-----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, K63ylSB80oumC8yvvs3i21evuUcfz9G+kyAuZrXGUYJ5395EsYelRhrBasA+8bcW hrH4CHXz2F1v32m5NHcWQQ== 0000950134-99-005790.txt : 19990630 0000950134-99-005790.hdr.sgml : 19990630 ACCESSION NUMBER: 0000950134-99-005790 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAISYTEK INTERNATIONAL CORPORATION /DE/ CENTRAL INDEX KEY: 0000887403 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752421746 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25400 FILM NUMBER: 99655401 BUSINESS ADDRESS: STREET 1: 500 N CENTRAL EXPRWY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9728814700 MAIL ADDRESS: STREET 1: 500 N CENTRAL EXPWY CITY: PLANO STATE: TX ZIP: 75074 10-K405 1 FORM 10-K405 FOR THE FISCAL YEAR END MARCH 31, 99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999 Commission File Number 0-25400 DAISYTEK INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2421746 (State or other jurisdiction of (I.R.S. Employer Number) incorporation or organization) 500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 972-881-4700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 11, 1999 (based on the closing price as reported by the National Association of Securities Dealers Automated Quotation System) was $236,044,518. As of June 11, 1999, there were 17,166,814 shares outstanding of the registrant's Common Stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Part II - Prospectus dated March 26, 1998 2 Unless the context otherwise requires, references to Daisytek International Corporation include its direct and indirect subsidiaries, including Daisytek, Incorporated, the Company's primary operating subsidiary. References in this Report to the Company's fiscal year means the 12 month period ending on March 31 of such year. INDEX
PART 1 Page Item 1. Business .................................................................... 3 Item 2. Properties .................................................................. 11 Item 3. Legal Proceedings ........................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders ......................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................................. 12 Item 6. Selected Consolidated Financial Data ........................................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 14 Item 7a. Quantitative and Qualitative Disclosure About Market Risk ................... 23 Item 8. Financial Statements and Supplementary Data ................................. 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................................... 24 PART III Item 10. Directors and Executive Officers of the Registrant .......................... 49 Item 11. Executive Compensation ...................................................... 51 Item 12. Security Ownership of Certain Beneficial Owners and Management .............................................................. 54 Item 13. Certain Relationships and Related Transactions .............................. 56 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................................................. 57 SIGNATURES ............................................................................... 62
-2- 3 PART I ITEM 1. BUSINESS GENERAL Daisytek International Corporation (the "Company" or "Daisytek") is a leading wholesale distributor of non-paper computer and office automation supplies and accessories ("computer supplies products") and professional-grade audio and video media products ("professional tape products"). Through its Priority Fulfillment Services subsidiaries ("PFS"), the Company is also a leading provider of end-to-end transaction management and e-commerce logistics business solutions. The Company has four business segments: (1) U.S. Computer Supplies; (2) International Computer Supplies; (3) Professional Tape Products; and (4) Priority Fulfillment Services. The Company began its U.S. Computer Supplies business in the 1980's and started to expand internationally in 1989 with its Canadian operations. The Computer Supplies segments distribute over 10,000 computer supplies products to over 28,000 customer locations, including value-added resellers ("VARs"), computer supplies dealers, office product dealers, contract stationers, buying groups, computer and office product superstores and other retailers who resell the products to end-users. The Company believes it is the largest wholesale distributor of computer supplies products in the world. The Computer Supplies segments sell primarily nationally known, name-brand computer supplies products manufactured by over 150 original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Apple, Panasonic, Tektronix, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. The Computer Supplies products include laser toner, inkjet cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage products, computer tape cartridges and accessories. These products are used in a broad range of computers and office automation products, including laser and inkjet printers, photocopiers, fax machines and data storage products. The Computer Supplies segments utilize sophisticated telemarketing, direct mail programs, frequent innovative sales promotions and electronic commerce technology to market computer supplies products throughout the United States, Canada, Mexico, Australia and Latin America, as well as in other international markets, including Singapore and the Pacific Rim. The U.S. Computer Supplies segment presently operates sales offices in Plano, Texas, and Memphis, Tennessee, and one centralized "superhub" distribution center in Memphis, Tennessee, to service the U.S. and certain international markets. To service other international markets, the International Computer Supplies segment operates smaller regional sales and distribution centers in Miami, Florida, Mexico, Australia, Canada and Singapore. Most of the Company's U.S. computer supplies products shipments are shipped via Federal Express under an agreement (the "Federal Express Agreement") which, together with the Company's centralized distribution center, currently enables the Company to accept orders for computer supplies products until 10:30 p.m. Eastern Standard Time (EST) and offer its customers next business day delivery of product in stock. In 1998, the Company added its Professional Tape Products segment with the acquisitions of The Tape Company, Inc. ("The Tape Company") and Steadi-Systems, Ltd. ("Steadi-Systems"). In late March 1999, the Company purchased the professional tape division of Videotape Products, Inc. ("VTP"). In connection with this purchase, the Company also sold certain assets of Steadi-Systems' professional hardware division to VTP. As part of the agreement, both VTP and the Company have entered into a long-term strategic alliance, under which both companies will work jointly to provide a full range of products to their combined customers. The Professional Tape Products segment is based in Chicago, Illinois and operates as a wholesale distributor of media products to the film, entertainment and multimedia industries. The Professional Tape Products segment distributes more than 2,000 professional tape products to over 18,000 customers. Professional Tape Products include videotape, audiotape, motion picture film, and data storage media used in video and audio production. Customers primarily include production companies, post-production operations, broadcast stations, corporate in-house production facilities, advertising agencies and cable television providers. -3- 4 PFS, formed in 1996, is a leading provider of end-to-end transaction management and e-commerce logistics solutions. PFS delivers these services to a number of clients in a wide variety of industries, both domestically and internationally. Services include sales and order processing, call center management, product warehousing with real time inventory management, customized packaging, product fulfillment and transaction management accounting. A rapid growing component of the PFS business is PFSweb, an outsourcing solution for companies conducting sales over the Internet by providing the infrastructure needed to support web-based activity, including online order processing, warehousing and shipping of product. PFS and PFSweb utilize primarily the Company's call center and distribution facilities in Plano, Texas, and Memphis, Tennessee, and also the Company's international sales and distribution facilities. In addition, in December 1998, PFS established a European operation ("PFS Europe") to provide fulfillment logistics call center activities and distribution services for clients throughout Europe, the Middle East and Africa. PFS Europe operates a call center in Maastrict, The Netherlands, and a distribution center in Aachen, Germany and expects to move into a new distribution facility in Leige, Belgium in fiscal 2000. SEGMENT INFORMATION For financial information about the results of the Company's operating segments for each of the last three fiscal years, see Note 9 of Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. PRODUCTS AND SERVICES The Company distributes more than 10,000 different computer supplies products and more than 2,000 professional tape products. The Company regularly updates its product line to reflect advances in technology and to provide a wide product range of the most popular products. Computer supplies product and professional tape product net sales represented approximately 79% and 11%, respectively, of the Company's total net sales in fiscal year 1999. The Company's major product and service categories can generally be classified as follows: Non-Impact Printer Supplies. Non-impact printer supplies include toner cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and fax supplies. Non-impact printers, such as laser printers, personal copiers and fax machines, continue to grow in popularity and have a wide range of applications. Sales of non-impact printer supplies accounted for approximately 57% of the Computer Supplies net sales in fiscal year 1999. The Company also sells specialized all-in-one toner cartridges for laser printers produced by manufacturers such as Canon, Hewlett-Packard, Digital, Brother and Apple. Sales of these supplies accounted for approximately 22% of the Computer Supplies net sales in fiscal year 1999. Magnetic Media Products. Magnetic media products include computer tapes, data cartridges, diskettes, optical disks, compact disc recordable drives and media, zip drives and media, and other products which store or record computer information and are used in a variety of computers ranging from notebook and personal computers to large mainframe computer systems. Sales of magnetic media products accounted for approximately 9% of the Computer Supplies net sales in fiscal year 1999. Impact Printer Supplies. Impact printer supplies include printwheels, ribbons, elements, fonts and other consumable supplies used in impact printers ranging from electronic typewriters to high-speed dot matrix printers. While new technology is moving toward non-impact printing, the Company believes that a substantial installed base of impact printers, such as dot matrix printers, are still in use and require a continuing amount of computer supplies products. Sales of impact printer supplies accounted for approximately 6% of the Computer Supplies net sales in fiscal year 1999. Accessories and Other Products. Accessories sold by the Computer Supplies segments include cleaning supplies, disk storage boxes, data cartridge storage, racks, surge protection devices, workstation accessories and anti-glare screens. The Company also sells a number of other products such as specialty paper, banking supplies and selected business machines. Sales of accessories and other products accounted for approximately 6% of the Computer Supplies net sales in fiscal year 1999. -4- 5 Professional Video and Audio Products. Professional video and audio products include digital and analog formats of professional video and audio recording media, the majority of which are cassette based. The Company also sells motion picture film, disc-based media such as recordable compact discs and recordable DVD, and data storage media products that are used in the editing and archiving of video and audio productions. In addition, the Company sells accessory items such as videotape cases, sleeves, labels, audio tape reels, storage/mailing boxes, and high density media storage systems such as shelving, cabinets, etc. The Professional Tape Products segment accounted for approximately 11% of the Company's total net sales in fiscal year 1999. Outsourcing Services. PFS offers end-to-end transaction management and e-commerce logistics business solutions. PFSweb provides e-business solutions to enable companies to do commerce on the Internet by providing the infrastructure needed to support web-based activity, including online order processing, warehousing and shipping of product. See Item 1. Business - Sales and Marketing - - PFS. SUPPLIERS The Company's computer supplies products are manufactured by over 150 original equipment manufacturers, including Hewlett-Packard, Canon, Lexmark, IBM, Okidata, Apple, Panasonic, Tektronix, Kodak, Imation, Epson, Sony, Xerox, Brother and Maxell. During fiscal year 1999, approximately 77% of the Computer Supplies product net sales were derived from products supplied by the Computer Supplies segments' ten largest suppliers. The sale of Hewlett-Packard products accounted for approximately 41% of Computer Supplies net sales, with the sales of the other nine largest suppliers each accounting for between 2% to 8% of Computer Supplies net sales. The Company's professional tape products are supplied by over 25 manufacturers, including Sony, Fuji, Quantegy, Maxell, Panasonic, BASF, TDK, Kodak, JVC, Russ Bassett, Plastic Reel Corporation and Alpha Enterprises. During fiscal year 1999, approximately 87% of the Professional Tape Products net sales were derived from products supplied by the segment's four largest suppliers, with the sales of the remaining suppliers each accounting for less than 5% of Professional Tape Products net sales. Many of the Company's suppliers offer rebate programs under which, subject to the Company purchasing certain predetermined amounts of inventory, the Company receives rebates based on a percentage of the dollar volume of total rebate program purchases. The Company also takes advantage of several other programs offered by many of its suppliers. These include price protection plans under which the Company receives credits if the supplier lowers prices on previously purchased inventory and stock rotation or stock balancing privileges under which the Company can return slow moving inventory in exchange for other products. In addition, in order to introduce new products, many suppliers will permit the Company to return all unsold inventory after an introductory trial period. Material changes by one or more of the Company's key suppliers of their pricing arrangements or other marketing programs may materially and adversely affect the Company's business. The Company's purchases of computer supplies and professional tape products inventory are closely tied to sales and are generally based upon the sales volume of the most recent six to ten week periods. Some of the Company's suppliers require minimum annual purchases, which, for fiscal year 2000, will aggregate approximately $50 million. The Company has entered into written distribution agreements with Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata and many of the other major suppliers of the products it distributes. As is customary in the industry, these agreements generally provide non-exclusive distribution rights, have one-year renewable terms and are terminable by either party at any time, with or without cause. The Company considers its relationships with its major suppliers, including Hewlett-Packard, Canon, Lexmark, IBM, Xerox, Epson, Brother, Sony, Fuji, Maxell, Tektronix and Okidata to be good. Nevertheless, there can be no assurance that a material change in the Company's relationship with one or more of its major suppliers will not have a material adverse effect on the Company's business. Although the Company purchases most of its products directly from authorized U.S. manufacturers, the Company also imports products from foreign sources, particularly when fluctuations in foreign exchange rates or product prices make it attractive to do so. Similarly, depending upon product pricing and availability, the Company also purchases products from secondary sources, such as other wholesalers and selected dealers, rather than directly from -5- 6 the manufacturer. The Company utilizes its ability to purchase imported and secondary source products in order to provide its customers with competitive prices and a wide range of product lines. In order to ensure that such imported and secondary source products are not produced by unauthorized manufacturers, the Company has established various procedures which it believes enable it to identify unauthorized products and, to the extent possible, return such unauthorized products to the foreign or secondary source. Nevertheless, there can be no assurance that the Company will be completely successful in such efforts or that such imported and secondary source products will continue to be available or that any lack of availability will not have a material adverse effect on the Company's business. SALES AND MARKETING COMPUTER SUPPLIES The Computer Supplies segments utilize sophisticated telemarketing, direct mail programs and frequent innovative sales promotions and other marketing efforts to market its computer supplies products to a wide array of dealers, contract stationers, VARs, retailers and other resellers. The customer and prospect list for computer supplies products includes U.S., Canadian, Australian, Mexican, Latin American, Singaporean and other foreign computer supplies dealers, office product dealers, VARs, buying groups, computer stores, contract stationers, computer and office product superstores, catalog merchandisers, drug and grocery stores, mass merchandisers, direct mail marketers, college bookstores and other resellers. The Company currently ships its Computer Supplies products to over 28,000 customer locations. The typical Computer Supplies customer is a small to medium sized reseller who does not have the resources to establish direct purchasing relationships with multiple manufacturers and, instead, must rely on wholesale distributors like the Company. The Company also sells its products to a number of large customers, including computer and office product superstores and contract stationers, which benefit from the Company's product breadth, timely delivery of fast-moving products, and efficient distribution of a variety of product lines to multiple locations. No single customer accounts for more than 10% of the Computer Supplies sales for each of the fiscal years ended March 31, 1999, 1998 and 1997. As a result of customer consolidation and office product superstores reducing inventory levels and buying direct from manufacturers, the Company's U.S. sales growth of computer supplies products has been slowing. International Computer Supplies sales accounted for approximately 34% of the Company's Computer Supplies net sales in fiscal year 1999, and the Company believes that international markets represent further opportunities for growth. The Company began its International Computer Supplies presence with sales and distribution operations in Canada. Net sales in Canada represent about 41% of total International Computer Supplies net sales. To service the growing Latin American market, the Company opened a sales office and distribution center in Mexico City, Mexico in November 1994 and opened a similar facility in Miami, Florida, in January 1996. To take advantage of the growing Far East and Australia marketplace, in October 1996, the Company acquired a large computer and office automation supplies wholesaler in Australia, and in January 1998, the Company opened a sales and distribution facility in Singapore. There can be no assurance, however, that the Company will be successful in these or other international efforts or that the risks inherent in international operations, such as currency fluctuations or the political or economic instability of certain foreign countries and regions, such as Mexico and the Pacific Rim, will not have a material adverse effect on the Company's results of operations. See Note 9 of the Notes to Consolidated Financial Statements for certain financial information regarding the Company's domestic and international sales during the last three fiscal years. The Company's Computer Supplies sales and telemarketing department is divided into several groups or teams, each having its own particular sales objective. For example, the Retail Department focuses specifically on large computer retailers and office product superstores. Similarly, separate groups of sales representatives are responsible for a select group of national accounts, such as contract stationers, office products dealers and buying groups, while other groups focus on new accounts, VARS, convenience stores and mass merchant customers, existing business or international and export sales. By utilizing sophisticated telemarketing software and call management systems, including caller identification, sales representatives are able to verify customer account numbers and contact persons and quickly identify a customer's buying patterns, recent purchases, credit availability and other sales and marketing -6- 7 information. The telecommunications software also enables sales and marketing management to better identify, control and monitor sales representatives' prospecting activity with the Company's customers. The Company provides extensive training for new computer supplies products sales personnel with special emphasis on the need for regular customer contact, prompt response to customers' demands for product information and the continuous need to inform customers of technological advancements by the Company's suppliers. The Company, together with its major suppliers, provides the Company's sales personnel with ongoing product-specific training and education emphasizing computer supplies as well as new technologies, new products and new product applications. In order to maintain its position as a low cost wholesale distributor, the Company regularly monitors the efficiency of its sales staff. By utilizing sophisticated telecommunications equipment, the Company is able to measure the number of calls being fielded by a sales representative, their success rate in terms of orders obtained compared to calls taken and customer service statistics, such as abandoned call rates and average response times. The Company's sales force receives a base salary as well as varying sales incentives based on gross profit margin achievements. In addition, a number of suppliers periodically offer sales bonus programs in connection with specific product sales campaigns which can further augment a sales representative's compensation. One of the Computer Supplies' primary marketing tools is its quarterly catalog, known as the "Book of Deals." In order to promote its image as a low cost wholesaler and provider of value-added services, the Book of Deals will usually highlight a theme related to specific products, customer services or a combination of the two. The U.S. Computer Supplies business presently distributes a total of approximately 52,000 catalogs and contract price books to its active U.S. customers each quarter. The International Computer Supplies segment also distributes a separate Book of Deals designed specifically for each of its Canadian, Mexican, Australian and Singaporean subsidiaries. Other catalog-type marketing tools used by the Computer Supplies business include customized catalogs produced by the Company for the reseller to distribute to its end-user customers. The Computer Supplies business also distributes "flyers" which announce new product line additions or special promotions and are usually inserted in the Book of Deals or mailed directly to customers. Although the Book of Deals remains one of the primary marketing tools for sales of computer supplies products, the Company also uses electronic commerce marketing tools as well. The Company believes it has established itself as a leader in the deployment of electronic commerce in the computer supplies products industry. These tools are designed to win further market share and to reduce cost in the customer relationship by automating information flow. By accepting both externally developed commercially available technologies as well as internally developed proprietary technologies, the Company can offer a suite of electronic commerce solutions including: traditional X.12, proprietary EDI, and integrated FTP; third party software systems such as DDMS, Copas, and The Systems House; and Internet, intranet, and extranet systems. During fiscal year 1997, the Company introduced a CD-ROM based electronic catalog of computer supplies products and on-line ordering tool, known as "SOLO", the System for Online Ordering, and during fiscal year 1998, introduced a World Wide Web version of the product, known as "SOLOnet". These electronic tools provide customers with on-line ordering capabilities; fingertip access to up-to-date pricing, product and order information; search and retrieval capabilities based on part numbers, manufacturers, product description, retail price, machine compatibility and other factors; and convenient access to manufacturers' product literature and training videos; and allows customers to view their own account information. During fiscal year 1999, the Company developed an Application Programming Interface ("API") known as the Business Interface. This API will allow companies with their own Internet technology to make live calls into the Company's inventory, tax, freight, and credit card systems for a real-time shopping experience. The order can be built simultaneously on the reseller's system and the Company's system, providing instantaneous fulfillment of the order. Certain of the Company's computer supplies manufacturers provide the Company with cooperative advertising programs, marketing development funds and other types of incentives and discounts which offset the production costs of the Company's quarterly Book of Deals, other published marketing tools and other related costs. -7- 8 PROFESSIONAL TAPE PRODUCTS The Professional Tape Products segment utilizes sophisticated telemarketing, direct mail programs and frequent sales promotions and other marketing efforts to market its products to customers, primarily including production companies, post-production operations, broadcast stations, corporate in-house production facilities, advertising agencies and cable television providers. The Professional Tape Products segment delivers products to more than 18,000 customers, which are primarily located in the U.S. The Professional Tape Products segment has account executives in the field covering major markets in the U.S. Account executives target to be in the field approximately three days per week to actively solicit new business of targeted high volume customers, maintain regular customer contact, respond to customers' demand for product information and inform customers of technological advancements by Professional Tape Products suppliers. The inbound call center teams supplement customer service provided by the account executives. The Professional Tape Products segment utilizes the Company's sophisticated telemarketing and call-center systems, as previously discussed. The Professional Tape Products segment provides extensive training for new account executives and, together with its major suppliers, provide the account executives with ongoing product-specific training and education emphasizing professional tape products as well as new technologies, new products and new product applications. The Professional Tape Products' call center teams receive the same training as the account executives. The Professional Tape Products segment publishes and distributes a catalog semiannually. The Professional Tape Products segment, with certain of its suppliers, offers quarterly promotions to its customers. With these programs, Professional Tape Products' customers earn and accumulate points on select purchases, which can be redeemed for merchandise like cameras, video equipment or service. PFS PFS provides end-to-end transaction management and e-commerce logistics solutions, on an outsourced basis, to companies looking to improve their overall service levels, reduce costs or to address new markets or channels of distribution. PFS provides call center, inventory management, distribution services, credit and collection and returns processing to clients primarily on a fee basis. PFS's call-center services include order entry, order tracking and customer service (inbound), outbound telemarketing services and customized reporting of customer and call information. PFS also provides other support services such as invoicing, credit management and collection services, and accounting and systems support. PFS services are available both domestically and internationally through the Company's distribution facilities and call centers in the United States, Canada, Mexico, Australia, Singapore and PFS's operation in Europe. Through PFSweb, the Company provides these services to companies looking to enter, expand or improve their overall business via sales over the Internet and other e-business type models. PFSweb offers the services necessary for companies to conduct sales over the Internet, from online order processing -- including credit card processing and call center support -- to warehousing and shipping of product. Electronic orders enter PFSweb's computer system and then are processed automatically and sent for shipment from PFS's or the clients' distribution facilities. In fiscal year 1999, PFS and PFSweb moved over $367 million of its clients' product, more than double the amount for the fiscal year 1998. Client relationships number over 30 and include major brands like IBM, Tektronix, Hewlett-Packard, Exabyte and Nokia, amongst others. PFS presently provides services primarily under fee-based contracts (where revenue is based on either the sales value of the products or service activity volume) and, in certain limited circumstances, under master distribution agreements (where PFS takes title and resells the product). -8- 9 MANAGEMENT INFORMATION SYSTEMS The Company maintains advanced management information systems and has automated virtually all key business functions using on-line, real time systems. These on-line systems provide management with information concerning sales and margins, inventory levels, customer payments and other operations which are essential for the Company to operate as a low cost, high efficiency wholesale distributor. These systems also serve as the platform from which the Company offers its PFS services. The implementation of these systems has allowed the Company to offer an advanced suite of electronic commerce tools to its customers so that the Company can communicate with their computer systems and automatically process, send and receive purchase orders, invoices and acknowledgments. The Company offers "customer links" to provide customers with direct access to a proprietary Company database to examine pricing, credit information, product description and availability and promotional information. This link also allows customers to place orders directly into the Company's order processing system. These systems also allow the Company to offer similar features to its customers through SOLOnet. The Company has also invested in advanced telecommunications, voice response equipment, electronic mail and messaging, automated fax technology, scanning, wireless technology, bar coding, fiber optic network communications and automated inventory management. The Company has developed and utilizes telecommunications technology which provide for automatic customer call recognition and customer profile recall for inbound telemarketing representatives and computer generated outbound call objectives for outbound telemarketing representatives. The Company plans to continue to invest in various management information systems enhancements and upgrades to improve efficiency, monitor its operations, manage inventory risks and offer faster and higher levels of service to its customers and vendors. DISTRIBUTION OF PRODUCTS The Company operates a "superhub" distribution center located in Memphis, Tennessee. The Company has expanded its facilities space at the "superhub" from 370,000 square feet in 1997 to 613,000 square feet in 1999. The facility is located approximately four miles from the Memphis International airport, where both Federal Express and United Parcel Service operate large hub facilities. The "superhub" contains automated conveyors, in-line scales and shipment photographs for automatic accuracy checking, computerized sorting equipment, powered material handling equipment and scanning and bar-coding systems. The Company believes that computer supplies and professional tape products sold by the Company are particularly suited to cost effective overnight delivery because of their unique value to weight characteristics. Accordingly, almost all of the Company's U.S. computer supplies package orders are shipped via Federal Express, except for certain "heavyweight" packages or as otherwise requested by the customer. The Company's centralized distribution center, together with the implementation of the Federal Express Agreement, currently enables the Company to offer to its customers next business day delivery to most U.S. geographic areas. The Company ships virtually 100% of U.S. computer supplies orders for product in stock on the same day. The material handling system at its Memphis distribution center includes several high technology enhancements, including an automated package routing system and a paperless order picking system. These systems have allowed the Company to substantially increase the package movement capacity within the existing facility, further improve package shipment accuracy and enhance the Company's ability to perform value-added services for its customers, including custom labeling and price stickering. Substantially all of the Company's U.S. computer supplies products sales are distributed from the Memphis distribution center. In order to effectively service international markets, the Company operates smaller, regional warehouse and distribution facilities in Toronto and Vancouver, Canada; Mexico City, Mexico; Sydney, Australia; Singapore; and Miami, Florida. -9- 10 The Company's Professional Tape Products segment operates regional warehouses to effectively service its local markets on a same-day basis. Regional Professional Tape Products warehouses are located in Chicago, Illinois; New York, New York; Hollywood, San Francisco and Irvine, California; Atlanta, Georgia; Philadelphia and Pittsburgh, Pennsylvania; Detroit, Michigan; Minneapolis, Minnesota; Cincinnati, Ohio; Dallas, Texas; Phoenix, Arizona; Kansas City, Missouri; Orlando, Florida; and Seattle, Washington. In addition, Professional Tape Products utilizes the Company's distribution facility in Miami, Florida, to service the local market. PFS and PFSweb utilize the same distribution facilities as the Computer Supplies business in the U.S., Canada, Mexico, Australia, and Singapore. PFS Europe operates a distribution center in Aachen, Germany and expects to move into a new distribution facility in Liege, Belgium in fiscal 2000. PFS maintains relationships with a number of shipping companies to provide up to next business day delivery on domestic package orders, truck shipments on larger domestic orders and a variety of air and surface delivery options for international orders. EMPLOYEES As of March 31, 1999, the Company had 1,021 full-time employees and 160 part-time employees. 908 of those employees were located in the United States. None of the Company's employees are represented by a labor union, and the Company has never suffered an interruption of business as a result of a Company labor dispute. The Company considers its relations with its employees to be favorable, and the Company believes it will be able to continue this relationship by various employee incentive and participation programs, including employee stock option and stock purchase plans. The Company also actively recruits college graduates through on-campus recruiting programs. Each newly hired employee for this program is placed into the Company's training program for approximately three months, which introduces them to most aspects of the Company's business. Management believes that this program is an important tool in recruiting and developing high quality individuals with management potential to support the Company's future growth. COMPETITION The Company believes that most, if not all, of its Computer Supplies and Professional Tape customers maintain several sources of supply for their product requirements. Accordingly, the Company's Computer Supplies segments compete with product manufacturers, general office supply wholesalers, other national and regional wholesale computer supplies distributors, computer hardware and software distributors and, to a lesser extent, non-specialized wholesaler distributors. The Professional Tape segment competes with product manufacturers, mail-order houses, video and audio equipment distributors, and other regional and local professional tape distributors. Competition in the distribution business is generally based on price, breadth of product lines, product and credit availability, delivery time and the level and quality of customer services. The Computer Supplies and Professional Tape Products segments compete primarily on the basis of their ability to offer competitive prices and quality service while maintaining a high level of operating efficiency. The Company believes its competitive advantages over product manufacturers and other wholesale distributors include its ability to efficiently maintain a wide selection of name brand products in stock ready to be shipped on a same-day basis and delivered overnight, to efficiently distribute its products, to provide innovative and high quality value-added customer service programs and to respond to changing customer demands and product development. The Company believes that the market for its outsourcing services is highly competitive. The Company competes with customer in-house operations, regional and national logistics providers, telemarketing firms, public warehouses and shipping and trucking companies. The Company believes that its service offering is unique due to its wide array of high quality, value-added services. PFS's competitive advantage is based on various factors including its ability to offer an end-to-end transaction management solution. Many competitors offer some or substantially all of the same services, and many of these competitors have greater financial, distribution and marketing resources than the Company. -10- 11 BACKLOG The Company does not have a significant backlog of orders and does not consider backlog to be material to an understanding of its business. ITEM 2. PROPERTIES The Company's Computer Supplies and PFS businesses are headquartered in a 65,419 square foot central office facility located in Plano, Texas, a Dallas suburb. The Company operates a central distribution center in Memphis, Tennessee, which is utilized by U.S. Computer Supplies, Professional Tape Products, and PFS. The Company also operates regional sales and distribution centers in Singapore; Toronto, Ontario; Mexico City, Mexico; Vancouver, British Columbia; Sydney, Australia; and Miami, Florida, which are utilized by International Computer Supplies and PFS. PFS's European operations are headquartered in Maastrict, The Netherlands, with initial distribution operations in Aachen, Germany. PFS's European distribution will be moving in mid-1999 to a larger facility in Leige, Belgium. The Company's Professional Tape Products business is headquartered in Wood Dale, Illinois, a Chicago suburb. The Professional Tape Products segment also operates regional offices in New York, New York; Hollywood, San Francisco and Irvine, California; Atlanta, Georgia; Philadelphia and Pittsburgh, Pennsylvania; Detroit, Michigan; Minneapolis, Minnesota; Cincinnati, Ohio; Dallas, Texas; Phoenix, Arizona; Kansas City, Missouri; Seattle, Washington; and Orlando and Miami, Florida. All of the Company's facilities are leased and the material lease agreements contain one or more multiple year renewal options. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -11- 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed and trades on the Nasdaq Stock Market under the symbol "DZTK." The following table sets forth for the period indicated the high and low sale price for the Common Stock as reported by the Nasdaq National Market, as adjusted to reflect the two for one stock split effective March 2, 1998:
PRICE ------------------------- HIGH LOW ----------- ---------- Fiscal Year 1998 First Quarter....................... $ 19 7/8 $ 12 3/8 Second Quarter...................... $ 24 $ 19 3/8 Third Quarter....................... $ 22 1/2 $ 16 5/16 Fourth Quarter ..................... $ 28 1/4 $ 17 3/8 Fiscal Year 1999 First Quarter....................... $ 26 7/8 $ 21 1/4 Second Quarter...................... $ 27 $ 16 3/4 Third Quarter....................... $ 23 1/4 $ 12 3/4 Fourth Quarter ..................... $ 23 1/2 $ 15 1/4
As of June 11, 1999, there were approximately 3,000 shareholders of which 84 were record holders of the Common Stock. The Company has never paid cash dividends on its Common Stock and does not anticipate the payment of cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain all earnings to finance the further development of its business. The payment of any future cash dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of income data for each of the fiscal years ended March 31, 1999, 1998 and 1997, and the selected consolidated balance sheet data as of March 31, 1999 and 1998 have been derived from the Company's audited consolidated financial statements, and should be read in conjunction with those statements, which are included in this Form 10-K. The selected consolidated statements of income data for the fiscal years ended March 31, 1996 and 1995 and the selected consolidated balance sheet data as of March 31, 1997, 1996 and 1995 have been derived from the Company's consolidated financial statements, and should be read in conjunction with those statements, which are not included in this Form 10-K. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto which are included elsewhere in this Form 10-K. The following selected consolidated financial data for fiscal years 1998, 1997, 1996 and 1995 has been restated to combine the results of operations and financial positions of Daisytek with The Tape Company, which was acquired by the Company during June 1998 and accounted for as a pooling of interests. See Note 2 of Notes to Consolidated Financial Statements for further discussion. -12- 13
FISCAL YEARS ENDED MARCH 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (in thousands, except per share data) CONSOLIDATED STATEMENTS OF INCOME DATA: Net sales ............................ $ 908,630 $ 800,112 $ 639,511 $ 492,097 $ 377,085 Cost of sales ........................ 800,263 712,568 571,448 437,970 335,731 --------- --------- --------- --------- --------- Gross profit ......................... 108,367 87,544 68,063 54,127 41,354 Selling, general and administrative expenses ........... 70,648 55,974 41,870 32,565 26,367 --------- --------- --------- --------- --------- Income from operations before acquisition and disposition costs ............................ 37,719 31,570 26,193 21,562 14,987 Acquisition related costs ............ 1,111 735 -- -- -- Loss on disposition of business ...... 2,800 -- -- -- -- --------- --------- --------- --------- --------- Income from operations ............... 33,808 30,835 26,193 21,562 14,987 Interest expense ..................... 2,797 3,134 1,847 1,542 2,126 --------- --------- --------- --------- --------- Income before income taxes ............................. 31,011 27,701 24,346 20,020 12,861 Provision for income taxes ............................. 11,823 10,185 8,432 6,725 4,198 --------- --------- --------- --------- --------- Income before cumulative effect of accounting change ................ 19,188 17,516 15,914 13,295 8,663 Cumulative effect of accounting change, net of tax ............... (405) -- -- -- -- --------- --------- --------- --------- --------- Net income ........................... $ 18,783 $ 17,516 $ 15,914 $ 13,295 $ 8,663 ========= ========= ========= ========= ========= PER SHARE DATA: Net income per common share: Basic Income before cumulative effect of accounting change ............... $ 1.12 $ 1.20 $ 1.14 $ 0.98 $ 0.82 Cumulative effect of accounting change, net of tax ................. (0.02) -- -- -- -- --------- --------- --------- --------- --------- Net income .......................... $ 1.10 $ 1.20 $ 1.14 $ 0.98 $ 0.82 ========= ========= ========= ========= ========= Diluted Income before cumulative effect of accounting change ............... $ 1.08 $ 1.14 $ 1.08 $ 0.92 $ 0.72 Cumulative effect of accounting change, net of tax ................. (0.02) -- -- -- -- --------- --------- --------- --------- --------- Net income .......................... $ 1.06 $ 1.14 $ 1.08 $ 0.92 $ 0.72 ========= ========= ========= ========= ========= Weighted average common and common share equivalents outstanding: Basic ......................... 17,101 14,541 13,909 13,577 10,525 Diluted ....................... 17,789 15,318 14,801 14,489 12,059
-13- 14
AS OF MARCH 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Working capital ................. $138,764 $123,986 $ 82,389 $ 58,453 $ 43,591 Total assets .................... 315,879 257,845 185,226 135,477 99,783 Long-term debt, net of current maturities .......... 43,021 16,916 30,454 16,419 11,334 Shareholders' equity ............ 157,170 137,731 70,383 53,720 41,307
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The matters discussed in this report on Form 10-K, other than historical information, and, in particular, information regarding future revenue, earnings and business plans and goals, consist of forward-looking information under the Private Securities Litigation Reform Act of 1995, and are subject to and involve risks and uncertainties which could cause actual results to differ materially from the forward-looking information. These risks and uncertainties include, but are not limited to, the "Risk Factors" set forth in the Company's prospectus dated March 26, 1998, which is incorporated by reference herein, as well as general economic conditions, industry trends, the loss of key suppliers or customers, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), risks inherent in acquiring, integrating and operating new businesses, concentrations of credit risk, distribution efficiencies, capacity constraints, technological difficulties, exchange rate fluctuations, and the regulatory and trade environment (both domestic and foreign). BUSINESS STRATEGY Daisytek is a low cost distributor and outsourcing services provider. The Company bases its continued growth on the following strategies: 1) Capitalize on e-commerce and outsourcing trends through expansion of its PFS and PFSweb operations. 2) Focus on the growing computer supplies and professional tape industries in the U.S. and international markets. 3) Seek acquisitions to supplement growth in the Company's computer supplies business, professional tape business, and fulfillment service business or to add selected product lines. Through its PFS business, the Company utilizes its core strengths in distribution and telemarketing to provide its business partners with end-to-end transaction management and e-commerce logistics solutions on an international basis. Services include sales and order processing, call center management, product warehousing with real-time inventory management, customized packaging, product fulfillment and transaction management accounting. Through PFSweb, the Company offers e-commerce outsourcing solutions for companies to conduct sales over the Internet by providing the infrastructure needed to support web-based activity, including online order processing, warehousing, and shipping of product. The PFS segment of the Company's business strategy offers the potential for higher margins because it is primarily service fee- and revenue-based. The Company's Computer Supplies segments specialize in computer supplies that have longer life cycles and lower risk of technological obsolescence than hardware and software products. The Company believes that the demand for these products remains strong due to the advancement and reduction in price points of printer and computer technologies, which in turn grows the installed base of equipment that consumes the products the Company distributes. Continuing automation of the workplace and the tremendous growth in color printing technologies that use consumable supplies at higher rates also fuel the demand for the computer supplies product offering. The Company offers these products to its customers using value-added services such as next-business-day delivery, the latest order cutoff times in the industry, order confirmation, product drop-shipping, and customized product catalogs. The Company plans to expand sales to existing customers including those in the contract stationers, value-added resellers, computer and -14- 15 office-product dealer, and superstore channels. The Company is also focusing on new distribution channels such as mass merchants, grocery and convenience stores and direct mail marketers. The Company continues to research new markets to expand its international computer supplies business. Many international markets are emerging markets that have exponentially higher growth opportunities for consumable computer supplies compared with the United States. Presently, the Company operates sales and distribution centers in Canada, Mexico, Australia and Singapore and exports products into Latin America and throughout much of the rest of the world. The Company's computer supplies experience and broad product range place the Company in a competitive position in emerging international markets. The Company began its Professional Tape Products segment in 1998, and has grown this division primarily through acquisitions. This segment operates as a wholesale distributor of media products to the film, entertainment and multimedia industries. The wholesale sector of this industry is highly fragmented and regionally focused. The Company's acquisition strategy is to acquire businesses which the Company believes can benefit from Daisytek's core competencies in telemarketing and distribution management to create efficiencies and provide value-added services to the customer base. Such businesses are integrated to create economies of scale. The Company believes this strategy will allow it to maintain the strong gross margins earned in this segment, while at the same time reducing the SG&A costs as a percentage of sales, and, thus, increasing profit margins. The Company plans to enhance growth by seeking acquisition opportunities to supplement growth in the Company's computer consumables business, professional tape business, and fulfillment service business or to add selected product lines that can capitalize on Daisytek's expertise in distribution and call-center management and offer the Company an opportunity to expand its product line and increase profit margins. RESULTS OF OPERATIONS The following table sets forth certain financial information from the Company's audited consolidated statements of income expressed as a percentage of net sales. Financial data for fiscal years 1998 and 1997 has been restated for pooling of interests to combine the results of operations of Daisytek and The Tape Company. See Note 2 of Notes to Consolidated Financial Statements.
FISCAL YEARS ENDED MARCH 31, --------------------------------- 1999 1998 1997 ------- ------- ------- Net sales........................................... 100.0% 100.0% 100.0% Cost of sales....................................... 88.1 89.1 89.4 ------- ------- ------- Gross profit...................................... 11.9 10.9 10.6 Selling, general and administrative expenses........ 7.8 7.0 6.5 Acquisition related costs........................... 0.1 0.1 -- Loss on disposition of business..................... 0.3 -- -- ------- ------- ------- Income from operations............................ 3.7 3.8 4.1 Interest expense.................................... 0.3 0.4 0.3 ------- ------- ------- Income before income taxes........................ 3.4 3.4 3.8 Provision for income taxes.......................... 1.3 1.2 1.3 ------- ------- ------- Income before cumulative effect of accounting change.......................................... 2.1 2.2 2.5 Cumulative effect of accounting change.............. 0.0 -- -- ------- ------- ------- Net income........................................ 2.1% 2.2% 2.5% ======= ======= =======
-15- 16 The following table sets forth certain unaudited quarterly financial data and certain data expressed as a percentage of net sales for fiscal years 1999 and 1998. Financial data for fiscal year 1998 has been restated for pooling of interests to combine the results of operations of Daisytek and The Tape Company. See Note 2 of Notes to Consolidated Financial Statements. The unaudited quarterly information includes all adjustments, consisting of only normal recurring adjustments, which management considers necessary for a fair presentation of the information shown. The financial data and ratios for any quarter are not necessarily indicative of results of any future period.
FISCAL YEAR 1999 FISCAL YEAR 1998 -------------------------------------------- ------------------------------------------------ 4TH QTR 3RD QTR 2ND QTR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR -------- -------- -------- -------- ---------- -------- -------- -------- (dollars in thousands) Net sales ............ $240,383 $225,507 $220,151 $222,589 $ 229,500 $197,775 $190,060 $182,777 Gross profit ......... $ 28,331 $ 26,786 $ 26,723 $ 26,527 $ 26,227 $ 21,368 $ 20,326 $ 19,623 Gross profit margin ........... 11.8% 11.9% 12.1% 11.9% 11.4% 10.8% 10.7% 10.7% SG&A expenses ........ $ 18,898 $ 17,803 $ 17,145 $ 16,802 $ 16,717 $ 13,641 $ 13,094 $ 12,522 Percent of net sales ............ 7.9% 7.9% 7.8% 7.6% 7.3% 6.9% 6.9% 6.9% Acquisition related costs ............. $ 379 $ 197 $ 130 $ 405 $ 735 $ -- $ -- $ -- Percent of net sales ............ 0.2% 0.1% 0.1% 0.2% 0.3% -- -- -- Loss on disposition of business .......... $ 2,800 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Percent of net sales ............ 1.2% -- -- -- -- -- -- -- Income from operations ........ $ 6,254 $ 8,786 $ 9,448 $ 9,320 $ 8,775 $ 7,727 $ 7,232 $ 7,101 Operating margin ........... 2.6% 3.9% 4.3% 4.2% 3.8% 3.9% 3.8% 3.9% Income before cumulative effect of accounting change ............ $ 3,488 $ 4,981 $ 5,281 $ 5,438 $ 4,845 $ 4,424 $ 4,147 $ 4,100 Percent of net sales ............. 1.5% 2.2% 2.4% 2.4% 2.1% 2.2% 2.2% 2.2% Net income ........... $ 3,488 $ 4,981 $ 5,281 $ 5,033 $ 4,845 $ 4,424 $ 4,147 $ 4,100 Net margin ......... 1.5% 2.2% 2.4% 2.4% 2.1% 2.2% 2.2% 2.2%
-16- 17 Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998 Net Sales. Net sales for the year ended March 31, 1999 increased $108.5 million, or 13.6%, to $908.6 million as compared to $800.1 million for the year ended March 31, 1998. International Computer Supplies sales increased 32.4% in fiscal 1999 over fiscal 1998 primarily due to market share growth and higher industry growth rates in the international markets, such as Canada, Latin America, Australia and the Far East. Professional Tape Products sales increased 80.2% in fiscal 1999 over fiscal 1998 due to organic growth of approximately 10% and the acquisition of Steadi-Systems in January 1998. Also, net sales grew during fiscal year 1999 as a result of higher sales volumes of products under master distribution outsourcing contracts in PFS. U.S. Computer Supplies sales decreased 8.6% in fiscal 1999 over fiscal 1998 due to a reduction in business with large office superstores and a warehouse club and a slower growth rate in the U.S. market. The growth in sales for the U.S. Computer Supplies business has slowed from previously realized levels. The Company believes this reduction is due in large part to slower industry growth, large channel shifts, turmoil in certain customer segments and slower printer placements. Gross Profit. The Company's gross profit margin as a percent of net sales was 11.9% for the year ended March 31, 1999 as compared to 10.9% for the prior year. The increase in the Company's gross profit margin as a percentage of net sales was primarily a result of (i) enhanced product sourcing in the Computer Supplies segments, (ii) a reduction in net sales of computer supplies with lower gross margins to large office superstores and a warehouse club, and (iii) an increase in Professional Tape Product sales, which have higher gross margins than the Company's computer supplies products, as a percent of total net sales. The Company believes that the competitive environment, consolidation of its computer supplies products customers and potentially reduced future product sourcing opportunities may negatively impact the Company's gross profit margin percentage during fiscal year 2000. SG&A Expenses. SG&A expenses for the year ended March 31, 1999 were $70.6 million (excluding acquisition related costs and a charge related to the disposition of the Professional Tape Products hardware division), or 7.8% of net sales, as compared to $56.0 million, or 7.0% of net sales, for the year ended March 31, 1998. The increase in SG&A expenses as a percentage of net sales for fiscal year 1999 was due primarily to (i) a reduction in net sales with lower SG&A expense ratios to large office superstores and a warehouse club, and (ii) the impact of the higher SG&A expense ratio in the Company's Professional Tape Products segment. Acquisition Related Costs. During June 1998, the Company completed the acquisition of The Tape Company through a stock-for-stock merger, which is accounted for as a pooling of interests in the accompanying Consolidated Financial Statements and notes thereto. Daisytek incurred various acquisition costs related to accounting, legal and other costs applicable to the acquisition of The Tape Company of $0.4 million in June 1998. During the fiscal year ended March 31, 1999, the Company incurred costs of approximately $0.7 million related to transition, integration and merger activities. Loss on Disposition of Business. The Company recorded a charge of $2.8 million related to the disposition of its professional tape hardware division in March 1999. See Note 2 of Notes to Consolidated Financial Statements. Interest Expense. Interest expense was $2.8 million during the year ended March 31, 1999 and was $3.1 million during the year ended March 31, 1998. Interest expense was higher in fiscal 1999 primarily due to an increase in the average line of credit to support working capital requirements and business acquisitions, partially offset by a slight decrease in interest rates. The weighted average interest rate was 6.5% and 6.7% during the years ended March 31, 1999 and 1998, respectively. Income Taxes. The Company's effective tax rate increased to 38.1% for the year ended March 31, 1999 as compared to 36.8% for the year ended March 31, 1998. The increase was primarily due to non-deductible goodwill amortization from the Steadi-Systems acquisition combined with additional state income taxes resulting from the acquisitions of both Steadi-Systems and The Tape Company. On a pro forma basis, excluding the impact of The Tape Company's subchapter S corporation status prior to the June 1998 merger, the Company's effective tax rate would have been approximately 39% in fiscal 1999. -17- 18 Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997 Net Sales. Net sales for the year ended March 31, 1998 were $800.1 million as compared to $639.5 million for the year ended March 31, 1997, an increase of $160.6 million, or 25.1%. International Computer Supplies sales increased 45.6% in fiscal 1998 over fiscal 1997 due primarily to market share growth and higher industry growth rates in the international markets, such as Canada, Latin America and Australia. U.S. Computer Supplies sales increased 11.5% in fiscal 1998 over fiscal 1997 due to increased sales volume to large national accounts and office superstores. The increase in U.S. Computer Supplies was offset by a reduction in sales to one of its largest customers due to the Company deciding it would not match lower pricing offered by a competitor. Net sales to this customer represented approximately 7% to 8% of U.S. Computer Supplies revenue in fiscal 1997 and the first half of fiscal 1998. Professional Tape Products sales increased 59.8% in fiscal 1998 over fiscal 1997 due primarily to organic growth of approximately 10% and the acquisition of Steadi-Systems in January 1998. Also, net sales grew during fiscal year 1998 as a result of higher sales volumes of products under master distribution outsourcing contracts in PFS. Gross Profit. The Company's gross profit margin as a percent of net sales was 10.9% for the year ended March 31, 1998 as compared to 10.6% for the prior year. The increase in the Company's gross profit margin percentage for fiscal year 1998 was primarily the result of enhanced computer supplies product sourcing in fiscal year 1998 and an increase in Professional Tape Products sales, which have higher margins than the Company's computer supplies products, as a percent of total net sales. SG&A Expenses. SG&A expenses for the year ended March 31, 1998 were $56.0 million (excluding acquisition related costs), or 7.0% of net sales, as compared to $41.9 million, or 6.5% of net sales, for the year ended March 31, 1997. The increase in SG&A expenses as a percentage of net sales for fiscal year 1998 was due primarily to increased SG&A costs from investments associated with the PFS business and the impact of the higher SG&A expense ratio in the Company's Professional Tape Products segment which grew strongly through organic growth and acquisition year over year. The increased costs during fiscal year 1998 were partially offset by lower costs due to improved operating efficiencies and staff productivity as a result of increased sales volume and continued technological enhancements implemented by the Company. Acquisition Related Costs. During January 1998, the Company purchased all of the common stock of Steadi-Systems. The Company recorded a pretax charge related to the completion of the transition, integration and merger activities of about $0.7 million in the Company's fourth financial quarter ended March 31, 1998. Interest Expense. Interest expense was $3.1 million during the year ended March 31, 1998 and was $1.8 million during the year ended March 31, 1997. Interest expense increased as a result of an increase in the average credit line to support a larger revenue base, the acquisition of Steadi-Systems, and the higher inventory levels due to purchasing opportunities. The weighted average interest rate was 6.7% during the years ended March 31, 1998 and 1997. Income Taxes. The Company's effective tax rate increased to 36.8% for the year ended March 31, 1998 as compared to 34.6% for the year ended March 31, 1997. The increase was primarily due to the pooling of interests with The Tape Company. Prior to its acquisition by the Company, The Tape Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. In fiscal year 1997, The Tape Company's income before taxes represented a larger percentage of the Company's total income before income taxes than in fiscal year 1998, which increases the effective tax rate for fiscal year 1998. See Notes 2 and 7 to Notes to Consolidated Financial Statements. -18- 19 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been from financing activities. Net cash provided by financing activities was $24.8 million, $30.8 million and $16.2 million for fiscal years 1999, 1998 and 1997, respectively. Cash provided by financing activities was generated primarily from proceeds from revolving lines of credit during the fiscal year ended March 31, 1999. In conjunction with the Professional Tape segments' business combinations in fiscal 1999 and 1998, certain acquired debt of these entities was paid in full by the Company. Included in cash flows from financing activities are also distributions made to shareholders of The Tape Company relating to taxes incurred by these shareholders for earnings of the business unit of The Tape Company, which was organized as a subchapter S corporation. These distributions were made prior to the business combination with the Company. During the fiscal year ended March 31, 1998, cash provided by financing activities was generated primarily through the issuance of 2.3 million shares of common stock, which was used to reduce the Company's indebtedness. Net cash provided by operating activities in fiscal 1999 was $13.0 million. Net cash used in operating activities was $16.7 million and $5.9 million for fiscal years 1998 and 1997, respectively. Working capital requirements increased in each of the three fiscal years ended March 31, 1999, primarily as a result of the growth in the Company's business. In fiscal 1999, such requirements were funded by cash generated from operations. In fiscal 1998 and 1997, these requirements were partially funded by cash generated by the Company's operations, with the remainder provided by financing activities. The Company's principal use of funds for investing activities was capital expenditures of $10.5 million, $6.3 million and $6.3 million for fiscal years 1999, 1998 and 1997, respectively, and for acquisitions of businesses and incremental costs of acquired businesses of $20.6 million, 6.3 million, and $3.4 million, in fiscal years 1999, 1998, and 1997, respectively. See Note 2 of Notes to Consolidated Financial Statements. In addition, PFS has entered into a long-term contractual agreement with one of its clients whereby PFS finances certain of the client's inventory, which was $12.1 million at March 31, 1999 (see Note 1 of Notes to Consolidated Financial Statements). Capital expenditures have consisted primarily of additions to upgrade the Company's management information systems, including the Company's Internet based customer tools, it's on-line catalog and ordering tool (SOLOnet), other methods of electronic commerce, and general expansion of its facilities, both domestic and foreign. The Company anticipates that its total investment in upgrades and additions to facilities for fiscal 2000 will be approximately $12.0 to $15.0 million. The increase in anticipated capital expenditures over fiscal 1999 relates primarily to capital expenditures applicable to the PFS segment, including its new Belgium distribution facility. Working capital increased to $138.8 million at March 31, 1999 from $124.0 million at March 31, 1998, an increase of $14.8 million, which was primarily attributable to increases in inventory associated with the Company's PFS segment and an increase in accounts receivable primarily related to revenue growth. These increases were partially offset by an increase in accounts payable. The Company has entered into an agreement with certain banks for an unsecured revolving line of credit facility (the "Facility") that, as amended on March 29, 1999, has a maximum borrowing availability of $85.0 million and expires on December 31, 2000. Availability under the Facility is based upon amounts of eligible accounts receivable and inventory, as defined. As of March 31, 1999, the Company had borrowed $29.8 million, leaving $55.2 million available under the Facility for additional borrowings. The Facility accrues interest, at the Company's option, at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities of the Company, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, as amended in July 1998, expires on December 31, 2000, and allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $4.8 million (U.S.) at March 31, 1999. The Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian bank's overnight rate plus 0.75%. A -19- 20 commitment fee of 0.25% is charged on the total amount of the Australian Facility. As of March 31, 1999, there was no unused availability under the Australian Facility. During December 1997, the Company's Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). The Canadian Facility, which expires on December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $9.9 million (U.S.) at March 31, 1999. The Company had borrowed approximately $8.1 million (U.S.), leaving approximately $1.8 million (U.S.) available under the Canadian Facility at March 31, 1999. The Canadian Facility accrues interest at the Company's option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the Canadian Facility. During December 1998, the Company entered into a promissory note agreement with a bank, which allows the Company to borrow up to a maximum of $10.0 million. Amounts borrowed under this note agreement bear interest at the bank's discretion, primarily based on a money market borrowing rate plus an adjustment. The maturity date of any amounts borrowed will occur prior to January 2000, the expiration date of the note. The Company had no borrowings outstanding under this promissory note agreement at March 31, 1999. The Company believes that international markets represent further opportunities for growth. The Company attempts to protect itself from foreign currency fluctuations by denominating substantially all its non-Canadian and non-Australian international sales in U.S. dollars. In addition, the Company has entered into various forward Canadian and Australian currency exchange contracts in order to hedge the Company's net investments in, and its intercompany payables applicable to, its Canadian and Australian subsidiaries. The Company has the following forward currency exchange contracts outstanding as of March 31, 1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------- ------------------- ------------- ---------- Canadian Dollars $9.7 million Sell Canadian Dollars May 1999 Australian Dollars $5.8 million Sell Australian Dollars April 1999 Australian Dollars $1.3 million Sell Australian Dollars August 1999
As of March 31, 1999, the Company had incurred net unrealized losses of approximately $184,000 on these outstanding Canadian and Australian forward exchange contracts, which are included as a component of shareholders' equity. The Company may consider entering into other forward exchange contracts in order to hedge the Company's net investment in its Canadian, Australian, Mexican, and Singaporean subsidiaries, although no assurance can be given that the Company will be able to do so on acceptable terms. In the future, the Company may attempt to acquire other businesses to expand its existing computer supplies and professional tape businesses in the U.S. or internationally, expand its product line similar to the Company's entry into the Professional Tape segment and expand its services or capabilities in connection with its efforts to grow its PFS business. The Company currently has no binding agreements to acquire any such businesses. Should the Company be successful in acquiring other businesses, the Company may require additional financing to consummate such a transaction. Acquisitions involve certain risks and uncertainties, therefore, the Company can give no assurance with respect to whether it will be successful in identifying such a business to acquire, whether it will be able to obtain financing to complete such an acquisition, or whether the Company will be successful in operating the acquired business. The Company believes it will be able to satisfy its working capital needs for fiscal year 2000, as well as business growth and planned capital expenditures, through funds available under the Company's various lines of credit facilities, trade credit, lease financing, internally generated funds and by increasing the amount available under the Company's credit facilities. In addition, depending on market conditions and the terms thereof, the Company may also consider obtaining additional funds through an additional line of credit, other debt financing or the sale of capital stock; however, no assurance can be given in such regard. -20- 21 YEAR 2000 ISSUE The Company utilizes a significant number of computer software programs and information systems in its operations ("IT systems"). The mission-critical IT systems include the Company's operating, accounting and telecommunications systems, such as IT software applications that allow the Company to maintain inventory and customer information and to communicate with its suppliers and customers. The Company also makes use of a variety of machinery and equipment in its business which are operated by or reliant upon non-information technology systems ("non-IT systems"), for example, equipment or mechanical systems which contain embedded technology such as microcontrollers. To the extent that the source code of the software applications of these IT systems or the embedded technologies of these non-IT systems are unable to appropriately interpret and process the upcoming calendar year 2000, some level of modification or possible replacement of such applications would be necessary for proper continuous performance. Without such modification or replacement, the normal course of the Company's business could be disrupted or otherwise adversely impacted. This potential problem is commonly referred to as the year 2000 compliance issue ("Y2K"). In fiscal 1997, the Company began to address Y2K. The Company has formed a Y2K task force under its Chief Information Officer to coordinate and implement measures designed to prevent disruption in its business operations related to Y2K. The Company is scheduled to complete the remediation of its mission-critical IT applications software in August 1999 and is scheduled to complete remediation of its non-mission critical applications software by October 1999. The Company is assessing the effect of Y2K on its non-IT systems and intends to modify or replace non-IT systems as necessary to insure Y2K readiness by October 1999. The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate Y2K. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company is developing contingency plans to address the risks created by third parties' failure to remediate Y2K. These plans include procuring alternative suppliers, when available, when the Company is able to conclude that an existing supplier will not be Y2K ready. The Company is scheduled to complete these contingency plans by September 1999. The Company continues to grow through business acquisitions. All acquisitions of the Company have been converted to the Company's operating system. During fiscal year 1999, the Company incurred approximately $0.5 million of expenses related to Y2K. In total, the Company's assessment and remediation of Y2K has a budget of approximately $0.8 million, which includes both external costs, such as outside consultants, software and hardware applications, as well as internal costs, primarily payroll related, which are not separately tracked. Funding for Y2K expenses will be generated from on-going operations and available borrowings under the Company's revolving line of credit facilities. There can be no assurance that Y2K remediation by the Company or third parties will be properly and timely completed and failure to do so could have a material adverse effect on the Company's financial condition. The Company cannot predict the actual effects of Y2K, which depends on numerous uncertainties such as: (1) whether major third parties address this issue properly and timely and (2) whether broad-based or systemic economic failures may occur. The Company is currently unaware of any events, trends, or conditions regarding this issue that may have a material effect on the Company's results of operations, liquidity, and financial position. If Y2K is not resolved by January 1, 2000, the Company's results of operations or financial condition could be materially adversely affected. INVENTORY MANAGEMENT The Company manages its inventories held for sale in its wholesale distribution business by maintaining sufficient quantities of product to achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory balances will fluctuate as the Company adds new product lines and makes large purchases from suppliers to take advantage of attractive terms. To reduce the risk of loss to the Company due to supplier price reductions and slow moving inventory, the Company's purchasing agreements with many of its suppliers, including -21- 22 most of its major suppliers, contain price protection and stock return privileges under which the Company receives credits if the supplier lowers prices on previously purchased inventory or the Company can return slow moving inventory in exchange for other products. Certain of PFS's product fulfillment and distribution service agreements provide that PFS own the related inventory, some of which also allow for the third party to manage the levels of inventory held by the Company. As a result, the levels of inventory held by PFS under these contracts are generally higher than the Company would normally carry in its wholesale distribution businesses. SEASONALITY Although the Company historically has experienced its greatest sequential quarter revenue growth in its fourth fiscal quarter, management has not been able to determine the specific or, if any, seasonal factors that may cause quarterly variability in operating results. Management believes, however, that factors that may influence quarterly variability include the overall growth in the non-paper computer supplies industry and shifts in demand for the Company's computer supplies products due to a variety of factors, including sales increases resulting from the introduction of new products. The Company generally experiences a relative slowness in sales during the summer months, which may adversely affect the Company's first and second fiscal quarter results in relation to sequential quarter performance. The seasonality of the Company's PFS business is dependent upon the seasonality of the customers' products which PFS distributes or provides services for. Accordingly, management must rely upon the projections of its PFS customers in assessing quarterly variability. The Company believes that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. INFLATION Management believes that inflation has not had a material effect on the Company's operations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be used to hedge certain types of transactions, including foreign currency exposures of a net investment in a foreign operation. The Company presently utilizes derivative financial instruments only to hedge its net investments in certain of its foreign operations. SFAS No. 133 requires gains or losses on these financial instruments in other comprehensive income as a part of the cumulative translation adjustment. The Company is currently evaluating the provisions of SFAS No. 133 and its effect on the accounting treatment of these financial instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with initial application as of the beginning of an entity's fiscal quarter. Early adoption of the standard is allowed, however, the statement cannot be applied retroactively to financial statements of prior periods. -22- 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is subject to market risk associated with changes in interest rates and foreign currency exchange rates. Interest rate exposure is limited to the Company's outstanding balances on its revolving lines of credit which amounted to $42.7 million at March 31, 1999. The interest rates on the revolving lines of credit float with the market. A 50 basis point movement in interest rates would result in approximately $214,000 annualized increase or decrease in interest expense based on the outstanding balance of the revolving line of credit at March 31, 1999. The Company's foreign currency exchange rate risk is primarily limited to Mexican Pesos, Canadian Dollars, Australian Dollars, and Singapore Dollars. The Company's international sales and purchases are generally U.S. Dollar based, except in Canada and Australia. In order to mitigate foreign currency rate risk, the Company periodically enters into foreign currency forward contracts to hedge the net investments and long-term intercompany payable balances applicable to its Canadian and Australian subsidiaries. The Company had three outstanding foreign currency forward contracts at March 31, 1999. If the foreign exchanges rates of the Canadian and Australian currencies fluctuate 10% from the March 31, 1999 rates, gains or losses in fair value on the three outstanding contracts would be $1.4 million. -23- 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants............................................................. 25 Consolidated Balance Sheets as of March 31, 1999 and 1998............................................ 26 Consolidated Statements of Income for the Fiscal Years Ended March 31, 1999, 1998 and 1997........... 28 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 1999, 1998 and 1997........................................................................................... 29 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1999, 1998 and 1997....... 30 Notes to Consolidated Financial Statements........................................................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -24- 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Daisytek International Corporation: We have audited the accompanying consolidated balance sheets of Daisytek International Corporation (a Delaware corporation) and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Daisytek International Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 5, 1999 -25- 26 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
MARCH 31, ---------------------------- 1999 1998 (a) ---------- ---------- CURRENT ASSETS: Cash.................................................................. $ 1,551 $ 2,087 Accounts receivable, net of allowance for doubtful accounts of $2,857 and $2,765 at March 31, 1999 and 1998, respectively.......... 139,864 127,563 Inventories, net: Inventories, excluding Priority Fulfillment Services................ 77,557 81,956 Inventories, Priority Fulfillment Services.......................... 30,361 11,634 Prepaid expenses and other current assets............................. 4,982 3,944 Deferred tax asset.................................................... 137 -- ---------- ---------- Total current assets........................................... 254,452 227,184 --------- --------- PROPERTY AND EQUIPMENT, at cost: Furniture, fixtures and equipment..................................... 37,807 28,391 Leasehold improvements................................................ 2,399 1,907 --------- --------- 40,206 30,298 Less-- Accumulated depreciation and amortization...................... (20,296) (15,025) --------- --------- Net property and equipment..................................... 19,910 15,273 OTHER ASSET............................................................. 12,070 -- EMPLOYEE RECEIVABLE..................................................... 485 459 EXCESS OF COST OVER NET ASSETS ACQUIRED, net............................ 28,962 14,929 --------- --------- Total assets................................................... $ 315,879 $ 257,845 ========== ==========
- ----------------- (a) Restated to combine the financial positions of Daisytek International Corporation (the "Company" or "Daisytek") with The Tape Company, Inc. ("The Tape Company"), which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of these Consolidated Financial Statements.) The accompanying notes are an integral part of these consolidated balance sheets. -26- 27 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, ------------------------ 1999 1998 (a) --------- --------- CURRENT LIABILITIES: Current portion of long-term debt ............................................ $ 146 $ 3,010 Trade accounts payable ....................................................... 103,179 87,390 Accrued expenses ............................................................. 11,802 9,768 Income taxes payable ......................................................... 561 1,484 Deferred income tax liability ................................................ -- 1,546 --------- --------- Total current liabilities ............................................. 115,688 103,198 --------- --------- LONG-TERM DEBT, less current portion ........................................... 43,021 16,916 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized at March 31, 1999 and 1998, none issued and outstanding ....................... -- -- Common stock, $0.01 par value; 30,000,000 and 20,000,000 shares authorized at March 31, 1999 and 1998, respectively; 17,162,382 and 16,935,896 shares issued and outstanding at March 31, 1999 and 1998, respectively ............ 172 170 Additional paid-in capital ................................................... 87,394 85,501 Retained earnings ............................................................ 71,801 53,991 Accumulated other comprehensive income ....................................... (2,197) (1,931) --------- --------- Total shareholders' equity ............................................ 157,170 137,731 --------- --------- Total liabilities and shareholders' equity ............................ $ 315,879 $ 257,845 ========= =========
- ----------------- (a) Restated to combine the financial positions of the Company with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of these Consolidated Financial Statements.) The accompanying notes are an integral part of these consolidated balance sheets. -27- 28 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31, -------------------------------------- 1999 1998 (a) 1997(a) --------- --------- --------- NET SALES .................................................. $ 908,630 $ 800,112 $ 639,511 COST OF SALES .............................................. 800,263 712,568 571,448 --------- --------- --------- Gross profit ............................. 108,367 87,544 68,063 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............................ 70,648 55,974 41,870 ACQUISITION RELATED COSTS .................................. 1,111 735 -- LOSS ON DISPOSITION OF BUSINESS ............................ 2,800 -- -- --------- --------- --------- Income from operations ................... 33,808 30,835 26,193 INTEREST EXPENSE ........................................... 2,797 3,134 1,847 --------- --------- --------- Income before income taxes ............... 31,011 27,701 24,346 PROVISION FOR INCOME TAXES: Current .................................. 13,506 8,074 8,235 Deferred ................................. (1,683) 2,111 197 --------- --------- --------- 11,823 10,185 8,432 --------- --------- --------- Income before cumulative effect of accounting change ..................... 19,188 17,516 15,914 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ......... (405) -- -- --------- --------- --------- NET INCOME ................................................. $ 18,783 $ 17,516 $ 15,914 ========= ========= ========= NET INCOME PER COMMON SHARE: Basic Income before cumulative effect of accounting change .... $ 1.12 $ 1.20 $ 1.14 Cumulative effect of accounting change, net of tax ...... (0.02) -- -- --------- --------- --------- Net income .............................................. $ 1.10 $ 1.20 $ 1.14 ========= ========= ========= Diluted Income before cumulative effect of accounting change .... $ 1.08 $ 1.14 $ 1.08 Cumulative effect of accounting change, net of tax ...... (0.02) -- -- --------- --------- --------- Net income .............................................. $ 1.06 $ 1.14 $ 1.08 ========= ========= ========= WEIGHTED AVERAGE COMMON AND COMMON SHARE EQUIVALENTS OUTSTANDING: Basic ............................................. 17,101 14,541 13,909 Diluted ........................................... 17,789 15,318 14,801
- ----------------- (a) Restated to combine the results of operations of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of these Consolidated Financial Statements.) The accompanying notes are an integral part of these consolidated statements. -28- 29 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL -------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ---------- ----------- ----------- ----------- BALANCE, .......................... March 31, 1996 (a) ................ 13,660,370 $ 137 $ 30,827 $ 23,768 Net income (a) .................. -- -- -- 15,914 Other comprehensive income - foreign currency translation adjustment .................... -- -- -- -- Comprehensive income ............ Distribution of earnings to The Tape Company shareholders ..... -- -- -- (1,416) Net proceeds from exercise of common stock options ......... 315,796 3 1,635 -- Issuance of common stock for acquisition of subsidiary .... 38,562 -- 791 -- Issuance of common stock ........ 1,554 -- 30 -- ---------- ----------- ----------- ----------- BALANCE, March 31, 1997 (a) ................ 14,016,282 140 33,283 38,266 Net income (a) .................. -- -- -- 17,516 Other comprehensive income - foreign currency translation adjustment .................... -- -- -- -- Comprehensive income ............ Distribution of earnings to The Tape Company shareholders ..... -- -- -- (1,791) Repurchase of The Tape Company shares......................... -- -- (4,394) -- Net proceeds from exercise of common stock options ......... 616,326 7 3,932 -- Net proceeds from issuance of common stock ................. 2,303,288 23 52,680 -- ---------- ----------- ----------- ----------- BALANCE, March 31, 1998 (a) ................ 16,935,896 170 85,501 53,991 Net income (a) .................. -- -- -- 18,783 Other comprehensive income - foreign currency translation adjustment .................... -- -- -- -- Comprehensive income ............ Distribution of earnings to The Tape Company shareholders ..... -- -- -- (973) Net proceeds from exercise of common stock options ......... 223,953 2 1,838 -- Issuance of common stock ........ 2,533 -- 55 -- ---------- ----------- ----------- ----------- BALANCE, March 31, 1999 .................... 17,162,382 $ 172 $ 87,394 $ 71,801 ========== =========== =========== =========== ACCUMULATED OTHER COMPREHENSIVE TOTAL COMPREHENSIVE INCOME EQUITY INCOME ----------- ----------- ----------- BALANCE, .......................... March 31, 1996 (a) ................ $ (1,012) $ 53,720 Net income (a) .................. -- 15,914 $ 15,914 Other comprehensive income - foreign currency translation adjustment .................... (294) (294) (294) ----------- Comprehensive income ............ $ 15,620 =========== Distribution of earnings to The Tape Company shareholders ..... -- (1,416) Net proceeds from exercise of common stock options ......... -- 1,638 Issuance of common stock for acquisition of subsidiary .... -- 791 Issuance of common stock ........ -- 30 ----------- ----------- BALANCE, March 31, 1997 (a) ................ (1,306) 70,383 Net income (a) .................. -- 17,516 $ 17,516 Other comprehensive income - foreign currency translation adjustment .................... (625) (625) (625) ----------- Comprehensive income ............ $ 16,891 =========== Distribution of earnings to The Tape Company shareholders ..... -- (1,791) Repurchase of The Tape Company shares......................... -- (4,394) Net proceeds from exercise of common stock options ......... -- 3,939 Net proceeds from issuance of common stock ................. -- 52,703 ----------- ----------- BALANCE, March 31, 1998 (a) ................ (1,931) 137,731 Net income (a) .................. -- 18,783 $ 18,783 Other comprehensive income - foreign currency translation adjustment .................... (266) (266) (266) ----------- Comprehensive income ............ $ 18,517 =========== Distribution of earnings to The Tape Company shareholders ..... -- (973) Net proceeds from exercise of common stock options ......... -- 1,840 Issuance of common stock ........ -- 55 ----------- ----------- BALANCE, March 31, 1999 .................... $ (2,197) $ 157,170 =========== ===========
- ----------- (a) Restated to combine the shareholders' equity of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of these Consolidated Financial Statements.) The accompanying notes are an integral part of these consolidated statements. -29- 30 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31, ------------------------------------ 1999 1998 (a) 1997 (a) -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 18,783 $ 17,516 $ 15,914 Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effects from acquisition of businesses: Depreciation and amortization .......................... 6,048 5,011 3,980 Provision for doubtful accounts ........................ 2,863 2,016 1,660 Deferred income tax (benefit) provision ................ (1,683) 2,111 197 Changes in operating assets and liabilities Accounts receivable ................................ (12,564) (31,773) (24,341) Inventories, net ................................... (16,279) (21,880) (19,623) Trade accounts payable and accrued expenses ......................................... 17,923 12,670 14,525 Income taxes payable ............................... (884) 115 967 Prepaid expenses and other current assets ........................................... (1,222) (2,484) 776 -------- -------- -------- Net cash provided by (used in) operating activities .......................................... 12,985 (16,698) (5,945) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ........................... (10,523) (6,304) (6,307) Acquisitions of businesses, net of cash acquired .............. (20,585) (6,322) (3,372) Disposition of business ....................................... 4,736 -- -- Advances of employee receivables, net ......................... (117) (45) -- Increase in other asset ....................................... (12,070) -- (30) -------- -------- -------- Net cash used in investing activities ................. (38,559) (12,671) (9,709) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments on) revolving lines of credit, net ................................................ 28,686 (20,361) 14,660 (Payments on) proceeds from capital leases and notes payable... (4,787) (2,796) 1,317 Net proceeds from sale of stock and exercise of stock options .............................................. 1,906 56,582 1,638 Distributions to former shareholders of The Tape Company ...... (973) (1,791) (1,416) Payment to former shareholder of The Tape Company ............. -- (809) -- -------- -------- -------- Net cash provided by financing activities .......................................... 24,832 30,825 16,199 -------- -------- -------- EFFECT OF EXCHANGE RATES ON CASH ................................ 206 74 (192) -------- -------- -------- NET (DECREASE) INCREASE IN CASH ................................. (536) 1,530 353 CASH, beginning of period ....................................... 2,087 557 204 -------- -------- -------- CASH, end of period ............................................. $ 1,551 $ 2,087 $ 557 ======== ======== ========
- -------- (a) Restated to combine the cash flows of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of these Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated statements -30- 31 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: Organization and Nature of Business Daisytek International Corporation (a Delaware corporation) and subsidiaries ("the Company") is a leading wholesale distributor of non-paper computer and office automation supplies and accessories ("computer supplies") and professional-grade video and audio media products ("professional tape products"). Through its Priority Fulfillment Services subsidiaries ("PFS"), the Company is also a leading provider of end-to-end transaction management and e-commerce logistics business solutions. The Company, through its wholly owned subsidiaries in the U.S., Canada, Australia, Mexico and Singapore, sells products and services primarily in North America, as well as in Latin America, Australia, Singapore, the Pacific Rim, Europe and Africa. The computer supplies products include laser toner, inkjet cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage products, computer tape cartridges and accessories such as cleaning kits and media storage files. These products are used in a broad range of computers and office automation products including laser and inkjet printers, photocopiers, fax machines and data storage products. The Company's computer supplies customers include value-added resellers, computer supplies dealers, office product dealers, contract stationers, buying groups, computer and office product superstores and other retailers who resell the products to end-users. During fiscal year 1996, the Company formed PFS to provide outsourcing solutions to its business partners and other customers. Through PFS, the Company sells its core competencies in call-center, product fulfillment, logistic and support services to client companies on an international basis. PFS customizes these services to meet specific requirements of these companies. PFS's call-center services include: order entry, order tracking and customer service (inbound), outbound telemarketing services and customized reporting of customer and call information. PFS also provides other support services such as invoicing, credit management and collection services, and accounting and systems support. Through the newly created PFSweb division of PFS, the Company now offers an outsourcing solution to companies conducting sales over the Internet by providing the infrastructure needed to support web-based activity, including online order processing, warehousing and shipping of product. In December 1998, PFS established a European operation with headquarters in Maastrict, The Netherlands. PFS provides its services primarily under fee-based contracts (where revenue is based on either the sales value of the products or service activity volume) and, in certain limited circumstances, under master distribution agreements (where PFS takes title and resells the product). In January 1998, the Company expanded its product line by acquiring Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of professional tape products to the filmed entertainment and multimedia industries. The Company further expanded its operations in the distribution of pro-tape products through the acquisition of The Tape Company in June 1998 and the purchase of the professional tape division of Videotape Products, Inc. ("VTP") in March 1999. In connection with the purchase of VTP, the Company also sold certain assets of its professional hardware division to VTP. As part of the agreement, both VTP and Daisytek have entered into a long-term strategic alliance. Under this alliance, the companies will work jointly to provide a full range of products to their combined customers. Through Steadi-Systems, The Tape Company, and VTP, the Company distributes a wide array of professional-grade audio and video media products to customers including production companies, post-production operations, broadcast stations, corporate in-house production facilities, advertising agencies, and cable television providers. Further segment information is presented in Note 9 to these Consolidated Financial Statements. -31- 32 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Basis of Presentation The consolidated financial statements include the accounts of Daisytek International Corporation and its subsidiaries and the accounts of companies acquired in business combinations accounted for under 1) the purchase method from their respective acquisition dates, and 2) the pooling of interests method, giving retroactive effect for all periods presented. All significant intercompany transactions are eliminated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Reclassifications Certain prior year data has been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income, shareholders' equity or net cash flows. Revenue Recognition The Company recognizes product revenue upon shipment of product to customers and provides for estimated returns and allowances. The Company permits its customers to return defective products (many of which are then returned by the Company to the manufacturer) and incorrect shipments for credit against other purchases. The Company offers terms to its customers that it believes are standard for its industries. PFS service fee revenues are recognized at the time the service is provided to its client. Inventories Inventories (merchandise held for resale, all of which are finished goods) are stated at the lower of weighted average cost or market. Inventories held and owned by the Company's PFS subsidiary relate to product fulfillment and logistics services provided for third parties, and are presented separately in the consolidated balance sheet as certain of these distribution agreements generally allow for the third party to manage the levels of inventory held by the Company. As a result, the levels of inventory held by the Company under these contracts are generally higher than the Company would normally carry in its core wholesale business. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets which range from three to ten years. Excess of Cost Over Net Assets Acquired Excess of cost over net assets acquired is amortized on a straight-line basis over 20 to 40 years. The related amortization expense for each of the fiscal years 1999, 1998 and 1997 was approximately $0.7 million, $0.3 million, and $0.2 million, respectively. Accumulated amortization as of March 31, 1999 and 1998 was approximately $1.7 million and $0.9 million, respectively. Other Asset The Other Asset reflects a receivable from a client of PFS. During fiscal 1999, PFS entered into a long-term contractual agreement whereby PFS finances certain inventory of the client. PFS warehouses this inventory and distributes it upon the sale to third parties by the client, who controls the disposition of this inventory. In connection with this agreement, PFS charges the client an asset -32- 33 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) management fee. Foreign Currency Translation and Transactions For the Company's Canadian and Australian subsidiaries, the local currency is the functional currency. All assets and liabilities are translated at exchange rates in effect at the end of the period, and income and expense items are translated at the average exchange rates for the period. Translation adjustments are reported as a separate component of shareholders' equity. In addition, the Company periodically enters into foreign exchange contracts in order to hedge the Company's net investment in, and its intercompany payable balance (of a long-term investment nature) applicable to its Canadian and Australian subsidiaries. The Company had the following forward currency exchange contracts outstanding as of March 31, 1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION ------------- ------------------- ------------- ---------- Canadian Dollars $9.7 million Sell Canadian Dollars May 1999 Australian Dollars $5.8 million Sell Australian Dollars April 1999 Australian Dollars $1.3 million Sell Australian Dollars August 1999
As of March 31, 1999, the Company had incurred net unrealized losses of approximately $184,000 on these outstanding Canadian and Australian forward exchange contracts, which are included as a component of shareholders' equity. The Company may consider entering into other forward exchange contracts in order to hedge the Company's net investment in its Canadian, and Australian subsidiaries, although no assurance can be given that the Company will be able to do so on acceptable terms. For the Company's Mexican, Singaporean and European subsidiaries, the U.S. dollar is the functional currency. Monetary assets and liabilities are translated at the rates of exchange on the balance sheet date and certain assets (notably inventory, and property and equipment) are translated at historical rates. Income and expense items are translated at average rates of exchange for the period except for those items of expense, which relate to assets, which are translated at historical rates. The gains and losses from foreign currency transactions and translation related to these subsidiaries are included in net income and have not been material. Cumulative Effect of Accounting Change In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5") requiring these costs to be accounted for as period expenses. The Company has elected early adoption of this pronouncement effective April 1, 1998, and, accordingly, recorded a cumulative effect charge to income, net of income taxes, as of April 1, 1998, of $405,000. Excluding the cumulative effect, the change in accounting for start-up costs did not materially affect net income for fiscal year 1999. Net Income Per Common Share Basic net income per common share is calculated by dividing net income by the weighted average common shares outstanding for each period. Diluted net income per share is calculated by dividing net income by the weighted average common shares and share equivalents outstanding for each period. The difference between the Company's basic and diluted weighted average common shares outstanding is due to dilutive common stock options outstanding. The stock split discussed in Note 4 has been reflected in the net income per common share calculations for all periods presented. -33- 34 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Adoption of New Accounting Standards The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal year 1997. SFAS No. 121 requires companies to periodically evaluate long-lived assets and to record an impairment loss if the expected undiscounted future cash flows is less than the carrying value of those assets. The effect of the application of SFAS No. 121 was not material. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in fiscal year 1997. The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans, and has opted to comply with the disclosure requirements of SFAS No. 123. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This statement establishes new standards for computing and presenting earnings per share ("EPS"). The Company adopted SFAS No. 128 during the quarter ended December 31, 1997. The Company restated its EPS data for all periods presented. The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in fiscal 1999. SFAS No. 130 requires the presentation of comprehensive income and its components in the financial statements. SFAS No. 131 requires the disclosure of financial and descriptive information about reportable operating segments. Both SFAS No. 130 and 131 are modifications of existing disclosure requirements and will have no effect on the results of operations or financial condition of the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be used to hedge certain types of transactions, including foreign currency exposures of a net investment in a foreign operation. The Company presently utilizes derivative financial instruments only to hedge its net investments in certain of its foreign operations. SFAS No. 133 requires gains or losses on these financial instruments in other comprehensive income as a part of the cumulative translation adjustment. The Company is currently evaluating the provisions of SFAS No. 133 and its effect on the accounting treatment of these financial instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with initial application as of the beginning of an entity's fiscal quarter. Early adoption of the standard is allowed, however, the statement cannot be applied retroactively to financial statements of prior periods. -34- 35 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. BUSINESS COMBINATIONS Effective October 1, 1996, the Company acquired, with cash and common stock, substantially all of the assets and liabilities of Lasercharge Pty Ltd ("Lasercharge"). Lasercharge is an Australian wholesale distributor of computer and office automation supplies and accessories. The acquisition of Lasercharge was accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets and liabilities assumed based on fair values at the date of acquisition. This resulted in cost in excess of fair value of approximately $3.6 million which is being amortized on a straight-line basis over 20 years. Pro forma results of operations have not been presented because the effects of the acquisition were not significant. During January 1998, the Company purchased all of the common stock of Steadi-Systems. Steadi-Systems is an independent wholesale distributor of media products to the filmed entertainment and multimedia industries. The acquisition of Steadi-Systems was accounted for using the purchase method of accounting, and, accordingly, the purchase price was allocated to the assets and liabilities assumed based on the fair values at the date of acquisition. This resulted in cost in excess of fair value at date of acquisition of approximately $10.4 million which is being amortized on a straight-line basis over 25 years. Pro forma results of operations have not been presented because the effects of the acquisition were not significant. The Company recorded a one-time acquisition integration charge related to the completion of transition, integration and merger activities, of about $0.7 million, or approximately $0.03 per diluted share, net of income taxes, in the Company's fourth financial quarter ended March 31, 1998. Steadi-Systems was acquired using cash of approximately $6.3 million during fiscal year 1998. Not included in this amount were contingent cash payment arrangements payable if certain events occurred. During May 1998, these events occurred and the Company incurred approximately $2.9 million in additional costs for the acquisition of Steadi-Systems and recorded the amount as an additional cost in excess of net assets acquired. During June 1998, the Company completed the acquisition of The Tape Company through a stock-for-stock merger. Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 974,864 shares of Company common stock for all of The Tape Company's common stock. The Tape Company is a Chicago, Illinois-based independent distributor of professional grade audio and video media products. In fiscal year 1999, the Company recorded $1.1 million, or approximately $0.04 per diluted share, net of income taxes, in acquisition related costs related to this transaction. Proforma data for fiscal year ended March 31, 1999, is as follows (in thousands, except per share data): Historical net income......................... $ 18,783 Proforma adjustments: Provision for income taxes............... (291) Acquisition related costs, net of tax.... 246 --------- Proforma net income........................... $ 18,738 ========= Proforma net income per share: Basic.................................... $ 1.10 Diluted.................................. $ 1.05
Pro forma adjustments for fiscal year 1999 include: (1) The Tape Company included a business unit organized as a subchapter S corporation, whereby income taxes were paid individually by the owners. The pro forma provision for income tax adjustment is provided to reflect income tax under a corporate tax structure. (2) Daisytek incurred various acquisition related accounting, legal and other costs applicable to the acquisition of The Tape Company. The pro forma adjustment for acquisition related costs, net of tax, excludes such costs from pro forma net income. -35- 36 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Restated and previously reported revenue, net income, pro forma net income and weighted average common share and common share equivalents outstanding are as follows (in thousands, except per share data):
Fiscal Year Ended March 31, 1998 ------------------------------------------------- Daisytek - Previously The Tape Daisytek - Reported Company Restated ------------ ------------ ------------ Net sales................................ $ 757,027 $ 43,085 $ 800,112 Net income............................... $ 16,160 $ 1,356 $ 17,516 Net income per common share: Basic.............................. $ 1.19 $ 1.20 Diluted............................ $ 1.13 $ 1.14 Pro forma data: Net income............................... $ 16,160 $ 1,356 $ 17,516 Pro forma adjustment for income taxes.... -- (431) (431) ------------ ------------ ------------ Pro forma net income..................... $ 16,160 $ 925 $ 17,085 ============ ============ ============ Pro forma net income per common share: Basic.............................. $ 1.19 $ 1.17 Diluted............................ $ 1.13 $ 1.12 Weighted average common and common share equivalents outstanding: Basic.............................. 13,566 14,541 Diluted............................ 14,343 15,318
Fiscal Year Ended March 31, 1997 ------------------------------------------------- Daisytek - Previously The Tape Daisytek - Reported Company Restated ------------ ------------ ------------ Net sales............................... $ 603,814 $ 35,697 $ 639,511 Net income.............................. $ 13,367 $ 2,547 $ 15,914 Net income per common share: Basic.............................. $ 1.03 $ 1.14 Diluted............................ $ 0.97 $ 1.08 Pro forma data: Net income.............................. $ 13,367 $ 2,547 $ 15,914 Pro forma adjustment for income taxes... -- (907) (907) ------------ ------------ ------------ Pro forma net income.................... $ 13,367 $ 1,640 $ 15,007 ============ ============ ============ Pro forma net income per common share: Basic.............................. $ 1.03 $ 1.08 Diluted............................ $ 0.97 $ 1.01 Weighted average common and common share equivalents outstanding: Basic.............................. 12,934 13,909 Diluted............................ 13,826 14,801
-36- 37 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In December 1998, the Company acquired accounts receivable and fixed assets of Forex Telegistics B.V. for cash consideration of $3.7 million. The purchase price has been allocated to the assets based on fair values at the date of acquisition. This resulted in costs in excess of fair value of approximately $0.1 million, which is being amortized on a straight line basis over 20 years. In March 1999, the Company purchased the professional tape division of VTP, a Glendale, California-based distributor of professional-grade audio and video media and professional hardware products for approximately $13.5 million. In addition, the Company sold certain assets of its professional hardware division to VTP for approximately $4.7 million. The net cash consideration paid by the Company for these transactions was approximately $8.8 million. The acquisition of VTP was accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets and liabilities assumed based on fair values at the date of acquisition. This resulted in costs in excess of fair value of approximately $11.9 million, which is being amortized over 25 years. Proforma results of operations have not been presented because the effects of the acquisition and disposition were not significant. In connection with this transaction, the Company recorded a $2.8 million one-time charge relating to the disposition of its hardware division. The components of the $2.8 million charge include: a) reserves for lease exit costs of approximately $1.4 million; b) reserves for loss on realizability and disposition of assets of $0.8 million; and c) employee and other exit costs of approximately $0.6 million. -37- 38 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. DEBT: Debt as of March 31, 1999 and 1998 is as follows (dollars in thousands):
March 31, -------------------------- 1999 1998 ---------- ---------- Revolving line of credit with commercial banks, interest (weighted average rate of 6.1% at March 31, 1999) at the Company's option at the prime rate of a bank (7.75% at March 31, 1999) or the Eurodollar rate plus 0.625% to 1.125% (5.8% at March 31, 1999), due December 31, 2000........... $ 29,800 $ -- Revolving line of credit with commercial bank, interest at the Australian Bank Bill Rate plus 0.75% or the Australian bank's overnight rate plus 0.75% (5.6% at March 31, 1999), due December 31, 2000...................... 4,778 4,410 Revolving line of credit with commercial bank, interest (weighted average rate of 6.0% at March 31, 1999) at the Canadian bank's cost of funds plus 0.65% (6.0% at March 31, 1999) or the Canadian bank's prime rate (6.5% at March 31, 1999), due December 31, 2000............................ 8,126 8,101 Revolving line of credit with commercial bank, interest payable monthly at the Federal Funds rate plus 2%, due October 31, 1998, and secured by a blanket lien on all assets of The Tape Company and affiliates.............. -- 2,161 Term loan with commercial bank, payable monthly at a rate of $25 plus interest at 7.65%, due October 31, 2002 and secured by a blanket lien on all assets of The Tape Company and affiliates........................... -- 1,400 Note payable to individual, payable monthly at a rate of $41 including interest at a rate of 6.66%, due July 25, 2007............................. -- 3,413 Notes payable and obligations under capital leases for warehouse equipment, computer equipment, office furniture, fixtures and transportation equipment, interest at varying rates ranging from 6.5% to 8.0%, with lease terms varying from three to five years............................... 463 441 ---------- ---------- Long-term debt.......................................................... 43,167 19,926 Less: Current portion of long-term debt........................................ (146) (3,010) ---------- ---------- Long-term debt, less current portion.................................... $ 43,021 $ 16,916 ========== ==========
The Company has an agreement with certain banks for an unsecured revolving line of credit facility (the "Facility") that, as amended on March 29, 1999, has a maximum borrowing availability of $85.0 million and expires on December 31, 2000. Availability under the Facility is based upon amounts of eligible accounts receivable and inventory, as defined. As of March 31, 1999, the Company had borrowed $29.8 million, leaving $55.2 million available under the Facility for additional borrowings. The Facility accrues interest, at the Company's option, at the prime rate of a bank or a Eurodollar rate plus an adjustment ranging from 0.625% to 1.125% depending on the Company's financial performance. A commitment fee of 0.20% to 0.25% is charged on the unused portion of the Facility. The Facility contains various covenants including, among other things, the maintenance of certain financial ratios including the achievement of a minimum fixed charge ratio and minimum level of tangible net worth, and restrictions on certain activities of the Company, including loans and payments to related parties, incurring additional debt, acquisitions, investments and asset sales. This Facility is part of the Company's integrated cash management system -38- 39 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) in which accounts receivable collections are used to pay down the Facility and disbursements are paid from the Facility. This system allows the Company to optimize its cash flow. During October 1997, the Company's Australian subsidiary entered into an agreement with an Australian bank for an unsecured revolving line of credit facility (the "Australian Facility"). The Australian Facility, as amended in July 1998, expires on December 31, 2000 and allows the Company to borrow Australian dollars up to a maximum of $7.5 million (Australian), or approximately $4.8 million (U.S.) at March 31, 1999. The Australian Facility accrues interest at the Australian Bank Bill Rate plus 0.75% or the Australian bank's overnight rate plus 0.75%. A commitment fee of 0.25% is charged on the total amount of the Australian Facility. As of March 31, 1999, there was no unused availability under the Australian Facility. During December 1997, the Company's Canadian subsidiary entered into an agreement with a Canadian bank for an unsecured revolving line of credit facility (the "Canadian Facility"). The Canadian Facility, which expires on December 31, 2000, allows the Company to borrow Canadian or U.S. dollars up to a maximum of $15.0 million (Canadian), or approximately $9.9 million (U.S.) at March 31, 1999. The Company had borrowed approximately $8.1 million (U.S.), leaving approximately $1.8 million (U.S.) available under the Canadian Facility at March 31, 1999. The Canadian Facility accrues interest at the Company's option at the bank's prime rate, the bank's cost of funds plus 0.65%, the bank's U.S. dollar commercial loan rate or LIBOR plus 0.65%. A commitment fee of 0.25% is charged on the unused portion of the Canadian Facility. In conjunction with the business combination with The Tape Company, certain debt of The Tape Company, including the term loan with commercial bank due October 31, 2002, and the note payable to individual due July 25, 2007, were paid in full by the Company and were retired. The Company is a party to a number of non-cancelable capital lease agreements involving warehouse equipment, computer equipment, and office furniture and fixtures. The Company's property held under capital leases, included in furniture, fixtures and equipment in the balance sheet, amounted to approximately $436,000, net of accumulated amortization of approximately $2.1 million at March 31, 1999, and approximately $284,000 net of accumulated amortization of approximately $2.5 million at March 31, 1998. Annual maturities of long-term debt and capital leases are as follows (in thousands): Fiscal year ended March 31, 2000.......................................................... $ 146 2001.......................................................... 42,811 2002.......................................................... 70 2003.......................................................... 74 2004.......................................................... 66 Thereafter.................................................... -- ----------- Total................................................. $ 43,167 ===========
4. STOCK OPTIONS AND SHAREHOLDERS' EQUITY: Public Offerings During March 1998, the Company completed a secondary offering of 3,300,000 shares, consisting of 2,300,000 shares offered by the Company, and 1,000,000 shares offered by a principal and selling shareholder. Preferred Stock The Company has authorized the issuance of up to 1,000,000 shares of preferred stock, par value $1.00 per share, none of which is issued or outstanding at March 31, 1999 and 1998. -39- 40 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock Split In February 1998, the Company's Board of Directors approved a two for one stock split which provided each holder of common stock to receive one additional share for each share held. The stock split was effected in the form of a stock dividend on March 2, 1998. The consolidated financial statements and the notes thereto have been adjusted to reflect this stock split on a retroactive basis for all periods presented. Stock Options At March 31, 1999 and 1998, the Company had stock option compensation plans and a non-employee Director stock option plan, which are described below. The Company may also, from time to time, issue non-qualified options outside these plans. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these stock options. Accordingly, no compensation cost has been recognized for stock-based compensation awards. Pro forma net income and earnings per share assuming compensation cost for the Company had been determined under SFAS No. 123, "Accounting for Stock-Based Compensation," are as follows (dollars in thousands, except per share data):
FISCAL YEARS ENDED MARCH 31, -------------------------------------- 1999 1998 1997 ------- ------- -------- Net income: As reported........................................... $18,783 $17,516 $ 15,914 Pro forma............................................. $14,169 $15,992 $ 13,830 Earnings per share: Basic: As reported........................................ $ 1.10 $ 1.20 $ 1.14 Pro forma.......................................... $ 0.83 $ 1.10 $ 1.07 Diluted As reported........................................ $ 1.06 $ 1.14 $ 1.08 Pro forma.......................................... $ 0.80 $ 1.04 $ 1.00
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in fiscal year 1997: no dividends, expected volatility ranging between 39.25% and 39.50%; risk-free interest rate ranging between 5.9% and 6.6%; and expected life of 6 years. The following assumptions were used for grants during the fiscal year 1998: no dividends, expected volatility ranging between 40.97% and 41.40%; risk-free interest rate ranging between 5.6% and 6.8%; and expected life of 6 years. The following assumptions were used for grants during the fiscal year 1999: no dividends, expected volatility ranging between 41.42% and 47.92%; risk-free interest rate ranging between 4.6% and 5.5%; and expected life of 6 years. In January 1989, the Company established an employee stock option plan (the "Plan") in which shares of common stock are reserved for the granting of options at an amount not less than market price, as determined by the Board of Directors, at the date of grant. There were no options available at March 31, 1999 and 1998 to be granted under the Plan. In 1994, the Company adopted the 1994 Stock Option Plan for Key Employees of Daisytek International Corporation (the "1994 Plan"). The 1994 Plan authorizes the Company to grant options to select officers and other key employees of the Company and to non-employee directors. The 1994 Plan provides for the granting to employees of both incentive stock options and nonqualified stock options. The maximum number of shares of common stock for which options may be granted is 1,450,000, subject to adjustments for certain changes in the shares issued and outstanding as described in the 1994 Plan. The exercise price of incentive stock options granted under the 1994 Plan may not be less than the fair market value at the date of the grant. The exercise price of nonqualified stock options granted under the 1994 Plan is determined by the option committee of the Board of Directors. As of March 31, 1999 and 1998, 166,772 and 100,974 options, respectively, remain to be granted in the future under the 1994 Plan. -40- 41 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During fiscal year 1997, the Company adopted the Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee Director Plan"). The Non-Employee Director Plan authorizes the Company to grant nonqualified common stock options to non-employee directors at the fair market value of the Company's common stock on the date of grant. The options vest over a three-year period starting on the date of grant. The maximum number of shares which may be granted under the Non-Employee Director Plan is 100,000 shares, subject to adjustments for certain changes in the shares issued and outstanding as described in the plan. As of March 31, 1999 and 1998 there were 10,956 and 7,440 options, respectively, granted under the Non-Employee Director Plan. During fiscal year 1999, the Company adopted the 1998 Amended and Restated Stock Option Plan (the "1998 Plan"). The 1998 Plan amends, restates and replaces the Company's 1997 Employee Stock Option Plan (the "1997 Plan") and all options outstanding under the 1997 Plan are deemed outstanding under the 1998 Plan. The 1998 Plan authorizes the Company to grant options to select officers, directors and other key employees of the Company. The 1998 Plan provides for the granting to employees of both incentive stock options and nonqualified stock options. The maximum number of shares of common stock for which options may be granted is 4,000,000, subject to adjustments for certain changes in the shares issued and outstanding as described in the 1998 Plan. The exercise price of incentive stock options granted under the 1998 Plan may not be less than the fair market value of the Company's stock at the date of the grant. In the case of an individual then owning more than 10% of the total combined voting power of the Company, the exercise price may not be less than 110% of the fair market value of the Company's stock at the date of the grant. As of March 31, 1999 and 1998, 1,318,912 and 3,864,942 options, respectively, remain to be granted in the future under the 1998 Plan. During fiscal years 1999, 1998 and 1997, the Company granted options to certain employees pursuant to its employee stock option plans. In addition to the options under such plans, the Company granted options to certain key employees, executives and directors to purchase 181,826 shares of common stock in fiscal year 1998, and 110,000 shares of common stock in fiscal year 1997. These options were granted at the fair market value at the date of the grant and become exercisable over a three-year period starting on the date of the grant. During April 1997, the Company, at the option of individual employees and directors, canceled options issued during fiscal year 1997 and issued replacement options, granted at the fair market value of the Company's common stock on the date of the replacement grant. Such options also become exercisable over a three-year period starting with the date of the replacement grant, based on vesting percentages. The following table summarizes stock option activity for the three years in the period ended March 31, 1999.
PRICE PER WEIGHTED AVERAGE SHARES SHARE EXERCISE PRICE --------- --------------- ---------------- Outstanding, March 31, 1996................ 1,437,988 $ 0.64--$ 9.75 $ 4.58 Granted.................................. 678,228 $16.25--$ 20.00 $ 16.54 Exercised................................ (315,796) $ 0.64--$ 9.75 $ 2.45 Canceled................................. (93,482) $ 3.80--$ 16.25 $ 13.27 --------- Outstanding, March 31, 1997................ 1,706,938 $ 0.64--$ 20.00 $ 9.25 Granted.................................. 1,341,650 $12.50--$ 22.44 $ 12.91 Exercised................................ (616,326) $ 0.64--$ 16.25 $ 2.76 Canceled................................. (706,288) $ 9.75--$ 20.00 $ 15.97 --------- Outstanding, March 31, 1998................ 1,725,974 $ 0.64--$ 22.44 $ 11.66 Granted.................................. 2,773,892 $12.88--$ 22.88 $ 15.68 Exercised................................ (223,953) $ 0.64--$ 17.38 $ 7.18 Canceled................................. (291,844) $ 9.75--$ 22.88 $ 16.41 --------- Outstanding, March 31, 1999................ 3,984,069 $ 2.65--$ 22.88 $ 14.37 =========
The weighted average fair values of options granted during each of the years ended March 31, 1999, 1998 and 1997, were $7.93, $7.02 and $8.08, respectively. As of March 31, 1999, 1998 and 1997, 413,766, 234,531 and -41- 42 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 682,543, respectively, of options outstanding were exercisable. The remaining options will become exercisable over the next three to five years based on vesting percentages. The following table summarizes information about the Company's stock options outstanding at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------------------------- ------------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE --------------- -------------- ---------------- -------------- ----------------- -------------- $ 2.29--$ 9.14 5,793 3.0 $ 2.65 5,793 $ 2.65 $ 9.15--$11.44 276,642 6.1 $ 9.75 276,642 $ 9.75 $11.45--$13.73 2,898,704 9.1 $ 12.74 128,633 $ 12.50 $13.74--$16.01 84,000 10.0 $ 15.41 -- $ -- $16.02--$18.30 11,704 8.4 $ 17.10 1,954 $ 16.25 $18.31--$20.58 17,000 9.4 $ 19.00 -- $ -- $20.59--$22.88 690,226 9.2 $ 22.86 744 $ 22.44
5. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
FISCAL YEARS ENDED MARCH 31, ------------------------------------------- 1999 1998 1997 -------- -------- -------- Cash paid during the period for: Interest.............................. $ 2,718 $ 2,762 $ 1,830 Income taxes.......................... $ 14,607 $ 5,416 $ 6,411 Fixed assets acquired under capital leases.............................. $ 347 $ 84 $ -- Acquisitions of businesses: Fair value of net assets acquired..... $ 20,585 $ 6,322 $ 4,163 Stock issued.......................... -- -- (791) -------- -------- -------- Net cash paid for acquisition....... $ 20,585 $ 6,322 $ 3,372 ======== ======== ========
In July 1997 (prior to the merger with the Company), The Tape Company repurchased 100% of the stock held by one of its shareholders. The shareholder received cash of $0.8 million and an installment note for $3.6 million payable in over 10 years. In conjunction with the business combination with The Tape Company, the Company paid the installment note in full. 6. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS: The Company has made various loans to its President, and a Senior Vice President. These loans accrue interest at the Company's effective borrowing rate (6.0% at March 31, 1999 and 6.8% at March 31, 1998). The Company's note receivable (including accrued interest) from its President of approximately $485,000 and $459,000 as of March 31, 1999 and 1998, respectively, is due in one installment on April 1, 2001 and classified as non-current assets in the consolidated balance sheet. The Company's note receivable (including accrued interest) from a Senior Vice President as of March 31, 1999 and 1998 of approximately $199,000 and $186,000, respectively, is due in one installment on March 31, 2000, and is classified as accounts receivable in the accompanying consolidated balance sheet. The Company's PFS Europe subsidiary entered into an agreement in May 1999 to provide services to a company for which the Company has two executive officers serving on this company's board of directors. 7. INCOME TAXES: Deferred taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. These differences relate primarily to provisions for doubtful accounts, capitalization of inventory costs, reserves for inventory, book versus tax depreciation differences, and certain accrued expenses deducted for book purposes but not yet deductible for tax -42- 43 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) purposes. A reconciliation of the difference between the expected income tax provision, before cumulative effect of accounting change, at the U.S. Federal statutory corporate tax rate of 35%, and the Company's effective tax rate is as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ----------------------------------------------- 1999 1998 1997 -------- -------- -------- Provision computed at statutory rate........... $ 10,854 $ 9,695 $ 8,521 Impact of foreign taxation at different rate... 538 356 270 State income taxes, net of federal benefit..... 694 520 426 Expenses not deductible for tax purposes....... 346 149 104 Impact of acquired subchapter S corporation accounted for as a pooling of interests...... (291) (431) (907) Change in valuation reserve.................... (203) 48 (123) Other.......................................... (115) (152) 141 -------- -------- -------- Provision for income taxes................ $ 11,823 $ 10,185 $ 8,432 ======== ======== ========
The consolidated income before taxes and cumulative effect of accounting change, by domestic and foreign entities, is as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ----------------------------------------------- 1999 1998 1997 -------- -------- -------- Domestic....................................... $ 24,879 $ 22,427 $ 21,390 Foreign........................................ 6,132 5,274 2,956 -------- -------- -------- Total..................................... $ 31,011 $ 27,701 $ 24,346 ======== ======== ========
The provision (benefit) for income taxes is summarized as follows (in thousands):
FISCAL YEARS ENDED MARCH 31, ----------------------------------------------- 1999 1998 1997 -------- -------- -------- Current Domestic.................................. $ 9,857 $ 5,141 $ 6,317 State..................................... 1,068 800 655 Foreign................................... 2,581 2,133 1,263 -------- -------- -------- Total current......................... 13,506 8,074 8,235 -------- -------- -------- Deferred Domestic.................................. (1,683) 2,018 197 Foreign................................... -- 93 -- -------- -------- -------- Total deferred........................ (1,683) 2,111 197 -------- -------- -------- Total............................ $ 11,823 $ 10,185 $ 8,432 ======== ======== ========
-43- 44 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The components of the deferred tax asset (liability) as of March 31, 1999 and 1998 are as follows (in thousands):
MARCH 31, ----------------------- 1999 1998 -------- -------- Deferred tax asset: Allowance for doubtful accounts.......................... $ 762 $ 692 Inventory................................................ 595 434 Reserves for disposition of business..................... 875 -- Foreign net operating loss carryforwards................. 2,847 1,659 Other.................................................... 428 251 -------- -------- 5,507 3,036 Less--Valuation reserve.................................. (108) (311) -------- -------- Total deferred tax asset......................... 5,399 2,725 -------- -------- Deferred tax liability: Property and equipment................................... (393) (413) Accounts receivable discount............................. (1,557) (2,077) Foreign inventory purchases.............................. (2,568) (1,257) Other.................................................... (744) (524) -------- -------- Total deferred liability......................... (5,262) (4,271) -------- -------- Deferred tax asset (liability), net........................ $ 137 $ (1,546) ======== ========
For financial reporting purposes, the tax benefit of cumulative temporary differences is recorded as an asset to the extent that management assesses the utilization of such temporary differences to be "more likely than not". Foreign net operating loss carryforwards relate primarily to taxable losses of the Company's Mexico and Singapore subsidiaries. These loss carryforwards begin to expire in fiscal year 2005. As of March 31, 1999 and 1998, a valuation allowance was recorded due to uncertainties regarding the Company's utilization of its Mexico subsidiary's net tax asset. No valuation allowance has been established for net operating loss carryforwards that are related to the Company's Singapore subsidiary due to projected income in future periods. 8. COMMITMENTS AND CONTINGENCIES: The Company and its subsidiaries lease facilities, and warehouse, office, transportation and other equipment under operating leases expiring in various years through fiscal year 2010. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (in thousands): 2000..................................................... $ 6,379 2001..................................................... 5,792 2002..................................................... 3,730 2003..................................................... 1,698 2004..................................................... 1,547 Thereafter............................................... 5,430 --------- Total............................................ $ 24,576 =========
Total rental expense under operating leases approximated $5.8 million, $4.2 million and $3.4 million for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Although the Company carries products and accessories supplied by numerous vendors, the Company's net sales from products manufactured by its ten largest suppliers were approximately 60%, 66% and 70% of total net sales during fiscal years 1999, 1998 and 1997, respectively. The Company has entered into written distribution agreements with nearly all of its major suppliers. As is customary in the industry, these agreements generally provide non-exclusive distribution rights, have one-year renewable terms and are terminable by either party at any time, with or without cause. Certain of these agreements require minimum annual purchases. Total minimum purchase -44- 45 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) requirements for fiscal year 2000 approximate $50 million. Additionally, many of the Company's suppliers offer rebate programs under which, subject to the Company purchasing certain predetermined amounts of inventory, the Company receives rebates based on a percentage of the dollar volume of total rebate program purchases. The Company also takes advantage of several other programs offered by substantially all of its suppliers. These include price protection plans under which the Company receives credits if the supplier lowers prices on previously purchased inventory and stock rotation or stock balancing privileges under which the Company can return slow-moving inventory in exchange for other products. Certain of the Company's suppliers also provide the Company with cooperative advertising programs, marketing development funds and other types of incentives and discounts which offset the production costs of the Company's published marketing tools and other related costs. The Company is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material effect on the Company's financial position or results of operations. 9. SEGMENT AND GEOGRAPHIC INFORMATION: In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related information." The Company is organized primarily on the basis of business segments and geographic locations. The Company operates in four reportable business segments: (1) U.S. Computer Supplies, (2) International Computer Supplies, (3) Professional Tape Products, and (4) PFS. The Company's reportable segments are strategic business units that offer different products and services or have significant volume of business conducted internationally. They are managed separately based on the fundamental differences in their operations or geographic location. The accounting policies of the segments are the same as those described in Note 1 other than the presentation of PFS net sales, which is discussed below. Segment information excludes intersegment net sales. No single customer accounted for more than 10% of the Company's annual net sales for the fiscal years ended March 31, 1999, 1998 and 1997. Included in the International Computer Supplies segment are operations in Canada, Mexico, Australia, Singapore and export sales from the U.S. The following tables set forth information as to the Company's reportable segments for fiscal year ended March 31:
U.S. International Professional Computer Computer Tape Supplies Supplies Products PFS Total -------- ------------- ------------ ------- -------- 1999 Net sales.................. $480,932 $233,728 $102,784 $12,633 $830,077 Operating contribution..... 20,657 9,088 4,383 3,591 37,719 Assets..................... 123,527 76,583 48,295 67,474 315,879 1998 Net sales.................. $526,268 $176,568 $57,040 $ 5,634 $765,510 Operating contribution..... 20,611 7,456 1,778 1,725 31,570 Assets..................... 145,968 54,508 36,864 20,505 257,845 1997 Net sales.................. $472,019 $121,303 $35,697 $ 1,674 $630,693 Operating contribution..... 17,060 5,424 2,857 852 26,193 Assets..................... 124,564 35,515 9,938 15,209 185,226
The Company's U.S. Computer Supplies segment includes certain expenses and assets that relate to other or all of the segments but are not allocated by management to the other segments. These expenses relate primarily to the Company's (i) centralized management information, warehouse and telephone systems, and (ii) executive, administrative, and other corporate costs. These assets primarily relate to the Company's centralized management information, warehouse and telephone systems and leasehold improvements on shared facilities. -45- 46 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Reconciliation of segment net sales to consolidated net sales is as follows:
Fiscal years ended March 31, ---------------------------------- 1999 1998 1997 -------- -------- -------- Segment net sales ............ $830,077 $765,510 $630,693 Adjustment for PFS ........... 78,553 34,602 8,818 -------- -------- -------- Consolidated net sales ....... $908,630 $800,112 $639,511 ======== ======== ========
In the table above, and for management purposes, PFS net sales is presented on a fee-equivalent basis. Fee-equivalent revenue is comprised of service fees earned for certain outsourcing services that PFS provides on a fee basis, plus gross profits that are recognized on other PFS contracts where accounting principles require PFS to recognize product revenue because PFS takes title to the inventory. Adjustment for PFS represents the adjustment to PFS net sales to recognize net sales under generally accepted accounting principles. Reconciliation of segment operating contribution to consolidated income before taxes is as follows:
Fiscal Years Ended March 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Segment operating contribution .............. $ 37,719 $ 31,570 $ 26,193 Loss on disposition of business(a) .......... (2,800) -- -- Acquisition related costs(a) ................ (1,111) (735) -- Interest expense ............................ (2,797) (3,134) (1,847) -------- -------- -------- Consolidated income before income taxes ..... $ 31,011 $ 27,701 $ 24,346 ======== ======== ========
(a) These charges relate to the Professional Tape Products segment.
Geographic information Fiscal Years Ended March 31 ---------------------------------- Net sales: 1999 1998 1997 -------- -------- -------- United States ...... $713,806 $671,670 $560,679 Canada ............. 100,192 76,623 53,235 Other .............. 94,632 51,819 25,597 -------- -------- -------- $908,630 $800,112 $639,511 ======== ======== ========
March 31, --------------------------------- Long-lived assets: 1999 1998 1997 ------- ------- ------- United States ...... $55,937 $26,218 $14,039 Canada ............. 1,340 802 517 Other .............. 4,150 3,641 3,892 ------- ------- ------- $61,427 $30,661 $18,448 ======= ======= =======
The Company also exports its products for sale throughout Latin America, Europe, the Far East, Africa and Australia. Total export sales to these geographic regions for fiscal years 1999, 1998 and 1997, included in United States sales in the preceding table, were approximately $60.2 million, $54.3 million, and $44.8 million, respectively. -46- 47 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. EMPLOYEE SAVINGS PLAN: The Company has a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to participate in the plan. The Company, at its discretion, may match employee contributions to the plan and also make an additional matching contribution in the form of profit sharing in recognition of Company performance. For fiscal year 1999, the Company matched 10% of employee contributions resulting in a charge against income of approximately $88,000. For fiscal year 1998, the Company matched 15% of employee contributions resulting in a charge against income of approximately $79,000. For fiscal year 1997, the Company matched 20% of employee contributions resulting in a charge against income of approximately $78,000. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS: The Company estimates fair value based on market information and appropriate valuation methodologies. Fair value is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The fair values of all non-derivative financial instruments approximate their carrying amounts in the accompanying consolidated balance sheets. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company's derivative financial instruments outstanding as of March 31, 1999 and 1998, consisted of forward foreign currency exchange contracts used to hedge the Company's net investment in, and its intercompany payable balances applicable to its Canadian and Australian subsidiaries (See Note 1). The fair values of these contracts based on fiscal year-end exchange rates, excluding related income taxes, were net losses of approximately $184,000 at March 31, 1999, and net gains of approximately $420,000 at March 31, 1998. -47- 48 DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. QUARTERLY DATA (UNAUDITED): Summarized quarterly financial data for fiscal years 1999 and 1998 are as follows (dollars in thousands, except per share data). Financial data for the 1998 fiscal year has been restated for pooling of interests to combine the results of operations of Daisytek and The Tape Company. See Note 2 of these Consolidated Financial Statements. Financial data for the first three quarters of fiscal year 1999 has been restated for the early adoption of SOP 98-5, as discussed in Note 1 of these Consolidated Financial Statements.
FISCAL YEAR 1999 --------------------------------------------------------------- 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. ----------- ----------- ----------- ----------- Net sales................................. $ 240,383 $ 225,507 $ 220,151 $ 222,589 Gross profit.............................. $ 28,331 $ 26,786 $ 26,723 $ 26,527 Gross profit margin.................. 11.8% 11.9% 12.1% 11.9% SG&A expenses............................. $ 18,898 $ 17,803 $ 17,145 $ 16,802 Percent of net sales................. 7.9% 7.9% 7.8% 7.5% Acquisition related costs................. $ 379 $ 197 $ 130 $ 405 Percent of net sales................. 0.2% 0.1% 0.1% 0.2% Loss on disposition of business........... $ 2,800 -- -- -- Percent of net sales................. 1.2% Income from operations.................... $ 6,254 $ 8,786 $ 9,448 $ 9,320 Operating margin..................... 2.6% 3.9% 4.3% 4.2% Income before cumulative effect of accounting change...................... $ 3,488 $ 4,981 $ 5,281 $ 5,438 Percent of net sales................. 1.5% 2.2% 2.4% 2.4% Net income................................ $ 3,488 $ 4,981 $ 5,281 $ 5,033 Net margin........................... 1.5% 2.2% 2.4% 2.3% Income before cumulative effect of accounting change per common share: Basic............................ $ 0.20 $ 0.29 $ 0.31 $ 0.32 Diluted.......................... $ 0.19 $ 0.28 $ 0.30 $ 0.31 Net income per common share: Basic............................ $ 0.20 $ 0.29 $ 0.31 $ 0.30 Diluted.......................... $ 0.19 $ 0.28 $ 0.30 $ 0.28
FISCAL YEAR 1998 --------------------------------------------------------------- 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. ----------- ----------- ----------- ----------- Net sales................................. $ 229,500 $ 197,775 $ 190,060 $ 182,777 Gross profit.............................. $ 26,227 $ 21,368 $ 20,326 $ 19,623 Gross profit margin.................. 11.4% 10.8% 10.7% 10.7% SG&A expenses............................. $ 16,717 $ 13,641 $ 13,094 $ 12,522 Percent of net sales................. 7.3% 6.9% 6.9% 6.9% Acquisition related costs................. $ 735 $ -- $ -- $ -- Percent of net sales................. 0.3% -- -- -- Income from operations.................... $ 8,775 $ 7,727 $ 7,232 $ 7,101 Operating margin..................... 3.8% 3.9% 3.8% 3.9% Net income................................ $ 4,845 $ 4,424 $ 4,147 $ 4,100 Net margin........................... 2.1% 2.2% 2.2% 2.2% Net income per common and common equivalent share Basic............................ $ 0.33 $ 0.30 $ 0.28 $ 0.29 Diluted.......................... $ 0.31 $ 0.29 $ 0.27 $ 0.27
-48- 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the directors and executive officers of the Company.
NAME AGE POSITION --------------------------- ------- ---------------------------------------- David A. Heap.............. 55 Chairman of the Board Mark C. Layton............. 39 President, Chief Executive Officer, Chief Operating Officer and Director Christopher Yates.......... 44 Senior Vice President-- Business Development and Director James R. Powell............ 38 Senior Vice President-- Sales and Marketing and Director Steven Graham.............. 47 Senior Vice President-- Information Technologies, Chief Information Officer Peter D. Wharf............. 40 Vice President-- International Operations Suzanne Garrett............ 34 Vice President Thomas J. Madden........... 37 Vice President-- Finance, Chief Financial Officer, Chief Accounting Officer and Treasurer John D. Kearney............ 45 Vice President-- Corporate Development Harvey H. Achatz........... 58 Vice President-- Administration and Secretary James R. Reilly............ 40 Director Timothy M. Murray.......... 47 Director Peter P. J. Vikanis........ 48 Director
DAVID A. HEAP has served as Chairman of the Board since 1982, as Chief Executive Officer from 1982 until his retirement in April 1997 and as President from 1982 to 1990. From 1970 to 1985, Mr. Heap served as Chairman of ISA International plc (and its predecessors) ("ISA"), a now publicly traded company he founded in England in 1970. Since 1998, Mr. Heap has served as Chairman and Chief Executive Officer of ISA. ISA is a distributor of computer supplies in Western Europe. MARK C. LAYTON has served as President, Chief Executive Officer and Chief Operating Officer since April 1997 and as a Director since 1988. Mr. Layton served as President, Chief Operating Officer and Chief Financial Officer from 1993 to April 1997, as Executive Vice President from 1990 to 1993 and as Vice President -- Operations from 1988 to 1990. Prior to joining the Company, Mr. Layton served as a management consultant with Arthur Andersen & Co., S.C. for six years through 1988 specializing in wholesale and retail distribution and technology. Mr. Layton also serves as a Director of ISA and uBid, Inc., an Internet auction company. CHRISTOPHER YATES was appointed Senior Vice President -- Business Development in February 1996, with primary responsibility for the PFS segment, and served as Vice President -- Business Development from November 1995 to February 1996, as a Director of the Company since February 1995, as Vice President -- Marketing from January 1994 to November 1995, as Vice President -- Sales from 1988 to 1994 and in various other sales capacities for the Company since 1982. Prior to joining the Company, Mr. Yates served in various sales capacities for ISA. JAMES R. POWELL has served as a Director and Senior Vice President -- Sales and Marketing since 1996, with primary responsibility for the U.S. Computer Supplies segment. Mr. Powell served as Vice President -- Sales from 1992 to 1996 and in various other sales capacities from 1988 to 1992. Prior to joining the Company, Mr. Powell was engaged in various sales and marketing activities. STEVEN GRAHAM has served as Senior Vice President of Information Technologies and Chief Information Officer since 1996. Prior to joining the Company, Mr. Graham was employed by Ingram Micro, a major microcomputer distributor. Mr. Graham has over 24 years of experience in the information-technology field. -49- 50 PETER D. WHARF has served as Vice President -- International Operations since February 1996. Mr. Wharf has primary responsibility for the International Computer Supplies segment. Mr. Wharf joined the Company in 1992 and has served in various export and international sales capacities since such time. Prior to joining the Company, Mr. Wharf served in various sales capacities for ISA. SUZANNE GARRETT serves as a Vice President with primary responsibilities for the Professional Tape Products segment and has served as Vice President of Product Management and Marketing, director of product management, marketing manager, and new-products manager for the U.S. Computer Supplies segment. Prior to joining the Company in 1991, Ms. Garrett served as an account executive for United Media. THOMAS J. MADDEN has served as Chief Financial Officer since July 1997. In addition, Mr. Madden also serves as Vice President -- Finance, Treasurer and as Chief Accounting Officer, positions he has held since November 1994, March 1994 and 1992, respectively. From 1992 to 1994 he also served as Controller. From 1983 to 1992, Mr. Madden served in various capacities with Arthur Andersen & Co., S.C., including financial consulting and audit manager. JOHN D. KEARNEY joined Daisytek as Vice President -- Corporate Development in March of 1999. From January 1998 to March 1999, he served as Vice President of Corporate Development for F. Y. I. Incorporated. Mr. Kearney has significant experience in investment banking, having served as Managing Director of Corporate Finance at Rauscher Pierce Refsnes Inc. from July 1995 to December 1997, and Senior Vice President of Corporate Finance at Raymond James & Associates from September 1991 to July 1995. HARVEY H. ACHATZ serves as Vice President -- Administration and Secretary, positions he has held since 1993 and 1984, respectively. Mr. Achatz served as Vice President -- Finance from 1985 to 1993, as Controller from 1981 to 1985 and as a Director from 1984 to 1990. JAMES F. REILLY was appointed a Director of the Company in October 1998. Mr. Reilly has served as Managing Director of the Technology Group at Warburg Dillon Read LLC ("Warburg Dillon Read") since April 1998. Warburg Dillon Read is a global investment banking firm and provides financial advisory services to Daisytek. Through Warburg Dillon Read, Mr. Reilly has been an advisor to Daisytek since 1994. Mr. Reilly has served in various senior management positions at Warburg Dillon Read and its predecessor companies since joining the firm in 1983. TIMOTHY M. MURRAY has served as a Director of the Company since 1991. Mr. Murray is a Principal of William Blair & Company, L.L.C., an investment banking firm he joined in 1979. Mr. Murray is also a director of MedE America Corporation and several privately held corporations. PETER P. J. VIKANIS has served as a Director of the Company since 1996. Mr. Vikanis served as Chief Operating Officer of ISA from 1991 to 1995, as a director of ISA from 1979 to 1995, and also served in various management capacities at ISA from 1971 to 1991. Mr. Vikanis presently serves as a non-Executive Director of ISA. Pursuant to the Company's Certificate of Incorporation, the Board of Directors is divided into three classes. Each class serves three years, with the terms of office of the respective classes expiring in successive years. Class I consists of Messrs. Powell and Yates whose terms will expire at the annual meeting of stockholders in 2001. Class II consists of Messrs. Murray and Layton whose terms will expire at the annual meeting of stockholders in 1999. Messrs. Murray and Layton have been nominated by the Board for election at the 1999 annual meeting. Class III consists of Messrs. Heap, Reilly and Vikanis whose terms will expire at the annual meeting of stockholders in 2000. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and controlling stockholders to file initial reports of ownership and reports of changes of ownership of the Company's Common Stock with the Securities and Exchange Commission and the Company. To the Company's knowledge, all reports required to be so filed were filed in accordance with the provisions of said Section 16(a). -50- 51 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company to its Chief Executive Officer and to each of the four most highly compensated executive officers for services rendered during fiscal years ended March 31, 1999, 1998 and 1997. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ------------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPLE POSITION YEAR SALARY BONUS OPTIONS COMPENSATION (1) - ----------------------------- ---- -------- -------- ------------ ---------------- David A. Heap............... 1999 $200,000 $ 87,580 36,250 $1,332 Chairman 1998 250,000 201,897 151,554 4,951 1997 385,000 222,900 85,728 5,970 Mark C. Layton.............. 1999 337,819 175,160 412,080 18,063 President, Chief Executive 1998 319,599 269,196 122,836 9,731 and Operating Officer 1997 299,013 222,900 69,832 8,458 Christopher Yates........... 1999 263,361 57,803 222,026 9,534 Senior Vice President - 1998 248,454 88,835 84,742 6,088 Business Development 1997 232,200 73,557 41,120 5,004 Steven Graham............... 1999 200,950 57,803 186,302 9,489 Senior Vice President - 1998 189,491 88,835 60,000 37,829 Information Technologies 1997 78,268 32,439 50,000 5,610 and Chief Information Officer James R. Powell............. 1999 184,690 57,803 185,134 4,320 Senior Vice President - 1998 175,037 88,835 76,116 3,015 Sales and Marketing 1997 163,652 73,557 42,660 3,715
- -------------------- (1) Represents compensation in respect of one or more of the following: personal use of Company automobiles; life insurance premiums paid by the Company for the benefit of the name executive officer; tax return preparation services paid by the Company; personal travel expenses and relocation costs. -51- 52 The following table sets forth information with respect to grants of stock options during the year ended March 31, 1999 to the named executive officers reflected in the Summary Compensation Table: OPTION GRANTS IN FISCAL YEAR 1999
INDIVIDUAL GRANTS ---------------------------------------------------- % OF TOTAL POTENTIAL REALIZABLE VALUE NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2) OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------------- NAME GRANTED YEAR SHARE DATE (1) 5% 10% - ----------------------- ---------- ---------- --------- ---------- ------------ ------------- David A. Heap.......... 36,250 1.3% $ 22.88 6-18-08 $ 521,491 $ 1,321,561 Mark C. Layton......... 360,000 13.0% 12.88 12-15-08 2,914,927 7,386,996 52,080 1.9% 22.88 6-18-08 749,221 1,898,673 Christopher Yates...... 180,000 6.5% 12.88 12-15-08 1,457,463 3,693,498 42,026 1.5% 22.88 6-18-08 604,585 1,532,136 Steven Graham.......... 150,000 5.4% 12.88 12-15-08 1,214,553 3,077,915 36,302 1.3% 22.88 6-18-08 522,239 1,323,457 James R. Powell........ 150,000 5.4% 12.88 12-15-08 1,214,553 3,077,915 35,134 1.3% 22.88 6-18-08 505,436 1,280,875
- ------------------ (1) Options expiring in June 2008 are subject to a three year cumulative vesting schedule and options expiring in December 2008 are subject to a four or five year cumulative vesting schedule. (2) These are hypothetical values using assumed annual rates of stock price appreciation as prescribed by the rules of the Securities and Exchange Commission. The following table sets forth information concerning the aggregate stock option exercises during the fiscal year ended March 31, 1999 and stock option values as of the end of fiscal year 1999 for unexercised stock options held by each of the named executive officers: AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END (1) ON VALUE --------------------------- ----------------------------- NAME EXERCISE RECEIVED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- -------- --------- ----------- ------------- ----------- ------------- David A. Heap.......... -- $ -- 98,399 165,071 $ 613,977 $ 531,387 Mark C. Layton......... -- -- 66,060 516,490 403,491 1,780,691 Christopher Yates...... -- -- 52,987 294,057 329,330 972,128 Steven Graham.......... -- -- 9,000 237,302 37,125 772,875 James R. Powell ....... 25,421 315,650 -- 249,833 -- 829,383
- ------------------ (1) Calculated by determining the difference between $16 5/8 (the last sale price of the Common Stock on March 31, 1999 as reported by the Nasdaq National Market) and the exercise price of the shares of Common Stock underlying the options. (2) Calculated by determining the difference between the last sale price of the Common Stock on the date of exercise as reported by the Nasdaq National Market and the exercise price. COMPENSATION OF DIRECTORS Each non-employee director receives an annual director's fee of $20,000 for each year in which he or she serves as a director. Non-employee directors do not receive additional Board or Committee meeting fees. The Company has also adopted a Non-Employee Director Stock Option and Retainer Plan (the "Non-Employee Director Plan") -52- 53 pursuant to which each non-employee director (i) may elect to receive payment of the director's fees in shares of Common Stock in lieu of cash, and (ii) is entitled to receive certain grants of options in accordance with the formula, and subject to the conditions precedent, set forth therein. The Non-Employee Director Plan is a formula grant plan pursuant to which each non-employee director receives options to purchase shares of Common Stock as of the date of each annual meeting of stockholders. The number of options to be issued under the Non-Employee Director Plan will increase each year based on the percentage increase, if any, in the Company's earnings before taxes ("EBT") for such fiscal year over the Company's previously reported EBT for the immediately preceding fiscal year. No options will be issued, however, under the Non-Employee Director Plan with respect to any fiscal year in which the company's EBT does not equal or exceed the Company's projected EBT for such year, nor will any options be issued to any non-employee director who does not attend at least 75% of all Board (and committee) meetings held during such fiscal year. Under the terms of the Non-Employee Director Plan, during fiscal year 1999 and related to fiscal year 1998 performance, each of the Company's non-employee directors received options to purchase 2,998 shares of Common Stock at an exercise price of $21 1/8 (the fair market value on the date of grant) as of the date of the 1999 Annual Meeting. Under the terms of the Non-Employee Director Plan, no options will be issued in respect of fiscal 1999. All options issued under the Non-Employee Director Plan are non-qualified options for federal income tax purposes and have an exercise price equal to the fair market value of a share of common stock as of the date of the annual meeting upon which such option is granted. All options are subject to a three year cumulative vesting schedule. Directors who are employees of the Company or any of its subsidiaries do not receive additional compensation for service on the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee of the Company's Board of Directors are Timothy M. Murray and James R. Reilly who are non-employee directors. -53- 54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of June 11, 1999, certain information regarding the beneficial ownership of the Common Stock by (i) each person who is known to the Company to beneficially own more than 5% of the Common Stock, (ii) each of the Directors and executive officers of the Company individually, (iii) the Directors and executive officers of the Company as a group and (iv) the Selling Stockholder. The information contained in this table reflects "beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless otherwise indicated, the stockholders identified in this table have sole voting and investment power with respect to the shares owned of record by them.
NUMBER NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT (1) ------------------------------------- ------------- ------------- David A. Heap(2).......................... 2,259,072 13.2% 500 North Central Expressway Plano, Texas 75074 Amvescap Plc (3).......................... 1,816,529 10.6% 11 Devonshire Square London, England EC2M 4YR Robert Fleming Inc. (4)................... 1,323,707 7.7% 320 Park Avenue, 11th & 12th Floors New York, New York 10022 T Rowe Price Associates, Inc. (5)......... 1,000,100 5.8% 100 East Pratt Street Baltimore, MD 21202 Mark C. Layton (6)........................ 325,226 1.9% Christopher Yates (7)..................... 83,647 * Harvey H. Achatz (8)...................... 63,109 * James R. Powell (9)....................... 29,150 * Steven Graham (10)........................ 33,000 * Thomas J. Madden (11)..................... 82,757 * James F. Reilly........................... 6,765 * Timothy M. Murray (12).................... 82,605 * Peter P.J. Vikanis (13)................... 8,551 * Suzanne Garrett (14)...................... 24,305 * Peter D. Wharf (15)....................... 37,541 * John D. Kearney (16)...................... -- -- All directors and executive officers as a group (13 persons) (17)............ 3,035,728 17.7%
- ---------- * Represents less than 1% (1) This table is based on 17,166,814 shares of Common Stock outstanding on June 11, 1999. (2) Includes outstanding options to purchase 151,443 shares of Common Stock, which are fully vested and exercisable. Does not include 1,800 shares held by Mr. Heap's spouse as custodian for minor children as to which beneficial ownership is disclaimed, and options to purchase 112,027 shares of Common Stock which are not vested or exercisable. Of the shares owned of record by Mr. Heap, 2,068,491 are pledged to a financial institution to secure indebtedness owing by Mr. Heap to such institution. (3) Based upon a Schedule 13G/A dated March 10, 1999 filed by Amvescap Plc, as parent holding company of Avz, Inc., AIM Management Group, Inc., Amvescap Group Services Inc., Invesco, Inc., and Invesco North American Holdings Inc., reporting beneficial ownership and shared voting and dispositive power as of December 31, 1998. (4) Based upon a Schedule 13G/A dated February 10, 1999 filed by Robert Fleming Inc. reporting beneficial ownership and shared voting and dispositive power as of December 31, 1998. -54- 55 (5) Based upon a Schedule 13-G dated February 12, 1999, these shares are owned as of December 31, 1998, by various individual and institutional investors, including T. Rowe Price New Horizons Fund, which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (6) Includes outstanding options to purchase 109,052 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 473,498 shares of Common Stock, which are not vested or exercisable. (7) Includes outstanding options to purchase 82,647 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 264,397 shares of Common Stock, which are not vested or exercisable. (8) Includes outstanding options to purchase 7,331 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 12,533 shares of Common Stock, which are not vested or exercisable. (9) Includes outstanding options to purchase 29,150 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 220,683 shares of Common Stock, which are not vested or exercisable. (10) Includes outstanding options to purchase 30,000 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 216,302 shares of Common Stock, which are not vested or exercisable. (11) Includes outstanding options to purchase 59,581 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 216,155 shares of Common Stock, which are not vested or exercisable. (12) Includes outstanding options to purchase 2,240 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 5,238 shares of Common Stock, which are not vested or exercisable. (13) Includes outstanding options to purchase 2,240 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 5,238 shares of Common Stock, which are not vested or exercisable. (14) Includes outstanding options to purchase 24,305 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 128,153 shares of Common Stock, which are not vested or exercisable. (15) Includes outstanding options to purchase 37,341 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 205,636 shares of Common Stock, which are not vested or exercisable. (16) Does not include outstanding options to purchase 40,000 shares of common stock which are not vested or exercisable. (17) Includes outstanding options to purchase 535,330 shares of Common Stock, which are fully vested and exercisable. Does not include outstanding options to purchase 1,899,860 shares of Common Stock which are not vested or exercisable. -55- 56 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN TRANSACTIONS During fiscal year 1999, the Company had loans outstanding in varying amounts to Messrs. Layton and Powell in order to provide such persons with the funds necessary to satisfy various personal obligations and for other purposes. The largest amount owing by such persons during fiscal year 1999 was $485,476 and $198,881, respectively. As of March 31, 1999, Messrs. Layton and Powell were indebted to the Company in the amounts of $485,476 and $198,881, respectively. The indebtedness owing by Messrs. Layton and Powell accrues interest at the rate charged to the Company for working capital borrowings. Messrs. Layton's and Powell's indebtedness is due and payable in one installment on April 1, 2001 and March 31, 2000, respectively. During fiscal year 1999, Warburg Dillon Read LLC, an investment banking firm of which Mr. Reilly is a Managing Director, performed financial advisory and investment banking services for the Company, and the Company presently expects that such firm may continue to provide such services in the current fiscal year. -56- 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets as of March 31, 1999 and 1998 Consolidated Statements of Income for the Fiscal Years Ended March 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. Financial Statements Schedules Report of Independent Public Accountants Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. 3. Exhibits
Exhibit No. Description of Exhibit ------- ---------------------- 3.1(5) - Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.1.1(5) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation. 3.2(1) - Amended and Restated By-laws of Daisytek International Corporation. 3.3(12) - Certificate of Amendment of Amended and Restated Certificate of Incorporation of Daisytek International Corporation 10.1(2) - 1994 Stock Option Plan of Daisytek International Corporation. 10.2(5) - Non-Employee Director Stock Option and Retainer Plan. 10.3(3) - Credit Agreement dated May 22, 1995, Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, Texas Commerce Bank National Association, as Agent, and Texas Commerce Bank National Association and State Street Bank and Trust Company, as Lenders. 10.4(6) - First Amendment to Credit Agreement dated April 15, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association and State Street Bank and Trust Company, as Lenders. 10.5(7) - Second Amendment to Credit Agreement dated November 14, 1996 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and Texas Commerce Bank National Association, NBD Bank, and State Street Bank and Trust Company, as Lenders. 10.6(2) - Industrial Lease Agreement between Industrial Developments International, Inc. and Daisytek, Incorporated, as amended. 10.7(2) - Lease Agreement dated September 30, 1991 between AmWest Savings Association and Daisytek, Incorporated, as amended. 10.8(8) - U.S. Reseller Agreement dated March 10, 1997 between Hewlett-Packard Company and Daisytek, Incorporated, with Addendum.
-57- 58 10.9(2) - Marketing Advantage Program Enrollment Agreement dated November 11, 1994 between Federal Express Corporation and Daisytek, Incorporated. 10.10(4) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and David A. Heap. 10.11(4) - Option to Purchase Shares of Common Stock dated May 9, 1995 between Daisytek International Corporation and Mark C. Layton. 10.12(4) - Second Amendment to Industrial Lease Agreement between New York Life Insurance Company and Daisytek, Incorporated. 10.13(4) - Sixth Modification to Lease Agreement dated November 30, 1995 between Atrium Association, L.P. and Daisytek, Incorporated. 10.14(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and David A. Heap. 10.15(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Steve Graham. 10.16(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Peter Vikanis. 10.17(8) - Option to Purchase Shares of Common Stock dated April 17, 1997 between Daisytek International Corporation and Timothy Murray. 10.18(9) - Third Amendment to Credit Agreement dated June 30, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.19(10) - Committed Credit Facility Agreement dated October 22, 1997 between Daisytek Australia PTY LTD, as Borrower, Daisytek International Corporation and Daisytek, Inc., as Guarantors, and The First National Bank of Chicago, as Lender. 10.20(10) - Fourth Amendment to Credit Agreement dated December 11, 1997 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Texas Commerce Bank National Association, as Lenders. 10.21(10) - Revolving Credit and Foreign Exchange Facility Agreement dated December 31, 1997 between Daisytek (Canada) Inc., as Borrower, Daisytek, Inc., as Guarantor, and First Chicago NBD Bank, Canada, as Lender. 10.22(13) - Stock Purchase Agreement by and among the Stockholders of Steadi-Systems, Ltd., Daisytek, Incorporated and Daisytek International Corporation dated January 5, 1998. 10.23(13) - Fifth Amendment to Credit Agreement dated February 13, 1998 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders. 10.24(11) - Agreement and Plan of Merger Among Daisytek International Corporation, Daisytek, Incorporated, TC Illinois Acquisition Corp., TC Michigan Acquisition Corp., TC Georgia Acquisition Corp., TC Ohio Acquisition Corp., TC Pennsylvania Acquisition Corp., TC Texas Acquisition Corp., And TC Minnesota Acquisition Corp., The Tape Company, Inc., An Illinois Corporation, The Tape Company, Inc., A Michigan Corporation, The Tape Company, Inc., A Georgia Corporation, The Tape Company, Inc., An Ohio Corporation, Tape Distributors, Inc., A Pennsylvania Corporation, Tape Distributors Of Texas, Inc., A Texas Corporation, Tape Distributors Of Minnesota, Inc., A Minnesota Corporation, Michael Cullen and Robert Daly. 10.25(11) - Registration Rights Agreement by and among Daisytek International Corporation, a Delaware corporation, Michael Cullen and Robert Daly, dated June 1, 1998. 10.26(12) - 1998 Amended and Restated Stock Option Plan of Daisytek International Corporation 10.27(12) - Daisytek International Corporation 1998 Employee Stock Purchase Plan 10.28(*) - Sixth Amendment to Credit Agreement dated March 29, 1999 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders.
-58- 59 10.29(*) - Asset Purchase Agreement between Steadi-Systems, Ltd. and Videotape Products, Inc. dated March 26, 1999 21(*) - Subsidiaries of the Registrant. 23(*) - Consents. 27.1(*) - Financial Data Schedule for fiscal year ended March 31, 1999. 27.2 (*) - Financial Data Schedule for fiscal year ended March 31, 1998. 27.3 (*) - Financial Data Schedule for fiscal year ended March 31, 1997.
- ------------------------------- (*) Filed herewith. (1) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1994 dated March 10, 1995. (2) Incorporated by reference from Registration Statement on Form S-1 No. 33-86926. (3) Incorporated by reference from Current Report on Form 8-K dated May 22, 1995. (4) Incorporated by reference from Registration Statement on Form S-1 No. 33-99796. (5) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1996 dated June 26, 1996. (6) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1996 dated August 13, 1996. (7) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1996 dated February 13, 1997. (8) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1997 dated June 27, 1997. (9) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997 dated August 14, 1997. (10) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1997 dated February 17, 1998. (11) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998 dated August 14, 1998. (12) Incorporated by reference from Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1998 dated November 16, 1998. (13) Incorporated by reference from Annual Report on Form 10-K for the Fiscal Year ended March 31, 1998 dated May 29, 1998. (b) Reports on Form 8-K 1. On May 5, 1998, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated May 5, 1998 announcing results for the fourth quarter and year ended March 31, 1998 results. 2. On August 4, 1998, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated July 29, 1998 announcing results for the first quarter of fiscal year 1999. 3. On November 4, 1998, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated October 28, 1998 announcing results for the second quarter of fiscal year 1999. 4. On February 11, 1999, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's press release dated February 11, 1999 announcing results for the third quarter of fiscal year 1999. -59- 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Daisytek International Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Daisytek International Corporation (a Delaware corporation) and subsidiaries included in this Form 10-K and have issued our report thereon dated May 5, 1999. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II of this Form 10-K is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Dallas, Texas, May 5, 1999 -60- 61 SCHEDULE II DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED MARCH 31, 1999 (AMOUNTS IN THOUSANDS)
ADDITIONS ------------------------- BALANCE AT CHARGES TO CHARGES TO BALANCE AT BEGINNING COST AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD --------- -------- -------- ---------- ---------- Fiscal Year Ended March 31, 1997 (a): Allowance for doubtful accounts............. $ 1,758 1,660 -- (993) $ 2,425 Income tax valuation allowance.............. $ 386 -- -- (123) $ 263 Fiscal Year Ended March 31, 1998 (a): Allowance for doubtful accounts............. $ 2,425 2,016 -- (1,676) $ 2,765 Income tax valuation allowance.............. $ 263 48 -- -- $ 311 Fiscal Year Ended March 31, 1999: Allowance for doubtful accounts............. $ 2,765 2,863 -- (2,771) $ 2,857 Income tax valuation allowance.............. $ 311 -- -- (203) $ 108 Reserves for disposition of business............................... $ -- 2,800 -- -- $ 2,800
- -------------------- (a) Retroactively restated to combine the results of operations of Daisytek with The Tape Company, which was acquired by Daisytek during June 1998 and accounted for as a pooling of interests. (See Note 2 of Notes to Consolidated Financial Statements). -61- 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAISYTEK INTERNATIONAL CORPORATION By: /s/ Thomas J. Madden Thomas J. Madden, Chief Financial Officer and Vice President - Finance June 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David A. Heap Chairman of the Board June 29, 1999 ------------------------ David A. Heap /s/ Mark C. Layton Chief Executive and Operating June 29, 1999 ------------------------ Officer, President and Director Mark C. Layton (principal executive officer) /s/ Thomas J. Madden Chief Financial Officer, Vice June 29, 1999 ------------------------ President - Finance Thomas J. Madden (principal financial and accounting officer) /s/ Christopher Yates Director June 29, 1999 ------------------------ Christopher Yates /s/ James R. Powell Director June 29, 1999 ------------------------ James R. Powell /s/ Timothy M. Murray Director June 29, 1999 ------------------------ Timothy M. Murray /s/ James F. Reilly Director June 29, 1999 ------------------------ James F. Reilly /s/ Peter P. J. Vikanis Director June 29, 1999 ------------------------ Peter P. J. Vikanis
-62- 63 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.28(*) - Sixth Amendment to Credit Agreement dated March 29, 1999 between Daisytek, Incorporated, as Borrower, Daisytek International Corporation and Borrower's Subsidiaries, as Guarantors, and State Street Bank and Trust Company, The First National Bank of Chicago, and Chase Bank of Texas, N.A., as Lenders. 10.29(*) - Asset Purchase Agreement between Steadi-Systems, Ltd. and Videotape Products, Inc. dated March 26, 1999 21(*) - Subsidiaries of the Registrant. 23(*) - Consents. 27.1(*) - Financial Data Schedule for fiscal year ended March 31, 1999. 27.2 (*) - Financial Data Schedule for fiscal year ended March 31, 1998. 27.3 (*) - Financial Data Schedule for fiscal year ended March 31, 1997.
EX-10.28 2 SIXTH AMENDMENT TO CREDIT AGREEMENT DATED 3/29/99 1 EXHIBIT 10.28 SIXTH AMENDMENT TO CREDIT AGREEMENT THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of March 29, 1999 and effective as of March 30, 1999, is among DAISYTEK, INCORPORATED, a Delaware corporation ("Borrower"), DAISYTEK INTERNATIONAL CORPORATION, a Delaware corporation ("Guarantor"), each of Borrower's Subsidiaries identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages of this Amendment or that, pursuant to Section 8.1(n) of the Credit Agreement (as hereinafter defined), become a "Subsidiary Guarantor" (individually, a "Subsidiary Guarantor," and, collectively, the "Subsidiary Guarantors"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust ("State Street"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), and CHASE BANK OF TEXAS, N.A., a national banking association formerly named Texas Commerce Bank National Association ("Chase"), as a lender and as administrative agent for itself, State Street and First Chicago (State Street, First Chicago, Chase and any assignee lender pursuant to Section 11.4A of the Credit Agreement being referred to, collectively, as "Lenders"). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS WHEREAS, Borrower, Guarantor, certain Subsidiary Guarantors, State Street, First Chicago (as assignee, effective June 30, 1997, of NBD Bank, a Michigan banking corporation) and Chase are parties to that certain Credit Agreement dated as of May 22, 1995, as amended by that certain First Amendment to Credit Agreement dated as of April 15, 1996, that certain Second Amendment to Credit Agreement dated as of November 14, 1996 and effective as of November 18, 1996, that certain Third Amendment to Credit Agreement dated and effective as of June 30, 1997, that certain Fourth Amendment to Credit Agreement dated and effective as of December 11, 1997, and that certain Fifth Amendment to Credit Agreement dated as of February 13, 1998 (as so amended, the "Credit Agreement"), establishing a revolving credit facility in the aggregate maximum principal amount of $65,000,000; WHEREAS, the parties desire to increase the maximum principal amount of the revolving credit facility from $65,000,000 to $85,000,000, to add certain inventory amounts to the Borrowing Base, to provide for the release foreign Subsidiary Guarantors from their Guaranty obligations, and to provide for the pledge of the capital stock of such foreign Subsidiary Guarantors; and WHEREAS, Chase will serve as administrative agent, syndication agent and arranger under the Credit Agreement and First Chicago will serve as documentation agent under the Credit Agreement. NOW, THEREFORE, in consideration of the recitals set forth above, the agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Guarantor, Subsidiary Guarantors and Lenders hereby agree as follows: 2 1. Amended Definitions. The following definitions in Section 1.1 of the Credit Agreement are amended to read in their entireties as follows: ""Borrowing Base" means a sum equal to (a) eighty percent (80%) of the amount of Net Outstanding Consolidated Eligible Receivables plus (b) an amount, not to exceed clause (a) above, equal to fifty percent (50%) of the amount of Consolidated Eligible Inventory, in each case as determined pursuant to the most recent Borrowing Base Certificate (in the form of Exhibit F) delivered by Borrower to Agent pursuant to Section 8.1(b)." ""Committed Sum" means, with respect to the Loan Commitment, Thirty Million Dollars ($30,000,000) with respect to Chase, Thirty Million Dollars ($30,000,000) with respect to First Chicago, and Twenty-Five Million Dollars ($25,000,000) with respect to State Street." ""Consolidated Eligible Inventory" means all Consolidated owned inventory of Guarantor that strictly complies with all of the Daisytek Corporations' representations, warranties and covenants contained in the Loan Documents with respect thereto; provided, however, that the following shall not be included: (a) work-in-process, (b) damaged, returned, or obsolete inventory, (c) inventory that for any other reason is not readily saleable in the ordinary course of business, (d) inventory subject to consignment (or other ownership interest in favor of a Person other than a Daisytek Corporation), (e) inventory located other than at a regular place of business of a Daisytek Corporation, and (f) inventory located outside of the United States of America or Canada." ""Loan Commitment" means Eighty-Five Million Dollars ($85,000,000)." 2. New Definition. The following definition is added to Section 1.1 of the Credit Agreement, to read in their entireties as follows: ""Sixth Amendment Closing Date" means March 30, 1999, being the effective date of the Sixth Amendment to Credit Agreement among Borrower, Guarantor, Subsidiary Guarantors, Lenders and Agent." 3. Amendment of Section 2.2. The first sentence of Section 2.2 of the Credit Agreement is amended to read in its entirety as follows: "The Loan made by Lenders pursuant to this Article II shall be evidenced by the Notes dated as of the Sixth Amendment Closing Date and substantially in the form of Exhibit A." 4. Amendment of Section 8.1(n). Section 8.1(n) of the Credit Agreement is amended to read in it entirety as follows: "(n) Additional Subsidiary Guarantors. Each Daisytek Corporation will take such action, and will cause each of its Subsidiaries to take such action, from time to time as shall be necessary to ensure that all Subsidiaries of Guarantor become "Subsidiary Guarantors" hereunder (but excluding from such requirement any Subsidiary that would, as a result of SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 2 3 becoming a "Subsidiary Guarantor" hereunder, also become a controlled foreign corporation as defined in Subpart F of the Internal Revenue Code of 1986, as amended). Any Subsidiary so excluded is hereinafter sometimes referred to as a "Subsidiary Non-Guarantor." Without limiting the generality of the foregoing, if a Daisytek Corporation shall form or acquire any new Subsidiary (other than a Subsidiary Non-Guarantor), then as soon thereafter as is reasonable practical, such corporation will cause such new Subsidiary to (i) become a "Subsidiary Guarantor" hereunder, and (ii) deliver to Lenders such proof of corporate or other organizational action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the then existing Daisytek Corporations pursuant to Section 6.1, or as Agent shall request." 5. New Section 8.1(o). A new Section 8.1(o) is added to the Credit Agreement, to read in its entirety as follows: "(o) Subsidiary Stock Pledges. Each Daisytek Corporation will take such action, and will cause each of its Subsidiaries to take such action, from time to time as shall be necessary to ensure that all stockholders (or other equity holders) of each Subsidiary Non-Guarantor execute and deliver to Agent a stock pledge agreement, or similar agreement (in either case in form and substance reasonably satisfactory to Agent), and to take such other actions and execute such other related documents, as is necessary to cause the legal, valid and binding pledge to Agent, for the benefit of Lenders, of sixty-five percent (65%) of the capital stock (or other similar equity interest) of such Subsidiary Non-Guarantor, to secure the Obligations." 6. Amendment of Exhibits. Exhibits A and F to the Credit Agreement are amended in their entirety to be in the forms of Exhibit A and F, respectively, attached to this Amendment. 7. Release of Foreign Subsidiary Guarantors. Upon the satisfaction by Guarantor and Borrower of all their obligations set forth in Section 8 below (and upon such satisfaction, with effect from May 22, 1995), each of the following Subsidiary Guarantors shall be released from its obligations under its Guaranties: Daisytek de Mexico Services, S.A. de C.V., Daisytek (Canada) Inc., Daisytek Australia Pty. Limited (ACN 075 675 795), Priority Fulfillment Services of Canada, Inc., Daisytek de Mexico, S.A. de C.V., Priority Fulfillment Services of Australia Pty. Limited (ACN 077 906 462), Daisytek Asia Pte. Ltd, and Priority Fulfillment Services de Mexico, S.A. de C.V. (collectively, the "Foreign Daisytek Corporations"). Also upon such satisfaction, each Foreign Daisytek Corporation shall not be a "Subsidiary Guarantor," as defined, but shall remain a "Daisytek Corporation," as defined. 8. Stock Pledge Agreement. Guarantor and Borrower agree to cause Borrower and each other Daisytek Corporation of which a Foreign Daisytek Corporation is a direct Subsidiary to execute and deliver to Agent a stock pledge agreement, or similar agreement (in either in case form and substance reasonably satisfactory to Agent), and to take such other actions and execute such other related documents, as is necessary to cause the legal, valid and binding pledge to Agent, for the benefit of Lenders, of sixty-five percent (65%) of the capital stock (or other similar equity interest) of such Foreign Daisytek Corporation, to secure the Obligations. Guarantor and Borrower further covenant and agree to cause such capital stock pledges to be effected as soon as commercially feasible. SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 3 4 9. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon the prior receipt by Agent of the documentation and fee set forth below: (a) Certificates. A certificate of the Secretary of each Daisytek Corporation, dated as of the Sixth Amendment Closing Date, to the effect that, except for an increase in the number of authorized shares of common stock of Guarantor, no changes have occurred to the certificates of incorporation (and other equivalent charter documents) and by-laws of the Daisytek Corporations, and no changes have occurred in the incumbency of officers of the Daisytek Corporations authorized to execute or attest any of the Loan Documents, in each case since May 22, 1995, except as expressly described in such certificate; (b) Resolutions. Copies of resolutions of the Board of Directors of each Daisytek Corporation, satisfactory to Lenders, approving the execution and delivery of this Amendment and such of the other Loan Documents to which such corporation is a party and authorizing the performance of the obligations of such corporation contemplated in this Amendment and in such other Loan Documents, accompanied by a certificate of the Secretary of such corporation, dated as of the Sixth Amendment Closing Date, that such copies are complete and correct copies of resolutions duly adopted at a meeting of such Board of Directors, and that such resolutions have not been amended, modified or revoked in any respect, and are in full force and effect as of the Sixth Amendment Closing Date; (c) Other Certificates. Certificates of each Daisytek Corporation's existence, good standing and qualification to do business, issued by appropriate officials in any state in which such corporation is incorporated, owns property or otherwise qualified, or required to qualify, to do business; (d) Notes. The Notes, duly executed; (e) Opinion of Counsel. An executed opinion of Wolff & Samson, P.C., Roseland, New Jersey, counsel to the Daisytek Corporations, dated as of the Sixth Amendment Closing Date and in form and substance satisfactory to Lenders and their counsel; (f) Other Documents. Any and all other documents or certificates reasonably requested by a Lender in connection with the execution of this Amendment; and (g) Fee. The fee referred to in Borrower's letter to the Lenders of even date herewith. 10. Guaranties. Each of Guarantor and each Subsidiary Guarantor hereby acknowledges, consents and agrees to this Amendment and (a) acknowledges that its obligations under that certain Guaranty executed by it, in favor of a Lender, includes a guaranty of all of the obligations, indebtedness and liabilities of Borrower under the Credit Agreement as amended by this Amendment (specifically including, without limitation, the obligations, indebtedness and liabilities resulting from the increase in the maximum principal amount of the revolving credit facility established by the Credit Agreement from $65,000,000 to $85,000,000, and specifically SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 4 5 acknowledging the prospective release of the Foreign Daisytek Corporations from their obligations under their Guaranties), (b) represents to each Lender that such Guaranty remains in full force and effect and shall continue to be its legal, valid and binding obligation, enforceable against it in accordance with its terms, and (c) agrees that this Amendment and all documents executed in connection herewith do not operate to reduce or discharge its obligations under such Guaranty. 11. Other Documents. Borrower shall provide such other documents incidental and appropriate to this Amendment as Agent or Agent's counsel may reasonably request, all such documents to be in form and substance reasonably satisfactory to Agent. 12. Terms of Agreement. Except as expressly amended by this Amendment, the Credit Agreement is and shall be unchanged. 13. Effect of Amendment. The Credit Agreement and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement in the Credit Agreement or the other documents shall mean a reference to the Credit Agreement as amended hereby. Lenders agree to undertake reasonable efforts among themselves such that, as of the Sixth Amendment Closing Date, amounts outstanding under the Loan shall, as to each Lender, be held Pro Rata (as Pro Rata is modified by the amendment, in this Amendment, of the term "Committed Sum."). 14. Reaffirmation; No Default. Each Daisytek Corporation hereby represents and warrants to Lenders that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and delivered in connection herewith have been authorized by all requisite corporate action on the part of such Daisytek Corporation and will not violate the certificate of incorporation (or other charter documents) or bylaws of any Daisytek Corporation, (b) the representations and warranties contained in the Credit Agreement, as amended by this Amendment, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (d) each Daisytek Corporation is in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby. 15. Enforceability. Each Daisytek Corporation hereby represents and warrants that, as of the date of this Amendment, the Credit Agreement and all documents and instruments executed in connection therewith are in full force and effect and that there are no claims, counterclaims, offsets or defenses to any of such documents or instruments. 16. GOVERNING LAW. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. PURSUANT TO SECTION 346.004 OF THE TEXAS FINANCE CODE, CHAPTER 346 OF THE TEXAS FINANCE CODE SHALL NOT APPLY TO THE CREDIT AGREEMENT, SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 5 6 AS AMENDED BY THIS AMENDMENT, THE NOTES, OR ANY ADVANCE OR LOAN EVIDENCED BY THE NOTES. 17. Maximum Interest Rate. Regardless of any provisions contained in this Amendment or in any other Loan Documents, Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes or otherwise any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and if Lenders ever receive, collect or apply as interest any such excess, or if acceleration of the maturity of the Notes or if any prepayment by Borrower results in Borrower having paid any interest in excess of the maximum rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balances of Notes are paid in full, any remaining excess shall forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or the Credit Agreement, as amended by this Amendment, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum lawful rate permitted under applicable law. In determining whether or not the interest paid or payable under any specific contingency exceeds the maximum rate of interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Notes at the maximum lawful rate under applicable law. 18. Counterparts. This Amendment may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 19. WAIVER OF TRIAL BY JURY. EACH DAISYTEK CORPORATION WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS AMENDMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH DAISYTEK CORPORATION ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL INDUCEMENT TO EACH LENDER'S ENTERING INTO THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH LENDER IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO EACH LENDER THAT SUCH CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING JURY TRIAL WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 6 7 20. WAIVER OF CONSUMER/DTPA RIGHTS. EACH DAISYTEK CORPORATION HEREBY WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE SECTION 17.41 ET SEQ.), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO EACH LENDER THAT SUCH CORPORATION (A) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT, (B) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION, AND (C) IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS. 21. OTHER AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE WRITTEN CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES. [The balance of this page is intentionally left blank.] SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 7 8 THIS AMENDMENT is executed and effective as of the date first written above. BORROWER: DAISYTEK, INCORPORATED By: -------------------------------- Name: ------------------------------ Title: ----------------------------- GUARANTOR: DAISYTEK INTERNATIONAL CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- SUBSIDIARY GUARANTORS: DAISYTEK (CANADA) INC., a Canadian corporation DAISYTEK ASIA PTE LTD, a Singapore corporation By: ------------------------------- By: Name: ------------------------------- ----------------------------- Name: Title: ----------------------------- ---------------------------- Title: ---------------------------- DAISYTEK DE MEXICO, S.A. DE C.V., DAISYTEK AUSTRALIA PTY. LTD. a Mexican corporation (ACN 075 675 795), an Australian corporation By: ------------------------------- By: Name: ------------------------------- ----------------------------- Name: Title: ----------------------------- ---------------------------- Title: ---------------------------- DAISYTEK DE MEXICO SERVICES, S.A. DE C.V., a Mexican corporation By: ------------------------------- Name: ----------------------------- Title: ---------------------------- SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 8 9 DAISYTEK LATIN AMERICA, INC., a PRIORITY FULFILLMENT SERVICES Florida corporation OF CANADA, INC., a Canadian corporation By: ------------------------------- By: Name: ------------------------------- ----------------------------- Name: Title: ----------------------------- ---------------------------- Title: ---------------------------- HOME TECH DEPOT, INC., a Delaware corporation STEADI-SYSTEMS, LTD., a California corporation By: ------------------------------- Name: By: ----------------------------- ------------------------------- Title: Name: ---------------------------- ----------------------------- Title: ---------------------------- PRIORITY FULFILLMENT SERVICES DE MEXICO, S.A. DE C.V., a Mexican corporation STEADI SYSTEMS MIAMI, INC., a Florida corporation By: ------------------------------- Name: By: ----------------------------- ------------------------------- Title: Name: ---------------------------- ----------------------------- Title: ---------------------------- PRIORITY FULFILLMENT SERVICES, INC., a Delaware corporation STEADI SYSTEMS NEW YORK, INC., a New York corporation By: ------------------------------- Name: By: ----------------------------- ------------------------------- Title: Name: ---------------------------- ----------------------------- Title: ---------------------------- PRIORITY FULFILLMENT SERVICES OF AUSTRALIA PTY. LIMITED, (ACN 077 906 462), an Australian SUPPLIES EXPRESS, INC., a Delaware corporation corporation By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 9 10 WORKING CAPITAL OF AMERICA, THE TAPE COMPANY, INC., an Ohio INC., a Delaware corporation corporation By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- THE TAPE COMPANY, INC., an Illinois THE TAPE COMPANY, INC., a corporation Minnesota corporation By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- THE TAPE COMPANY, INC., a Georgia TAPE DISTRIBUTORS OF TEXAS, corporation INC., a Texas corporation By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- THE TAPE COMPANY, INC., a Pennsylvania corporation By: ------------------------------- Name: ----------------------------- Title: ---------------------------- AGENT: CHASE BANK OF TEXAS, N.A., a national banking association By: ------------------------------ Name: ---------------------------- Title: --------------------------- SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 10 11 LENDERS: CHASE BANK OF TEXAS, N.A. a national banking association By: ------------------------------ Name: ---------------------------- Title: --------------------------- STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust By: ------------------------------ Michael St. Jean, Vice President THE FIRST NATIONAL BANK OF CHICAGO, a national banking association By: ------------------------------ Cory M. Olson, Authorized Agent SIXTH AMENDMENT TO CREDIT AGREEMENT - Page 11 EX-10.29 3 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.29 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is dated as of March 26, 1999 (this "AGREEMENT") and is by and among Steadi-Systems, Ltd., a California corporation ("STEADI"), Daisytek, Inc., a Delaware corporation ("DAISYTEK"), Videotape Products, Inc., a California corporation ("VTP"), John Palazzola and Richard Marzec (collectively, the "STOCKHOLDERS"). VTP is engaged in the business of, among other things, the sale and distribution of professional video and audio recording tape, data storage media products and related products. Steadi is engaged in the business of, among other things, the sale, distribution and rental of professional video and audio hardware products. VTP and Steadi have each agreed to purchase and acquire certain assets, and assume certain liabilities, of the other. Accordingly, in consideration of the mutual representations, warranties and covenants contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1. CERTAIN DEFINED TERMS. As used in this Agreement, (i) terms defined in the Preamble or elsewhere in this Agreement shall have the meaning set forth therein and (ii) the following terms shall have the following meanings: "ACTION" means any claim, action, suit, arbitration, inquiry, proceeding or investigation, in each case, by or before any Governmental Authority. "AFFILIATE" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "CONSIGNMENT AGREEMENTS" means the Inventory Consignment Agreement dated October 30, 1998 between VTP and CIN Services, Inc. and the Inventory Consignment Agreement dated March 15, 1997 between VTP and CineFilm Laboratory, Inc. "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor or by contract, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "ENCUMBRANCE" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential 2 arrangement, or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. "ENVIRONMENT" means surface waters, groundwaters, soil, subsurface strata and ambient air. "ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or judicial actions, suits, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any Environmental Permit (hereinafter "Claims"), including without limitation (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL LAWS" means any federal, state or local law or any foreign law, including any statute, rule, regulation, ordinance, code or rule of common law, now or hereafter in effect and in each case as amended, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations promulgated thereunder; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq. "ENVIRONMENTAL PERMITS" means all permits, written approvals, U.S. Environmental Protection Agency or state generator numbers, licenses and other authorizations from applicable Governmental Authorities required under any applicable Environmental Law. "GOVERNMENTAL AUTHORITY" means any United States federal, state, local, possession or foreign governmental, regulatory or administrative authority, agency or commission, or any political subdivision thereof, or any court, tribunal or arbitral body. "GOVERNMENTAL ORDER" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "HARDWARE BUSINESS" means the sale, distribution, rental and service of professional video and audio hardware products (excluding video and audio tape products, data storage media products and film) conducted by Steadi and its subsidiaries, taken as a whole (excluding the logistics, fulfillment, distribution and transaction management services outsourcing business conducted by Priority Fulfillment Services, Inc., a Daisytek subsidiary, and its Affiliates). 2 3 "HAZARDOUS MATERIALS" means (a) petroleum and petroleum fuels, lubricants and cleaning agents, radioactive materials, friable asbestos material as defined under 40 C.F.R. 61.141, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls in concentrations of 50 ppm, and radon gas; (b) any other chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials" or "extremely hazardous wastes"; and (c) any other chemical, material or substance exposure to which is regulated pursuant to any applicable Environmental Law. "INDEMNIFIED PARTY" means any Person having a right to indemnification from an Indemnifying Party under the terms and provisions of Article VIII hereof. "INDEMNIFYING PARTY" means any Person responsible or obligated to provide indemnification to an Indemnified Party under the terms and provisions of Article VIII hereof. "LIABILITIES" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any law (including, without limitation, any Environmental Law), rule, regulation, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking, including all indemnification obligations under any charter document, any indemnity agreement or as permitted under applicable law. "MATERIAL ADVERSE EFFECT" means any circumstance, change in, or effect on, (i) for purposes of the representations of VTP and the Stockholders hereunder, the Tape Business or (ii) for purposes of the representations of Steadi hereunder, the Hardware Business, in each case, that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Tape Business or the Hardware Business, as the case may be, is, or would be, materially adverse to the operations, assets or liabilities (including, without limitation, contingent liabilities), customer or supplier relationships, prospects, results of operations or the condition (financial or otherwise) of the Tape Business or the Hardware Business, as the case may be. "PERSON" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "STRATEGIC ALLIANCE AGREEMENT" means the Strategic Alliance Agreement of even date herewith to be executed and delivered by VTP, Steadi, Daisytek and the Stockholders concurrently with the Closing hereunder. "TAPE BUSINESS" means the sale and distribution of professional video and audio recording tape, data storage media products, film and related products (excluding hardware and equipment) as conducted by VTP. 3 4 "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement of even date herewith to be executed and delivered by VTP and Steadi concurrently with the Closing hereunder. ARTICLE II SALE AND PURCHASE OF TAPE ASSETS 2.1. SALE AND PURCHASE OF TAPE ASSETS. Subject to the terms and conditions of this Agreement and on the basis of and in reliance upon the representations, warranties, obligations and agreements set forth herein, VTP does hereby validly sell, assign, transfer, convey and deliver to Steadi, and Steadi does hereby purchase and acquire from VTP, all of the right, title and interest of VTP in, to and under all of the following assets to the extent they relate to, or are used by VTP in connection with or are necessary for the operation of, the Tape Business (collectively, the "TAPE ASSETS"): (a) all customer lists, telephone lists, prospect lists, customer information (including all information relating to customer credit history, purchasing information, contact names, addresses and phone numbers and all other customer information), all advertising materials, catalogs, price lists, mailing lists, distribution lists, sales and promotional materials, customer and sales order, files and records, all rights (but not obligations) under all unfilled customer purchase orders and the Consignment Agreements, customer commitments and obligations relating to future purchases, all trade secrets and confidential information, all rights to enforce all confidentiality and non-disclosure agreements with respect to the Tape Business, all transferable licenses, franchises, rights and authorizations, those certain telephone and fax numbers set forth on Schedule 2.1(a) hereto and all goodwill of every kind and nature relating to or associated with the Tape Business (collectively, the "TAPE GOODWILL ASSETS"); and (b) all Tape Business finished goods inventory, consisting of the products set forth on Schedule 2.1(b) hereto, including all transferable rights of return to the supplier thereof, if any, and all other rights, benefits and privileges associated therewith or related thereto; (collectively, the "TAPE INVENTORY"), excluding, however, all inventory which is (i) visibly damaged or defective, (ii) as to certain products so identified on Schedule 2.1(b) hereto, in excess of the maximum amount therefor set forth therein or (iii) physically segregated from the Tape Inventory and to be shipped in fulfillment of customer orders received prior to the Closing or returned to the manufacturer (collectively, the "EXCLUDED TAPE INVENTORY"). Except for the Tape Assets, and except as otherwise described in the Transition Services Agreement, VTP is not selling or transferring to Steadi, and Steadi is not purchasing or acquiring from VTP, any assets or other property relating to the Tape Business, including all accounts receivable and the name "Videotape Products". 2.2. NO ASSUMED TAPE LIABILITIES. Notwithstanding the purchase of the Tape Assets, Steadi does not assume or agree to discharge or perform any debts, liabilities or obligations of VTP or any predecessor or affiliate thereto, it being expressly agreed and understood that Steadi does not agree to assume, nor shall have any responsibility, liability or obligation for any 4 5 Liabilities of VTP or the Stockholders, including the following (collectively, the "RETAINED TAPE LIABILITIES"): (i) any liability or obligation of VTP based upon, arising out of or otherwise in respect of the negotiation and preparation of this Agreement or any of the Schedules or Exhibits hereto, or the consummation of the transactions contemplated hereby, including without limitation, any tax liability so arising; (ii) any liability or obligation based upon, arising out of or otherwise in respect of, any accounts payable, trade payables, employee wages, employee benefits, product liability, product warranty, or any agreement or contract to which VTP is a party; (iii) any liability or obligation of VTP, or any consolidated group of which VTP is or has been a member, for any federal, state, county or local taxes, or any interest, additions to and/or penalties thereon, accrued for, applicable to or arising during any period whether prior to or following the date hereof; (iv) any liability or obligation of VTP for any cause of action, claim, demand, breach or violation of any kind or description, whether arising under any contract, agreement, law, rule or regulation, or otherwise, including without limitation, any claim for personal injury, malpractice, negligence, fraud, discrimination, sexual harassment, wrongful termination, property damage or any environmental claim or remedial claim; and (v) any liability or obligation arising under any collective bargaining agreement, union contract, employment agreement or other agreement or understanding of any kind relating to employment of any employee or group of employees. 2.3. TAPE PURCHASE PRICE. In consideration of the sale, assignment, transfer, conveyance and delivery of the Tape Assets by VTP to Steadi and the execution and delivery of the Strategic Alliance Agreement and the Transition Services Agreement, Steadi shall pay to VTP the amounts set forth below (collectively, the "TAPE PURCHASE PRICE") subject to, and in accordance with, the following: (a) The sum of $ 11,100,000 which shall be allocated as the purchase price for the Tape Goodwill Assets; and (b) The purchase price for the Tape Inventory shall be determined as follows. As promptly as practicable following the Closing, VTP and Steadi shall jointly conduct a physical inventory count of all Tape Inventory located at the locations set forth on Schedule 2.3(b). Upon completion of such physical inventory count, VTP and Steadi shall jointly determine the purchase price for the Tape Inventory which shall be based upon the product prices (net of vendor rebates) set forth on Schedule 2.1(b). Steadi shall be responsible for, and shall promptly thereafter arrange for, the shipping and delivery of the Tape Inventory to the Steadi warehouse(s) (except for the Tape Inventory located in the Tape Premises (as defined in the Transition Services Agreement) or 5 6 held by the consignees under the Consignment Agreements which shall remain in such locations). All shipping and delivery costs (and all risk of loss in transit) shall be borne by Steadi. ARTICLE III SALE AND PURCHASE OF HARDWARE ASSETS 3.1. SALE AND PURCHASE OF HARDWARE ASSETS. Subject to the terms and conditions of this Agreement and on the basis of and in reliance upon the representations, warranties, obligations and agreements set forth herein, Steadi does hereby validly sell, assign, transfer, convey and deliver to VTP, and VTP does hereby purchase and acquire from Steadi, all of the right, title and interest of Steadi in, to and under all of the following assets to the extent they relate to, or are used by Steadi in connection with or are necessary for the operation of, the Hardware Business (collectively, the "HARDWARE ASSETS"): (a) all customer lists, telephone lists, prospect lists, customer information (including all information relating to customer credit history, purchasing information, contact names, addresses and phone numbers and all other customer information), all advertising materials, catalogs, price lists, mailing lists, distribution lists, sales and promotional materials, customer and sales order files and records, all rights (including the deposits) under the unfilled customer purchase orders set forth on Schedule 3.1(a), customer commitments and obligations relating to future purchases, all trade secrets and confidential information, all rights to enforce all confidentiality and non-disclosure agreements with respect to the Hardware Business, all transferable licenses, franchises, rights and authorizations, those certain telephone and fax numbers set forth on Schedule 2.1(a) hereto and all goodwill of every kind and nature relating to or associated with the Hardware Business (collectively, the "HARDWARE GOODWILL ASSETS"); (b) all rental agreements which are in effect as of the Closing (collectively, the "HARDWARE EQUIPMENT LEASES") and all hardware and equipment which is subject thereto (collectively, the "LEASED HARDWARE EQUIPMENT") and all credit card authorization slips and insurance certificates received by Steadi in connection therewith; and (c) all Hardware Business finished goods inventory (including all inventory designated on Steadi's records as new, used, rental, demo, defective and service parts) consisting of the products set forth on Schedule 3.1(c) hereto, including all transferable rights of return to the supplier thereof, if any, and all other rights, benefits and privileges associated therewith or related thereto (the "HARDWARE INVENTORY"), excluding, however, all inventory which is physically segregated from the Hardware Inventory and to be shipped in fulfillment of customer orders received prior to the Closing or returned to the manufacturer (the "EXCLUDED HARDWARE INVENTORY"); Except for the Hardware Assets, and except as otherwise described in the Transition Services Agreement, Steadi is not selling or transferring to VTP, and VTP is not purchasing or acquiring from Steadi, any assets or other property relating to the Hardware Business, including all accounts receivable and the name "Steadi Systems". 6 7 3.2. ASSUMED HARDWARE LIABILITIES. Subject to the terms and conditions contained herein, VTP does hereby assume and agree to discharge and perform all liabilities and obligations arising under (i) the Hardware Equipment Leases with respect to the remaining terms thereof from and after the date hereof (ii) the unfilled customer orders set forth on Schedule 3.1(a) (collectively, the "ASSUMED HARDWARE LIABILITIES"). Except for the Assumed Hardware Liabilities, VTP does not assume or agree to discharge or perform any debts, liabilities or obligations of Steadi or any predecessor or affiliate thereto, it being expressly agreed and understood that VTP does not agree to assume, nor shall have any responsibility, liability or obligation for any Liabilities of Steadi, including the following (collectively, the "RETAINED HARDWARE LIABILITIES"): (i) any liability or obligation of Steadi based upon, arising out of or otherwise in respect of the negotiation and preparation of this Agreement or any of the Schedules or Exhibits hereto, or the consummation of the transactions contemplated hereby, including without limitation, any tax liability so arising; (ii) any liability or obligation based upon, arising out of or otherwise in respect of, any accounts payable, trade payables, employee wages, employee benefits, product liability, product warranty, or any agreement or contract to which Steadi is a party; (iii) any liability or obligation of Steadi, or any consolidated group of which Steadi is or has been a member, for any federal, state, county or local taxes, or any interest, additions to and/or penalties thereon, accrued for, applicable to or arising during any period whether prior to or following the date hereof; (iv) any liability or obligation of Steadi for any cause of action, claim, demand, breach or violation of any kind or description, whether arising under any contract, agreement, law, rule or regulation, or otherwise, including without limitation, any claim for personal injury, malpractice, negligence, fraud, discrimination, sexual harassment, wrongful termination, property damage or any environmental claim or remedial claim; and (v) any liability or obligation arising under any collective bargaining agreement, union contract, employment agreement or other agreement or understanding of any kind relating to employment of any employee or group of employees. 3.3. HARDWARE PURCHASE PRICE. In consideration of the sale, assignment, transfer, conveyance and delivery of the Hardware Assets by Steadi to VTP and the execution and delivery of the Strategic Alliance Agreement and the Transition Services Agreement, VTP shall assume the Assumed Hardware Liabilities and shall pay to Steadi the amounts set forth below (collectively, the "HARDWARE PURCHASE PRICE") subject to, and in accordance with, the following: (a) The sum of One Dollar ($1.00) which shall be allocated as the purchase price for the Hardware Goodwill Assets and the Hardware Equipment Leases; 7 8 (b) The purchase price for the Hardware Inventory and the Leased Hardware Equipment shall be determined as follows. As promptly as practicable following the Closing, VTP and Steadi shall jointly conduct a physical inventory count of all Hardware Inventory located at the locations set forth on Schedule 3.3(b) and a listing of the Hardware Equipment Leases and the Leased Hardware Equipment. Upon completion of such physical inventory count and listing, Steadi and VTP shall jointly determine the purchase price for the Hardware Inventory and the Leased Hardware Equipment which shall be based upon the product prices set forth on Schedule 3.1(c). Steadi shall deliver to VTP the Hardware Equipment Leases, and VTP shall be responsible for, and shall promptly thereafter arrange for, the shipping and delivery of the Hardware Inventory to the VTP warehouse(s) (except for the Hardware Inventory located in the Hardware Premises (as defined in the Transition Services Agreement) which shall remain in such locations). All shipping and delivery costs (and all risk of loss in transit) shall be borne by VTP. ARTICLE IV CLOSING OF TAPE TRANSACTION AND HARDWARE TRANSACTION 4.1. CLOSING. The closing ("CLOSING") of the sale and purchase of the Tape Assets as described herein (the "TAPE TRANSACTION") and the sale and purchase of the Hardware Assets as described herein (the "HARDWARE TRANSACTION") shall occur concurrently with each other and immediately following the execution and delivery of this Agreement on the date hereof (the "CLOSING DATE"). The Closing shall be held at the offices of Hahn & Hahn, Pasadena, California or at such other time and place as the parties shall mutually agree. Subject to the terms set forth herein, the Closing of the Tape Transaction and the Hardware Transaction shall be deemed effective for all purposes immediately following the close of business (Pacific time) on the Closing Date. 4.2. PAYMENT OF THE NET PURCHASE PRICE. At the Closing, Steadi shall pay to VTP the sum of $5,500,000 (the "INITIAL PAYMENT") in cash by wire transfer to an account designated in writing by VTP (the "VTP ACCOUNT"). Within three business days following the determination of the Tape Inventory Purchase Price and the Hardware Inventory Purchase Price, (a) Steadi and VTP shall execute and deliver a Closing Statement setting forth the Tape Purchase Price and the Hardware Purchase Price, as finally determined, and each of the respective components thereof as provided above, and (b) VTP shall deliver to Steadi reasonably satisfactory evidence that the holders of all Encumbrances upon the Tape Assets have released such Encumbrances, whereupon Steadi shall thereafter pay to VTP, by wire transfer to the VTP Account, the amount (the "NET PAYMENT") by which (i) the Tape Purchase Price minus the Initial Payment exceeds (ii) the Hardware Purchase Price. The Net Payment shall be adjusted, at such time or times as may be necessary, whether as of the Closing or following the Closing, to reflect and equitably account for (i) any liabilities of a party hereto accrued prior to the Closing Date which the other party hereto agrees to pay (or does pay) for the mutual convenience of the parties and in order to effect an orderly transition of the business being purchased hereunder, (ii) the transfer of the deposits under the unfilled customer orders set forth on Schedule 3.1(a) and (iii) the transfer of the Hardware Equipment Leases and any amounts received by VTP in payment of amounts owing under the Hardware Equipment Leases which relate to the period prior to the Closing. Any adjustment to 8 9 the Net Payment shall be paid within three business days following the determination thereof, in cash by wire transfer to the account designated by the receiving party. 4.3. ACTIONS TAKEN AT CLOSING. The following actions shall be taken at the Closing, and all such actions shall be deemed to have occurred concurrently with each other. (a) ANCILLARY AGREEMENTS. The parties shall execute and deliver the Strategic Alliance Agreement and the Transition Services Agreement. (b) BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT. The parties shall execute and deliver a Bill of Sale and Assignment and Assumption Agreement to evidence the purchase and sale of the Tape Assets and the Hardware Assets hereunder and the assignment and assumption of the Hardware Equipment Leases and the Assumed Hardware Liabilities. (c) RESOLUTIONS. Each party shall deliver a true and complete copy, certified by its Secretary or Assistant Secretary, of the resolutions duly adopted by its Board of Directors evidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. (d) INITIAL PAYMENT. Steadi shall pay the Initial Payment to VTP in accordance with the terms set forth herein. (e) ELECTRONIC TRANSMISSION. The Tape Goodwill Assets and the Hardware Goodwill Assets shall be transferred by electronic transmission in such manner as the parties shall mutually agree. 4.4. OFFER OF EMPLOYMENT. VTP agrees not to interfere with the ability of Steadi to offer employment to the employees listed on Schedule 4.4(i) hereto (the "TAPE EMPLOYEES") and Steadi agrees not to interfere with the ability of VTP to offer employment to the employees listed on Schedule 4.4(ii) hereto (the "HARDWARE EMPLOYEES"). This Section shall not be construed as a promise of employment, nor shall any Tape Employee or Hardware Employee be deemed a third-party beneficiary hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES OF VTP VTP and the Stockholders hereby, jointly and severally, make the following representations and warranties to Steadi: 5.1. ORGANIZATION AND QUALIFICATION. VTP is a corporation, duly organized, validly existing and in good standing under the laws of the State of California with full corporate power and authority to own its properties and to carry on the Tape Business as now conducted. 5.2. CAPITALIZATION. The Stockholders are the lawful record and beneficial owners of all of the issued and outstanding shares of capital stock of VTP. VTP has no other shares or other 9 10 securities which are authorized, issued and/or outstanding other than the shares of capital stock owned by the Stockholders. 5.3. AUTHORITY; BINDING OBLIGATION. The Stockholders and VTP have all requisite power and authority to execute, deliver and perform their respective obligations under this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and consummate the transactions contemplated herein and therein. The execution and delivery of this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors and stockholders of VTP, and no other action on the part of VTP or Stockholders is necessary to consummate the transactions contemplated hereby or thereby. This Agreement and the Strategic Alliance Agreement and the Transition Services Agreement have been duly executed and delivered by the Stockholders and VTP and constitute the legal, valid and binding obligation of the Stockholders and VTP enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditor's rights' generally and to general equitable principles. 5.4. NO VIOLATIONS. The execution, delivery and performance of this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and the consummation of the transactions contemplated herein and therein by the Stockholders and VTP do not and will not, with or without the giving of notice or passage of time or both (a) violate, conflict with or result in the breach of any term or provision of, or require any notice, filing or consent under (i) the certificate or articles of incorporation, by-laws or other charter documents of VTP, (ii) any statutes, laws, rules, regulations, ordinances or permits of any Governmental Authority applicable to the Stockholders or VTP or (iii) any Governmental Order binding upon VTP or the Stockholders or any of their respective properties or assets; (b) conflict with or result in the breach of any term or provision of, require any notice or consent under, give rise to a right of termination of, constitute a default under, result in the acceleration of, or give rise to a right to accelerate any obligation under, any loan agreement, mortgage, indenture, financing agreement, lease or any other contract, agreement or instrument to which VTP or any Stockholder is a party or by which any of their respective properties or assets are bound; or (c) result in any Encumbrance on any of the properties or assets of any Stockholder or VTP. 5.5. FINANCIAL STATEMENTS. VTP has furnished to Steadi certain financial information regarding the Tape Business which is described on Schedule 5.5 hereto (the "TAPE FINANCIAL STATEMENTS"). The Tape Financial Statements (i) were prepared in all material respects in accordance with the books of account and other financial records of VTP and (ii) fairly present the financial condition and results of operations for the Tape Business as of the dates and for the periods covered thereby. 5.6. BOOKS OF ACCOUNTS. The books of account and other financial records of the Tape Business maintained by VTP and made available to Steadi (i) reflect all items of income and expense and all assets and liabilities required to be reflected therein in accordance with good accounting practice, (ii) are in all material respects complete and correct and do not contain or reflect any material inaccuracies or discrepancies and (iii) have been maintained in accordance with good business and accounting practices. 10 11 5.7. INVENTORY. The Tape Inventory is in the physical possession of VTP and stored at the locations set forth on Schedule 2.3(c) (except for the Tape Inventory held by the consignees under the Consignment Agreements). Subject to amounts reserved therefor, the value at which the Tape Inventory is carried in the Tape Financial Statements reflect the historical inventory valuation policy of VTP of stating such inventory at the lower of their cost or market value. VTP has, and is conveying to Steadi hereby, good and marketable title to all of the Tape Inventory, free and clear of all Encumbrances. The Tape Inventory does not include any items held by VTP on consignment for others. 5.8. ASSETS. VTP has, and is conveying to Steadi hereby, good and marketable title to all of the other Tape Assets, free and clear of all Encumbrances. 5.9. CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES. (a) Since the date of the most recent balance sheet included in the Tape Financial Statements (the "BALANCE SHEET DATE"), there has not been any change in the assets, customer or supplier relations, operations, results of operations, prospects or condition (financial or otherwise) of the Tape Business, including, without limitation, any damage or destruction of property by fire or other casualty, which change would have a Material Adverse Effect. (b) Since the Balance Sheet Date, the Tape Business has been conducted in all material respects in the ordinary course and consistent with past practice. 5.10. LITIGATION. There are no Actions pending or, to VTP's or the Stockholders' knowledge, threatened, against any VTP and which relate to the Tape Business. Neither VTP, nor any of its assets or properties, is subject to any Governmental Order (nor, to the knowledge of VTP or the Stockholders, are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or would have a Material Adverse Effect. 5.11. COMPLIANCE WITH LAWS. To the best of VTP's and the Stockholders' knowledge, VTP has conducted the Tape Business in all material respects in accordance with all applicable laws, ordinances, statutes, rules, regulations and Governmental Orders applicable to it or any of its properties or assets, and VTP is not in violation of any such law, ordinance, statute, rule, regulation or Governmental Order. In conducting the Tape Business, neither VTP nor any officer, director, employee, agent or representative of VTP has violated or is currently in violation of the Foreign Corrupt Practices Act of 1977, as amended. 5.12. ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS. (a) To the best of VTP's and the Stockholder's knowledge, VTP currently holds all health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities (collectively, "PERMITS"), including, without limitation, Environmental Permits, necessary or proper for the current operation or conduct of the Tape Business, and all such Permits and Environmental Permits are in full force and effect. VTP has not received any notice from any Governmental Authority revoking, canceling, rescinding, materially modifying or refusing to renew any such Permit or providing written notice of violations under 11 12 any Environmental Law. To the best of VTP's and the Stockholders' knowledge, VTP is in all material respects in compliance with all applicable Permits, all applicable Environmental Laws and the requirements of all applicable Environmental Permits. (b) To the best of VTP's and the Stockholders' knowledge, in conducting the Tape Business (i) Hazardous Materials have not been generated, used, treated, handled or stored on, or transported to or from, or released (as "release" is defined under any applicable Environmental Law) on any real property owned, leased or occupied by VTP; (ii) VTP has disposed of all wastes, including those containing Hazardous Materials, in compliance with all applicable Environmental Laws and Environmental Permits; and (iii) there are no past, pending or threatened Environmental Claims, nor any basis for asserting the same, against any VTP. 5.13. MATERIAL TAPE CONTRACTS. Schedule 5.13 lists each of the following contracts and agreements to which VTP is a party and which relate to the Tape Business (such contracts and agreements being collectively referred to herein as the "MATERIAL TAPE CONTRACTS"): (i) all contracts, agreements and other arrangements, whether oral or written, with any customer or supplier for the purchase or sale of inventory, other than open purchase or sale orders arising in the ordinary course of the Tape Business consistent with past practice; (ii) except for ordinary vendor contracts for the purchase of inventory, all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing and advertising contracts, management contracts and consulting contracts to which VTP is a party and which involve payments, or the provision of goods or services having a value in excess of $50,000; (iii) all contracts and agreements with any Governmental Authority to which VTP is a party; (iv) all contracts and agreements with manufacturers under which VTP is designated as an exclusive distributor; (v) all contracts and agreements that limit the ability of VTP to compete in any line of business or with any Person or entity or in any geographic area or during any period of time; (vi) except for ordinary vendor contracts for the purchase of inventory, all other contracts, agreements and other arrangements, whether or not made in the ordinary course of the Tape Business, which if terminated by the other party thereto (with or without notice and with or without cause) would cause a Material Adverse Effect upon the Tape Business as presently conducted; and 12 13 (vii) the Consignment Agreements and all other agreements pursuant to which any other party holds any Tape Inventory on consignment or on a sale or return basis or similar arrangement. 5.14. CUSTOMERS. VTP has delivered to Steadi a true, correct and complete list of the names of the top 20 customers of the Tape Business (by revenue) during the twelve (12) month period ended October 31, 1998 and the four months ended February 28, 1999. Except as set forth on Schedule 5.14, to the best of VTP's and the Stockholders' knowledge, VTP has not received any oral or written notice that any of such customers has ceased, or will cease, to use the products, equipment, goods or services of VTP, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services following the Closing Date. 5.15. SUPPLIERS. VTP has delivered to Steadi a true, correct and complete list of the names and addresses of the top ten suppliers of the Tape Business (by purchase order dollar amount) during the twelve (12) month period ended October 31, 1998. 5.16. BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of VTP or the Stockholders. 5.17. FULL DISCLOSURE. Neither VTP nor the Stockholders have knowledge of any facts pertaining to VTP or the Tape Business which would have a Material Adverse Effect and which have not been disclosed in this Agreement or any of the Schedules hereto (except for general economic conditions or factors affecting the industry as a whole in which the Tape Business operates). No representation or warranty of VTP or the Stockholders in this Agreement, or any Schedules hereto, or any certificate furnished to Steadi pursuant to this Agreement, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein not misleading. 5.18. PURCHASE FOR RESALE. VTP is purchasing the Hardware Inventory for resale and will provide to Steadi a resale certificate upon request. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF STEADI Steadi and Daisytek hereby, jointly and severally, represent and warrant to VTP and the Stockholders as follows: 6.1. ORGANIZATION AND QUALIFICATION. Steadi is a corporation, duly organized, validly existing and in good standing under the laws of the State of California with full corporate power and authority to own its properties and to carry on the Hardware Business as now conducted. 6.2. CAPITALIZATION. Steadi is a wholly owned subsidiary of Daisytek. Except for Steadi and its subsidiaries and Affiliates, neither Daisytek nor any other subsidiary or affiliate of Daisytek is engaged in the Hardware Business. 13 14 6.3. AUTHORITY; BINDING OBLIGATION. Steadi and Daisytek have all requisite power and authority to execute, deliver and perform its respective obligations under this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and consummate the transactions contemplated herein and therein. The execution and delivery of this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors and stockholder of Steadi and Daisytek, and no other action on the part of Steadi or Daisytek is necessary to consummate the transactions contemplated hereby or thereby. This Agreement and the Strategic Alliance Agreement and the Transition Services Agreement have been duly executed and delivered by Steadi and Daisytek and constitute the legal, valid and binding obligation of Steadi and Daisytek enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditor's rights' generally and to general equitable principles. 6.4. NO VIOLATIONS. The execution, delivery and performance of this Agreement and the Strategic Alliance Agreement and the Transition Services Agreement and the consummation of the transactions contemplated herein and therein by Steadi and Daisytek do not and will not, with or without the giving of notice or passage of time or both (a) violate, conflict with or result in the breach of any term or provision of, or require any notice, filing or consent under (i) the certificate or articles of incorporation, by-laws or other charter documents of Steadi and Daisytek, (ii) any statutes, laws, rules, regulations, ordinances or permits of any Governmental Authority applicable to Steadi and Daisytek or (iii) any Governmental Order binding upon Steadi and Daisytek or any of its properties or assets; (b) conflict with or result in the breach of any term or provision of, require any notice or consent under, give rise to a right of termination of, constitute a default under, result in the acceleration of, or give rise to a right to accelerate any obligation under, any loan agreement, mortgage, indenture, financing agreement, lease or any other contract, agreement or instrument to which Steadi and Daisytek is a party or by which any of its properties or assets are bound; or (c) result in any Encumbrance on any of the properties or assets of Steadi and Daisytek. 6.5. INVENTORY. The Hardware Inventory is in the physical possession of Steadi and stored at the locations set forth on Schedule 3.2(b). Steadi has, and is conveying to VTP hereby, good and marketable title to all of the Hardware Inventory, free and clear of all Encumbrances. The Hardware Inventory does not include any items held by Steadi on consignment for others. 6.6. ASSETS. Steadi has, and is conveying to VTP hereby, good and marketable title to all of the other Hardware Assets, free and clear of all Encumbrances. 6.7. HARDWARE EQUIPMENT LEASES. Together with the physical inventory count, Steadi will deliver to VTP true, correct and complete copies of all Hardware Equipment Leases and all amendments, modifications, supplements and addendums thereto. Each Hardware Equipment Lease: (i) is valid and binding on Steadi and, to the best of Steadi's knowledge, on the other parties thereto and is in full force and effect, and (ii) upon consummation of the transactions contemplated by this Agreement shall continue in full force and effect without penalty or other adverse consequence and unaffected by such transactions. Except for the credit card authorization slips, Steadi has neither accepted nor received any deposits, prepayments or advance payments under the Hardware Equipment Leases from any lessee thereunder. Steadi is not in material 14 15 breach or default under the terms of any Hardware Equipment Lease, and to the best of Steadi's knowledge, no other party to any Hardware Equipment Lease is in material breach or default thereunder. 6.8. BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Steadi. 6.9. FULL DISCLOSURE. No representation or warranty of Steadi in this Agreement, or any Schedules hereto, or any certificate furnished to VTP pursuant to this Agreement, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein not misleading. 6.10. PURCHASE FOR RESALE. Steadi is purchasing the Tape Inventory for resale and will provide to VTP a resale certificate upon request. 6.11. LITIGATION. There are no Actions pending or, to Steadi's knowledge, threatened, against Steadi and which relate to the Hardware Business. Neither Steadi, nor any of its assets or properties, is subject to any Governmental Order (nor, to the knowledge of Steadi, are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or would have a Material Adverse Effect. For purposes of this Article VI, the phrase "to the best of Steadi's knowledge" and similar terms shall mean the actual knowledge of Tom Madden and Suzanne Garrette. 6.12. COMPLIANCE WITH LAWS. To the best of Steadi's knowledge, Steadi has conducted the Hardware Business in all material respects in accordance with all applicable laws, ordinances, statutes, rules, regulations and Governmental Orders applicable to it or any of its properties or assets, and Steadi is not in violation of any such law, ordinance, statute, rule, regulation or Governmental Order. In conducting the Hardware Business, neither Steadi nor any officer, director, employee, agent or representative of Steadi has violated or is currently in violation of the Foreign Corrupt Practices Act of 1977, as amended. 6.13. CUSTOMERS. Steadi has delivered to VTP a true, correct and complete list of the names of the top 20 customers of the Hardware Business (by revenue) during the period from March 1, 1998 to March 18, 1999. Except as set forth on Schedule 6.13, to the best of Steadi's knowledge, Steadi has not received any oral or written notice that any of such customers has ceased, or will cease, to use the products, equipment, goods or services of Steadi, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services following the Closing Date. ARTICLE VII ACTIONS TO BE TAKEN POST-CLOSING 7.1. COLLECTION OF ACCOUNTS RECEIVABLE. Each party shall (i) be permitted to retain copies of current customer files and records for the sole purpose of collecting all accounts 15 16 receivable owing from such customers and (ii) during the 90 day period following the Closing, provide reasonable cooperation and assistance to the other party in collecting such accounts receivable. 7.2. INVENTORY RETURNS. During the 90 day period following the Closing: (a) Steadi shall purchase from VTP all Tape Inventory which is (i) approved by Steadi for return and purchase hereunder, (ii) returned by VTP customers to VTP during such period, (iii) not visibly damaged or defective, (iv) not in excess of the amounts set forth for certain products as set forth on Schedule 2.1(b) and (v) included in the list of products set forth on Schedule 2.1(b). The purchase price for such inventory shall be based upon the product prices (net of vendor rebates) set forth on Schedule 2.1(b) and shall be paid within ten (10) days following the delivery thereof to the Steadi location to be designated by Steadi. All shipping and delivery costs (and all risk of loss in transit) shall be borne by Steadi. (b) VTP shall purchase from Steadi all Hardware Inventory which is (i) approved by VTP for return and purchase hereunder, (ii) returned by Steadi customers to Steadi during such period, (iii) not visibly damaged or defective and (iv) included in the list of products set forth on Schedule 3.1(c). The purchase price for such inventory shall be based upon the product prices set forth in Schedule 3.1(c) and shall be paid within ten (10) days following the delivery thereof to the VTP location to the designated by VTP. All shipping and delivery costs (and all risk of loss in transit) shall be borne by VTP. (c) All credits and refunds to customers (i) in respect of the returned Tape Inventory shall be the responsibility of VTP and (ii) in respect of the returned Hardware Inventory shall be the responsibility of Steadi. (d) Steadi and VTP will cooperate with each other and use good faith efforts to reach a mutually satisfactory agreement regarding the Excluded Tape Inventory which is to be returned to the manufacturer. ARTICLE VIII INDEMNIFICATION 8.1. INDEMNIFICATION BY VTP AND THE STOCKHOLDERS. From and after the Closing, VTP and the Stockholders shall, jointly and severally, but subject to the limitations hereof, reimburse, indemnify and hold harmless Steadi and its officers, directors, employees, agents, representatives and successors and assigns from and against and in respect of each of the following: (a) any and all damages, losses, deficiencies, liabilities, claims, demands, charges, costs and expenses of every nature and character whatsoever, including, without limitation, reasonable attorneys' fees and costs (collectively, the "LOSSES") that result from, relate to or arise out of (i) the Retained Tape Liabilities, (ii) any failure by VTP to pay or discharge when due the Assumed Hardware Liabilities or (iii) any misrepresentation or breach of warranty or covenant of VTP or the Stockholders in this Agreement, or any of the Schedules provided by VTP hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of VTP or the Stockholder or any of 16 17 them in connection with the negotiation, execution or performance of this Agreement and the transactions contemplated herein; and (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses incident to any of the foregoing or to the successful enforcement of this Section. 8.2. INDEMNIFICATION OF VTP AND THE STOCKHOLDERS. From and after the Closing, Steadi and Daisytek, jointly and severally, shall, subject to the limitations hereof, reimburse, indemnify and hold harmless VTP and the Stockholders and each of their respective officers, directors, employees, agents, representatives and heirs, estate, successors and assigns from and against and in respect of each of the following: (a) any and all Losses that result from, relate to or arise out of (i) the Retained Hardware Liabilities or (ii) any misrepresentation or breach of warranty or covenant of Steadi in this Agreement or any of the Schedules provided by Steadi hereunder or any agreement, document, statement, list, certificate or instrument furnished by or on behalf of Steadi in connection with the negotiation, execution or performance of this Agreement and the transactions contemplated herein; and (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses incident to any of the foregoing or to the successful enforcement of this Section. 8.3. LIMITATIONS ON LOSSES. (a) In case any event shall occur that would otherwise entitle any party to assert a claim for indemnification hereunder, no Losses shall be deemed to have been sustained by such party to the extent of (i) any actual tax savings realized by such party with respect thereto or (ii) any proceeds (net of deductibles, taxes and collection costs) received by such party from any insurance policies maintained by or on behalf of such party with respect to such Losses. The parties agree to submit a claim under such insurance policies prior to or promptly following making a request for indemnification hereunder. (b) The aggregate liability of VTP and the Stockholders shall not exceed the Tape Purchase Price and the aggregate liability of Steadi and Daisytek shall not exceed the Hardware Purchase Price. (c) The sum of all Losses incurred by an Indemnified Party must exceed $25,000 before such party shall be entitled to indemnification hereunder; provided, however, once such Losses exceed $25,000, such party shall be entitled to indemnification for all Losses, including the first $25,000. (d) No party shall have any liability hereunder in respect of claims (excluding Third Party Claims, as defined below) asserted against any Indemnified Party on or after one year from the Closing Date; provided, however, the representations and warranties of each party relating to title to the assets being sold by it hereunder shall survive indefinitely. The limitation set forth in this paragraph shall not apply to any claim asserted in writing on or before such one year anniversary. 17 18 (e) The limitations set forth herein shall not apply in the case of a fraudulent or intentional misrepresentation or breach by any party. 8.4. NOTICE. (a) Promptly after receipt by an Indemnified Party of notice of the assertion of any claim by a Person not a party to this Agreement (a "THIRD PARTY CLAIM") with respect to which such Indemnified Party expects to make a request for indemnification hereunder, such Indemnified Party shall give the Indemnifying Party written notice describing such claim in reasonable detail. The Indemnifying Party shall, upon receipt of such notice, be entitled to participate in or, at the Indemnifying Party's option, assume the defense, appeal or settlement of, such claim with respect to which such indemnity has been invoked with counsel selected by it and approved by the Indemnified Party (such approval not to be unreasonably withheld), and the Indemnified Party will fully cooperate with the Indemnifying Party in connection therewith; provided, that the Indemnified Party shall be entitled to employ separate counsel (at the expense of the Indemnifying Party) to represent such Indemnified Party if counsel selected by the Indemnifying Party cannot, by reason of any actual or deemed conflict of interest, adequately represent the interests of the Indemnified Party. In the event that the Indemnifying Party fails to assume the defense, appeal or settlement of such claim within 20 days after receipt of notice thereof from the Indemnified Party, the Indemnified Party shall have the right to undertake the defense or appeal of, or settle or compromise, such claim on behalf of and for the account and risk of the Indemnifying Party. The Indemnifying Party shall not settle or compromise any such claim without the Indemnified Party's prior written consent, unless the terms of such settlement or compromise release the Indemnified Party from any and all liabilities with respect to such Third Party Claim. (b) Any indemnifiable claim that is not a Third Party Claim shall be asserted by written notice to the Indemnifying Party. If the Indemnifying Party does not respond to such notice within 30 days, it shall have no further right to contest the validity of such claim. 8.5. SURVIVAL; EXCLUSIVE REMEDY. Notwithstanding any right of any party to fully investigate the affairs of the other party and notwithstanding any knowledge of facts determined or determinable by such party pursuant to such investigation or right of investigation, each party has the right to rely fully upon the representations, warranties, covenants and agreements of each other party in this Agreement or in any certificate, financial statement or other document delivered by any party pursuant hereto. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the Closing hereunder, subject to the limitations set forth herein. No person shall have a right to recovery against any party (or any officer, director, employee or agent of a party) other than through the exercise of the indemnification rights set forth herein, which shall constitute the sole and exclusive remedy after the Closing for any breach by a party of any representation, warranty or covenant contained herein or in any certificate or other instrument delivered pursuant hereto, other than a fraudulent or intentional breach, as to which each party shall have all rights and remedies available at law or in equity. 18 19 ARTICLE IX MISCELLANEOUS 9.1. COVENANT OF FURTHER ASSURANCES. The parties hereto covenant and agree to execute and deliver any and all additional writings, instruments and other documents and take such further actions as shall be reasonably required or requested to effectuate the terms and conditions of this Agreement. 9.2. ENTIRE AGREEMENT. This Agreement and the Strategic Alliance Agreement and the other agreements and instruments described herein represent the entire agreements between the parties hereto and thereto with respect to the subject matter hereof and thereof, and supersede all prior agreements and communications with respect thereto. 9.3. ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor any rights or obligations hereunder may be assigned by any party hereto without the express written consent of the others and any attempted assignment in violation thereof shall be null and void; provided, however, that the rights of Steadi hereunder may be assigned to any Affiliate of Daisytek. In addition, title to any or all of the Tape Assets may be taken in the name of any Affiliate of Daisytek. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties hereto or their respective successors or permitted assigns or the Indemnified Parties (who shall be deemed third party beneficiaries hereof) any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.4. AMENDMENT OR MODIFICATION. This Agreement may not be waived, amended, modified or supplemented by the parties hereto in any manner, except by an instrument in writing signed by VTP and Steadi. 9.5. SEVERABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the remaining provisions of this Agreement, all of which shall remain in full force and effect, nor shall it affect their validity or enforceability in any other jurisdiction. To the extent permitted by law, each party hereto waives any provision of law which renders any provision hereof unenforceable in any respect. 9.6. NOTICES. All notices, requests, demands or other communications under or with respect to this Agreement shall be in writing and shall be given by hand, by telecopy with request for acknowledgment or confirmation of receipt, by Federal Express or other nationally recognized overnight delivery service providing for receipt against delivery (delivery charges prepaid) or by certified or registered U.S. Mail, postage prepaid, return receipt requested, and shall be deemed to have been duly given and effective upon the earlier of (i) its actual receipt (or acknowledgment or confirmation of receipt), (ii) the next business day after having been sent by Federal Express or similar nationally recognized overnight delivery service providing for receipt against delivery, delivery charges prepaid, or (iii) three days after having been sent by certified or registered U.S. mail, return receipt requested, postage prepaid, addressed as follows: 19 20 If to VTP: Videotape Products, Inc. 900 Allen Avenue Glendale, California 91201 Attn: John Palazzola Telecopier: 323-660-2856 - with a copy to - Hahn & Hahn 301 E. Colorado Blvd. Pasadena, California 91101 Attn: Scott Jenkins, Esq. Telecopier: 626-449-7357 If to Steadi: Steadi Systems, Ltd. c/o Daisytek Incorporated 500 North Central Expressway Plano, TX 75074 Attention: Tom Madden Telecopier: 972-423-1108 - with a copy to - Wolff & Samson, P.A. 5 Becker Farm Road Roseland, New Jersey 07068 Attention: Morris Bienenfeld, Esq. Telecopier: 973-740-1407 Any such Person by written notice to each of the others listed in this Section in accordance herewith may change the address to which notices may be directed, but such notice shall be deemed duly given and effective only upon actual receipt thereof. 9.7. WAIVERS AND EXTENSIONS. Any waiver by any party hereto of any provision or condition of this Agreement or breach thereof or any extension of time granted by any party under this Agreement shall not be construed or deemed to be a waiver of any other provision or condition of this Agreement or breach thereof or extension of time with respect thereto or a waiver of a subsequent breach of or subsequent extension of time with respect to same provision or condition. 9.8. GOVERNING LAW. This Agreement shall be governed by, and be construed in accordance with, the laws of the State of California without regard to the conflicts of laws principles thereof. 20 21 9.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement but all of which taken together shall constitute one and the same instrument. 9.10. CAPTIONS AND HEADINGS. The captions, section and other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.11. EXHIBITS AND SCHEDULES. All Exhibits annexed hereto, and all Schedules referred to herein, are hereby incorporated in and made a part of this Agreement as if set forth herein. 9.12. CONSTRUCTION. The parties hereto hereby acknowledge and agree that they and their respective counsel have independently reviewed and made amendments to this Agreement and that the normal rule of construction, whereby ambiguities are to be resolved against the drafting party, shall be inapplicable to this Agreement. 9.13. PUBLICITY. Except as otherwise required by applicable laws or regulations, no party hereto nor any Affiliate thereof, shall issue any press release or make any other public statement regarding the transactions described in this Agreement without obtaining the prior approval of the 21 22 other parties hereto to the contents and the manner of presentation and publication thereof, such consent not to be unreasonably delayed or withheld. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STEADI-SYSTEMS, LTD. By: /s/ Tom Madden ----------------------------------- Name: Tom Madden Title: Vice President-Finance DAISYTEK, INC. By: /s/ Tom Madden ----------------------------------- Name: Tom Madden Title: Vice President-Finance VIDEOTAPE PRODUCTS, INC. By: /s/ John Palazzola ----------------------------------- Name: John Palazzola Title: President STOCKHOLDERS: /s/ John Palazzola -------------------------------------- JOHN PALAZZOLA /s/ Richard Marzec -------------------------------------- RICHARD MARZEC 22 23 SCHEDULES TO ASSET PURCHASE AGREEMENT Schedule 2.1(a) - list of telephone and fax numbers to be transferred Schedule 2.1(b) - list of VTP inventory by product (with maximum amounts) Schedule 2.3(b) - list of Tape inventory locations Schedule 3.1(a) - list of Steadi unfilled customer orders and deposits Schedule 3.1(c) - list of Hardware inventory by product Schedule 3.3(b) - list of Hardware inventory locations Schedule 4.4(i) - list of Tape Employees Schedule 4.4(ii) - list of Hardware Employees Schedule 5.5 - list of Tape financial statements Schedule 5.13 - list of Material Tape Contracts Schedule 5.14 - list of non-continuing Tape customers Schedule 6.13 - list of non-continuing Hardware customers 23 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF NAME INCORPORATION - ---- ---------------- Daisytek, Incorporated Delaware Subsidiaries of Daisytek, Incorporated: Daisytek (Canada) Inc. Canada Working Capital of America, Inc. Delaware Home Tech Depot, Inc. Delaware Daisytek De Mexico S.A. de C.V. Mexico Daisytek Latin America, Inc. Florida Supplies Express, Inc. Delaware Priority Fulfillment Services, Inc. Delaware Priority Fulfillment Services of Canada, Inc. Canada Daisytek De Mexico Services, S.A. de C.V Mexico Priority Fulfillment Services de Mexico, S.A. de C.V. Mexico Daisytek Australia PTY. LTD. Australia Priority Fulfillment Services Australia PTY LTD Australia Daisytek Asia PTY LTD Singapore Steadi-Systems, Ltd. (Including 6 wholly-owned U.S. subsidiaries operating as California distributors of professional-grade audio and video media products) Steadi-Systems de Mexico S.A. de C.V. Mexico Steadi-Systems Canada Inc. Canada The Tape Company, Inc. Georgia The Tape Company, Inc. Illinois The Tape Company, Inc. Michigan The Tape Company, Inc. Minnesota The Tape Company, Inc. Pennsylvania The Tape Company, Inc. Ohio The Tape Distributors of Texas, Inc. Texas
EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-53505. /s/ ARTHUR ANDERSEN LLP Dallas, Texas, June 29, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 3/31/1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1999 MAR-31-1999 1,551 0 142,721 2,857 107,918 254,452 40,206 20,296 315,879 115,688 43,167 0 0 172 156,998 315,879 908,630 908,630 800,263 800,263 0 2,863 2,797 31,011 11,823 19,188 0 0 (405) 18,783 1.10 1.06
EX-27.2 7 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 3/31/1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RESTATED TO COMBINE THE ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE TAPE COMPANY, INC., WHICH WAS ACQUIRED BY DAISYTEK IN JUNE 1998 AND ACCOUNTED FOR AS A POOLING OF INTERESTS. 1,000 YEAR MAR-31-1998 MAR-31-1998 2,087 0 130,328 2,765 93,590 227,184 30,298 15,025 257,845 103,198 19,926 0 0 169 137,562 257,845 800,112 800,112 712,568 712,568 0 2,016 3,134 27,701 10,185 17,516 0 0 0 17,516 1.20 1.14
EX-27.3 8 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 3/31/1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS BELOW HAVE BEEN RESTATED TO COMBINE THE ACCOUNTS OF DAISYTEK INTERNATIONAL CORPORATION WITH THE TAPE COMPANY, INC., WHICH WAS ACQUIRED BY DAISYTEK IN JUNE 1998 AND ACCOUNTED FOR AS A POOLING OF INTERESTS. 1,000 YEAR MAR-31-1997 MAR-31-1997 557 0 97,730 2,425 68,860 166,778 22,923 10,412 185,226 84,389 34,574 0 0 140 70,243 185,226 639,511 639,511 571,448 571,448 0 1,660 1,847 24,346 8,432 15,914 0 0 0 15,914 1.14 1.08
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