-----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, HbZ2mUBWcQv5ETCURRl0zJcDzkeBZWQlZEhCzSQhk/nbQpoqrNmIVJH4DaixAYR5 9OxaHeI9BIktBNg5LwFbcA== 0000950134-02-010015.txt : 20020814 0000950134-02-010015.hdr.sgml : 20020814 20020814144506 ACCESSION NUMBER: 0000950134-02-010015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 1934 Act SEC FILE NUMBER: 000-25400 FILM NUMBER: 02734976 BUSINESS ADDRESS: STREET 1: 1025 CENTRAL EXPRESSWAY SOUTH STE 200 CITY: ALLEN STATE: TX ZIP: 75013 BUSINESS PHONE: 9728814700 MAIL ADDRESS: STREET 1: 1025 CENTRAL EXPRESSWAY SOUTH STE 200 CITY: ALLEN STATE: TX ZIP: 75013 10-Q 1 d99214e10vq.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 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, TEXAS 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 August 9, 2002 there were 18,394,262 shares of the registrant's common stock outstanding, excluding 1,773,905 shares of common stock in treasury. DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets (unaudited).................. 3 Condensed Consolidated Statements of Operations (unaudited) ....... 4 Condensed Consolidated Statements of Cash Flows (unaudited)........ 5 Notes to Condensed Consolidated Financial Statements (unaudited)... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................. 15 Item 6. Exhibits and Reports on Form 8-K .................................. 15 SIGNATURES...................................................................... 16
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, MARCH 31, 2002 2002 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents .................................................... $ 10,559 $ 4,147 Accounts receivable, net of allowance for doubtful accounts of $4,413 and $4,038 at June 30, 2002 and March 31, 2002, respectively ...... 255,734 175,921 Inventories, net ............................................................. 161,802 115,377 Prepaid expenses and other current assets .................................... 23,273 13,259 --------- --------- Total current assets .................................................. 451,368 308,704 --------- --------- Property and equipment, at cost: Furniture, fixtures and equipment ............................................ 48,023 38,176 Leasehold improvements ....................................................... 4,827 3,875 --------- --------- 52,850 42,051 Less accumulated depreciation and amortization ............................... (23,137) (21,245) --------- --------- Net property and equipment ............................................ 29,713 20,806 Investment in ISA .............................................................. -- 28,082 Other assets ................................................................... 10,321 1,928 Goodwill, net .................................................................. 82,487 54,870 --------- --------- Total assets .......................................................... $ 573,889 $ 414,390 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............................................ $ 63,756 $ 7,069 Trade accounts payable ....................................................... 144,641 84,718 Accrued expenses and other current liabilities ............................... 14,013 13,575 --------- --------- Total current liabilities ............................................. 222,410 105,362 --------- --------- Long-term debt, less current portion ........................................... 149,741 111,343 Other liabilities .............................................................. 2,446 1,665 Commitments and contingencies Shareholders' equity: Preferred stock, $1.00 par value; 1,000,000 shares authorized, none issued and outstanding ................................................................. -- -- Common stock, $0.01 par value; 30,000,000 shares authorized; 19,952,838 shares issued at June 30, 2002 and 19,684,711 shares issued at March 31, 2002 ...... 200 197 Additional paid-in capital ................................................... 120,918 117,946 Retained earnings ............................................................ 105,510 103,268 Accumulated other comprehensive loss ......................................... (15,644) (13,699) Treasury stock at cost, 1,773,905 at June 30, 2002 and March 31, 2002 ........ (11,692) (11,692) --------- --------- Total shareholders' equity ............................................ 199,292 196,020 --------- --------- Total liabilities and shareholders' equity ............................ $ 573,889 $ 414,390 ========= =========
The accompanying notes are an integral part of these financial statements. -3- DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, ------------------- 2002 2001 -------- -------- Net revenues ........................................................ $402,496 $272,952 Cost of revenues .................................................... 363,807 241,504 -------- -------- Gross profit ................................................ 38,689 31,448 Selling, general and administrative expenses ........................ 29,974 21,394 Depreciation and amortization ....................................... 1,970 1,255 Restructuring and nonrecurring costs ................................ 2,153 4,425 -------- -------- Income from operations ...................................... 4,592 4,374 Interest expense, net ............................................... 2,928 1,554 -------- -------- Income from continuing operations before income taxes ....... 1,664 2,820 Provision for income taxes .......................................... 267 1,084 -------- -------- Income from continuing operations before equity in net income of affiliate and minority interest ............................ 1,397 1,736 Equity in net income of affiliate and minority interest ............. 845 -- -------- -------- Income from continuing operations ........................... 2,242 1,736 Discontinued operations Income from operations of discontinued subsidiary, net of tax -- 35 -------- -------- Net income .................................................. $ 2,242 $ 1,771 ======== ======== Net income per common share: Basic Income from continuing operations ............................ $ 0.12 $ 0.12 Income from operations of discontinued subsidiary, net of tax -- -- -------- -------- Net income ................................................... $ 0.12 $ 0.12 ======== ======== Diluted Income from continuing operations ............................ $ 0.12 $ 0.11 Income from operations of discontinued subsidiary, net of tax -- -- -------- -------- Net income ................................................... $ 0.12 $ 0.11 ======== ======== Weighted average common and common share equivalents outstanding: Basic ........................................................ 17,990 14,729 Diluted ...................................................... 19,415 15,995
The accompanying notes are an integral part of these financial statements. -4- DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, -------------------- 2002 2001 -------- -------- Net cash used in operating activities from continuing operations $(19,416) $(11,460) Cash flows from investing activities: Purchases of property and equipment ........................ (808) (1,588) Acquisition of Memphis distribution assets ................. -- (10,700) Acquisitions of businesses, net of cash acquired ........... (8,124) (14,256) Increase in note receivable and other assets ............... (95) (4) -------- -------- Net cash used in investing activities .......... (9,027) (26,548) -------- -------- Cash flows from financing activities: Proceeds from lines of credit, net ......................... 34,693 30,920 Net proceeds from exercise of stock options and issuance of common stock .......................................... 954 7,370 -------- -------- Net cash provided by financing activities ...... 35,647 38,290 Effect of exchange rates on cash and cash equivalents .......... (792) 155 -------- -------- Net increase in cash and cash equivalents ...................... 6,412 437 Cash and cash equivalents, beginning of period ................. 4,147 1,971 -------- -------- Cash and cash equivalents, end of period ....................... $ 10,559 $ 2,408 ======== ======== Net cash provided by operating activities from discontinued operations .................................................. $ -- $ 4,271 Activities not affecting cash: Property and equipment acquired under capital leases ......... $ 3,422 $ 3,088
The accompanying notes are an integral part of these financial statements. -5- DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim period results are not necessarily indicative of results to be expected for the year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Daisytek International Corporation ("Daisytek" or the "Company") Annual Report on Form 10-K for the year ended March 31, 2002. The year-end consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. The income from operations of discontinued subsidiary for the three months ended June 30, 2001 is presented net of a tax expense of approximately $20,000 and includes net revenues of approximately $51.4 million. NOTE 2 -- RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, effective April 1, 2002. SFAS No. 145 rescinds SFAS No. 4 and SFAS No. 64 related to classification of gains and losses on debt extinguishment such that most debt extinguishment gains and losses will no longer be classified as extraordinary; amends SFAS No. 13 with respect to sales-leaseback transactions; and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 did not have a material impact on the Company's reported results of operations or financial position. Approximately $0.2 million of debt termination costs that would have been classified as extraordinary under the provisions of SFAS No. 4 are included in restructuring and nonrecurring costs for the quarter ended June 30, 2002. NOTE 3 -- ACQUISITION OF ISA On May 23, 2002, the Company mailed a recommended offer to shareholders of ISA International plc ("ISA"), a pan-European distributor of computer supplies, which indirectly owns 47% of Kingfield Heath Ltd. ("Kingfield Heath"), a U.K.-based wholesaler of office products. During the first quarter of fiscal 2003, Daisytek received acceptances from ISA shareholders totaling more than 90% of ISA ordinary shares and, on August 8, 2002, the Company exercised its rights under U.K. law to pursue compulsory acquisition of the remainder of the ISA ordinary shares. The Company expects to complete the acquisition of the remainder of the ISA shares during August 2002. During September 2001, Daisytek invested 8.0 million British pounds, or approximately $11.4 million, in preference shares of ISA convertible into 50% plus one share of ISA at Daisytek's option at any time over a period of five years. The preference shares earned a quarterly variable rate cumulative preferential dividend. ISA did not pay the preference dividend due to Daisytek on April 1, 2002. Failure to pay a preference dividend for more than 14 days after its due date constitutes an event of default under ISA's articles of association, unless waived by Daisytek. Daisytek had agreed to waive the outstanding payment, but this agreement to waive expired on May 6, 2002. As a result of this event of default, as of May 7, 2002, Daisytek was entitled to vote its preference shares on an as-converted basis (50% plus one share), entitling Daisytek to majority voting control and allowing the Company to appoint to the board of ISA a number of directors equivalent to 50%. Accordingly, the Company began using consolidation accounting for the investment in ISA effective May 7, 2002. -6- The aggregate purchase price of and investment in ISA is approximately $38.2 million, including cash purchases of ISA shares of approximately $4.7 million, the issuance of approximately 140,000 unregistered Daisytek common shares valued at approximately $1.9 million (based on the average Daisytek share value upon mailing of the recommended offer) in exchange for ISA shares, Daisytek's prior investment in ISA preference shares of approximately $11.4 million, funds previously advanced by Daisytek to ISA of approximately $16.7 million and transactions costs of $3.5 million. The acquisition of ISA provides the Company with access to ISA's pan-European reach and local knowledge and resulted in the recognition of approximately $26.4 million of goodwill. The following table summarizes the estimated fair value of ISA's assets acquired and liabilities assumed at the date of merger. This purchase price allocation is preliminary pending completion of appraisals and other fair value analysis of assets and liabilities.
(in thousands) Current assets........................................... $ 121,127 Property and equipment................................... 6,379 Deferred tax asset....................................... 8,624 Goodwill................................................. 26,392 Other assets............................................. 30 Current liabilities...................................... (71,229) Long-term debt........................................... (53,151) ------------ Total net assets acquired.............................. $ 38,172 ===========
The results of operations for the three months ended June 30, 2002 include the operations of ISA from May 7, 2002, based on the Company's ownership percentages during this period. Unaudited pro forma consolidated results of operations, assuming that the Company acquired 100% of ISA on April 1, 2001 follow:
THREE MONTHS ENDED JUNE 30, ------------------------- 2002 2001 ----------- ----------- Net revenues .................................. $ 458,581 $ 389,997 Net income .................................... $ 2,205 $ 124 Net income per common share - Basic ........... $ 0.12 $ 0.01 Net income per common share - Diluted ......... $ 0.11 $ 0.01
The pro forma information is not necessarily indicative of the actual results that would have been achieved had the ISA acquisition occurred for the periods presented, nor is it indicative of future results of operations. NOTE 4 -- INVESTMENT The Company indirectly owns a 47% investment in Kingfield Heath, a U.K.-based wholesaler of office products. The Company is accounting for this investment using the equity method. The investment was obtained as part of the ISA acquisition. Therefore, the Company's 47% interest in the results of operations of Kingfield Heath are included from May 7, 2002, based on the Company's ownership percentages of ISA and Kingfield Heath during this period. Summarized income statement financial information for Kingfield Heath follows (in thousands): Net revenues ............................................. $43,347 Gross profit ............................................. 9,065 Net income ............................................... 2,028
-7- NOTE 5 -- COMPREHENSIVE INCOME The Company includes currency translation adjustments and changes in the fair value of certain derivative financial instruments which qualify for hedge accounting in comprehensive income. The following table sets forth comprehensive income (in thousands):
THREE MONTHS ENDED JUNE 30, ------------------ 2002 2001 ------- ------- Net income ................................................................. $ 2,242 $ 1,771 Comprehensive income adjustments: Foreign currency translation adjustment ............................... (1,437) 1,596 Cumulative effect of adoption of SFAS 133 as of April 1, 2001, net of tax of $240 ........................................................... -- (445) Change in fair value of derivative financial instruments, net of tax of ($273) and $43 for the three months ended June 30, 2002 and 2001, respectively .......................................................... (508) 80 ------- ------- Comprehensive income ....................................................... $ 297 $ 3,002 ======= =======
NOTE 6 -- EARNINGS PER SHARE DATA The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, ------------------ 2002 2001 ------- ------- NUMERATOR: Income from continuing operations ............................. $ 2,242 $ 1,736 Income from operations of discontinued subsidiary, net of tax -- 35 ------- ------- Net income .................................................. $ 2,242 $ 1,771 ======= ======= DENOMINATOR: Denominator for basic earnings per share - Weighted average shares ..................................... 17,990 14,729 Effect of dilutive securities: Stock options ............................................... 1,425 1,266 ------- ------- Denominator for diluted earnings per share - Adjusted weighted average shares ............................ 19,415 15,995 ======= ======= Basic earnings per common share: Income from continuing operations ........................... $ 0.12 $ 0.12 Income from operations of discontinued subsidiary, net of tax -- -- ------- ------- Net income .................................................. $ 0.12 $ 0.12 ======= ======= Diluted earnings per common share: Income from continuing operations ........................... $ 0.12 $ 0.11 Income from operations of discontinued subsidiary, net of tax -- -- ------- ------- Net income .................................................. $ 0.12 $ 0.11 ======= =======
Employees and former employees exercised stock options to acquire 102,298 shares for proceeds of approximately $1.0 million during the three months ended June 30, 2002. -8- NOTE 7 -- DEBT During April 2002, Daisytek signed a $200 million senior secured debt facility expiring on April 24, 2005, which was amended and increased to $250 million during June 2002. This credit facility replaced the existing $150 million credit facility expiring on December 19, 2003. Availability under the credit facility is subject to certain borrowing base limitations, including eligible accounts receivable and inventory, as defined. Borrowings under the credit facility accrue interest, at the Company's option, at the prime rate of the lead bank plus an adjustment ranging from 0.0% to 0.75% or the LIBOR rate plus an adjustment ranging from 2.0% to 2.75%, both of which are limited by a maximum rate, as defined. The Company pays fees of 0.375% per annum on the unused portion of the credit facility. The credit facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities, including loans and payments to related parties, payment of dividends, capital expenditures, acquisitions, investments and asset sales. During July 2002, the Company's Mexican subsidiary entered into a secured revolving line of credit facility with a Mexican bank with maximum credit availability of 90.0 million Mexican pesos, or approximately $9.0 million, expiring during July 2005. Availability under the credit facility is subject to certain borrowing base limitations, as defined. The facility accrues interest at the Interbank Equilibrium Interest Rate in Mexico City plus 325 basis points. NOTE 8 -- RESTRUCTURING AND NONRECURRING COSTS Restructuring and nonrecurring costs consist of the following for the three months ended June 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED JUNE 30, ------------------- 2002 2001 ------- ------- Restructuring charges(a)............................ $ 1,998 $ -- Final PFSweb separation charges(b).................. -- 4,425 Other............................................... 155 -- ------- ------- $ 2,153 $ 4,425 ======= =======
- ---------- (a) During the third quarter of fiscal year 2002, the Company commenced a United States restructuring plan that includes (1) information technology enhancements to ensure growth in the business will be technologically supported; (2) distribution improvements and consolidation of subsidiary computer and office supplies warehouses into five new regional hub facilities in order to leverage distribution costs; and (3) centralization of certain back-office resources into a shared services organization to reduce costs and improve efficiencies. The Company incurred pre-tax charges of approximately $2.0 million during the quarter ended June 30, 2002, including $1.0 million related to warehouse and distribution initiatives, including the integration of office products at the Company's central distribution center in Memphis; $0.2 million related to the termination of employees; and $0.8 million related to other back-office improvements. (b) As part of the Company's May 2001 transaction to terminate certain transaction management services agreements between the Company and its former subsidiary PFSweb, Inc. ("PFSweb") and to purchase certain Memphis distribution assets from PFSweb, the Company recognized a pre-tax nonrecurring charge of $4.4 million. This charge included transaction costs, a separation payment and finalization of other balances between the Company and PFSweb. -9- NOTE 9 -- INCOME TAXES The provision for income taxes for the quarter ended June 30, 2002 was affected by a recovery of approximately $0.3 million of previously paid state income taxes. The income tax rate is expected to be approximately 36% for the remainder of the fiscal year, down from the prior year due to the acquisition of ISA. NOTE 10 -- SEGMENT DATA The Company currently operates in two reportable business segments - (1) computer and office supplies and (2) professional tape products. Separate financial data for each of the Company's operating segments, excluding discontinued operations, is provided below (in thousands):
THREE MONTHS ENDED JUNE 30, ------------------- 2002 2001 -------- -------- Net revenues: Computer and office supplies, excluding discontinued operations ........................................ $386,290 $254,636 Professional tape products ......................... 16,206 18,316 -------- -------- Consolidated ....................................... $402,496 $272,952 ======== ======== Operating contribution: Computer and office supplies, excluding discontinued operations ....................................... 5,771 7,917 Professional tape products ......................... 974 882 -------- -------- Consolidated ....................................... $ 6,745 $ 8,799 ======== ========
The Company's computer and office supplies segment includes certain expenses that relate to the professional tape products segment which are not allocated by management to this segment. These expenses primarily represent: (1) costs related to the Company's centralized management information, warehouse and telephone systems and (2) executive, administrative and other corporate costs. Restructuring and nonrecurring costs of $2.2 million for the three months ended June 30, 2002 and $4.4 million for the three months ended June 30, 2001 have not been allocated to the reportable segments and must be included to reconcile to the income from operations reported in the Company's consolidated financial statements. -10- 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 Condensed Consolidated Financial Statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise indicated, all references to "Daisytek," "we," "us," and "our" refer to Daisytek International Corporation, a Delaware corporation, and its direct and indirect subsidiaries, including Daisytek, Incorporated, which is Daisytek's primary operating subsidiary. References in the Report to Daisytek's fiscal year mean the twelve-month period ending on March 31 of such fiscal year. Daisytek is a leading global distributor of computer and office supplies and professional tape products. To enhance our relationship with our computer and office supplies customers worldwide, we also provide unique, value-added services such as direct marketing, merchandising and demand generation. We sell our products and services in the United States, Europe, Canada, Australia, Mexico and South America. RESULTS OF OPERATIONS Acquisition of ISA On May 23, 2002, we mailed a recommended offer to shareholders of ISA International plc ("ISA"), a pan-European distributor of computer supplies, which indirectly owns 47% of Kingfield Heath Ltd. ("Kingfield Heath"), a U.K.-based wholesaler of office products. During the first quarter of fiscal 2003, we received acceptances from ISA shareholders totaling more than 90% of ISA ordinary shares and, on August 8, 2002, we exercised our rights under U.K. law to pursue compulsory acquisition of the remainder of the ISA ordinary shares. We expect to complete the acquisition of the remainder of the ISA shares on during August 2002. We began using consolidation accounting for our investment in ISA effective May 7, 2002. Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Net Revenues. Net revenues for the quarter ended June 30, 2002 increased 47.5% to $402.5 million compared to $273.0 million for the prior year quarter. Computer and office supplies net revenues increased 51.7% for the quarter ended June 30, 2002 compared to the prior year, attributable to (1) the acquisition of ISA; (2) growth in the emerging consumer channels such as web-based resellers, drug and grocery stores, mass merchants and direct marketers; (3) growth in the international computer supplies business; and (4) the acquisitions of Digital Storage and General Stationery Supplies during fiscal year 2002. Increases were primarily volume-related. Excluding ISA, computer and office supplies revenues increased 19.2%. Within the computer and office supplies segment, domestic operations increased approximately 25.4% and international operations, in U.S. dollars and excluding ISA, increased approximately 9.5% compared to the prior year quarter. Excluding revenue from Argentina, which has been negatively impacted by a currency devaluation and general economic slowdown, international operations, in U.S. dollars and excluding ISA, increased approximately 19% compared to the prior year quarter. The computer and office supplies revenue increase for the quarter ended June 30, 2002 was partially offset by an 11.5% revenue decrease in our professional tape products segment, due to increased competition, decreases in volume and industry price decreases which continued to impact our revenues. Gross Profit. Gross profit as a percentage of net revenues was 9.6% for the quarter ended June 30, 2002 compared to 11.5% for the prior year. The decline in gross margin percentage is attributable to (1) the acquisition during the first quarter of fiscal 2002 of certain assets and liabilities of Digital Storage, which typically operates at lower gross margins than the remainder of our business; (2) the reduction in revenue in the professional tape products segment, which typically operates at higher gross margin percentages; (3) our restructuring activities; and (4) overall product mix. These factors were partially offset by a higher gross margin for ISA. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the quarter ended June 30, 2002 was $30.0 million, or 7.4% of net revenues, compared to $21.4 million, or 7.8% of net revenues, for the prior year. The decrease in SG&A as a percentage of revenues is due to (1) improvements resulting from our restructuring activities; (2) the acquisition of our Memphis distribution assets and termination of the transaction services agreement with our former subsidiary PFSweb, Inc. ("PFSweb") in May 2001, which has allowed us to operate the facility rather than pay an outsourcing service fee; and (3) the acquisition of Digital Storage during the first quarter of fiscal 2002, which operates at lower SG&A percentages than our other businesses. These factors were partially offset by a higher SG&A margin for ISA. -11- Depreciation and Amortization. Depreciation and amortization for the quarter ended June 30, 2002 was $2.0 million compared to $1.3 million for the prior year quarter. The increase is due to the acquisition of ISA and to new capital expenditures and business acquisitions since June 30, 2001. Restructuring and Nonrecurring costs. During the quarter ended June 30, 2002, we recognized pre-tax charges of (1) $2.0 million related to restructuring activities, including $1.0 million related to warehouse and distribution initiatives (including the integration of office products at our central distribution center in Memphis), $0.2 million related to the termination of employees and $0.8 million related to other back-office improvements, and (2) $0.2 million related to the write-off of unamortized debt acquisition costs. During the quarter ended June 30, 2001, we recognized charges of $4.4 million related to the acquisition of the Memphis distribution assets and the termination of certain transaction management service agreements between PFSweb and Daisytek, including transaction costs, a separation payment and finalization of other balances with PFSweb. Interest Expense, net. Interest expense increased to $2.9 million for the quarter ended June 30, 2002 compared to $1.6 million for the prior year. The increase in interest expense is primarily attributable to increases in our debt levels due to: (1) the impact of the investment in and working capital advances to ISA during fiscal year 2002 and the subsequent acquisition of ISA during fiscal year 2003; (2) the acquisitions of Digital Storage and General Stationery Supplies during fiscal year 2002; (3) the acquisition of our Memphis distribution assets during May 2001; and (4) volume growth requiring higher working capital. These increases in debt levels were partially offset by debt reductions using cash proceeds from the exercise of stock options and the completion of a private placement of common stock on December 20, 2001. Income Taxes. Our effective income tax rate was 16.0% and 38.4% for the three months ended June 30, 2002 and 2001, respectively. First quarter 2003 taxes were affected by a recovery of approximately $0.3 million of previously paid state income taxes. The income tax rate is expected to be approximately 36% for the remainder of the fiscal year, down from the prior year due to the effect of the acquisition of ISA. Equity in Net Income of Affiliate and Minority Interest. Equity in net income of affiliate and minority interest was $0.8 million for the quarter ended June 30, 2002. This includes equity method income of $1.0 million related to ISA's investment in Kingfield Heath, offset by $0.2 million related to operations of ISA owned by third parties during the quarter. Seasonality. Although historically we have experienced our greatest sequential quarter revenue growth in our fourth fiscal quarter, management has not been able to determine the specific or, if any, seasonal factors that may cause quarterly variability in operating results. As the international portion of our business grows, seasonality may become more of a factor due to holidays and work patterns in these countries. Management believes that factors that may influence quarterly variability include the overall growth in the non-paper computer supplies industry and shifts in demand for 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 quarters in relation to sequential quarter performance. DILUTION Because of the wide range of exercise prices on outstanding stock options, the number of shares included in our dilutive earnings per share calculation and the resulting diluted earnings per share could vary greatly depending on the average market price of our common stock. The following table summarizes the diluted shares outstanding at various price points using common stock outstanding at June 30, 2002 of 18,178,933.
DILUTED SHARES AVERAGE SHARE PRICE OUTSTANDING --------------------------- ----------- $12.00........................ 19,195,265 $13.00........................ 19,333,327 $14.00........................ 19,475,425 $15.00........................ 19,605,783 $16.00........................ 19,723,768 $17.00........................ 19,827,883 $18.00........................ 19,920,429
-12- LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities from continuing operations for the three months ended June 30, 2002 was $19.4 million, compared with $11.5 million for the same period in the prior year. Working capital, excluding the current portion of long-term debt and cash balances, increased to $282.2 million at June 30, 2002 from $206.3 million at March 31, 2002, attributable primarily to our acquisition of ISA, revenue growth and stocking at the two new regional distribution centers in Bakersfield, California and Albany, New York. The working capital requirements were funded primarily with proceeds from our credit facilities. Net cash used in investing activities during the three months ended June 30, 2002 was $9.0 million. Payments included cash paid for the acquisition of ISA, which was funded with proceeds from our credit facilities. Capital expenditures for the three months ended June 30, 2002 were $4.2 million, including $3.4 million acquired under a capital lease and $0.8 million funded with proceeds from our credit facilities. Proceeds from the exercise of stock options and the issuance of common shares were $1.0 million for the three months ended June 30, 2002, which were used to reduce outstanding balances under our credit facilities. Financing Activities Domestic Credit Facility. During April 2002, Daisytek signed a $200 million senior secured debt facility expiring on April 24, 2005, which was amended and increased to $250 million during June 2002. This credit facility replaced the existing $150 million credit facility expiring on December 19, 2003. Availability under the credit facility is subject to certain borrowing base limitations, including eligible accounts receivable and inventory, as defined. Borrowings under the credit facility accrue interest, at our option, at the prime rate of the lead bank plus an adjustment ranging from 0.0% to 0.75% or the LIBOR rate plus an adjustment ranging from 2.0% to 2.75%, both of which are limited by a maximum rate, as defined. We pay fees of 0.375% per annum on the unused portion of the credit facility. The credit facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities, including loans and payments to related parties, payment of dividends, capital expenditures, acquisitions, investments and asset sales. As of June 30, 2002, the outstanding balance under this credit facility was $125.4 million and, based on our borrowing base limit at June 30, 2002, $5.4 million was available for future borrowings. Foreign Credit Facilities. During March 2001, we entered into a revolving credit facility with a Canadian bank with maximum credit availability of 40.0 million Canadian dollars, or approximately $26.4 million, expiring during March 2004. Availability under the credit facility is subject to certain borrowing base limitations, as defined. For Canadian dollar borrowings, the Canadian credit facility accrues interest at the bank's prime rate plus 75 basis points. For U.S. dollar borrowings, the Canadian credit facility accrues interest at the bank's U.S. dollar base rate in New York plus 75 basis points. As of June 30, 2002, the outstanding balance under the Canadian credit facility was 29.8 million Canadian dollars, or approximately $19.7 million. We had 10.2 million Canadian dollars, or approximately $6.7 million, available for future borrowings. In December 2000, we entered into an agreement with an Australian bank for an unsecured revolving line of credit facility allowing us to borrow Australian dollars up to a maximum of 20.0 million Australian dollars, or approximately $11.3 million, as amended. The Australian credit facility, as amended, expires on January 1, 2003. The Australian credit facility accrues interest at the Australian Bill Rate plus an adjustment ranging from 142.5 basis points to 212.5 basis points depending on our financial performance. As of June 30, 2002, the outstanding balance under the Australian credit facility was 13.5 million Australian dollars, or approximately $7.6 million. We had 6.5 million Australian dollars, or approximately $3.7 million, available for future borrowings. Upon acquisition of ISA, we assumed debt of 36.5 million British pounds, or approximately $53.2 million. ISA debt balances in the U.K. at June 30, 2002 include revolving credit facilities of 19.8 million British pounds, or approximately $30.3 million. ISA also has revolving credit facilities with various European banks of 15.5 million British pounds, or approximately $23.7 million, and a term loan with a bank in Norway for 0.4 million British pounds, or approximately $0.6 million. At June 30, 2002, ISA had 5.2 million British pounds, or approximately $7.9 million, available for future borrowings under its current financing arrangements. We are planning to refinance ISA's revolving credit facilities in the UK, Norway and Sweden with three-year secured credit facilities. -13- During July 2002, our Mexican subsidiary entered into a secured revolving line of credit facility with a Mexican bank with maximum credit availability of 90.0 million Mexican pesos, or approximately $9.0 million, expiring during July 2005. Availability under the credit facility is subject to certain borrowing base limitations, as defined. The facility accrues interest at the Interbank Equilibrium Interest Rate in Mexico City plus 325 basis points. Contractual Obligations and Guarantees. Obligations under long-term debt, capital leases and non-cancelable operating leases at June 30, 2002 are as follows (in millions):
PAYMENTS DUE BY PERIOD ------------------------------------------------ LESS THAN AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS - ----------------------- ------ ------ --------- --------- ------- Long-term debt ............... $207.3 $ 61.8 $145.3 $ 0.2 $ -- Capital lease obligations .... 6.2 2.0 2.1 1.0 1.1 Operating leases ............. 44.5 10.2 15.2 9.3 9.8 ------ ------ ------ ------ ------ Total ........................ $258.0 $ 74.0 $162.6 $ 10.5 $ 10.9
In connection with the initial public offering of PFSweb, we have guaranteed or subleased to PFSweb certain operating lease obligations. Total minimum payments for these agreements are $20.6 million, including $5.7 million due in less than one year, $8.1 million due in one to three years, $5.1 million due in four to five years and $1.7 million due after five years. We do not expect to make payments under these guarantees or sublease agreements; however, if performance were required, we would seek to mitigate our exposure with lease terminations and/or subleases. FORWARD-LOOKING STATEMENTS Certain statements used in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements about the financial condition, prospects, operations and business of Daisytek are generally accompanied by words such as "anticipates," "expects," "estimates," "believes," "intends," "plans" or similar expressions. These forward-looking statements are subject to numerous risks, uncertainties and other factors, some of which are beyond the control of Daisytek that could cause actual results to differ materially from those forecasted or anticipated in such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to: general economic conditions; industry trends; the loss of or inability to hire skilled personnel; the loss of key suppliers or customers; the loss or material decline in service of strategic product shipping relationships; customer demand; product availability; competition (including pricing and availability); risks inherent in acquiring, integrating and operating new businesses and investments; concentrations of credit risk; distribution efficiencies; capacity constraints; technological difficulties, including equipment failure or a breach of our security measures; the volatility of our common stock; economic and political uncertainties arising as a result of terrorist attacks; seasonality; exchange rate fluctuations; foreign currency devaluations; and the regulatory and trade environment (both domestic and foreign). These risks and others are more fully described in Daisytek's Annual Report of Form 10-K for the year ended March 31, 2002. Because such forward-looking statements are subject to risks, uncertainties and assumptions, you are cautioned not to place undue reliance on these forward-looking statements, which reflect management's view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have experienced no material changes in interest rate risk or foreign exchange risk during the three months ended June 30, 2002. Our market risk is described in more detail in our Annual Report on Form 10-K for the year ended March 31, 2002. During the three months ended June 30, 2002, 46.8% of our revenues were derived from customers located outside the United States. -14- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Daisytek is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material adverse affect on our financial position, results of operations or liquidity. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1* Current Account Credit Opening Agreement Formalized by Scotiabank Inverlat, Sociedad Anonima, a Multiple Banking Institution, Grupo Financiero Scotiabank Inverlat and Daisytek de Mexico. 10.2* Promissory Note dated May 6, 2002, made by James R. Powell in favor of Daisytek, Incorporated. * Filed herewith. (b) Reports on Form 8-K. Current Report on Form 8-K (Items 5 and 7), dated and filed on April 16, 2002, to announce that Daisytek was in ongoing discussions with ISA regarding a potential tender offer for shares of ISA. Current Report on Form 8-K (Items 5 and 7), dated April 25, 2002 and filed on April 26, 2002, to announce that Daisytek had signed a $200 million senior secured debt facility with Bank of America, N.A. Current Report on Form 8-K (Items 5 and 7), dated and filed on May 7, 2002, regarding earnings for the quarter ended March 31, 2002. Current Report on Form 8-K (Items 2 and 7), dated May 7, 2002 and filed on May 22, 2002, to report that Daisytek would be consolidating the results of operations of ISA effective May 7, 2002. Current Report on Form 8-K (Items 5 and 7), dated May 24, 2002 and filed on May 31, 2002, to announce that Daisytek had mailed a recommended offer to ISA shareholders on May 23, 2002 Current Report on Form 8-K (Items 5 and 7), dated June 14, 2002 and filed on June 19, 2002, to announce that Daisytek had received acceptances from shareholders or acquired shares in open-market purchases representing 85.3% of the ordinary share capital of ISA and that all conditions to the offer for all of the ordinary shares of ISA had either been satisfied or waived and to announce that three Daisytek executives had been appointed as directors of ISA. Current Report on Form 8-K (Items 5 and 7), dated June 24, 2002 and filed on June 25, 2002, to provide initial guidance on future earnings following the successful takeover of ISA and to announce that Daisytek had closed syndication of its $200 million senior secured credit facility and increased the size of the facility to $250 million. -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2002 DAISYTEK INTERNATIONAL CORPORATION By: /s/ Ralph Mitchell --------------------------------------- Ralph Mitchell Chief Financial Officer, Chief Accounting Officer, Executive Vice President -- Finance -16- EXHIBIT INDEX
Exhibit No. Description - ------ ----------- 10.1* Current Account Credit Opening Agreement Formalized by Scotiabank Inverlat, Sociedad Anonima, a Multiple Banking Institution, Grupo Financiero Scotiabank Inverlat and Daisytek de Mexico. 10.2* Promissory Note dated May 6, 2002, made by James R. Powell in favor of Daisytek, Incorporated.
* Filed herewith. EX-10.1 3 d99214exv10w1.txt CURRENT ACCOUNT CREDIT OPENING AGREEMENT EXHIBIT 10.1 CURRENT ACCOUNT CREDIT OPENING AGREEMENT FORMALIZED BY SCOTIABANK INVERLAT, SOCIEDAD ANONIMA, A MULTIPLE BANKING INSTITUTION, GRUPO FINANCIERO SCOTIABANK INVERLAT, HEREINAFTER REFERRED TO AS "THE CREDITOR", REPRESENTED BY MR. FRANCISCO VAZQUEZ FERNANDEZ AND BY DAISYTEK DE MEXICO, A VARIABLE CAPITAL CORPORATION, HEREINAFTER REFERRED TO AS "THE ACCREDITED" REPRESENTED BY GLAUBER DAVID VIVAS; PURSUANT WITH THE FOLLOWING STATEMENTS AND CLAUSES: REPRESENTATIONS AND WARRANTEES I. The Creditor's representative states that his represented is a Credit Institution, constituted in accordance with the laws in the matter and is empowered to formalize the agreement herein.. II. The Accredited representative states that: a) His represented is a mercantile society of Mexican nationality regulated by its social statutes, by the General Mercantile Societies Law (Ley de Sociedades Mercantiles) and other applicable regulations. b) His represented is proprietor of the inventories of merchandise located within its installations, distinct from deposited merchandise or merchandise deposited on consignment for sale of which third parties are owners of as well as the machinery used for its operation. c) He has no knowledge of any legal procedure filed against his represented, which could adversely affect their financial situation, operations, assets or their own legal existence, in prejudice of the legality validity or ability to claim what is set forth by the agreement herein. d) The financial and accountable information brought forth to the Creditor for the acceptance of this credit, accurately and truthfully reflects his represented economic situation and therefore has not breached article one hundred and twelve of the Credit Institutions Law (Ley de Instituciones de Credito), whose text and legal scope has been explained to them, thus considering its transcription unnecessary. e) To comply with the general capacity dispositions referred to by article one hundred and fifteen of the Credit Institutions Law (Ley de Instituciones de Credito), issued by the Treasury Department (Secretaria de Hacienda y Credito Publico), in the Official Federation Diary (Diario Oficial de la Federacion) on the tenth of March, nineteen ninety seven, and according to what is set forth in the Second disposition, he has brought forth before the Creditor copies of the documents of his represented listed as follows: 1. Federal Taxpayer's Record Identification Number and Fiscal Identification Certificate. 2. Evidence of the filed Deeds of Incorporation of his represented, and their applicable reforms, as well as the power through which its credits its empowerment of representation. 3. His represented proofs of address (Property tax payment, electric power service receipt, telephone bill, etc.). f) That his represented acknowledges that the agreement herein was authorized according to the legal and financial regulations applicable to Credit Institutions, based on the information provided by the Creditor. g) That his represented has knowledge of the fact that a breach of any positive or negative covenants give rise to effects that repercussion on the credit administration costs, that is, in the charge of a commission that to this effect the Creditor gives knowledge of at the moment of signing, for in the event of any such assumption, the Creditor needs to perform several unforeseen administrative and/or juridical activities, in order for the Accredited to fulfill the obligations agreed to in the agreement herein. h) That it owns the assets that integrate the Industrial Unit, which is free of encumbrance or domain limitation, as evidenced with the corresponding certificate issued by the Public Commerce Records of the Federal District Registro Publico de Comercio del Distrito Federal attached to the agreement herein as annex "A". The Industrial Unit is understood as all floating and fixed assets subject to exploitation, cash in the current account and credits in favour of the company, originated by its operations, considered in their unity. Having stated the above, the parties grant the following: CLAUSES CHAPTER ONE CURRENT ACCOUNT CREDIT FIRST.- CREDIT.- The Creditor grants the Accredited a Current Account Credit, up to the amount of $90'000,000.00 (NINENTY MILLION PESOS, MEXICAN LEGAL TENDER). This amount does not include the interest, expenses and accessories the Accredited shall cover for the use of the credit herein.. SECOND.- DESTINATION.- The Accredited is obliged to invest the credit amount precisely as support to his working capital. THIRD.- WITHDRAWAL.- The Accredited may withdraw the granted revolving credit amount in the following terms: a) In a revolving manner at maximum terms of 180 (one hundred and eighty) days, with the possibility of extending the withdrawal terms without surpassing the indicated 180 (one hundred and eighty) days; and may again dispose of the granted credit amounts he may have settled when the stated term has expired. b) Up to the amount that is lower from the following amounts: b.1) $90'000,000.00 (Ninety million pesos Mexican Legal Tender 00/100), which the first clause of this agreement refer to; or b.2) The amount resulting from the maximum financing Calculation relative to the analysis of accounts receivable and the inventory of the Accredited. We understand as maximum financing Calculation, the monthly balance in books of its accounts receivable with an age not older than 120 (one hundred and twenty) days times 60% (sixty percent), plus the monthly balance in books of its inventories times 30%(thirty percent). Such withdrawals shall for no reason surpass neither the open credit amount nor the expiry date of the contract herein. The Accredited may have access to the credit, providing the agreement herein is ratified before a public certifier appointed by the Creditor and in its case, is filed, or else brought forth for this process, in the corresponding Property and Commerce Public Files. FOURTH.- COMMISSIONS.- The Accredited is obliged to pay the Creditor, over the total credit amount, an opening commission equivalent to 1 % (one percent). Likewise, the Accredited shall promptly inform the Creditor about any likely non-compliance in the cases where the Accredited itself has previous knowledge of the fact that it will be unable to fulfill its positive and negative covenants on time, and for such purpose he must request an extension to fulfill such obligations. 2 In such extension application he shall describe the causes that originate such non-compliance, the actions and periods of time he will need to repair it, understanding that the Creditor reserves his right to grant the aforementioned extension to the Accredited. If the Creditor has knowledge of any non-compliance with the positive and negative covenants, it will notify the Accredited in order for them to inform it of the causes that originated such non-compliance, the actions and periods of time he will take to repair them for which an extension will be applied for in order to comply with such obligations. In said application the causes that originated such non-compliance will be outlined, with the understanding that the Creditor reserves the right to serve the Accredited the aforesaid extension. In both cases, the Accredited authorizes the Creditor to charge on any of the checking accounts it manages, the valid fee it informs them whenever any of the aforementioned assumptions occur. For informative effects, the fee at the time the agreement herein was formalized is USD $200.00 (Two-hundred dollars United States of America legal tender 00/100) or its equivalent in Pesos, Mexican Currency, plus the Value Added Tax (V.A.T.). Without prejudice that the Accredited pay the commission for non-compliance outlined in the previous paragraph, the Creditor reserves the power to terminate the agreement herein in advance due to non-compliance. FIFTH.- AMORTIZATION.- The Accredited: a) Is obliged to restore the Creditor the withdrawn amounts at the agreed dates for their amortization in the promissory notes that evidence the dispositions and in its case, together with their interest, whenever the withdrawals have an expiry term under 3 (three) months. b) Shall in no event surpass the amount of the withdrawals charged to this credit, surpass the limit set forth, in its case the due date of the promissory notes that evidence them, nor the validity of this agreement. The application of the amounts the Accredited pays the Creditor shall cover his debt in the following sequence: a) Trial or collections expenses, insurance or other accounted concepts, if any, b) Value Added Tax over penalty interest, if any, c) Penalty interest, d) Value Added Tax over ordinary interest, e) Ordinary interest, f) Overdue capital, g) Valid capital. The Accredited shall make the payments corresponding to the Creditor, at the working day immediately subsequent to each of the payment dates if any of them should be a non-working day. SIXTH.- INTEREST.- The Accredited is obliged to pay the Creditor, ordinary annual interest, over the unpaid balances according to the following: a) In a due quarterly manner, when the withdrawal due date is equal to or over 3 (three) months. b) At the withdrawal due date, when it is under 3 (three) months. c) We shall take as reference rate the Interbank Equilibrium Interest Rate (T.I.I.E), which shall be determined at the beginning of the interest calculation period and is updated on a monthly basis. 3 To the reference rate mentioned in the above item c), we shall add 3.25 (three point twenty-five) additional percentage points, thus conforming the ordinary interest rate. In the event the T.I.I.E. Rate exists no more, or when the ordinary interest calculation is done, according to what is set forth in the above paragraph, is unknown, its substitute reference rate shall be that of the Federation Treasury Certificates (CETES); to this reference rate we shall add 6.25 (six point twenty-five) percentage points, thus conforming the substitute interest rate. In the event the T.I.I.E and CETES rates no longer exist, or when the interest calculation is done, they are unknown, their substitute reference rate shall be the Liabilities Time Collection Cost (C.C.P.); to this reference rate we shall add 7.5 (seven point five) percentage points, thus conforming the substitute rate. The agreed rate and, in its case, its substitute rates, shall be applied at the effectively elapsed days during the interest calculation period. DEFINITIONS: As T.I.I.E. we shall understand the 28-day term Interbank Equilibrium Rate issued daily by the Banco de Mexico, through the Oficial Federation Diary (Diario Oficial de la Federacion), the day each interest rate determination period begins, and for effects of its calculation, the 28-day term T.I.I.E rate shall be equivalent to 30-day terms. In the event such rate is not issued, we shall use as reference rate that issued at the immediately prior date, and so subsequently until the twenty-second day of such interest calculation rate date. As CETES we shall understand the 28-day term Federation Treasury Certificates Rate, issued by the Banco de Mexico, through the Oficial Federation Diary (Diario Oficial de la Federacion) at the most recent prior date to the starting date of each interest rate determination period. As Liabilities Time Collection Cost (C.C.P.) we shall understand the 30-day Liabilities Time Collection cost, estimated by the Banco de Mexico representing the group of Multiple Banking Institutions and issued by the Official Federation Diary (Diario Oficial de la Federacion) at the initial date of each rate determination period. If the Accredited were to incur in payment default of the agreed amortizations, as well as any other obligation under its charge, caused by the credit hereby formalized, the Creditor shall apply penalty interest equal to those resulting from multiplying by 2 (two) the aforementioned ordinary interest rate, during the term it is still in force. Penalty interest shall give rise: over any of the Accredited unpaid due balance which is not interest and over the amount of other patrimonial obligations under the Accredited liability that are not over capital or interest if they are not paid in terms with what is set forth herein. SEVENTH.- WITHDRAWAL DOCUMENTATION.- To document a withdrawal set forth herein, the Accredited shall subscribe to the Creditor promissory notes that shall not surpass its amount and whose expiry dates shall not be later than this agreement's expiry date; such securities shall gather the requirements, terms and conditions set forth by the General Securities and Credit Operations Law. CHAPTER TWO 48-HOUR CURRENT ACCOUNT CREDIT EIGHTH.- CREDIT.- The Creditor grants the Accredited a Current Account Credit, up to the amount of $5'000,000.00 (FIVE MILLION PESOS, MEXICAN LEGAL TENDER). This amount does not include interest, expenses and accessories the Accredited shall cover to use the herein credit. 4 NINTH.- DISPOSITION.- The Accredited may make use of the credit amount exclusively to cover the remaining amounts when drafting checks to be paid charged on checking account number 0001181122 which the Accredited himself has established with the Creditor in Branch PATRIOTISMO (113), Mexico City, Federal District (Distrito Federal). The Accredited may make use of the credit amount conceded herein providing it is ratified before a public Certifier appointed by the Creditor and, in its case, is filed, or else brought forth for this process, in the corresponding Property and Commerce Public Files. TENTH.- AMORTIZATION.- The Accredited is obliged to restore the Creditor the established amounts, with their corresponding interest according to the herein interest clause, exactly within forty-eight hours after the withdrawal in question. The application of payments by the Accredited to the Creditor shall be to cover his debt in the following sequence: a) Trial or collections expenses, insurance and commissions, if any, b) Value Added Tax over penalty interest, if any, c) Penalty interest, d) Value Added Tax over ordinary interest, e) Ordinary interest, f) Overdue capital, g) Valid capital. The Accredited shall pay the Creditor, at the working day immediately subsequent to each of the payment dates if any of them should be a non-working day. ELEVENTH.- INTEREST.- The Accredited is obliged to pay the Creditor, exactly within 48 hours after the date of withdrawal, ordinary annual interest, over unpaid balances according to the following: the reference rate shall be the Interbank Equilibrium Interest Rate (T.I.I.E..), which shall be determined at the beginning of the interest calculation period and will be updated on a daily basis To the aforementioned reference rate, we shall add 2.5 (two point five) percentage points, thus conforming the ordinary interest rate. In the event the T.I.I.E. Rate exists no more, or when the ordinary interest calculation is done, according to what is set forth in the above paragraph, is unknown, its substitute reference rate shall be that of the Federation Treasury Certificates (CETES); to this reference rate we shall add 5.5 (five point five) percentage points, thus conforming the substitute interest rate. In the event the T.I.I.E and CETES rates no longer exist, or when the interest calculation is done, they are unknown, their substitute reference rate shall be the Liabilities Time Collection Cost (C.C.P.); to this reference rate we shall add 6.5 (six point five) percentage points, thus conforming the substitute rate. The agreed rate and, in its case, its substitute rates, shall be applied at the effectively elapsed days during the interest calculation period. DEFINITIONS: As T.I.I.E. we shall understand the 28-day term Interbank Equilibrium Rate issued daily by the Banco de Mexico, through the Oficial Federation Diary (Diario Oficial de la Federacion), the day each interest rate determination period begins, and for effects of its calculation, the 28-day term T.I.I.E rate shall be 5 equivalent to 30-day terms. In the event such rate is not issued, we shall use as reference rate that issued at the immediately prior date, and so subsequently until the twenty-second day of such interest calculation rate date. As CETES we shall understand the 28-day term Federation Treasury Certificates Rate, issued by the Banco de Mexico, through the Oficial Federation Diary (Diario Oficial de la Federacion) at the most recent prior date to the starting date of each interest rate determination period. As Liabilities Time Collection Cost (C.C.P.) we shall understand the 30-day Liabilities Time Collection cost, estimated by the Banco de Mexico representing the group of Multiple Banking Institutions and issued by the Official Federation Diary (Diario Oficial de la Federacion) at the initial date of each rate determination period. If the Accredited were to incur in payment default of the agreed amortizations, as well as any other obligation under his charge, caused by the credit hereby formalized, the Creditor shall apply penalty interest equal to those resulting from multiplying by 2 (two) the aforementioned ordinary interest rate, during the term it is still in force. Penalty interest shall give rise: over any of the Accredited unpaid due balance which is not interest and over the amount of other patrimonial obligations under the Accredited liability that are not over capital or interest if they are not paid in terms with what is set forth herein. CHAPTER THREE COMMON CLAUSES TWELFTH.- TERMINATION.- This agreement shall be deemed as terminated at its (36) thirty-six months of validity, counting from its date of formalization. Without prejudice to the above, the Creditor, at the twelfth and twenty-fourth months portfolio validity, shall have the power to make a credit revision, as well as a revision of the terms, conditions and obligations under the charge of the Accredited according to the present Contract and Daisytek International Corporation under the terms of the Guarantee Letter, and in its case to deem it terminated at such dated, and thus shall notify the Accredited himself about the early termination, thirty days prior to the effective termination date, and he shall pay the unpaid credit balance. THIRTEENTH.- GUARANTEES.- Without prejudice of the obligation by the Accredited of responding with all his assets, present or future, as guarantee of the fulfillment of the obligations under his charge derived from the agreement herein, of the payment of interest and other benefits derived from the Law or Judicial Resolutions and from expenses and trial expenses or costs in the event of a trial where the court rules to hold the Accredited to its payment, the Accredited constitutes in favor and with the Creditor's consent, a SPECIFIC AND FIRST TERM MORTGAGE OVER THE INDUSTRIAL UNIT HE IS PROPRIETOR OF, which includes all the material and fixture elements of the Accredited's business subject to exploitation, considered in his unit, the current exploitation cash, the loans in favor of the Accredited originated by his operations, his collectibles, without prejudice of the responsibility of disposing of them and substituting them in the normal movement of its operations, without the need of consent by the Creditor and its total assets located within the mentioned Industrial Unit. Such mortgage includes all and everything that corresponds to it, in terms with article sixty-seven of the Credit Institutions Law, and therefore it will prevail due to its filing in the corresponding Public Commerce Records, during the entire duration of any unpaid balance under the Accredited. The Accredited broadens the agreed industrial mortgage to past due unpaid interest, even if it exceeds three years, agreement which will be filed in the corresponding Public Commerce Records. The Accredited guarantees with the agreed mortgage, the herein credit amount and its accessories, notwithstanding the guaranteed obligation is reduced. 6 The guarantees constituted in accordance with what is set forth above shall prevail while the capital or its interest, all or in parts, remain unpaid. The Accredited states his conformity in the fact that there shall be no guarantee decrease if the credit is decreased. To comply with what is set forth by the Security and Exchange Commission (Comision Nacional Bancaria y de Valores) in matters of appraisals, the Creditor shall request the elaboration of the corresponding appraisals, in its case, every two years starting from the date this agreement is signed, in order to verify the value of the goods granted as guarantee; the expenses caused by the elaboration of the appraisals shall be borne by the Accredited, who authorized the corresponding charge on the Accredited checking account. Without prejudice of the guarantee constituted herein, the Accredited is obliged to deliver a letter of Guarantee from Daisytek International Corporation for an amount of $95'000,000.00 (Ninety five million pesos, Mexican Legal Tender 00/100), which shall have the same validity term as the herein agreement. Such guarantee shall subsist providing there is a pending debt and shall respond for the total unpaid credit at that point of time, together with ordinary interest, penalty interest, if any, and other legal accessories in reasonable and duly evidenced amounts. FOURTEENTH.- OFFICER.- The Creditor shall be entitled, during the validity of the agreement herein, to appoint an officer to verify the exact compliance of the obligations under the Accredited. FIFTEENTH.- NEGOTIABILITY.- The Accredited specifically empowers the Creditor to discount or cede the entire or part of the credit, even before it expires and in its case, to endorse and in any other form negotiate the securities that document the dispositions derived from the credit herein, though this will not deem it renewed in the ceded or discounted portion. SIXTEENTH.- INSURANCE.- The Accredited or Daisytek International Corporation isis obliged at the date of signature of the agreement herein or at the latest by the first withdrawal to acquire insurance that covers his company's assets for an amount no lesser than their replacement value, as well as that which covers its accounts receivable, for a minimum value of USD 8,000,000 (eight million dollars, legal tender of the United States of America). In both cases, the policies should have the main endorsement in favor of the Creditor and to furnish the Creditor with the insurance certificate or policy. In the policy that covers the accounts receivable it shall be set forth that if they surpass a 180-day (one hundred and eighty day) term, the Creditor as main beneficiary may demand the collection of the policy. By the expiration date of the aforementioned policies, the Accredited or Daisytek International Corporation shall perform the corresponding renewal, furnishing the Creditor with a copy of the new insurance policy. Likewise, the Accredited or Daisytek International Corporation is obliged to insure the assets object to guarantee, for an amount no lesser than their replacement value, which covers at least the total amount of the granted credit and its accessories, stating as beneficiary the Creditor and to process the endorsement through which the insurance company is informed that the insured assets have been object of a guarantee granted for the Creditor, in order for the corresponding policy to point out the corresponding encumbrance. In the event the Accredited or Daisytek International Corporation does not contract an insurance in the terms set forth in the above paragraphs, they hereby authorize the Creditor to contract the corresponding insurance and to charge on any of the checking accounts that has or comes to have the corresponding amounts. Likewise, when the policies expire, the Accredited is obliged to deliver the renewals within a 15-day term; after such term, they authorize the Creditor to request them and is obliged to pay the amount of such renewals. 7 SEVENTEENTH.- ADVANCED PAYMENT.- The parties agree that if the Accredited is current in compliance with his payment obligations, he may make total or partial advanced payments of the credit's insolvable balance. The Accredited is obliged to notify the Creditor in writing, one business day in advance, about the advanced payment amount to be made, in which case it will cause no commission. EIGHTEENTH.- POSITIVE AND NEGATIVE COVENANTS.- The Accredited is obliged to comply with the following obligations: Before making the credit withdrawal: a) Deliver a copy of the written confirmation by Daisytek International Corporation and Daisytek Inc., stating that the credits granted by the Creditor to the Accredited, do not infringe the conditions of credit Syndicated Contracts formalized with foreign Financial Institutions. b) Deliver a copy of the authorization of the creditor Credit Institutions of Daisytek International Corporation, for the release of the covenants set forth in the Syndicated Credit. c) Obtain a consent by Daisytek International Corporation to subordinate its credits to its debt with the Creditor. Once the first withdrawal from any of the credits has been made and during their validity: I. Positive Covenants: a) Formally subordinate the liabilities of its filial companies. b) Accredit the dissolution of the Priority Fulfillment Services de Mexico, S.A. de C.V. society, a filial company of the Accredited, within three months from the first withdrawal of any of the loans formalized herein. c) Keep the Accredited's assets insured including its inventory with main endorsement in favor of the Creditor. d) Keep valid the Accredited's accounts payable insurance policy with main endorsement in favor of the Creditor. e) Deliver audited individual and consolidated annual financial information of the Accredited and Daisytek International Corporation, within one hundred and twenty days after the closing of the fiscal year. f) Deliver quarterly individual and consolidated financial information of the Accredited and Daisytek International Corporation, within sixty days after the period closing. g) Deliver a negative and positive covenants compliance letter, together with the aforementioned financial information which shall include compliance with the negative and positive covenants in this contract and those set forth in credit contracts signed between Daisytek International Corporation with foreign Financial Institutions. h) Deliver the "Loan basis calculation" on a monthly basis, that includes the inventory and accounts receivable with an age not over 120 (one hundred and twenty) days, within the 30 (thirty) days after month closing. i) Deliver a quarterly report of the age of accounts receivable. 8 j) Notify the Creditor of any substantial change in administration, in which case, the Creditor should manifest its conformity, such that it cannot be denied without just cause for it, within five working days, counted from the date of notification. k) Keep the following quarterly financial covenants: 1) A debt coverage index no greater than 3.50 (three point fifty) We understand as debt coverage index: Bank Debt divided by operating Profit, before interest, taxes, depreciation and amortization. It is understood that this will be calculated on a rolling four-quarter basis. 2) An interest Coverage Index no less than 2.00 (two point zero). We understand as interest index: operating Profit, before interest, taxes, depreciation and amortization divided by Financial ------- Expenses. 3) A minimum tangible net worth of USD $15'000,000.00 (Fifteen million dollars, US National Legal Tender). We understand tangible net worth as: total equity minus investments in subsidiaries and affiliates, minus accounts due by officers and affiliates, plus any debt subordinated to the Creditor. II. Negative covenants: l) Constitute real guarantees over the company's assets. m) Contract additional financing to those contracted, nor grant guarantees. n) Decree dividends, nor withdraw profit. o) Change the line of business. p) Change the Accredited's share control. q) Hold transactions with connected, affiliated and filial parties, except those deriving from its normal course of operations. NINETEENTH.- CAUSES FOR EARLY EXPIRY. - The Creditor may deem this agreement as expired in advance, and therefore demand payment of the principal amount, caused interest and other legal accessories, if the Accredited breaches the positive and negative covenants, as well as the other obligations under his charge derived from this agreement and especially: a) If it uses the credit amount or part of it, in its case, for different ends than those agreed to in this agreement's Second and Ninth Clauses or if it does not furnish the Creditor, whenever it request so, the information or documents relative to the credit's destination and how its company works. b) If it stops covering at the due date one or more of the amounts under its charge, either capital or interest. c) If it leases or transfers its business, changes its facilities, if it scissions or merges, or if it changes its social address or social denomination without prior written authorization by the Creditor. d) If the guarantee set forth by it in this agreement, in its case, does not fulfill the requirements to which the guarantees Clause refers to. 9 e) If its company and/or, in its case, the guarantee assets, were alienated, granted as guarantee or were in total or partial lien, except for the sale of goods during the normal course of business. f) If any suit is filed against it affecting the proper functioning of its company or impairs its patrimony and/or the guarantee, in its case, for an amount higher than USD $5'000,000.00 (Five million dollars, U.S. legal tender) 00/1009, that is not resolved within a 30-natural day term, counting from its date of inception, except if it proves the Creditor that it has taken all the legal measures necessary for its defense and that the Creditor agrees with this. g) If it does not comply with the payment of its contributions, taxes or any other fiscal debt under its charge, including the fees corresponding to the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), the National Workers Housing Fund Institute (Instituto del Fondo Nacional para la Vivienda de los Trabajadores) and the Pension Funds System (Sistema de Ahorro para el Retiro). h) If it does not comply with the conditions set forth in the clause relative to Insurance. i) If it does not grant the officer, or in its case the Auditor the Creditor appoints, with the necessary powers to undertake his position. j) If the Accredited or Daisytek International Corporation were declared in contest or if a contest procedure were initiated against them. k) If the Accredited or Daisytek International Corporation, breaches any of their obligations, and especially that of payment, derived from credits granted by the Creditor or by any National or Foreign Financial Institution. l) If the Accredited breaches any of the conditions established in the contracts related to the normal course of business, provided that a "final and definitive" sentence exists to this effect. m) By any reason foreseen by the Law for this effect. Without prejudice of what is set forth above, the Creditor grants the Accredited a ten workday term of grace counting from the date of payment default of capital or interest of the Credit, to repair it, and therefore at such term the Accredited shall not be deemed as having incurred in a cause for anticipated termination, without prejudice of generating the corresponding penalty interest. TWENTIETH. - ACTIONS. - The Creditor reserves the power of obtaining the collection of the balances charged to the Accredited, exercising via merchant execution enforcement procedure or the corresponding one where appropriate, without restraint order, in the understanding that, if the latter execution procedure does not exclude the other; the Creditor shall point out the sufficient assets for embargo without subjection to the order established in article one thousand three hundred and ninety five of the Merchant Code (Codigo de Comercio) in which case the Depositary named by the Creditor shall take possession without granting bail. The exercise of one of these actions does not imply the loss of the other and the actions that concern the Creditor, shall integrally prevail in subsistence until the total credit and its accessories charged to the Accredited be realized. The Accredited states his specific consent for the quantities that may be appropriated in the event of a trial, the Creditor shall apply them to cover their debts in the sequence indicated by the amortization clause. TWENTY-FIRST. - ACCOUNT STATEMENT. - In the terms of article sixty eight of the Credit Institutions Law (Ley de Instituciones de Credito), the herein agreement in addition to a certified account statement by an Accountant empowered by the Creditor, shall be a bond conveying an enforceable right security without the need of authentication of signature or any other requirement. 10 TWENTY-SECOND. - RESTRICTION AND DENOUNCE. - The Creditor in terms with what is set forth by article two hundred and ninety four of the Securities and Credit Operations General Law (Ley General de Titulos y Operaciones de Credito), shall denounce the present instrument, or where appropriate, shorten the term, through a simple written notification on this matter to the Accredited - under the understanding that the amounts drawn down by the Accredited will be paid at their original maturity and may only be required by the Creditor in an anticipated manner, in the event of non-compliance as described in this contract. TWENTY-THIRD. - COST INCREASE. - If during the enforcement of this agreement, the competent authorities issue legal dispositions of general character, applicable to loans as the one formalized herein, or issue a specific requirement related to the credit granted hereby, and from these an increase in credit costs is derived, the Creditor, through written notification shall inform Accredited of the latter event, in order that in a thirty day period, counted from the such dispositions or requirements, during its enforcement, the terms of the third paragraph number M.21.2. of Banco de Mexico's Bulletin 2019/95, whose text is transcribed hereinafter: "In the case of credits whose cost for the loaning institutions partially depends on the commissions charged to a third party to the institution itself, and are unknown by it when the credit is formalized, or else may be modified by the third party itself after it, institutions may agree with their accredited the possibility of rebounding the amount of such commissions." TWENTY-FOURTH.- CREDIT INFORMATION.- The Accredited, authorizes the Creditor to request and furnish at any given moment, credit information to and from any of The Grupo Financiero Scotiabank Inverlat entities and to and from credit information societies and to use any other mean considered pertinent to obtain information of his credit history and verify the information herein. TWENTY-FIFTH.- ADDRESSES AND PAYMENT LOCATION.- The parties declare the following as their addresses to hear and receive all types of documents and notifications regarding this agreement: Creditor: Boulevard M. Avila Camacho No. 1-18, Colonia Lomas de Chapultepec, Mexico, Distrito Federal, C.P. 11009. Accredited: Avenida Benjamin Franklin No. 98, 5 degrees. Piso, Colonia Escandon, Mexico, Distrito Federal, C.P. 11800. The Accredited undertakes to pay the Creditor the capital, interest and other benefits derived from the agreement herein, at the Creditor's address, or any of its branches, in working days and hours without requirement or previous collection effort, in cash or in checks, but if these were not certified or teller, the amount shall not be applied, until these have been cashed. Without prejudice of the above, the Accredited empowers the Creditor to charge to any checking account it operates or may come to operate, the amount of all the debt as capital, interest, commission, expenses and accessories derived hereby. In the supposition that the aforementioned checking accounts have no available funds and only as that referring to capital amortization, the parties agree that if the Accredited does no cover them promptly, for the days elapsed since the obligation is due until the date when the corresponding payment is made, instead of the corresponding ordinary rate, the penalty rate set forth hereby shall be applied. The Creditor shall be empowered to appoint a different payment location, prior notification to the Accredited. TWENTY-SIXTH.- FORTUITOUS CASE.- The Accredited and the Creditor expressly oblige themselves to comply with the agreement herein, even in the fortuitous case of force-majeur, in terms with what is set forth in article two thousand one hundred and eleven of the Federal District Civil Code (Codigo Civil para el Distrito Federal). 11 TWENTY-SEVENTH.- RIGHTS AND FEES.- The rights, fees and other expenses caused by the formalization of this instrument, as well as by the intervention of a Public Certifier in this agreement, its filing, in its case, in the corresponding Property and Commerce Public Records and its cancellation, when due, shall be bourn by the Accredited, who is obliged to cover them when this instrument is signed. TWENTY-EIGHTH.-JURISDICTION.- For all that relative to the interpretation, compliance and execution of the agreement herewith, the parties submit to the jurisdiction of the Courts competent of the Federal District (Distrito Federal), expressly renouncing to the jurisdiction of any address they have or may come to have. LEGAL PERSONALITIES AND PARTICULARS OF WITNESSES SCOTIABANK INVERLAT, SOCIEDAD ANONIMA, INSTITUCION DE BANCA MULTIPLE, GRUPO FINANCIERO SCOTIABANK INVERLAT, (PREVIOUSLY BANCO INVERLAT, SOCIEDAD ANONIMA, INSTITUCION DE BANCA MULTIPLE, GRUPO FINANCIERO INVERLAT), is an institution constituted in accordance with the Country's laws, in deed number three-hundred and ten dated January the thirtieth, nineteen thirty-four before the Certification of Public Notary number seven of the City of Chihuahua, Chihuahua, Mr. Jose Mena Castillo; the first testimony of the aforementioned deed was filed dated May the twenty-fourth, nineteen thirty-four, under number forty-two to folios two-hundred eighty-two and subsequent of book number seventeen of the Commerce Section of the Property Public Records of the District of Morelos, Chihuahua. With deed number three-thousand two-hundred and eighty-eight by Mr. Fernando O. Bustamante, Public Notary number nineteen of the District of Morelos, Chihuahua, on December twenty-fourth, nineteen seventy-six, the Financiera Comermex, Sociedad Anonima e Hipotecaria Comermex, Sociedad Anonima fusion with Banco Comercial Mexicano, Sociedad Anonima was formalized, the alter prevailing under the denomination of Multibanco Comermex, Sociedad Anonima, the first testimony of the aforementioned deed was filed under number four-hundred and thirteen to folios one-hundred and fifty-nine of book number two-hundred and thirteen, of the Commerce Section of the Property Public Records of the aforementioned District of Morelos, State of Chihuahua, dated December the thirty-first, nineteen seventy six. As of August the twenty-ninth, nineteen eighty-three, date of issuance of the relative Decree by the Official Federation Diary (Diario Oficial de la Federacion) with the same date, it became a National Credit Society (Sociedad Nacional de Credito) and therefore its denomination changed Multibanco Comermex Sociedad Nacional de Credito. By Federal Executive Decree dated January the twenty-ninth, nineteen ninety-two, issued in the Official Federation Diary (Diario Oficial de la Federacion) dated the thirtieth of the same date and year, this National Credit Society changed to a Corporation (Sociedad Anonima). Such Decree sets forth in its seventh article that the appointments, powers, orders, commissions, designations, of Fiduciary Delegates and, in general, the representations granted and the powers conceded by the Corporation (Sociedad) that is changed, shall prevail in their terms providing they are not specifically modified or revoked. By public deed number thirty-three thousand nine-hundred seventy-three dated June the third, nineteen ninety-two, certificated by Mr. Francisco Javier Gutierrez Silva, Notary number one-hundred forty-seven, of the Federal District (Distrito Federal), and filed in the Property and Commerce Public Records of Chihuahua, State of Chihuahua, under number one-thousand two-hundred and twenty-seven, to folios one-hundred and eight, book number five-hundred seventy-three, dated September the nineteenth, nineteen ninety-two, the shareholders extraordinary assembly deed was formalized where they agreed, among other issues, to incorporate Multibanco Comermex Corporation (Sociedad Anonima) to Grupo Financiero Inverlat, a Variable Capital Corporation (Sociedad Anonima de Capital Variable), taking as their denomination that of Multibanco Comermex, Sociedad Anonima, Institucion de Banca 12 Multiple, Grupo Financiero Inverlat and completely modifying its social statutes. By deed number thirteen thousand two-hundred and fifty four, dated December the second, nineteen ninety-four, certified by Ana Patricia Bandala Tolentino, Notary number one-hundred ninety-five of the Federal District (Distrito Federal), whose first testimony as duly filed in the Commerce Public Records of Chihuahua, State of Chihuahua, under number two-thousand two-hundred and twenty one, folios ninety one, book number six-hundred and sixty-six of the Commerce Section on June the first, nineteen ninety-five, and in the Commerce Public Records of the Federal District (Distrito Federal) in the mercantile file number one-hundred ninety-eight thousand eight-hundred and sixty seven, on June the seventh, nineteen ninety-five, through which the Shareholder Extraordinary General Assembly Deed was formalized, where, among others, they agreed to change its denomination to Inverlat Bank, Corporation, Multiple Banking Institution, Inverlat Financial Group, (Banco Inverlat, Sociedad Anonima, Institucion de Banca Multiple, Grupo Financiero Inverlat), and change its social address from the City of Chihuahua, State of Chihuahua, to Mexico City, Federal District (Distrito Federal), reforming for this effect the first and fifth articles of its social statutes. By deed number twenty-three thousand three-hundred and ninety-five dated January the twelfth two-thousand and one, certified by Mrs. Ana Patricia Bandala Tolentino, officer of Notary one-hundred and ninety-five of the Federal District (Distrito Federal), in filing process due to the recent nature of its granting the Inverlat Bank, Corporation, Multiple Banking Institution, Inverlat Financial Group (Banco Inverlat, S.A., Institucion de Banca Multiple, Grupo Financiero Inverlat) Shareholders Ordinary, Extraordinary and Special Assembly Deed was formalized, where, among other agreements, they adopted the change of the corporation into a filial and the integral reform of its statutes, to adopt the denomination Scotiabank Inverlat, S.A., Institucion de Banca Multiple, Grupo Financiero Scotiabank Inverlat. FRANCISCO JOSE VAZQUEZ FERNANDEZ, who participates in the formalization of the agreement herein with the capacity of representative of Scotiabank Inverlat, Sociedad Anonima, Institucion de Banca Multiple, Grupo Financiero Scotiabank Inverlat, justifies his personality and powers with the testimony of deed number ninety-nine thousand and fifty-five, dated February the second, nineteen ninety-six, certified by Mr. Francisco Villalon Igartua, Notary number thirty of the Federal District (Distrito Federal), where the granting of powers by Inverlat Bank, Corporation, Multiple Banking Institution, Inverlat Financial Group (Banco Inverlat, Sociedad Anonima, Institucion de Banca Multiple, Grupo Financiero Inverlat) is evidenced appointing him with powers to Claim and Collect, with all the general powers and even special ones that, according to the Law, require a special power or clause, but not including the power to cession assets, in terms with paragraph one of article two-thousand five-hundred and fifty-four of the Federal District Civil Code (Codigo Civil para el Distrito Federal); for Deeds of Administration in terms with the second paragraph of article two-thousand five-hundred and fifty-four of the Federal District Civil Code (Codigo Civil para el Distrito Federal); to formalize all types of agreements where the where the empowering corporation grants credit to third parties and release the assets from encumbrance set forth to guarantee them, exercising whatever rights and actions competent to the aforementioned empowering corporation; power to grant and file credit deeds in terms with what is set forth in article nine of the General Securities and Credit Operations Law (Ley General de Titulos y Operaciones de Credito), needing to exercise this latter power jointly with any other empowered officer of the corporation. As his particulars, the empowered officer states to be: Mexican by birth; original from Mexico, Federal District (Distrito Federal), born the first of October, nineteen forty-three; married; a Lawyer and Banking Officer, with address Boulevard Manuel Avila Camacho number one, tenth floor, Juridical Executive Office, Colonia Lomas de Chapultepec, Delegacion Miguel Hidalgo, zip code eleven-thousand and nine, Federal District (Distrito Federal). Maria del Rosario Ordonez Rodriguez and Fernando Angel Ruiz Ramirez, in their witness capacity; state to be Mexican by birth; both of age; Banking Functionaries; she states she is single and he states he is married; with address Boulevard Manuel Avila Camacho number one, seventeenth floor, Juridical Executive Office, Colonia Lomas de Chapultepec, Delegacion Miguel Hidalgo, zip code eleven-thousand and nine, Federal District (Distrito Federal). DAISYTEK DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE, was constituted prior authorization by the Foreign Affairs Ministry (Secretaria de Relaciones Exteriores), as is evidenced by deed number seventy-nine thousand eight-hundred and ninety-two, granted May the twenty-fourth, nineteen ninety-four, certified by Mr. Ignacio Soto Borja, Notary number one-hundred and twenty-nine of the Federal District (Distrito Federal), filed in the Commerce Public Records of the Federal District (Distrito Federal), in mercantile folio number one-hundred ninety-two thousand and three on September ninth, nineteen ninety-four; with a ninety-nine-year duration; and address in the Federal District (Distrito Federal); its social object, among others is to: a) acquire, sell and distribute all types of computer provisions and their accessories, not including videotext or package commuting, ...f) obtain and grant loans that are not subject to baking intermediation, sign, accept and negotiate all types of securities, either civil or mercantile, subscribe and issue amortizable real estate share bonds, obligations or certificates mortgage certificates and request and obtain bonds and insurance and likewise issue guarantees or bonds regarding contracted obligations, or over securities, in representation of the Corporation, or corporations it has interest on or shares, j) in general, the execution of all types of lawful deeds, contracts and agreements, either civil or mercantile necessary to perform its social ends. Glauber David Vivas in his capacity as legal representative of Daisytek, a Variable Capital Corporation (Sociedad Anonima de Capital Variable), evidences his powers with the testimony of deed number 107847, granted on August sixth of the year two-thousand and one, certified by Mr. Ignacio Soto Borja, Notary number 129, filed in the Commerce Public Records of the Federal District (Distrito Federal), under mercantile folio number 192303. Signed in triplicate, before the witnesses subscribed hereafter, in the City of Mexico, Federal District (Distrito Federal) on the 22 day of the month of July of the year two-thousand two. 13 "THE CREDITOR" "THE ACCREDITED" SCOTIABANK INVERLAT, S.A. DAISYTEK DE MEXICO, S.A. DE C.V. INSTITUCION DE BANCA MULTIPLE GRUPO FINANCIERO SCOTIABANK INVERLAT - ---------------------------------------- --------------------------------- MR. FRANCISCO JOSE VAZQUEZ FERNANDEZ MR. GLAUBER DAVID VIVAS WITNESSES: - ---------------------------------------- --------------------------------- MISS MARIA DEL ROSARIO ORDONEZ RODRIGUEZ MR. FERNANDO ANGEL RUIZ RAMIREZ 14 DEED NUMBER IN THE CITY OF MEXICO, FEDERAL DISTRICT (DISTRITO FEDERAL), THE __ DAY OF THE MONTH OF ____ OF YEAR TWO-THOUSAND AND TWO, I, ENRIQUE FLORES CASTRO ALTAMIRANO, BROKER OF THE PUBLIC BROKERAGE COMPANY NUMBER THIRTY-SIX OF THE FEDERAL DISTRICT, HEREBY CERTIFY: That on this date and before me appeared Mr. Francisco Jose Vazquez Fernandez, in his capacity as Legal Representative of SCOTIABANK INVERLAT, SOCIEDAD ANONIMA, INSTITUCION DE BANCA MULTIPLE, GRUPO FINANCIERO SCOTIABANK INVERLAT, Mr. GLAUBER DAVID VIVAS, in his capacity as Legal Representative of DAISYTEK DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE, Mr. GLAUBER DAVID VIVAS, in his capacity as Legal Representative of PRIORITY FULLFILLMENT SERVICES DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE, and Miss. Maria del Rosario Ordonez Rodriguez and Mr. Fernando Angel Ruiz Ramirez, both in their own right, who in the latter CURRENT ACCOUNT CREDIT OPENING AGREEMENT, appear as "THE CREDITOR", "THE ACCREDITED" and "THE WITNESSES", respectively, with the purpose to ratify it in all and each of its parts, stating that what is included in it is the lawful expression of their will and that the signatures it bears are their authentic rubrics for they wrote them with their own hands and they are the same they use in all their deeds and businesses, statement they declare under oath to tell the truth and who for a greater evidence sign the herein deed before my presence and next to me. "THE CREDITOR" SCOTIABANK INVERLAT, SOCIEDAD ANONIMA INSTITUCION DE BANCA MULTIPLE GRUPO FINANCIERO SCOTIABANK INVERLAT ------------------------------------------------------------------------- REPRESENTED BY MR. FRANCISCO JOSE VAZQUEZ FERNANDEZ "THE ACCREDITED" DAISYTEK DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE - -------------------------------------------------------------------------------- REPRESENTED BY MR. GLAUBER DAVID VIVAS "THE WITNESSES" - ---------------------------------------- --------------------------------- MARIA DEL ROSARIO ORDONEZ RODRIGUEZ FERNANDO ANGEL RUIZ RAMIREZ BY HER OWN RIGHT BY HIS OWN RIGHT BEFORE ME ------------------------------------------------------------------------- LICENCIADO ENRIQUE FLORES CASTRO ALTAMIRANO PUBLIC BROKER NUMBER THIRTY-SIX OF THE FEDERAL DISTRICT (DISTRITO FEDERAL) 15 EX-10.2 4 d99214exv10w2.txt PROMISSORY NOTE DATED MAY 6, 2002 EXHIBIT 10.2 PROMISSORY NOTE $ 609,180.73 May 6, 2002 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay on or before March 31, 2003 to the order of DAISYTEK INCORPORATED, a Delaware corporation (the "COMPANY"), in lawful money of the United States, the principal amount set forth in Attachment B, together with interest thereon and at the times as therein provided. Interest shall accrue on the outstanding principal balance hereof at a fluctuating rate per annum equal to the rate of interest charged to the Company pursuant to that certain Credit Agreement dated as of April 24, 2002 by and among the Lenders named therein, Bank of America, National Association, as agent for the Lenders, the Company and each of the other Obligated Parties identified therein (the "CREDIT AGREEMENT") for a LIBOR Rate Revolving Loan (as defined in the Credit Agreement) with perpetual Interest Periods (as defined in the Credit Agreement) equal to one month for the entire duration that the indebtedness evidenced by this note remains outstanding, as such rate may change from time to time and/or from one Interest Period to the next Interest Period, as the case may be. Should the Credit Agreement no longer exist then the interest rate used shall be the rate charged to the Company by its primary lender for the Company's US operations. The undersigned hereby agrees that if he fails to repay the principal and accrued interest on this note at the times specified herein, then in addition to all other rights and remedies available to the Company, options for shares of stock of the Company held by the undersigned shall, subject to any conflicting provisions contained in Article 9 of the Uniform Commercial Code, terminate upon written notice being sent from the Company to the undersigned. The Company's ability to terminate options shall be limited to those options having a value determined in accordance with the Black-Scholes Option Pricing Model to have a value in the aggregate not to exceed the total amount due under this note together with the expenses of collection. The undersigned hereby grants a security interest in all of his right, title and interest, including the right to receive any shares of stock of the Company, under that certain Option Agreement governing the options listed on Attachment A between the undersigned and the Company (the "OPTION AGREEMENT") as collateral security for the obligation of the undersigned to repay the indebtedness evidenced by this note in accordance with its terms. The undersigned hereby directs the Company to mark its records with respect to the Option Agreement to note the security interest granted hereunder and hereby irrevocably makes, constitutes and appoints the Company as the undersigned's true and lawful attorney, with power to (i) issue to itself any shares under the Option Agreement that the undersigned would otherwise be entitled to in the event that the undersigned is in default under this note and exercises any rights under the Option Agreement and (ii) file a financing statement with the Texas Secretary of State pursuant to the Uniform Commercial Code as enacted by the State of Texas (the "TEXAS UCC"). The appointment of the Company as the undersigned's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the obligations under this note have been fully and finally paid. The undersigned intends that the security interest granted herein to the Company shall be in addition to all other rights that the Company may have against the undersigned for the enforcement of the indebtedness evidenced hereby. The Company shall have all the rights of a secured party under the Texas UCC in respect of the security interest granted hereby. The undersigned agrees to execute a customary form of blank stock powers with respect to all shares he may be entitled to receive under the Option Agreement. Notwithstanding the grant of the security interest, the exercise of the option shall be solely at the discretion of the undersigned. This note may be prepaid, in whole or in part, at one time or from time to time, without premium or penalty with such prepayments to be applied to the installments in their reverse order of maturity. The Company may declare this note to be immediately due and payable upon the termination of the employment of the undersigned by the Company whether such termination is for cause, not for cause, voluntary or involuntary, death, disability, or resignation. The undersigned hereby waives presentment, demand for payment, protest and notice of dishonor of this note. The note is binding upon the undersigned and her heirs, estate, representatives, successors and assigns, and shall inure to the benefit of the Company and its successors and assigns. This note shall supersede and replace in all respects all prior notes executed and delivered by the undersigned to the Company. Notwithstanding anything herein to the contrary, no provision of this note shall require the payment or permit the collection of interest in excess of the maximum rate permitted by applicable law as the same exists from day to day during the term hereof (the "Maximum Rate"). If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither the undersigned nor the sureties, guarantors, successors or assigns of the undersigned 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. If for any reason interest in excess of the Maximum Rate shall be deemed charged, required or permitted or otherwise should arise, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to the undersigned. ---------------------------- Jim Powell ATTACHMENT A: OPTION GRANTS FOR JIM POWELL
TOTAL # SHARES GRANT DATE EXERCISE PRICE OUTSTANDING ---------- -------------- ----------- 04/17/1997 $ 7.82 64,791 12/15/1998 $ 8.05 203,745 09/08/1999 $ 5.71 193,845 07/12/2000 $6.3125 175,000 04/02/2001 $ 7.50 125,000 02/25/2002 $ 12.76 75,000
ATTACHMENT B: DATES OF REPAYMENT OF PRINCIPAL $200,000.00 plus interest thereon shall be paid within 20 business days after the later of July 1, 2002 or the third business day following the public announcement of the completion or termination of the Offer. "Offer" means that certain offer by the Issuer to acquire all of the ordinary share capital of ISA International plc, a public limited company listed on the Alternative Investment Market of the London Stock Exchange and organized under the laws of England and Wales as described in the offer announcement date May 7, 2002. $409,180.73 plus interest thereon together with all remaining amounts of principal and interest shall be paid on or before March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----