTICE TO: Money Market Desk BANK ONE, NA (A.R.B.N. 065 752 918) Level 4 70 Hindmarsh Square ADELAIDE SA 5000 FAX: 08 8223 2948 In accordance with Facility Agreement dated --------------- day of ------------ ("the Agreement") DAISYTEK AUSTRALIA PTY LTD (A.C.N. 075 675 795) irrevocably gives you notice of drawdown under the Facility as follows: ADVANCE 1. Date of Drawdown: -------------------- 2. Amount of Drawdown: $ ------------------ (currency and amount) 3. Tenor Required: -------------------- 4. Other requests/special conditions (if any) The Borrower by its execution of this Notice reaffirms and reconstitutes all representations and warranties or agreements of the Borrower in the Agreement as if made at the date of this Notice and certifies that no Event of Default (as defined in the Agreement) has occurred or is continuing or is likely to result from this transaction. DATED this day of SIGNED for and on behalf Daisytek Australia Pty Ltd - --------------------------- --------------------------- Authorised Signatory: Name/Title Signature - --------------------------- --------------------------- Authorised Signatory: Name/Title Signature 19 -----END PRIVACY-ENHANCED MESSAGE-----