EXHIBIT 99.2
THIS OFFER DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt as to the action you should take, you are recommended to
seek your own personal financial advice immediately from your stockbroker, bank
manager, solicitor, accountant or independent financial adviser authorised under
the Financial Services and Markets Act 2000 if you are in the United Kingdom,
or, if not, from another appropriately authorised financial adviser.
This document should be read in conjunction with the accompanying Form of
Acceptance.
If you have sold or transferred all your holding of ISA Ordinary Shares, please
forward this Offer Document, the accompanying Form of Acceptance and reply-paid
envelope as soon as possible to the purchaser or transferee or to the
stockbroker, bank or other agent through whom the sale or transfer was effected
for transmission to the purchaser or transferee. However, such documents should
not be forwarded or transmitted in or into Canada, Australia or Japan.
- --------------------------------------------------------------------------------
RECOMMENDED OFFER
BY
ROBERT W. BAIRD LIMITED
ON BEHALF OF
DAISYTEK UK LIMITED
A WHOLLY-OWNED SUBSIDIARY OF
DAISYTEK INTERNATIONAL CORPORATION
FOR
ISA INTERNATIONAL PLC
- --------------------------------------------------------------------------------
The Offer is not being made, directly or indirectly, in or into, nor is it
capable of acceptance from, Canada, Australia or Japan and this Offer Document
and the Form of Acceptance are not being, and must not be, mailed or transmitted
in or into Canada, Australia or Japan.
A letter from the Board of ISA recommending the Offer is set out in Part 1 of
this Offer Document.
TO ACCEPT THE OFFER, THE FORM OF ACCEPTANCE MUST BE COMPLETED WHETHER OR NOT
YOUR ISA ORDINARY SHARES ARE IN CREST AND RETURNED AS SOON AS POSSIBLE AND, IN
ANY EVENT, SO AS TO BE RECEIVED BY CAPITA IRG PLC AT PO BOX 166, BOURNE HOUSE,
34 BECKENHAM ROAD, BECKENHAM, KENT BR3 4TH NO LATER THAN 3.00 P.M. (UK TIME) ON
13 JUNE 2002. The procedure for acceptance of the Offer is set out on pages 22
to 24 of this Offer Document and in the accompanying Form of Acceptance.
See Appendix VII of this Offer Document for definitions of terms used in this
Offer Document.
Investing in New Daisytek Restricted Common Stock involves risks. ISA
Shareholders considering accepting the Restricted Share Offer should consider
the risk factors set forth in Appendix III of this Offer Document prior to
making their decision.
The Shareholders of ISA are strongly urged to read and consider carefully this
Offer Document and the accompanying Form of Acceptance in their entirety.
Neither the Securities and Exchange Commission nor any United States state
securities commission has approved or disapproved these securities, or
determined if this Offer Document is truthful or complete. Any representation to
the contrary is a criminal offence.
Baird, which is regulated in the United Kingdom by the Financial Services
Authority, is acting exclusively for Daisytek and Daisytek UK and for no one
else in connection with the Offer and will not be responsible to anyone other
than Daisytek and Daisytek UK for providing the protections afforded to
customers of Baird nor for providing advice in relation to the Offer nor in
relation to the contents of this Offer Document nor any transaction or
arrangements referred to in it.
KPMG Corporate Finance, a division of KPMG LLP, is acting for ISA and no one
else in connection with the Offer and will not be responsible to anyone other
than ISA for providing the protections afforded to clients of KPMG Corporate
Finance nor for providing advice in relation to the Offer nor in relation to the
contents of this Offer Document nor any transaction or arrangements referred to
in it.
Certain market makers on the Alternative Investment Market ("AIM") may engage in
"market making" transactions on AIM in ISA Ordinary Shares during the period
from the announcement of the Offer until the end of the Offer Period.
US SHAREHOLDERS OF ISA SHOULD NOTE THAT THE OFFER IS MADE FOR THE SECURITIES OF
A NON-US COMPANY. THE OFFER IS SUBJECT TO THE DISCLOSURE REQUIREMENTS OF A
COUNTRY THAT ARE DIFFERENT FROM THOSE OF THE UNITED STATES. THE FINANCIAL
INFORMATION RELATING TO ISA INCLUDED IN THIS OFFER DOCUMENT HAS BEEN PREPARED IN
ACCORDANCE WITH ACCOUNTING STANDARDS THAT MAY NOT BE COMPARABLE TO THE FINANCIAL
STATEMENTS OF US COMPANIES.
YOU SHOULD BE AWARE THAT DAISYTEK MAY PURCHASE SHARES IN ISA OTHERWISE THAN
UNDER THE OFFER, SUCH AS IN THE OPEN MARKET OR THROUGH PRIVATELY NEGOTIATED
PURCHASES.
THE RECOMMENDED OFFER
o The Cash Offer is 7.5 pence in cash for each ISA Ordinary Share.
o The Restricted Share Offer is 0.914 shares of New Daisytek Restricted
Common Stock for every 100 ISA Ordinary Shares held.
o The ISA Directors, advised by KPMG Corporate Finance, consider the
terms of the Offer to be fair and reasonable and unanimously recommend
ISA shareholders to accept the Offer.
WHY YOU SHOULD ACCEPT THE OFFER
o ISA has not paid an ordinary dividend since the interim dividend for
1998. ISA does not intend to pay a dividend for 2001 and no dividend is
likely to be paid in the near future.
o The ISA Group is operating at the maximum limit of its borrowing
facilities. The ISA Directors anticipate that existing facilities will
be insufficient to cover the ISA Group's trading requirements in the
coming months.
o The ISA Group's bankers are unwilling to increase ISA's facilities
without a further injection of equity into the ISA Group.
o ISA has very limited options available to it for raising further
finance without Daisytek's approval under the terms of the ISA
Preference Shares.
o Daisytek has advanced L.11.9 million to ISA. If ISA does not repay the
amount due to Daisytek by 30 June 2002, ISA is committed to proceeding
with a deeply discounted share issue at 1 pence per share (subject to
the necessary shareholder approvals) to repay Daisytek and to meet its
ongoing working capital requirements. This share issue would be
extremely dilutive to existing ISA shareholders who do not participate.
o IN VIEW OF THE SHORT TERM CAPITAL REQUIREMENTS OF ISA AND THE
RESTRICTED FINANCING ALTERNATIVES AVAILABLE TO ISA, THE BOARD OF ISA
CONSIDERS THAT THE OFFER PROVIDES THE ONLY VIABLE SOLUTION TO ENSURE
THE CONTINUATION OF ISA'S BUSINESS AND PROVIDES AN ACCEPTABLE EXIT FOR
ISA SHAREHOLDERS IN THE CIRCUMSTANCES.
o Daisytek UK has received irrevocable undertakings to accept the Offer
representing in aggregate, approximately 56.5 per cent. of ISA's
existing issued ordinary share capital.
HOW TO ACCEPT THE OFFER
o Complete and return the Form of Acceptance by post to Capita IRG Plc at
PO Box 166, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH in
accordance with the procedure set out in paragraph 17 of Part 2 of this
Offer Document, AS SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE
RECEIVED BY NO LATER THAN 3 P.M. (UK TIME) ON 13 JUNE 2002.
o PLEASE RETURN YOUR COMPLETED FORM OF ACCEPTANCE IN GOOD TIME.
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION CONTAINED IN THIS OFFER
DOCUMENT. THE FULL CONDITIONS AND FURTHER TERMS OF THE OFFER ARE SET OUT IN
APPENDIX I TO THIS OFFER DOCUMENT. TERMS USED IN THIS OFFER DOCUMENT HAVE THE
MEANINGS SET OUT IN APPENDIX VII, UNLESS THE CONTEXT REQUIRES OTHERWISE. ISA
SHAREHOLDERS ARE STRONGLY ENCOURAGED TO READ THE FULL TEXT OF THE OFFER
DOCUMENT, THE ATTACHED APPENDICES AND THE FORM OF ACCEPTANCE.
IF YOU ARE IN ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED TO
SEEK YOUR OWN PERSONAL FINANCIAL ADVICE IMMEDIATELY FROM YOUR STOCKBROKER, BANK
MANAGER, SOLICITOR, ACCOUNTANT OR INDEPENDENT FINANCIAL ADVISER AUTHORISED UNDER
THE FINANCIAL SERVICES AND MARKETS ACT 2000 IF YOU ARE IN THE UNITED KINGDOM,
OR, IF NOT, FROM ANOTHER APPROPRIATELY AUTHORISED FINANCIAL ADVISER.
2
RULE 8 NOTICES
Any person who, alone or acting together with any other person(s) pursuant to
any agreement (formal or informal), owns or controls, or becomes the owner or
controller of, directly or indirectly, one per cent. or more of any relevant
securities (as such term is defined in paragraph 3(a) of Appendix V of this
Offer Document) is required, under the provisions of Rule 8 of the City Code, to
make a public disclosure by no later than 12.00 noon (in the time zone of the
disclosing party) on the business day following the date of the relevant
transaction of every dealing in any relevant securities until the Initial
Closing Date of the Offer or (if later) such time as the Offer becomes or is
declared unconditional in all respects or lapses, in accordance with Rule 8.
Dealings by "associates" (within the meaning of the City Code) of Daisytek or
ISA in Daisytek Common Stock or ISA Ordinary Shares until such time must also be
disclosed. Please consult your legal adviser immediately if you believe Rule 8
may be applicable to you. Disclosure should be made on an appropriate form
before noon (in the time zone of the disclosing party) on the business day
following the date of the dealing transaction. These disclosures should be sent
to a regulatory information service such as RNS of the London Stock Exchange by
fax (fax number: +44 (0)20 7588 6057) or by electronic delivery on the
appropriate form and copied to the monitoring section of the Panel (fax number:
+44 (0)20 7256 9386) or by email (monitoring@disclosure.org.uk) at the same
time. Copies of appropriate disclosure forms may be obtained from the Panel's
website at www.thetakeoverpanel.org.uk.
If there is any doubt as to these disclosure requirements, the monitoring
section of the Panel should be consulted (telephone number: +44 (0)20 638 0129;
fax number: +44 (0)20 7256 9386).
FINANCIAL INFORMATION
The extracts from the consolidated financial statements of, and other
information about, Daisytek appearing in this Offer Document are presented in US
dollars ($) and have been prepared in accordance with US GAAP. The extracts from
the consolidated financial statements of, and other information about, ISA
appearing in this Offer Document are presented in pounds sterling (L.) and have
been prepared in accordance with UK GAAP. US GAAP and UK GAAP differ in certain
significant respects.
PUBLICLY AVAILABLE DOCUMENTS
CERTAIN DOCUMENTS WHICH HAVE PREVIOUSLY BEEN FILED BY DAISYTEK WITH THE SEC AND
ARE NOT PRESENTED IN THIS OFFER DOCUMENT OR DELIVERED WITH IT ARE AVAILABLE
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM DAISYTEK AT THE ADDRESS AND
TELEPHONE NUMBER SET OUT ON PAGE 16 OF THIS OFFER DOCUMENT.
FORWARD-LOOKING STATEMENTS
Certain statements used in this Offer Document are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These forward-looking statements about the financial condition,
prospects, operations and business of Daisytek are generally accompanied by
words such as "anticipates," "expects," "estimates," "believes," "intends,"
"plans" or similar expressions. These forward-looking statements are subject to
numerous risks, uncertainties and other factors, some of which are beyond the
control of Daisytek, that could cause actual results to differ materially from
those forecasted or anticipated in such forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to:
general economic conditions; industry trends; the loss of or inability to hire
skilled personnel; the loss of key suppliers or customers; the loss or material
decline in service of strategic product shipping relationships; customer demand;
product availability; competition (including pricing and availability); risks
inherent in acquiring, integrating and operating new businesses; concentrations
of credit risk; distribution efficiencies; capacity constraints; technological
difficulties, including equipment failure or a breach of Daisytek's security
measures; the volatility of Daisytek Common Stock; economic and political
uncertainties arising as a result of terrorist attacks; seasonality; exchange
rate fluctuations; and the regulatory and trade environment (both domestic and
foreign).
Because such forward-looking statements are subject to risks, uncertainties and
assumptions, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's view only as of the date
of the forward-looking statement is made. Daisytek undertakes no obligation to
update publicly any forward-looking statement for any reason, even if new
information becomes available or other events occur in the future.
3
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
THE RECOMMENDED OFFER 2
RULE 8 NOTICES 3
FINANCIAL INFORMATION 3
PUBLICLY AVAILABLE DOCUMENTS 3
FORWARD-LOOKING STATEMENTS 3
PART 1 LETTER OF RECOMMENDATION FROM THE BOARD OF ISA 6
1. Introduction 6
2. Terms of the Offer 7
3. Background to and reasons for the Offer 7
4. Current trading, prospects and working capital 9
5. Irrevocable undertakings to accept the Offer 10
6. Management and employees 10
7. ISA Share Option Schemes 10
8. Cancellation of trading on AIM and compulsory acquisition 10
9. Taxation 11
10. Action to be taken to accept the Offer 11
11. Further information 11
12. Conclusion 11
13. Recommendation 11
PART 2 OFFER LETTER FROM BAIRD TO ISA SHAREHOLDERS 12
1. Introduction 12
2. The Cash Offer 12
3. The Restricted Share Offer 13
4. Further information concerning the New Daisytek Restricted Common Stock 14
5. Irrevocable undertakings 15
6. Background to and reasons for the Offer 15
7. Information on Daisytek 15
8. Information on Daisytek UK 16
9. Information on ISA 16
10. Daisytek's intentions in relation to the ISA Group 17
11. Management and employees 17
12. Financing of the Offer 17
13. ISA Share Option Schemes 17
14. Financial effects of acceptance 17
15. Cancellation of trading on AIM and compulsory acquisition 18
16. Taxation 18
17. Procedure for acceptance of the Offer 22
18. Settlement 24
19. Further information 25
</Table>
4
<Table>
<Caption>
PAGE
APPENDIX I CONDITIONS AND FURTHER TERMS OF THE OFFER 26
PART A --- Conditions of the Offer 26
1. Principal terms 26
2. Waiver of conditions 30
3. General 31
4. Unregistered shares; Transfer restrictions 31
PART B --- Further terms of the Offer 33
1. Acceptance period 33
2. Announcements 33
3. Rights of withdrawal 34
4. Revised Offer 35
5. Acceptances and purchases 36
6. General 36
7. Overseas Shareholders 38
PART C --- Form of Acceptance 39
APPENDIX II FINANCIAL INFORMATION RELATING TO THE DAISYTEK GROUP 45
APPENDIX III RISK FACTORS 87
Risks relating to the Offer 87
Risks related to our business 89
Risks related to our industry 93
APPENDIX IV FINANCIAL INFORMATION RELATING TO THE ISA GROUP 94
APPENDIX V ADDITIONAL INFORMATION 130
1. Responsibility 130
2. Directors 130
3. Disclosures of interests and dealings 130
4. Service contracts of ISA Directors 135
5. Material contracts 136
6. Directors appointment and employment arrangements 146
7. Compulsory acquisition 146
8. General 146
9. Dividend policy 147
10. Market and price data 148
11. Basis of calculation and sources of information 148
12. Documents available for inspection 148
APPENDIX VI DESCRIPTION OF DAISYTEK CAPITAL STOCK AND CHANGES IN CERTAIN RIGHTS OF
ISA SHAREHOLDERS 149
1. Daisytek Common Stock 149
2. Preferred Stock 149
3. Special Provisions of the Certificate of Incorporation and Bylaws 149
4. Stockholder Rights Agreement 151
5. Summary comparison of rights 152
APPENDIX VII DEFINITIONS 159
</Table>
5
PART 1
LETTER OF RECOMMENDATION FROM THE BOARD OF ISA
ISA INTERNATIONAL PLC
Registered in England No. 1925205
B Robinson, Chief Executive Officer Registered office:
MJ Murphy, Chief Financial Officer 66-70 Vicar Lane
H Fristedt, Non Executive Director Bradford
West Yorkshire
BD1 5AG
23 May 2002
To ISA Shareholders and, for information only, to holders of options under the
ISA Share Option Schemes
Dear Shareholder
RECOMMENDED OFFER BY DAISYTEK UK FOR ISA
1. INTRODUCTION
It was announced on 7 May 2002 that the boards of ISA and Daisytek had reached
agreement on the terms of a recommended cash offer with a restricted share
alternative to be made by Baird on behalf of Daisytek UK, a wholly-owned UK
subsidiary of Daisytek, for the whole of the issued ordinary share capital of
ISA. A circular was sent to ISA Shareholders on that date providing details of
the Offer, the preliminary unaudited results of the ISA Group, the default under
the terms of the ISA Preference Shares and to convene an Extraordinary General
Meeting to seek shareholder approval for a resolution to sanction an increase in
the ISA Group's borrowings. This resolution was passed at the Extraordinary
General Meeting held on 22 May 2002.
I am writing to explain the background to the Offer and the reasons why the
Board of ISA considers the terms of the Offer to be fair and reasonable and
recommends that you accept the Offer.
In September 2001, ISA entered into a strategic alliance with, and received an
investment of L.8.0 million (L.6.9 million net of costs) from, Daisytek UK by
way of ISA Preference Shares which addressed ISA's immediate financial needs.
However, subsequent to the investment being made by Daisytek UK, trade credit
terms available to the ISA Group in Continental Europe have been materially less
than the Board of ISA expected. This limited commercial credit combined with
strong sales growth in 2001 has increased the ISA Group's indebtedness and the
level of capital required in the business. The ISA Group's net asset base has
also been eroded by trading losses and exceptional restructuring and relocation
costs resulting in a material increase in the level of gearing with consequent
pressure on the banking facilities available to the ISA Group. The ISA Group
therefore requires a further injection of capital in the short term.
If the Offer becomes wholly unconditional, Daisytek has committed to the Board
of ISA to provide sufficient finance in the form of new capital for the ISA
Group's future requirements, and this is a fundamental component of the Board of
ISA's consideration of the Offer. Further details on the background to and
reasons for the Offer are given in paragraph 3 below.
IN VIEW OF THE SHORT TERM CAPITAL REQUIREMENTS OF ISA AND THE RESTRICTED
FINANCING ALTERNATIVES AVAILABLE TO ISA, THE BOARD OF ISA CONSIDERS THAT THE
OFFER PROVIDES THE ONLY VIABLE SOLUTION TO ENSURE THE CONTINUATION OF ISA'S
BUSINESS AND PROVIDES ISA SHAREHOLDERS WITH THE ABILITY TO REALISE FULLY THEIR
INVESTMENT IN ISA THROUGH ACCEPTING THE CASH OFFER OR TO PARTICIPATE IN ANY
FUTURE RECOVERY BY THE ISA GROUP THROUGH ACCEPTING NEW DAISYTEK RESTRICTED
COMMON STOCK (ALTHOUGH THE VALUE OF THE NEW DAISYTEK RESTRICTED COMMON STOCK
WILL BE DEPENDENT ON A NUMBER OF FACTORS, INCLUDING THE PERFORMANCE OF THE
ENLARGED GROUP).
6
IRREVOCABLE UNDERTAKINGS TO ACCEPT THE OFFER HAVE BEEN GIVEN BY THE ISA
DIRECTORS AND CERTAIN ISA SHAREHOLDERS REPRESENTING, IN AGGREGATE, APPROXIMATELY
56.5 PER CENT. OF THE ISSUED ORDINARY SHARE CAPITAL OF ISA.
2. TERMS OF THE OFFER
THE CASH OFFER
The Cash Offer is being made on the following basis:
FOR EACH ISA ORDINARY SHARE 7.5 PENCE IN CASH
The Cash Offer equates to the closing middle market price per ISA Ordinary Share
on 15 April 2002, the last dealing day prior to the announcement by Daisytek and
ISA that they were in discussions which may or may not lead to an offer being
made for ISA. Full acceptance of the Cash Offer would value the existing issued
share capital of ISA at approximately L.4.4 million.
THE RESTRICTED SHARE OFFER
ISA Shareholders may elect to receive New Daisytek Restricted Common Stock
instead of cash in consideration of the transfer of their ISA Ordinary Shares on
the following basis:
FOR EVERY 100 ISA ORDINARY SHARES 0.914 SHARES OF NEW DAISYTEK
RESTRICTED COMMON STOCK
and so in proportion for any other number of ISA Ordinary Shares held.
YOUR ATTENTION IS DRAWN TO THE FORMAL OFFER, INCLUDING FULL DETAILS OF THE TERMS
AND CONDITIONS OF THE OFFER, OF THE NEW DAISYTEK RESTRICTED COMMON STOCK AND OF
THE VALUE OF EACH SHARE OF NEW DAISYTEK RESTRICTED COMMON STOCK, WHICH IS SET
OUT IN THE LETTER FROM BAIRD IN PART 2 OF THIS OFFER DOCUMENT, IN APPENDICES I
AND VI AND IN THE ENCLOSED FORM OF ACCEPTANCE.
3. BACKGROUND TO AND REASONS FOR THE OFFER
BACKGROUND
In September 2001, ISA entered into a strategic alliance with, and received an
investment of L.8.0 million (L.6.9 million net of costs) from, Daisytek UK by
way of the ISA Preference Shares. This addressed ISA's immediate financial needs
and its requirement to have strong global partnerships with vendors and to
service customers. The ISA Preference Shares issued to Daisytek UK are
convertible at any time during their 5 year term at the option of Daisytek UK
into Ordinary Shares of ISA representing 50 per cent. plus one share of ISA's
issued share capital as enlarged by the conversion of the ISA Preference Shares,
subject to dilution by the exercise of certain share options. In addition,
Daisytek UK obtained the Warrant.
REASONS FOR THE OFFER
ISA's current trading position
In January of this year, ISA announced that it had enjoyed strong sales growth
in 2001, with turnover in the region of 20 per cent. higher than in the previous
year, that the UK business was trading at record levels, that the turnaround of
the French and German businesses was in progress (albeit slower than the Board
of ISA had anticipated) and that the ISA Group's Scandinavian operations were
performing satisfactorily. However, trade credit terms available to the ISA
Group in Continental Europe following the investment by Daisytek UK have been
materially less than the Board of ISA expected. This strong sales growth,
combined with limited commercial credit, has increased the ISA Group's
indebtedness and the level of capital required in the business.
The ISA Group's net asset base has also been eroded by trading losses compounded
by exceptional restructuring and relocation costs in the year ended 31 December
2001 of L.1.7 million in ISA and by a further L.5.6 million of exceptional
restructuring and relocation costs in Kingfield Heath (of which the ISA Group's
47 per cent. share is L.2.6 million). The increase in the ISA Group's net
indebtedness combined with the reduction in the ISA Group's net asset base have
resulted in a material increase in the level of gearing with consequent pressure
on the banking facilities available to the ISA Group.
ISA's current financing arrangements
At an Extraordinary General Meeting held on 22 May 2002, ISA Shareholders
sanctioned an increase in ISA's borrowings from up to three times the amount of
its share capital and reserves, as shown in the latest
7
audited consolidated balance sheet of the ISA Group, to up to five times the
amount of its share capital and reserves.
The ISA Group is operating at the maximum limit of its borrowing facilities and
the ISA Directors have advised Daisytek UK that they anticipate that existing
facilities will be insufficient to cover the ISA Group's trading requirements in
the coming months. A significant increase in the level of capital available to
ISA is therefore required in the short term. Though remaining supportive, the
ISA Group's bankers have advised ISA that they are unwilling to further increase
facilities without a further injection of equity into the ISA Group. Although
the Board of ISA has considered alternative sources of finance, if additional
facilities are not forthcoming, the ability of the ISA Group to continue to
trade will be severely jeopardised.
ISA's ability to pay dividends
ISA has not paid an ordinary dividend since the interim dividend in respect of
the year ended 31 December 1998. ISA does not intend to pay a final dividend in
respect of the year ended 31 December 2001 and no ordinary dividend is likely to
be paid in the near future.
The ISA Group did not pay the dividend amounting in aggregate to L.141,278
which was due to Daisytek UK on 1 April 2002 in respect of the ISA Preference
Shares. If a Preference Dividend is not paid on the due date and remains in
arrears for more than 14 days, this constitutes an event of default under the
provisions of ISA's Articles of Association unless waived by Daisytek UK.
Daisytek UK agreed to defer the outstanding payment but this agreement expired
on 6 May 2002, at which point an event of default occurred. As a result of this
event of default, Daisytek UK is now entitled to vote 50 per cent. plus one
share of the votes entitled to be cast at any shareholder meeting of ISA. In
addition, Daisytek UK is entitled to appoint to the Board of ISA a number of
directors which is equivalent to 50 per cent. of the total number of directors
on the Board of ISA following such appointment, but has no immediate intention
to do so. Daisytek UK has agreed that it will not exercise the right to vote in
respect of the ISA Preference Shares on or before 30 June 2002 or, if earlier,
the date of receipt of clearance from the Bundeskartellamt in relation to the
Offer by Daisytek UK in accordance with paragraph 1(b)(i) of Part A of Appendix
1 of this Offer Document.
Daisytek UK is also entitled to request (within 120 days of default) the payment
of a special dividend to be satisfied by either a payment in cash to Daisytek UK
equal to the value of the shares held by ISA in its associate company, Kaye, at
the time when payment of the special dividend is required, less costs incurred
by ISA in subscribing or otherwise acquiring further shares in Kaye after 9
August 2001 ("the Kaye Value") or (with the consent of Daisytek UK) a
distribution in specie of assets of ISA equal to the Kaye Value. Where the value
of the special dividend is less than the amount that would otherwise be payable
on redemption of the ISA Preference Shares, ISA is obliged to make up the
shortfall by redeeming an appropriate number of ISA Preference Shares. Daisytek
UK has agreed not to request the payment of a special dividend on or before 30
June 2002. ISA does not currently have sufficient cash resources available to
enable it to meet its obligations in respect of this special dividend.
ISA's indebtedness to Daisytek UK
ISA has received significant further funding amounting to L.11.9 million from
Daisytek UK since its investment in September 2001. In October 2001, ISA was
advanced L.3.2 million by Daisytek UK in order to participate in a fundraising
by Kaye and thereby maintain its interest in its associate at 47 per cent..
Daisytek UK also provided further cash advances amounting to L.0.9 million in
November 2001 resulting in total advances of L.4.1 million by Daisytek UK in
the final quarter of 2001. Subsequent to the year end, debt has increased
further due to the usual seasonal movement in working capital, and to support
this, Daisytek UK provided a further L.4.8 million of finance. Daisytek UK has
also provided L.3.0 million of interim funding to support ISA during the Offer
process.
Had ISA not been able to participate in the fundraising referred to above, its
interest in Kaye would have been diluted from 47 per cent. to 4.3 per cent..
This would in turn have necessitated a significant write-down of the carrying
value of Kaye in the accounts of ISA.
With effect from 12 October 2001, Daisytek UK and ISA entered into a Loan
Facility in respect of the loan advances and guarantees from Daisytek UK to ISA.
The Loan Facility provides that if ISA does not repay the amounts advanced by
Daisytek UK due on, or before, 30 June 2002, ISA must forthwith take all
necessary steps (including without limitation, the convening of all necessary
shareholder meetings of ISA and the proposal of resolutions to approve and
effect any necessary reorganisation of the share capital of ISA) to procure that
ISA shall offer to Daisytek UK (subject only to a pro rata right of clawback in
favour of the then existing holders of ISA Ordinary Shares) such number of
ordinary shares in the capital of ISA at a price
8
of not more than 1 pence per share as shall raise, net of expenses, an amount in
cash equal to the amount advanced under the Loan Facility, any potential special
dividend and a further sum (such further sum not to exceed L.10 million) which
will be used to satisfy the ongoing working capital requirements of ISA as
determined by the Board of ISA from time to time. The passing of these
resolutions would require 75 per cent. of the votes cast to be in favour.
ISA's limited refinancing options
The ISA Group requires an injection of capital in the short term in order to
ensure its ability to continue to trade. The Board of ISA has considered the
options available to it for raising finance, which are very restricted without
Daisytek UK's approval under the terms of the ISA Preference Shares. As
described above, under the terms of the Loan Facility with Daisytek UK, if ISA
does not make the repayment of the amounts due on 30 June 2002, ISA is committed
to proceeding with a deeply discounted share issue, which Daisytek UK intends to
require ISA to implement (subject to the passing of the necessary resolutions,
which require a 75 per cent. majority), to repay Daisytek UK's loans and to
provide sufficient funds to meet the capital requirements of the ISA Group. The
share issue, if made, will be highly dilutive to ISA Shareholders who do not
take up their clawback rights.
In the event that the Offer becomes wholly unconditional, having received
acceptances in respect of less than 90 per cent. of the ISA Shares to which the
Offer relates but greater than 75 per cent. of the voting rights, Daisytek UK
intends to proceed to refinance ISA by subscribing (subject to shareholder
clawback) for a deeply discounted share issue. Daisytek UK has advised the Board
of ISA that it is not prepared to make any commitment to underwrite further
financing of ISA if the Offer lapses or if a lower level of acceptance is
received, however Daisytek UK has indicated in this case that it is committed to
working with the Board of ISA to achieve a refinancing of ISA.
ISA's trading facilities on AIM
Daisytek UK and the Board of ISA do not consider that ISA or its shareholders
derive any significant benefits from continuing as an independent AIM traded
company. There is currently limited market liquidity in ISA Ordinary Shares and
ISA is also unable to effectively incentivise staff through share options and
other forms of equity participation. In its current financial condition, ISA is
not able effectively to access the public equity markets for the additional
capital which it urgently requires.
Daisytek UK has stated that it will seek the cancellation of ISA's admission to
trading on AIM in the event that the Offer becomes wholly unconditional.
Conclusion
IN VIEW OF THE SHORT TERM CAPITAL REQUIREMENTS OF ISA AND THE RESTRICTED
FINANCING ALTERNATIVES AVAILABLE TO ISA, AS DESCRIBED ABOVE, THE BOARD OF ISA
CONSIDERS THAT THE OFFER PROVIDES THE ONLY VIABLE SOLUTION TO ENSURE THE
CONTINUATION OF ISA'S BUSINESS AND PROVIDES AN ACCEPTABLE EXIT FOR SHAREHOLDERS
IN THE CIRCUMSTANCES. THE BOARD OF ISA HAS, THEREFORE, CONCLUDED THAT THE OFFER
IS IN THE BEST INTERESTS OF ISA AND ITS SHAREHOLDERS AND, ACCORDINGLY,
UNANIMOUSLY RECOMMENDS THAT ISA SHAREHOLDERS ACCEPT THE OFFER.
4. CURRENT TRADING, PROSPECTS AND WORKING CAPITAL
Your attention is drawn to the audited accounts of the ISA Group for the year
ended 31 December 2001, set out in Appendix IV of this Offer Document and to the
Board of ISA's statement in the preliminary announcement of results contained in
a circular sent to ISA Shareholders on 7 May 2002.
Turnover increased from L.296.8 million in the year ended 31 December 2000 to
L.361.6 million in the year ended 31 December 2001 and the ISA Group's
operating loss (after exceptional items, before share of associates) fell from
L.8.3 million to L.0.3 million in the same period. The share of profits from
ISA's associate, Kaye, fell from a loss after exceptionals and tax of L.0.5
million to a loss after exceptionals and tax of L.3.1 million. Interest payable
increased from L.3.2 million to L.4.1 million over the same period. The loss
before tax for the year ended 31 December 2001 was L.6.8 million (2000: L.11.9
million). Net debt increased from L.25.8 million at 31 December 2000 to L.37.3
million at 31 December 2001 and, subsequent to the year end, has increased
further due to the usual seasonal movement in working capital. Net assets fell
from L.12.7 million at 31 December 2000 to L.11.9 million at 31 December 2001
which includes net proceeds of L.6.9 million received from the investment by
Daisytek UK in September 2001.
The ISA Group has made significant progress on the road to profit recovery from
the events of 1999 and 2000. However, this has placed a heavy burden on the
balance sheet and it remains very stretched, with the
9
level of debt and therefore interest expense restricting further substantive
progress. The ISA Group's business is characterised by volume growth and low
margins, demanding significant cash resources with the correct balance of equity
and debt.
The UK and Scandinavian operations continue to perform satisfactorily and the
recovery in the European businesses is progressing well as they have received
substantial funding from the ISA Group. Assuming the funding issues can be
addressed, ISA now has in place an infrastructure platform from which it can
leverage future growth.
Though ISA has, in an operational sense, turned the corner following the
problems of 1999 and 2000, it remains extremely vulnerable due to an
undercapitalised balance sheet. Without adequate funding, it is highly unlikely
that the ISA Group will be able to continue to meet its obligations as they fall
due and the prospects for creating shareholder value are extremely difficult.
The Board of ISA believes that the Offer from Daisytek is the only viable
solution to refinance the business and without the Offer and the subsequent
financial support from Daisytek, the ability of the ISA Group to continue to
trade is at risk.
5. IRREVOCABLE UNDERTAKINGS TO ACCEPT THE OFFER
Daisytek UK has received irrevocable undertakings to accept the Offer from the
ISA Directors in respect of their entire beneficial holdings of 210,000 ISA
Ordinary Shares representing approximately 0.4 per cent. of ISA's existing
issued ordinary share capital.
Daisytek UK has also received irrevocable undertakings to accept the Offer from
certain other ISA Shareholders in respect of, in aggregate, 33,016,866 ISA
Ordinary Shares representing approximately 56.1 per cent. of ISA's existing
issued ordinary share capital.
Accordingly, Daisytek UK has received irrevocable undertakings to accept the
Offer in respect of 33,226,866 ISA Ordinary Shares, in aggregate, representing
approximately 56.5 per cent. of the existing issued ordinary share capital of
ISA.
Further details of the irrevocable undertakings can be found in paragraph 3(i)
of Appendix V of this Offer Document.
6. MANAGEMENT AND EMPLOYEES
Daisytek UK has undertaken that it will use reasonable commercial endeavours to
safeguard the existing employment rights, including the pension rights, of the
management and employees of the members of the ISA Group.
7. ISA SHARE OPTION SCHEMES
The Offer extends, subject to the terms and conditions set out in this Offer
Document and the Form of Acceptance, to any ISA Ordinary Shares which are
unconditionally allotted or issued fully paid (or credited as fully paid) upon
exercise of options under the ISA Share Option Schemes whilst the Offer remains
open for acceptance. However, as all outstanding options under the ISA Share
Option Schemes are at exercise prices in excess of the value attributed to ISA
Ordinary Shares under the Offer, no further proposals will be made to
participants in the ISA Share Option Schemes and, to the extent that such
options are not exercised in accordance with the rules of the ISA Share Option
Schemes, they will lapse and it is Daisytek UK's intention that the schemes will
thereafter be terminated.
8. CANCELLATION OF TRADING ON AIM AND COMPULSORY ACQUISITION
Subject to the Offer becoming or being declared unconditional in all respects,
if sufficient acceptances are received under the Offer, Daisytek UK intends to
use the procedures set out in Section 428 to 430F (inclusive) of the Act to
compulsorily acquire any outstanding ISA Shares to which the Offer relates.
Daisytek UK also intends to procure that ISA applies to the London Stock
Exchange for admission to trading of ISA Ordinary Shares on AIM to be cancelled.
It is anticipated that the cancellation of ISA's admission will take effect no
earlier than the expiry of 20 business days after the Offer becomes or is
declared unconditional in all respects.
THE CANCELLATION OF ADMISSION TO TRADING ON AIM COULD SIGNIFICANTLY REDUCE THE
LIQUIDITY AND MARKETABILITY OF ANY ISA ORDINARY SHARES NOT ASSENTED TO THE
OFFER.
10
9. TAXATION
Your attention is drawn to paragraph 16 headed "Taxation" in Part 2 of this
Offer Document. IF YOU ARE IN ANY DOUBT ABOUT YOUR OWN TAX POSITION OR ARE
SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UK, YOU ARE STRONGLY
RECOMMENDED TO CONSULT AN APPROPRIATE PROFESSIONAL ADVISER IMMEDIATELY.
10. ACTION TO BE TAKEN TO ACCEPT THE OFFER
Your attention is drawn to paragraph 17 of Part 2 of this Offer Document and to
the accompanying Form of Acceptance, which sets out the procedure for acceptance
of the Offer.
In order to accept the Offer, you should complete and return the Form of
Acceptance in accordance with the instructions printed thereon, whether or not
your ISA Ordinary Shares are in CREST, as soon as possible and in any event so
as to be received by NO LATER THAN 3.00 P.M. ON 13 JUNE 2002. A reply-paid
envelope is enclosed for your use if you are posting your documents in the
United Kingdom.
11. FURTHER INFORMATION
Your attention is drawn to the letter from Baird in Part 2 of this Offer
Document and to the Appendices.
12. CONCLUSION
THE ISA DIRECTORS, WHO HAVE BEEN SO ADVISED BY KPMG CORPORATE FINANCE, CONSIDER
THAT THE TERMS OF THE OFFER ARE FAIR AND REASONABLE SO FAR AS THE ISA
SHAREHOLDERS ARE CONCERNED. IN PROVIDING ADVICE TO THE ISA DIRECTORS, KPMG
CORPORATE FINANCE HAS TAKEN INTO ACCOUNT THE ISA DIRECTORS' COMMERCIAL
ASSESSMENTS OF THE OFFER.
13. RECOMMENDATION
YOUR DIRECTORS BELIEVE THAT THE OFFER IS IN THE BEST INTERESTS OF THE ISA
SHAREHOLDERS AND ACCORDINGLY UNANIMOUSLY RECOMMEND ISA SHAREHOLDERS TO ACCEPT
THE OFFER AS THEY HAVE IRREVOCABLY UNDERTAKEN TO DO IN RESPECT OF THEIR OWN
BENEFICIAL HOLDINGS AMOUNTING TO 210,000 ISA ORDINARY SHARES IN AGGREGATE,
REPRESENTING APPROXIMATELY 0.4 PER CENT. OF THE EXISTING ISSUED ORDINARY SHARE
CAPITAL OF ISA.
THE ISA DIRECTORS ARE NOT EXPRESSING ANY VIEW ON WHICH OF THE CASH OFFER OR THE
RESTRICTED SHARE OFFER ISA SHAREHOLDERS SHOULD ACCEPT. ISA SHAREHOLDERS WHO ARE
IN ANY DOUBT AS TO WHICH ALTERNATIVE THEY SHOULD ACCEPT ARE RECOMMENDED TO SEEK
THEIR OWN INDEPENDENT FINANCIAL ADVICE.
Yours sincerely
B Robinson
Chief Executive Officer
for and on behalf of the Board of ISA
11
PART 2
OFFER LETTER FROM BAIRD TO ISA SHAREHOLDERS
[BAIRD LETTERHEAD]
23 May 2002
To ISA Shareholders and, for information only, to holders of options under the
ISA Share Option Schemes
Dear Shareholder
RECOMMENDED OFFER BY DAISYTEK UK FOR ISA
1. INTRODUCTION
It was announced on 7 May 2002 that the boards of ISA and Daisytek, had reached
agreement on terms of a recommended cash offer with a restricted share
alternative (the "Offer"), to be made by Baird on behalf of Daisytek UK, a
wholly-owned UK subsidiary of Daisytek, for the whole of the issued ordinary
share capital of ISA.
This letter, Appendix I of this Offer Document and the accompanying Form of
Acceptance set out the formal Offer.
Daisytek UK has received irrevocable undertakings to accept the Offer in respect
of, in aggregate, 33,226,866 ISA Ordinary Shares representing approximately 56.5
per cent. of the existing issued ordinary share capital of ISA.
YOUR ATTENTION IS DRAWN TO THE LETTER FROM THE CHIEF EXECUTIVE OFFICER OF ISA,
BRUCE ROBINSON, SET OUT IN PART 1 OF THIS OFFER DOCUMENT, WHICH STATES THAT THE
ISA DIRECTORS, WHO HAVE BEEN SO ADVISED BY KPMG CORPORATE FINANCE, CONSIDER THE
TERMS OF THE OFFER TO BE FAIR AND REASONABLE. THE ISA DIRECTORS UNANIMOUSLY
RECOMMEND ISA SHAREHOLDERS TO ACCEPT THE OFFER, AS THOSE ISA DIRECTORS WHO ARE
SHAREHOLDERS HAVE UNDERTAKEN TO DO IN RESPECT OF THEIR OWN BENEFICIAL INTERESTS.
INSTRUCTIONS ON HOW TO ACCEPT THE OFFER ARE SET OUT IN THE PARAGRAPH HEADED
"PROCEDURE FOR ACCEPTANCE OF THE OFFER" ON PAGES 22 TO 24 OF THIS OFFER
DOCUMENT. YOUR ATTENTION IS ALSO DRAWN TO THE CONDITIONS AND FURTHER TERMS OF
THE OFFER SET OUT IN APPENDIX I TO THIS OFFER DOCUMENT AND IN THE ACCOMPANYING
FORM OF ACCEPTANCE. TO ACCEPT THE OFFER, THE FORM OF ACCEPTANCE MUST BE
COMPLETED AND RETURNED, WHETHER OR NOT YOUR ISA ORDINARY SHARES ARE IN CREST, AS
SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE RECEIVED BY CAPITA IRG PLC NO
LATER THAN 3.00 P.M. ON 13 JUNE 2002.
2. THE CASH OFFER
On behalf of Daisytek UK, Baird hereby offers to acquire, on the terms and
subject to the conditions set out in this Offer Document and the Form of
Acceptance, all of the ISA Ordinary Shares on the following basis:
FOR EACH ISA ORDINARY SHARE 7.5 PENCE IN CASH
The Cash Offer equates to the closing middle market price per ISA Ordinary Share
on 15 April 2002, the last dealing day prior to the announcement by Daisytek and
ISA that they were in discussions which may or may not lead to an offer being
made for ISA. Full acceptance of the Cash Offer would value the existing issued
share capital of ISA at approximately L.4.4 million.
Details of the financial effects of acceptance of the Cash Offer are set out in
paragraph 14 of Part 2 of this Offer Document.
12
The ISA Ordinary Shares to be acquired pursuant to the Offer are to be acquired
fully paid and free from all liens, charges, equitable interests, encumbrances,
rights of pre-emption and other third party rights or interests of any nature
whatsoever, and together with all rights now or hereafter attached to them,
including the right to receive and retain the benefit of all dividends and other
distributions (if any) declared, made or paid hereafter.
3. THE RESTRICTED SHARE OFFER
ISA Shareholders may elect to receive New Daisytek Restricted Common Stock
instead of cash in consideration of the transfer of their ISA Ordinary Shares on
the following basis:
FOR EVERY 100 ISA ORDINARY SHARES 0.914 SHARES OF NEW DAISYTEK
RESTRICTED COMMON STOCK
and so in proportion for any other number of ISA Ordinary Shares held.
If the Offer becomes or is declared unconditional in all respects, fractions of
a share of New Daisytek Restricted Common Stock will not be issued to ISA
Shareholders accepting the Restricted Share Offer, who will instead receive from
Daisytek an amount in cash of 7.5 pence per ISA Ordinary Share in respect of
fractional entitlements.
The New Daisytek Restricted Common Stock which is being used to satisfy the
Restricted Share Offer is not currently transferable, save in limited
circumstances, and is therefore inherently less valuable than existing shares of
Daisytek Common Stock, which may not be subject to such restrictions on
transfer. Further details of the transfer and other restrictions to which the
New Daisytek Restricted Common Stock is subject, and of Daisytek's proposals for
rendering such stock freely transferable in the United States following closing
of the Offer, are set out in paragraph 4 below.
Baird has advised that if the New Daisytek Restricted Common Stock had been in
issue on 22 May 2002 (being the latest practicable date prior to the posting of
this Offer Document), the value of each share of New Daisytek Restricted Common
Stock would have been approximately $11.85. Based on the terms of the Restricted
Share Offer, this implies a value of approximately 7.42 pence for every ISA
Ordinary Share held. This valuation of the Restricted Share Offer represents a
discount of approximately 1.1 per cent. to the closing middle market price per
ISA Ordinary Share on 15 April 2002, the last dealing day prior to the
announcement by Daisytek and ISA that they were in discussions which may or may
not lead to an Offer being made for ISA. Full acceptance of the Restricted Share
Offer would value the existing share capital of ISA at approximately L.4.4
million.
This valuation is based on:
(i) market conditions on 22 May 2002;
(ii) the Restricted Common Stock Exchange Rate;
(iii) the Closing Price on 22 May 2002; and
(iv) the other assumptions and information set out in this Part 2 of
this Offer Document.
This valuation is also based on the assumption that the Registration Statement
will be filed in the ordinary course. Neither Baird nor Daisytek makes any
representations regarding whether such Registration Statement will be filed, or
the period of time from the filing of the Registration Statement to the date on
which the Registration Statement is declared effective by the SEC. Baird is not
providing any opinion as to the value of the New Daisytek Restricted Common
Stock if such registration is not completed or is not completed in the ordinary
course, consistent with normal practice of the SEC.
This valuation will not be updated by Baird except as required by the Code. ISA
Shareholders should note that the valuation of the Restricted Share Offer will
vary with, inter alia, market conditions, the L.:$ exchange rate and the price
of Daisytek Common Stock.
Details of the financial effects of acceptance of the Restricted Share Offer are
set out in paragraph 14 of Part 2 of this Offer Document.
The New Daisytek Restricted Common Stock to be issued pursuant to the Offer will
be credited as fully paid and will be of the same class and rank as all the
existing Daisytek Common Stock, including the right to receive the benefit of
all dividends and other distributions declared and made or paid after the date
on which the New Daisytek Restricted Common Stock is issued (except that the New
Daisytek Restricted Common Stock will not be registered and will be subject to
restrictions on transfers that may not be applicable to existing shares of
Daisytek Common Stock).
13
ISA SHAREHOLDERS SHOULD NOTE THAT THE NEW DAISYTEK RESTRICTED COMMON STOCK WILL
BE DENOMINATED IN US DOLLARS AND WILL BE LISTED ON THE NATIONAL MARKET SYSTEM OF
NASDAQ FOR QUOTATION (BUT SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK MAY NOT
BE RESOLD INTO THE UNITED STATES, WHETHER ON THE NATIONAL MARKET SYSTEM OF
NASDAQ OR OTHERWISE, UNLESS SUCH RESALE IS EFFECTED PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION). A COMMONLY AVAILABLE EXEMPTION FROM REGISTRATION IS THE EXEMPTION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, WHICH GENERALLY REQUIRES A HOLDER
OF STOCK TO HOLD SUCH SHARES FOR AT LEAST ONE YEAR BEFORE BEING ELIGIBLE TO
RESELL SUCH SHARES INTO THE UNITED STATES PURSUANT TO SUCH EXEMPTION (AND ALSO
REQUIRES THE HOLDER TO MEET THE OTHER CONDITIONS SET FORTH IN SUCH EXEMPTION).
THE NEW DAISYTEK RESTRICTED COMMON STOCK WILL NOT BE TRADED ON THE OFFICIAL LIST
OF THE UK LISTING AUTHORITY OR ADMITTED TO TRADING ON AIM.
INVESTING IN NEW DAISYTEK RESTRICTED COMMON STOCK INVOLVES RISKS. ISA
SHAREHOLDERS CONSIDERING ACCEPTING THE RESTRICTED SHARE OFFER SHOULD CONSIDER
THE RISK FACTORS SET FORTH IN APPENDIX III OF THIS OFFER DOCUMENT PRIOR TO
MAKING THEIR DECISION.
4. FURTHER INFORMATION CONCERNING THE NEW DAISYTEK RESTRICTED COMMON STOCK
The New Daisytek Restricted Common Stock issued pursuant to the Offer will not
be registered under the Securities Act, or under the securities laws of any
state or other jurisdiction inside or outside the United States and will contain
a legend to that effect. Such shares may not be offered or sold within the
United States, except pursuant to a registration statement declared effective
under the Securities Act or pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. A commonly
available exemption from registration is the exemption provided by Rule 144
under the Securities Act, which generally requires a holder of stock to hold
such shares for at least one year before being eligible to resell such shares
into the United States pursuant to such exemption (and also requires the holder
to meet the other conditions set forth in such exemption).
Daisytek has undertaken to use its reasonable commercial endeavours to file a
Registration Statement under the Securities Act to register for resale into the
United States the shares of New Daisytek Restricted Common Stock issued in the
Restricted Share Offer as soon as reasonably practicable following the closing
of the Offer or, if earlier, the date on which the Restricted Share Offer is
closed, provided that Daisytek will not file any such Registration Statement
under the Securities Act unless at such time there are available for
incorporation into such filing financial statements of ISA for the financial
year ended 31 December 2001 prepared in accordance with United Kingdom generally
accepted accounting principles with a reconciliation to US GAAP and audited in
accordance with United States generally accepted auditing standards and in a
form acceptable for filing with the SEC. ISA Shareholders should however note
that, notwithstanding the use of such reasonable commercial endeavours, no
assurance can be made that any such Registration Statement will be capable of
being filed or, if filed, whether it will be declared effective by the SEC or
for how long it will remain effective.
If the Registration Statement is filed and becomes effective, then for so long
as the Registration Statement remains effective, the holders of the New Daisytek
Restricted Common Stock registered under the Registration Statement will, by
selling such shares in accordance with the Registration Statement, be able to
publicly resell their shares of New Daisytek Restricted Common Stock in the US
without regard to any transfer restrictions. If the Registration Statement is
filed and becomes effective, Daisytek will use its reasonable commercial
endeavours to keep the Registration Statement effective until the earlier of the
sale of the shares of the New Daisytek Restricted Common Stock covered by the
Registration Statement or the first anniversary of the date of the closing of
the Offer (or if earlier, the date of the closing of the Restricted Share
Offer). Thereafter, Daisytek may withdraw or terminate the Registration
Statement in its sole discretion. If the Registration Statement is withdrawn or
terminated, any shares of New Daisytek Restricted Common Stock covered by the
Registration Statement that have not been resold pursuant to the Registration
Statement at the time it is withdrawn or terminated may no longer be resold
pursuant to the Registration Statement (however, it is expected that other
exemptions will be available to holders of New Daisytek Restricted Common Stock
to resell such shares in the US, including without limitation Rule 144 under the
Securities Act).
Part C of Appendix I of this Offer Document and the Form of Acceptance set forth
the procedures by which an ISA Shareholder who receives New Daisytek Restricted
Common Stock in the Restricted Share Offer may elect to have such shares
included in the Registration Statement to be registered for resale into the
United States. In the event that Daisytek is able to file such Registration
Statement after the closing of the Offer, or the Restricted Share Offer, if
earlier, any ISA Shareholder who acquires shares of New Daisytek
14
Restricted Common Stock and wishes to have such shares registered for resale
pursuant to such Registration Statement will be required, as a condition to
being allowed to have their shares included in such Registration Statement, to
be named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers and will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales. In addition,
each such ISA Shareholder will be required to deliver certain information to be
used in connection with the Registration Statement (including the name and
address of such shareholder, the number of shares of New Daisytek Restricted
Common Stock owned beneficially by, and registered to, such shareholder and the
number of shares that such shareholder desires to register for resale) and to
provide comments on the portions of the Registration Statement that include such
information within the time periods determined by Daisytek (and will be required
to undertake to indemnify Daisytek and its affiliates with respect to the
information so provided and certain related matters).
As a result of the resale restrictions applicable to the New Daisytek Restricted
Common Stock, ISA Shareholders who elect to receive New Daisytek Restricted
Common Stock in the Offer must be prepared to treat such shares as a long-term
investment and expect to bear the economic risk of the ownership of such shares
for an indefinite period of time. As a result of the resale restrictions
applicable to the New Daisytek Restricted Common Stock, no assurances can be
made that such shares can be resold by the holder thereof for a price equal to
the current market price of Daisytek Common Stock, or for any price, and no
assurances can be made by Daisytek or ISA as to the future value, if any, of the
New Daisytek Restricted Common Stock or the profitability or success of the
business of Daisytek.
5. IRREVOCABLE UNDERTAKINGS
Daisytek UK has received irrevocable undertakings to accept the Offer from the
ISA Directors in respect of their entire beneficial holdings of 210,000 ISA
Ordinary Shares representing approximately 0.4 per cent. of ISA's existing
issued ordinary share capital.
Daisytek UK has also received irrevocable undertakings to accept the Offer from
certain other shareholders of ISA in respect of, in aggregate, 33,016,866 ISA
Ordinary Shares representing approximately 56.1 per cent. of ISA's existing
issued ordinary share capital.
In aggregate, Daisytek UK has received irrevocable undertakings to accept the
Offer in respect of 33,226,866 ISA Ordinary Shares representing approximately
56.5 per cent. of the existing issued ordinary share capital of ISA.
Further details of the irrevocable undertakings can be found in paragraph 3(i)
of Appendix V of this Offer Document.
6. BACKGROUND TO AND REASONS FOR THE OFFER
Daisytek's strategic objective is to become the leading global wholesale
distributor of computer supplies, office supplies and accessories. Manufacturers
are increasingly relying on distributors such as the Daisytek Group to offer
broad geographic coverage and to provide efficient access to reseller customers
not otherwise served by the manufacturer's direct sales force. The acquisition
of ISA will provide the Daisytek Group with an enhanced platform to expand into
Europe. The combination will bring together the Daisytek Group's logistical
expertise, global infrastructure and capital resources with ISA's pan-European
reach, customer relationships and local knowledge. Daisytek therefore believes
that the acquisition of ISA, which continues Daisytek's international expansion,
strengthens the Daisytek Group's strategic position.
The Board of Daisytek expects earnings dilution from the consolidation and
funding of ISA (and its 47 per cent. investment in Kaye), especially in the
first two quarters of the financial year ending 31 March 2003, due to the
seasonality of the European businesses and the ongoing operational improvement
initiatives in ISA's continental operations. However, the Board of Daisytek
expects ISA to be significantly net accretive, rather than dilutive, for the
full year to 31 March 2004. Statements on future performance should not be
interpreted to mean that earnings per share will necessarily be greater or lower
than those for the relevant preceding financial period.
The transaction will provide a larger asset base to enable the future expansion
of the enlarged group through organic growth and acquisitions.
7. Information on Daisytek
Daisytek, through its direct and indirect subsidiaries, including Daisytek UK,
is a leading global wholesale distributor of computer and office supplies and
professional tape products. To enhance its relationship with computer and office
supplies customers and manufacturers worldwide, it also provides unique,
value-added
15
services such as direct marketing, merchandising and demand generation. Daisytek
sells thousands of consumable products in the United States, Canada, Australia,
Mexico and South America to resellers, who in turn sell directly to end-users.
Daisytek announced its unaudited results for the financial year ended 31 March
2002 on 7 May 2002. Daisytek reported revenues of $1,185.0 million (2001:
$1,012.1 million) and income from continuing operations before taxes and
minority interest of $19.0 million (2001: $18.4 million). As at 31 March 2002,
Daisytek had shareholders' equity of $196.0 million (2001: $159.1 million).
Daisytek Common Stock is traded on the NASDAQ National Market System under the
symbol "DZTK". Daisytek had a market capitalisation of approximately $237.34
million as at 22 May 2002, the last dealing day before the date of this Offer
Document based on the Closing Price on 22 May 2002 of $13.17.
Daisytek files annual, quarterly and current reports, proxy statements and other
information with the SEC. You can inspect, read and copy these materials at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You can obtain information on the operation of the Public Reference Room by
calling the SEC at +1 800 SEC 0330. The SEC also maintains a web site
(http://www.sec.gov) that makes available reports, proxy statements and other
information regarding issuers that file electronically with it. ISA Shareholders
can also obtain any of these documents through Daisytek by either inspecting
them during normal business hours on any weekday (public holidays excepted)
while the Offer remains open for acceptance or requesting them in writing or
orally from Daisytek's head office and principal place of business:
Daisytek International Corporation
1025 Central Expressway South, Suite 200
Allen, Texas 75013
USA
Attention: The Corporate Secretary
Telephone: +1 972 881 4700
ISA Shareholders may rely only on the information concerning Daisytek contained
in this Offer Document in determining whether to accept the Offer. Daisytek has
not authorised anyone to provide ISA Shareholders with information that is
different from what is contained in this Offer Document. This Offer Document is
dated 23 May 2002. ISA Shareholders should not assume that the information
contained in this Offer Document is accurate as of any date other than such
date, and neither the mailing of this Offer Document to ISA Shareholders nor the
delivery of New Daisytek Restricted Common Stock in exchange for ISA Ordinary
Shares will create any implication to the contrary.
8. INFORMATION ON DAISYTEK UK
Daisytek UK is incorporated in the United Kingdom and is a wholly-owned UK
subsidiary of Daisytek. Daisytek UK was incorporated on 1 June 2001, under the
Act, as a private company with limited liability, with the name Screencircuit
Limited. It changed its name to Daisytek UK on 13 July 2001. The entire issued
share capital of Daisytek UK (comprising 8,000,000 fully paid ordinary shares of
L.1), are held by Daisytek.
Daisytek UK was established for the purpose of its initial investment in ISA by
way of a subscription for the ISA Preference Shares and issue of the Warrant to
it. To date, Daisytek UK's activities have been limited to those activities
relating to, and incidental to, that investment, including the funding of debt
incurred by ISA pursuant to the Loan Facility.
9. INFORMATION ON ISA
ISA, which is based in Bradford, was formed in 1985 and was listed on the
Official List of the London Stock Exchange in October 1987. It was subsequently
delisted and its Ordinary Shares were admitted to trading on AIM on 10 September
2001. ISA has a 47 per cent. shareholding in Kaye, the holding company for
Kingfield Heath, a privately owned UK-based wholesale distributor of office
products.
ISA has sales offices and distribution centres in the United Kingdom, Ireland,
Germany, France, Italy, Norway and Sweden.
For the year ended 31 December 2001, ISA reported a consolidated loss on
ordinary activities before taxation of L.6.8 million (2000: L.11.9 million) on
turnover of L.361.6 million (2000: L.296.8 million). As at 31 December 2001,
ISA had total consolidated shareholders' funds of L.11.9 million (2000: L.12.7
million).
Further information on ISA may be found in Appendices IV and V of this Offer
Document.
16
10. DAISYTEK'S INTENTIONS IN RELATION TO THE ISA GROUP
Daisytek is fully committed to the growth and development of the business of
ISA. The benefits of the Offer from the perspective of an ISA Shareholder are
set out in the letter from the Board of ISA which appears in Part 1 of this
Offer Document.
11. MANAGEMENT AND EMPLOYEES
Daisytek UK has undertaken that it will use reasonable commercial endeavours to
safeguard the existing employment rights, including the pension rights, of the
management and employees of the members of the ISA Group.
12. FINANCING OF THE OFFER
The Offer will be financed from cash resources which Daisytek has
unconditionally drawn down under its current banking facilities with Bank of
America and advanced to Daisytek UK for the purposes of the Offer. Such cash has
been placed on deposit with Bird & Bird, Daisytek UK's UK solicitors. Baird is
satisfied that Daisytek UK has the necessary financial resources available to
satisfy full acceptance of the Offer. Daisytek does not consider that the
payment of interest on, repayment of, or security for such borrowings will
depend to a significant extent on the business of ISA.
13. ISA SHARE OPTION SCHEMES
No offer is being made to holders of options to acquire ISA Ordinary Shares
although the Offer extends to any ISA Ordinary Shares which are unconditionally
allotted or issued while the Offer remains open for acceptance.
14. FINANCIAL EFFECTS OF ACCEPTANCE
The following tables set out, for illustrative purposes only, on the bases and
assumptions set out in the notes below and assuming that the Offer becomes or is
declared unconditional in all respects, the financial effects of acceptance of
the Offer on the capital value and gross income for a holder of 1,000 ISA
Ordinary Shares electing for (i) the Cash Offer, and (ii) the Restricted Share
Offer:
<Table>
<Caption>
(ii)
(i) Restricted
Cash Offer Share Offer
Capital Value
Cash consideration under the Cash Offer L.75.00 --
Estimated value of 1,000 ISA Ordinary Shares under the Restricted Share Offer -- L.74.20
Less: Market value of 1,000 ISA Ordinary Shares L.75.00 L.75.00
------------- -------------
Change in capital value Nil L.(0.80)
============= =============
This represents a percentage change of approximately Nil (1.1)%
============= =============
</Table>
<Table>
<Caption>
Restricted
Cash Offer Share Offer
Gross Income
Gross dividend income from shares of New Daisytek Restricted Common Stock
issued in exchange for 1,000 ISA Ordinary Shares under the Restricted Share Offer -- L.nil
Gross income from cash consideration under the Cash Offer L.3.96 --
Less: Gross dividend income on 1,000 ISA Ordinary Shares L.nil L.nil
------------- -------------
Assumed increase in gross income L.3.96 L.nil
============= =============
</Table>
Notes:
(i) The market value of ISA Ordinary Shares is based on the closing price of 7.5
pence per ISA Ordinary Share on 15 April 2002, being the last dealing day before
the date of ISA's announcement that it was in discussions which may or may not
lead to an offer for ISA.
(ii) The estimated value of 1,000 ISA Ordinary Shares under the Restricted Share
Offer is based on the valuation of each share of New Daisytek Restricted Common
Stock by Baird, set out on page 13 of this Offer Document.
(iii) The cash consideration is assumed to be reinvested so to as to yield 5.28
per cent. gross per annum, being the FTSE Actuaries Government Securities UK
Index gross redemption yield for medium coupon UK gilts with maturities up to
five years, derived from the Financial Times on 22 May 2002, being the last
practicable date prior to the announcement of the Offer.
(iv) In assessing the financial effects of acceptance of the Offer, no account
has been taken of any potential liability to taxation for ISA Shareholders.
17
15. CANCELLATION OF TRADING ON AIM AND COMPULSORY ACQUISITION
Subject to the Offer becoming or being declared unconditional in all respects,
if sufficient acceptances are received under the Offer, Daisytek UK intends to
use the procedures set out in Section 428 to 430F (inclusive) of the Act to
compulsorily acquire any outstanding ISA Shares to which the Offer relates.
Daisytek UK also intends to procure that ISA applies to the London Stock
Exchange for admission to trading of ISA Ordinary Shares on AIM to be cancelled.
It is anticipated that the cancellation of ISA's admission will take effect no
earlier than the expiry of 20 business days after the Offer becomes or is
declared unconditional in all respects.
16. TAXATION
UNITED KINGDOM TAXATION
The following discussion summarises, in general terms for an ISA Shareholder who
is a UK resident or who is a US holder (as defined below) but not a UK resident
and, in either case, who is the absolute beneficial owner of ISA Ordinary Shares
and holds ISA Ordinary Shares as an investment, the principal UK tax
consequences associated with the Offer. This summary assumes that Daisytek is
resident for tax purposes only in the US.
The explanation of UK tax laws set out below is based on laws and practice, at
present in effect, including the Treaty, and judicial and administrative
precedent as of the date of this Offer Document. This explanation is subject to
any changes in those laws, or in the interpretation of them by the relevant
taxation authorities, which changes may be made with prospective or retroactive
effect, practice and precedent occurring after the date hereof. No information
is provided herein with respect to taxation under the laws of any jurisdiction
other than the UK.
ISA SHAREHOLDERS WHO ARE IN ANY DOUBT AS TO THEIR TAXATION POSITION OR ARE
SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UK ARE URGED TO CONSULT
THEIR PROFESSIONAL ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
OFFER.
UK taxation of capital gains to UK residents. Liability to UK taxation on
chargeable gains will depend on the individual circumstances of each ISA
Shareholder who is a UK resident and on the form of consideration received.
(i) CASH OFFER --- To the extent that an ISA Shareholder receives cash
under the Offer, that will constitute a disposal or part disposal of
his ISA Ordinary Shares which may, depending upon his individual
circumstances, give rise to a chargeable gain or allowable loss for the
purpose of UK taxation of capital gains.
(ii) RESTRICTED SHARE OFFER --- The exchange of ISA Ordinary Shares by an
ISA Shareholder who does not hold more than 5 per cent. of any class of
shares or debentures in ISA in return for New Daisytek Restricted
Common Stock should not be treated as a disposal of ISA Ordinary Shares
for the purposes of UK taxation of capital gains. The New Daisytek
Restricted Common Stock should instead be treated as the same asset as
the ISA Ordinary Shares, acquired as and when the ISA Ordinary Shares
were acquired.
An ISA Shareholder holding 5 per cent. or more of any class of share or
debenture in ISA is advised that an application has been made for
clearance under section 138 of the Taxation of Chargeable Gains Act
1992 in respect of the Offer.
A subsequent disposal of New Daisytek Restricted Common Stock by a UK
resident may give rise to a chargeable gain or allowable loss for the
purpose of UK taxation of capital gains.
UK corporate Shareholder holding 10 per cent. or more of ISA share capital. ISA
should be treated as a trading company for the purposes of the capital gains
exemption for substantial shareholdings published in the Finance Bill 2002 due
to take effect on disposals occurring from 1 April 2002. Accordingly, assuming
the other requirements for the exemption are met, the capital gains tax
consequences for a UK corporate Shareholder holding 10 per cent. or more of the
ISA share capital will be as follows (depending on the form of consideration
received):
(i) CASH OFFER --- To the extent the ISA Shareholder receives cash under
the Offer, the exemption for substantial shareholdings may be available
provided that the ISA Shareholder has held the ISA Ordinary Shares for
a continuous period of at least 12 months during the two years before
the date of the Offer and the ISA Shareholder fulfils the requirements
of an investing company for the purposes of the exemption at and
immediately after the receipt of cash under the Offer.
18
(ii) Restricted Share Offer --- The capital gains exemption for substantial
shareholdings will apply in priority to the roll-over relief.
Accordingly, an ISA Shareholder which qualifies for the exemption in
relation to its holding of ISA Ordinary Shares, will be treated as
having disposed of the ISA Ordinary Shares and will acquire a base cost
in respect of the New Daisytek Restricted Common Stock equal to the
value of the ISA Ordinary Shares on the date of disposal.
UK taxation of capital gains to US holders. Liability to UK taxation on
chargeable gains on the disposal of ISA Ordinary Shares by an ISA Shareholder
who is a US holder for cash consideration and the exchange of ISA Ordinary
Shares by an ISA Shareholder in return for New Daisytek Restricted Common Stock
will not arise unless, at the time of disposal, such ISA Shareholder carries on
a business in the UK through a branch or agency, in which event the comments
contained in "UK taxation of capital gains to UK residents" and "UK corporate
shareholder holding 10 per cent. or more of ISA share capital" above will apply
in the same way as they apply to UK residents.
Stamp duty and stamp duty reserve tax. No UK stamp duty or stamp duty reserve
tax will be payable by an ISA Shareholder who is a UK resident or who is a US
holder on the transfer of ISA Ordinary Shares to Daisytek UK. Any liability to
UK stamp duty or stamp duty reserve tax on the transfer of such ISA Ordinary
Shares to Daisytek UK will be borne by Daisytek UK. No UK stamp duty or stamp
duty reserve tax will be payable on the issue of New Daisytek Restricted Common
Stock.
UK taxation of dividends to UK residents. A UK resident will generally be liable
to income tax or corporation tax in the UK on the aggregate of any dividend
received from Daisytek and any tax withheld at source in the US (see the
comments contained in "United States federal income taxation --- Distributions
on New Daisytek Restricted Common Stock" below). In computing that liability to
taxation, credit will be given for any tax withheld in the US. In the case of a
corporate UK resident which controls 10 per cent. or more of the voting stock of
Daisytek, credit will also be available for underlying tax against UK taxes in
respect of the dividend.
Special rules apply to UK residents who are not domiciled in the UK.
UK taxation of dividends to US holders. Daisytek has never paid, and does not
anticipate that it will pay, cash dividends on its Daisytek Common Stock.
Dividends, if any, paid on New Daisytek Restricted Common Stock to a person who
is not a UK resident will not be subject to UK tax unless that person carries on
a business in the UK through a branch or agency and the New Daisytek Restricted
Common Stock is effectively connected with that branch or agency, in which event
the comments contained in "UK taxation of dividends to UK residents" above will
apply in the same way as they apply to UK residents.
UNITED STATES FEDERAL INCOME TAXATION
The following is a summary of the principal US federal income tax consequences
that may be relevant with respect to the exchange of ISA Ordinary Shares for New
Daisytek Restricted Common Stock and/or cash pursuant to the Offer and the
ownership and disposition of New Daisytek Restricted Common Stock acquired under
the Offer. For purposes of this summary, the term "US holder" means: (i) a
citizen or resident of the United States; (ii) a corporation, partnership, or
association or legal entity taxable as a corporation created or organised in the
United States or under the laws of the United States or of any State thereof
(including the District of Columbia); (iii) an estate the income of which is
subject to United States federal income tax regardless of its source; or (iv) a
trust if such trust validly elects to be treated as a US holder for US federal
income tax purposes or if (v) a court within the United States is able to
exercise primary supervision over its administration and (vi) one or more US
persons who have the authority to control all of the substantial decisions of
the trust. A "Non-US holder" is a beneficial owner of ISA Ordinary Shares or New
Daisytek Restricted Common Stock, as the case may be, that is not a US holder.
This summary does not contain a comprehensive description of all of the tax
consequences of the exchange of ISA Ordinary Shares for New Daisytek Restricted
Common Stock and/or cash pursuant to the Offer and the ownership and disposition
of New Daisytek Restricted Common Stock. In particular, this summary applies
only to holders who hold ISA Ordinary Shares and will hold New Daisytek
Restricted Common Stock as capital assets at all relevant times. This summary
does not address US federal income tax considerations applicable to holders that
may be subject to special tax rules, such as partnerships, S corporations, and
other pass-through entities, banks, financial institutions, insurance companies,
real estate investment trusts, regulated investment companies, grantor trusts,
dealers or traders in securities or currencies, tax- exempt entities, persons
that hold or will hold ISA Ordinary Shares or New Daisytek Restricted Common
Stock as part of an "integrated," "hedging," or "conversion" transaction or
synthetic security or as a position in a "straddle" for US federal income tax
purposes, persons that have a "functional currency" other than the United States
dollar, individuals who renounced their US citizenship or terminated their
long-term US
19
residency, holders who acquired their ISA Ordinary Shares by means of the
exercise of employee stock options or otherwise as compensation, broker-dealers
or dealers in securities or currencies, traders in securities who elect to apply
a mark-to-market method of accounting, or holders that own or at any time in the
past five years have owned directly, indirectly, or constructively by rules of
attribution, 10 per cent. or more (by voting power or value) of the stock of ISA
or Daisytek. Moreover, this summary does not address the US federal estate and
gift or alternative minimum tax consequences of either the exchange of ISA
Ordinary Shares for New Daisytek Restricted Common Stock and/or cash pursuant to
the Offer or the ownership and disposition of New Daisytek Restricted Common
Stock.
This summary is based on the United States Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury Regulations and judicial and
administrative interpretations thereof, in each case as in effect and available
on the date of this Offer Document. All of the foregoing are subject to change,
which change could apply retroactively and could affect the tax consequences
described below.
EACH HOLDER OF ISA ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISER WITH
RESPECT TO THE US FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OF ISA ORDINARY SHARES FOR NEW DAISYTEK RESTRICTED COMMON STOCK AND/OR
CASH PURSUANT TO THE OFFER AND THE OWNERSHIP AND DISPOSITION OF NEW DAISYTEK
RESTRICTED COMMON STOCK.
Consequences of exchange pursuant to the Offer
(a) US holders
Generally, a US holder will recognise gain or loss upon the receipt of New
Daisytek Restricted Common Stock and/or cash in exchange for such holder's ISA
Ordinary Shares pursuant to the Offer in an amount equal to the difference
between (a) the sum of (i) the fair market value of such New Daisytek Restricted
Common Stock received and (ii) the US Dollar value of the pounds Sterling that
would have been received on the date of receipt and (b) the US holder's adjusted
tax basis in the ISA Ordinary Shares. Such gain or loss will be capital gain or
loss. In the case of a non-corporate US holder, the maximum marginal US federal
income tax rate applicable to such gain will be lower than the maximum marginal
US federal income tax rate applicable to ordinary income if such US holder's
holding period for such ISA Ordinary Shares exceeds one year. Gain or loss, if
any, recognised by a US holder generally will be treated as US source income or
loss for US foreign tax credit purposes. The deductibility of capital losses is
subject to limitations. A US holder's initial tax basis in the New Daisytek
Restricted Common Stock will be the fair market value of such New Daisytek
Restricted Common Stock on the date such New Daisytek Restricted Common Stock is
received.
(b) Non-US holders
Subject to the discussion below under "Backup withholding tax and information
reporting requirements," a Non-US holder generally will not recognise gain or
loss upon the receipt of New Daisytek Restricted Common Stock and/or cash in
exchange for such holder's ISA Ordinary Shares pursuant to the Offer unless (i)
such gain or loss is effectively connected with the conduct by such Non-US
holder of a trade or business in the United States (in which case the branch
profits tax described under "Distributions on New Daisytek Restricted Common
Stock -- Non-US holders" below may also apply if the holder is a foreign
corporation), but if the Non-US holder is a UK resident eligible for the
benefits of the Treaty, only if the gain or loss is attributable to a permanent
establishment of such UK resident in the United States; (ii) in the case of any
gain realised by an individual Non-US holder, such holder is present in the
United States for 183 or more days in the taxable year of such sale or exchange
and certain other requirements are met; or (iii) the Non-US holder is subject to
tax pursuant to the provisions of US tax law applicable to certain US
expatriates. A Non-US holder who is subject to US tax on the exchange of ISA
Ordinary Shares should consult his, her, or its own tax adviser concerning the
amount of the resulting tax liability, which will depend on the Non-US holder's
individual circumstances.
Distributions on New Daisytek Restricted Common Stock
(a) US holders
Daisytek has never paid, and does not anticipate that it will pay, cash
dividends on its Daisytek Common Stock. The gross amount of any distribution
with respect to New Daisytek Restricted Common Stock, other than a distribution
of New Daisytek Restricted Common Stock made to all shareholders, will be
includible in a US holder's ordinary income as dividends to the extent of
Daisytek's current or accumulated earning and profits (as determined under US
federal income tax principles). Corporate US holders generally will be eligible
for the dividends received deduction. The dividends received deduction is
subject to certain limitations, though, and the benefit of such deduction may be
reduced by the corporate alternative minimum
20
tax. Accordingly, corporate US holders should consult their own tax advisers
regarding the availability of, and limitations on, the dividends received
deduction. Any distributions in excess of Daisytek's current and accumulated
earnings and profits will be treated as a tax-free return of capital to the
extent of a US holder's adjusted tax basis and thereafter as capital gain.
(b) Non-US holders
Dividends paid to a Non-US holder generally will be subject to withholding of US
federal income tax at a rate of 30 per cent. unless such rate is reduced by an
applicable US income tax treaty. If a Non-US holder desires to obtain the
benefit of any applicable US income tax treaty, such holder and any
intermediaries through whom such holder holds shares of New Daisytek Restricted
Common Stock must satisfy certain certification and other requirements. Non-US
holders are urged to consult their own tax advisors concerning the effect, if
any, of these requirements. Further, except as otherwise provided in an
applicable US income tax treaty, a Non-US holder will be taxed at ordinary US
federal income tax rates (on a net income basis) on dividends that are
effectively connected with the conduct of a trade or business by such Non-US
holder within the United States, but such dividends (assuming applicable
procedural requirements are met) will not be subject to US withholding tax as
described above. If such Non-US holder is a foreign corporation, it may also be
subject to a 30 per cent. branch profits tax unless it qualifies for a lower
rate under an applicable US income tax treaty.
Sales or exchange of New Daisytek Restricted Common Stock
(a) US holders
Generally, upon a sale or exchange of New Daisytek Restricted Common Stock, a US
holder will recognise gain or loss equal to the difference between the amount
realised on the sale or exchange and its adjusted tax basis in such New Daisytek
Restricted Common Stock. For non-corporate US holders, the maximum US federal
income tax rate applicable to such gain will be lower than the maximum US
federal income tax rate applicable to ordinary income if such US holder's
holding period for such New Daisytek Restricted Common Stock exceeds one year.
(b) Non-US holders
Subject to the discussion below under "Backup withholding tax and information
reporting requirements," a Non-US holder generally will not be subject to US
federal income tax in respect of gain recognised on the sale or exchange of New
Daisytek Restricted Common Stock unless (i) such gain is effectively connected
with the conduct by such Non-US holder of a trade or business in the United
States (in which case the branch profits tax described under "Distributions on
New Daisytek Restricted Common Stock -- Non-US holders" above may also apply if
the holder is a foreign corporation), but if the Non-US holder is a UK resident
eligible for the benefits of the Treaty, only if the gain or loss is
attributable to a permanent establishment of such UK resident in the United
States; (ii) in the case of any gain realised by an individual Non-US holder,
such holder is present in the United States for 183 or more days in the taxable
year of such sale or exchange and certain other requirements are met; (iii) the
Non-US holder is subject to tax pursuant to the provisions of US tax law
applicable to certain US expatriates, or (iv) Daisytek is or has been a "United
States real property holding corporation" for US federal income tax purposes
and, in the event that the New Daisytek Restricted Common Stock is considered to
be "regularly traded," the Non-US holder held, directly or indirectly, at any
time during the five-year period ending on the date of such sale or exchange
more than five per cent. of the Daisytek Common Stock. Daisytek believes that it
is not currently (and is not likely to become) a United States real property
holding corporation. Generally, the rule for stock in a United States real
property holding corporation takes precedence over relief provided by US income
tax treaties.
Backup withholding tax and information reporting requirements
In general, information reporting requirements will apply to payments of
dividends on New Daisytek Restricted Common Stock and payments of the proceeds
of the sale of New Daisytek Restricted Common Stock to a non-corporate US
holder, and a backup withholding tax (currently 30 per cent.) may apply to such
payments if the holder fails to comply with certain identification requirements.
Any amounts withheld under the backup withholding rules from a payment to you
will be allowed as a credit against your US federal income tax and may entitle
you to a refund, provided that the required information is furnished to the
Internal Revenue Service.
The payment of the proceeds of a sale of New Daisytek Restricted Common Stock to
or through a US office of a "broker", as defined in applicable Treasury
regulations is currently subject to both information reporting and US backup
withholding at the rate of 30 per cent. unless a Non-US holder certifies its
non-US
21
status under penalties of perjury or otherwise establishes an exemption. US
information reporting requirements and backup withholding tax will not apply to
any payment of the proceeds of the sale or exchange of New Daisytek Restricted
Common Stock effected outside the US by a foreign office of a "broker", as
defined in applicable Treasury regulations, unless such broker (i) is a "US
person" as defined in the Code, (ii) is a foreign person that derives 50 per
cent. or more of its gross income for certain periods from the conduct of a
trade or business in the United States, (iii) is a controlled foreign
corporation for US federal income tax purposes, or (iv) is a foreign partnership
with certain US connections. Payment of the proceeds of any such sale effected
outside the US by a foreign office of any broker that is described in the
preceding sentence may be subject to backup withholding tax and information
reporting requirements, unless such broker has documentary evidence in its
records that the beneficial owner is a non-US holder and certain other
conditions are met, or the beneficial owner otherwise establishes an exemption.
Dividends on New Daisytek Restricted Common Stock held by a Non- US holder will
be subject to information reporting and may be subject to backup withholding
requirements unless certain certification requirements are satisfied. In
general, a payor or middleman may rely on a certification provided by a payee
that is a Non-US holder only if such payor or middleman does not have actual
knowledge or a reason to know that any information or certification stated in
such certificate is incorrect.
17. PROCEDURE FOR ACCEPTANCE OF THE OFFER
You should note that, if you hold ISA Ordinary Shares in both certificated form
and uncertificated form (that is, in CREST), you should complete a separate Form
of Acceptance for each holding. If you hold ISA Ordinary Shares in
uncertificated form, but under different member account IDs, you should complete
a separate Form of Acceptance in respect of each member account ID.
Similarly, if you hold ISA Ordinary Shares in certificated form but under
different designations, you should complete a separate Form of Acceptance in
respect of each designation.
To accept the Offer
To accept the Cash Offer in respect of all or some of your ISA Ordinary Shares,
you must complete Boxes 1 and 2, and if your ISA Ordinary Shares are in CREST,
Box 6, and if appropriate, Boxes 7, and/or 8 of the enclosed Form of Acceptance.
To accept the Restricted Share Offer in respect of all or some of your ISA
Ordinary Shares, you must complete Boxes 1 and 3, and if your ISA Ordinary
Shares are in CREST, Box 6, and if appropriate, Boxes 7, and/or 8 of the
enclosed Form of Acceptance.
In all cases, you must sign Box 4 of the enclosed Form of Acceptance in the
presence of a witness, who should also sign in accordance with the instructions
printed thereon.
Return of Form of Acceptance
The completed Form of Acceptance, together, if your ISA Ordinary Shares are in
certificated form, with your share certificate(s) for such ISA Ordinary Shares
and/or other document(s) of title, should be returned by post or by hand to New
Issues Department, Capita IRG Plc, PO Box 166, Bourne House, 34 Beckenham Road,
Beckenham, Kent BR3 4TH AS SOON AS POSSIBLE BUT, IN ANY EVENT, SO AS TO BE
RECEIVED NOT LATER THAN 3.00 P.M. (UK TIME) ON 13 JUNE 2002. A reply-paid
envelope is enclosed for your convenience and may be used by ISA Shareholders
for returning the Form of Acceptance within the UK. No acknowledgement of
receipt of documents will be given. The instructions printed on the Form of
Acceptance shall be deemed to form part of the terms of the Offer. Any Form of
Acceptance received in an envelope postmarked Canada, Australia or Japan may be
rejected as invalid acceptance of the Offer. For further information on Overseas
Shareholders, please refer to paragraph 7 of Part B of Appendix I.
IF YOU HAVE ANY QUERIES AS TO HOW TO COMPLETE THE FORM OF ACCEPTANCE, PLEASE
TELEPHONE CAPITA IRG PLC ON 0870 162 3100 (OR +44 20 8639 2157 IF TELEPHONING
FROM OUTSIDE THE UK).
Shares in uncertificated form (that is, in CREST)
If your ISA Ordinary Shares are in uncertificated form, you should insert, in
Box 6 of the enclosed Form of Acceptance, the participant ID and member account
ID under which such shares are held by you in CREST and otherwise complete and
return the Form of Acceptance as described above. In addition, you should take
(or procure to be taken) the action set out below to transfer the ISA Ordinary
Shares in respect of which you wish to accept the Offer to an escrow balance,
specifying Capita IRG Plc (in its capacity as a CREST
22
participant under its participant ID referred to below) as the escrow agent, as
soon as possible AND IN ANY EVENT SO THAT THE TRANSFER TO ESCROW SETTLES NOT
LATER THAN 3.00 P.M. (UK TIME) ON 13 JUNE 2002.
IF YOU ARE A CREST SPONSORED MEMBER, YOU SHOULD REFER TO YOUR CREST SPONSOR
BEFORE TAKING ANY ACTION. Your CREST sponsor will be able to confirm details of
your participant ID and the member account ID under which your ISA Ordinary
Shares are held. In addition, only your CREST sponsor will be able to send the
TTE instruction to CRESTCo in relation to your ISA Ordinary Shares.
YOU SHOULD NOTE THAT CRESTCO DOES NOT MAKE AVAILABLE SPECIAL PROCEDURES, IN
CREST, FOR ANY PARTICULAR CORPORATE ACTION. NORMAL SYSTEM TIMINGS AND
LIMITATIONS WILL THEREFORE APPLY IN CONNECTION WITH A TTE INSTRUCTION AND ITS
SETTLEMENT. YOU SHOULD THEREFORE ENSURE THAT ALL NECESSARY ACTION IS TAKEN BY
YOU (OR BY YOUR CREST SPONSOR) TO ENABLE A TTE INSTRUCTION RELATING TO ISA
ORDINARY SHARES TO SETTLE PRIOR TO 3.00 P.M. (UK TIME) ON 13 JUNE 2002. IN THIS
CONNECTION, YOU ARE REFERRED IN PARTICULAR TO THOSE SECTIONS OF THE CREST MANUAL
CONCERNING PRACTICAL LIMITATIONS OF THE CREST SYSTEM AND TIMINGS.
You should send (or, if you are a CREST sponsored member, ensure that your CREST
sponsor sends) a TTE instruction to CRESTCo which must be properly authenticated
in accordance with CRESTCo's specifications and which must contain, in addition
to the other information that is required for a TTE instruction to settle in
CREST, the following details:
o the number of ISA Ordinary Shares to be transferred to an escrow
balance;
o your member account ID. This must be the same member account ID as the
member account ID that is inserted in Box 6 of the Form of Acceptance;
o your participant ID. This must be the same participant ID as the
participant ID that is inserted in Box 6 of the Form of Acceptance;
o the participant ID of the escrow agent, Capita IRG Plc, in its capacity
as a CREST Receiving Agent. This is RA10;
o the member account ID of Capita IRG Plc. This is "DAISYTEK ";
o the Form of Acceptance Reference Number. This is the Reference Number
that appears next to Box 6 on page 3 of the Form of Acceptance. This
Reference Number should be inserted in the first eight characters of
the shared note field on the TTE instruction. Such insertion will
enable Capita IRG Plc to match the transfer to escrow to your Form of
Acceptance. You should keep a separate record of this Reference Number
for future reference;
o the intended settlement date. This should be as soon as possible and in
any event not later than 3.00 p.m. (UK time) on 13 June 2002;
o the Corporate Action ISIN. This is GB0004600911;
o the Corporate Action Number for the Offer. This is allocated by CRESTCo
and can be found by viewing the relevant Corporate Action details in
CREST; and
o input with a Standard Delivery Instruction priority of 80.
After settlement of the TTE instruction, you will not be able to access the ISA
Ordinary Shares concerned in CREST for any transaction or charging purposes. If
the Offer becomes or is declared unconditional in all respects, Capita IRG Plc
will transfer the ISA Ordinary Shares concerned to itself in accordance with
paragraph (e) of Part C of Appendix I of this Offer Document.
You are recommended to refer to the CREST Manual published by CRESTCo for
further information on the CREST procedure outlined above. For ease of
processing, you are requested wherever possible, to ensure that a Form of
Acceptance relates to only one transfer to escrow.
If no Form of Acceptance Reference Number, or an incorrect Form of Acceptance
Reference Number, is included on the TTE instruction, Daisytek UK may treat any
amount of ISA Ordinary Shares transferred to an escrow balance in favour of
Capita IRG Plc specified above from the participant ID and member account ID
identified in the TTE instruction as relating to any Form of Acceptance which
relates to the same member account ID and participant ID (up to the amount of
ISA Ordinary Shares inserted or deemed to be inserted on the Form of Acceptance
concerned).
Daisytek UK will make an appropriate announcement if any of the details
contained under "Procedure for acceptance --- Shares in Uncertificated Form
(that is, in CREST)" of this paragraph 17 alter for any reason.
23
Share certificates not readily available or lost
If your ISA Ordinary Shares are in certificated form but your share
certificate(s) and/or other document(s) of title is/are not readily available or
is/are lost, the relevant Form of Acceptance should nevertheless be completed,
signed and returned so as to arrive not later than 3.00 p.m. (UK time) on 13
June 2002 at New Issues Department, Capita IRG Plc, PO Box 166, Bourne House, 34
Beckenham Road, Beckenham, Kent BR3 4TH, together with any share certificate(s)
and/or document(s) of title that you have available, accompanied by a letter
stating that the balance will follow or that you have lost one or more share
certificate(s) and/or document(s) of title. You should then arrange for the
relevant share certificate(s) and/or other document(s) of title to be forwarded
as soon as possible thereafter. No acknowledgement of receipt of documents will
be given. In the case of loss, you should write as soon as possible to ISA's
registrars, Capita IRG Plc, Balfour House, 390-398 High Road, Ilford, Essex IG1
1NQ, for a letter of indemnity for lost share certificate(s) and/or other
document of title, which, when completed in accordance with the instructions
given, should be returned to New Issues Department, Capita IRG Plc, PO Box 166,
Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH.
Deposits of ISA Ordinary Shares into, and withdrawals of ISA Ordinary Shares
from, CREST
Normal CREST procedures (including timings) will be applied in relation to any
ISA Ordinary Shares that are, or are to be, converted from uncertificated to
certificated form, or from certificated to uncertificated form, during the
course of the Offer (whether any such conversion arises as a result of a
transfer of ISA Ordinary Shares or otherwise). ISA Shareholders who are
proposing so to convert any such shares are recommended to ensure that the
conversion procedure is implemented in sufficient time to enable the person
holding or acquiring the shares as a result of the conversion to take all
necessary steps in connection with an acceptance of the Offer (in particular, as
regards delivery of share certificates and/or other document(s) of title or
transfers to an escrow balance as described above) prior to 3.00 p.m. (UK time)
on 13 June 2002.
Validity of acceptance
Subject to the provisions of the City Code and without prejudice to paragraph 5
of Part B of Appendix I of this Offer Document, Daisytek UK reserves the right
to treat as valid any acceptance of the Offer which is not entirely in order or
which is not accompanied by the relevant transfer to escrow or as applicable the
relevant share certificate(s) and/or other document(s) of title. In that event,
no shares of New Daisytek Restricted Common Stock will be issued under the
Offer, until after the relevant transfer to escrow has settled or (as
applicable) the relevant share certificate(s) and/or other document(s) of title
or indemnities satisfactory to Daisytek UK have been received.
Overseas Shareholders
The attention of shareholders who are citizens or residents of jurisdictions
outside the United Kingdom is drawn to paragraph 7 of Part B and Part C of
Appendix I of this Offer Document and to the relevant provisions of the Form of
Acceptance, including Box 7.
FORMS OF ACCEPTANCE SHOULD BE RETURNED AS SOON AS POSSIBLE AND IN ANY EVENT SO
AS TO BE RECEIVED BY NO LATER THAN 3.00 P.M. (UK TIME) ON 13 JUNE 2002.
If you are in any doubt as to the procedure for acceptance, please contact
Capita IRG Plc by telephone on 0870 162 3100 or if calling from outside the UK
on +44 20 8639 2157 or at New Issues Department, Capita IRG Plc, PO Box 166,
Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH. You are reminded that,
if you are a CREST member, you should contact your CREST sponsor before taking
any action.
18. SETTLEMENT
Subject to the Offer becoming or being declared unconditional in all respects
and, in the case of ISA Shareholders who are citizens, nationals or residents of
jurisdictions outside the UK or who are in Canada, Japan or Australia, except as
provided in paragraph 7 of Part B of Appendix I of this Offer Document,
settlement of the consideration to which any ISA Shareholder is entitled under
the Offer will be effected: (i) in the case of acceptances received, complete in
all respects, by the date on which the Offer becomes or is declared
unconditional in all respects, within 14 days of such date; or (ii) in the case
of acceptances of the Offer received, complete in all respects, after the date
on which the Offer becomes or is declared unconditional in all respects but
whilst it remains open for acceptance, within 14 days of such receipt, in the
manner stated below.
24
Cash Offer
(a) ISA Ordinary Shares in uncertificated form (that is, in CREST)
Where an acceptance relates to ISA Ordinary Shares in uncertificated form,
settlement of any cash consideration to which the accepting ISA Shareholder is
entitled will be posted or despatched by means of CREST by Daisytek UK procuring
the creation of an assured payment obligation in favour of the accepting ISA
Shareholder's payment bank in respect of cash considerations due, in accordance
with the CREST assured payment arrangements. Daisytek UK reserves the right to
settle all or any part of the consideration referred to in this sub-paragraph
(a), for all or any accepting ISA Shareholder(s), in the manner referred to in
sub-paragraph (b) below if, for any reason, it wishes to do so.
(b) ISA Ordinary Shares in certificated form
Where an acceptance relates to ISA Ordinary Shares in certificated form,
settlement of any cash due will be despatched by first class post (or by such
other method as the Panel may approve). All such cash payments will be made in
pounds sterling by cheque drawn on a branch of a UK clearing bank.
Restricted Share Offer
Whether or not the ISA Ordinary Shares are in certificated or uncertificated
from, if an ISA Shareholder validly elects for the Restricted Share Offer,
certificates for New Daisytek Restricted Common Stock and, where applicable,
cheques representing fractional entitlements will be despatched to ISA
Shareholders. In the case of joint holders of ISA Ordinary Shares, these will be
despatched to the joint holder whose name appears first in the register of
members. All documents will be sent by pre-paid post at the risk of the person
entitled thereto. Accepting ISA Shareholders will receive their New Daisytek
Restricted Common Stock certificates without having to take any further action.
Pending despatch of certificates, transfers of New Daisytek Restricted Common
Stock will be certified against the register of stockholders of Daisytek and
stop transfer instructions will be provided to Daisytek's transfer agent to not
recognise such transfers due to the restrictions on transfer applicable to such
shares. The New Daisytek Restricted Common Stock will be subject to restrictions
on transfers as described elsewhere herein and in Appendix I.
If the Offer does not become or is not declared unconditional in all respects:
(a) share certificate(s) and/or other document(s) of title will be returned by
post (or such other method as may be approved by the Panel) within 14 days of
the Offer lapsing to the person or agent whose name and address outside Canada,
Japan and Australia is set out in Box 1 of the Form of Acceptance or, if none is
set out, to the first named holder at his registered address outside Canada,
Australia and Japan; and (b) Capita IRG Plc will, immediately after the lapsing
of the Offer (or within such longer period, not exceeding 14 days after the
Offer lapsing, as the Panel may approve) give TFE instructions to CRESTCo to
transfer all ISA Ordinary Shares held in escrow balances to the original
available balances of the ISA Shareholders concerned.
Except with the consent of the Panel, settlement of the consideration to which
any ISA Shareholder is entitled under the Offer will be implemented in
accordance with the terms of the Offer without regard to any lien, right of
set-off, counterclaim or other analogous right to which Daisytek UK or Daisytek
may otherwise be, or claim to be, entitled against such shareholders.
All documents and remittances sent by, to or from ISA Shareholders or their
appointed agents will be sent at their own risk.
19. FURTHER INFORMATION
Your attention is drawn to the other sections and Appendices contained in this
Offer Document which contain additional relevant information.
Yours faithfully
for and on behalf of Robert W. Baird
Nicholas Sealy
Director -- Investment Banking
25
APPENDIX I
CONDITIONS AND FURTHER TERMS OF THE OFFER
PART A --- CONDITIONS OF THE OFFER
1. PRINCIPAL TERMS
The Offer is subject to the following conditions:
(a) valid acceptances being received (and not, where permitted, withdrawn) by
not later than the Initial Closing Date in respect of not less than 90 per
cent. (or such lower percentage as Daisytek UK may decide) in nominal value
of the ISA Shares to which the Offer relates. This condition shall not be
satisfied unless Daisytek UK and/or any of its wholly-owned subsidiaries
shall have acquired or agreed to acquire, whether pursuant to the Offer or
otherwise, ISA Ordinary Shares carrying in aggregate more than 50 per cent.
of the voting rights exercisable at general meetings of ISA (as at the
Initial Closing Date). For the purposes of this condition, shares which
have been unconditionally allotted shall be deemed to carry the voting
rights they will carry on being entered into the Register of Members of
ISA;
(b) (i) the Bundeskartellamt indicating that it will not institute main
examination proceedings in respect of the proposed acquisition of
ISA by Daisytek UK or the Bundeskartellamt otherwise clearing a
merger of Daisytek UK and ISA according to German merger law with
the effect that no clearance under German merger law is required for
the proposed transaction;
(ii) clearances having been received from any other national
authority in any other country in which a notification of the
proposed acquisition of ISA by Daisytek UK must be made and
has been made under the relevant national merger law;
(iii) if the proposed acquisition of ISA by Daisytek UK is notified
to the Office of Fair Trading in the United Kingdom, then it
indicating, in terms reasonably satisfactory to Daisytek UK,
that it is not the intention of the Secretary of State for
Trade and Industry to refer the proposed acquisition or any
matter arising therefrom or related thereto, to the
Competition Commission;
(c) all filings which Daisytek considers appropriate having been made and all
or any applicable waiting periods (including any extensions thereof) under
the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations thereunder having expired or been terminated
(as appropriate) in respect of the Offer and the proposed acquisition of
ISA by Daisytek UK;
(d) the New Daisytek Restricted Common Stock to be issued pursuant to the Offer
being listed on NASDAQ for quotation;
(e) except as has been disclosed in writing to Daisytek UK or Daisytek or their
respective advisers prior to 7 May 2002, there being no provision of any
agreement, arrangement, licence, permit or other instrument to which any
member of the Wider ISA Group is a party or by or to which any such member
or any of its assets may be bound, entitled or subject, which in
consequence of the Offer or the proposed acquisition of any shares in ISA
or because of a change in the control or management of ISA or otherwise,
could or might result in any of the following where the same is or is
reasonably likely to be material in the context of the Wider ISA Group
taken as a whole:
(i) any moneys borrowed by or any other indebtedness (actual or
contingent) of, or grant available to any such member, being or
becoming repayable or capable of being declared repayable
immediately or earlier than their or its stated maturity date or
repayment date or the ability of any such member to borrow moneys or
incur any indebtedness being withdrawn or inhibited or being capable
of becoming or being withdrawn or inhibited;
(ii) any such agreement, arrangement, licence, permit or instrument
or the rights, liabilities, obligations or interests of any such
member under any of them being terminated or modified or affected or
any obligation or liability arising or any action being taken under
any of them;
(iii) any assets or interests of any such member being or falling to be
disposed of or charged or any right arising under which any such
asset or interest could be required to be disposed of or charged;
26
(iv) the creation or enforcement of any mortgage, charge or other
security interest over the whole or any part of the business,
property or assets of any such member or any such security
(wherever arising or having arisen) becoming enforceable;
(v) the rights, liabilities, obligations or interests of any such
member in, or the business of any such member with, any
person, firm or body (or any arrangement or arrangements
relating to any such interest or business) being terminated,
adversely modified or affected;
(vi) the value of any such member or its financial or trading
position or prospects being prejudiced or adversely affected;
(vii) any such member ceasing to be able to carry on business under
any name under which it presently does so; or
(viii) the creation of any liability, actual or contingent, by any
such member,
and no event having occurred which, under any provision of any
agreement, arrangement, licence, permit or other instrument to which
any member of the Wider ISA Group is a party or by or to which any such
member or any of its assets may be bound, entitled or subject, could
result in any of the events or circumstances as are referred to in
sub-paragraphs (i) to (viii) of this paragraph (e) to an extent which
is or is reasonably likely to be material in the context of the Wider
ISA Group taken as a whole;
(f) no government or governmental, quasi-governmental, supranational,
statutory, regulatory, environmental or investigative body, court,
trade agency, association, institution or any other body or person
whatsoever in any jurisdiction (each a "Third Party") having decided to
take, institute, implement or threaten any action, proceeding, suit,
investigation, enquiry or reference, or enacted, made or proposed any
statute, regulation, rule, law, ordinance, decision, judgment, decree,
injunction or order, or having taken any other steps which would or
might reasonably be expected to:
(i) require, prevent or delay the divestiture, or alter the terms
envisaged for any proposed divestiture by any member of the
Wider Daisytek UK Group or any member of the Wider ISA Group
of all or any portion of their respective businesses, assets
or property or impose any limitation on the ability of any of
them to conduct their respective businesses (or any of them)
or to own any of their respective assets or properties or any
part thereof which, in any such case, is material in the
context of the Wider Daisytek UK Group or the Wider ISA Group
in either case taken as a whole;
(ii) require, prevent or delay the divestiture by any member of the
Wider Daisytek UK Group of any shares or other securities in
ISA;
(iii) impose any limitation on, or result in a delay in, the ability
of any member of the Wider Daisytek UK Group directly or
indirectly to acquire or to hold or to exercise effectively
any rights of ownership in respect of shares or loans or
securities convertible into shares or any other securities (or
the equivalent) in any member of the Wider ISA Group or the
Wider Daisytek UK Group or to exercise management control over
any such member;
(iv) otherwise adversely affect the business, assets, profits or
prospects of any member of the Wider Daisytek UK Group or of
any member of the Wider ISA Group in a manner which is adverse
to and material in the context of the Daisytek Group or the
ISA Group in either case taken as a whole;
(v) make the Offer or its implementation or the acquisition or
proposed acquisition by Daisytek UK or any member of the Wider
Daisytek UK Group of any shares or other securities in, or
control of ISA void, illegal, and/or unenforceable under the
laws of any jurisdiction, or otherwise, directly or
indirectly, restrain, restrict, prohibit, delay or otherwise
materially interfere with the same, or impose additional
conditions or obligations with respect to it, or otherwise
challenge or interfere with the Offer or any such acquisition;
(vi) save pursuant to the Offer, require any member of the Wider
Daisytek UK Group or the Wider ISA Group to offer to acquire
any shares or other securities (or the equivalent) or interest
in any member of the Wider ISA Group or the Wider Daisytek UK
Group owned by any third party;
(vii) impose any limitation on the ability of any member of the
Wider ISA Group to co-ordinate its business, or any part of
it, with the businesses of any other members which is adverse
to and material in the context of the Wider ISA Group taken as
a whole; or
27
(viii) result in any member of the Wider ISA Group ceasing to be able
to carry on business under any name other than the name under
which it carries on business at the date of the announcement
of the Offer,
in any such case to an extent which is material in the context of the
Wider Daisytek UK Group taken as a whole, and all applicable waiting and
other time periods during which any such Third Party could institute,
implement or threaten any action, proceeding, suit, investigation, enquiry
or reference or any step under the laws of any jurisdiction in respect of
the Offer or the acquisition or proposed acquisition of any ISA Ordinary
Shares having expired, lapsed or been terminated;
(g) Daisytek UK having received evidence reasonably satisfactory to it that
all material filings or applications have been made in connection with the
Offer and all statutory or regulatory obligations in any jurisdiction have
been complied with in connection with the Offer or the acquisition by any
member of the Wider Daisytek UK Group of any shares or other securities
in, or control of, ISA; all material authorisations, orders, recognitions,
grants, consents, licences, confirmations, clearances, permissions,
qualifications and approvals reasonably deemed necessary or appropriate by
Daisytek UK for or in respect of the Offer or the proposed acquisition of
any shares or other securities in, or control of, ISA by any member of the
Wider Daisytek UK Group having been obtained in terms and in a form
reasonably satisfactory to Daisytek UK from all appropriate Third Parties
and persons with whom any member of the Wider ISA Group has entered into
contractual arrangements and all such authorisations, orders,
recognitions, grants, consents, licences, confirmations, clearances,
permissions, qualifications and approvals together with all material
authorisations, orders, recognitions, grants, licences, confirmations,
clearances, permissions, qualifications and approvals necessary or
appropriate to carry on the business of any member of the Wider ISA Group
which is material in the context of the Daisytek Group or the ISA Group as
a whole remaining in full force and effect and all filings necessary for
such purpose having been made and there being no notice or intimation of
any intention to revoke or not to renew any of the same at the time at
which the Offer becomes otherwise unconditional and all necessary
statutory or regulatory obligations in any jurisdictions having been
complied with;
(h) except as publicly announced through the Company Announcements Office of
the London Stock Exchange by ISA or disclosed in writing to Daisytek or
Daisytek UK or their respective advisers, in each case, prior to 7 May
2002, no member of the Wider ISA Group having, since 31 December 2001:
(i) save as between ISA and wholly-owned subsidiaries of ISA or for
ISA Ordinary Shares issued pursuant to the exercise of options
granted under the ISA Share Option Schemes, issued, authorised or
proposed the issue of additional shares of any class;
(ii) save as between ISA and wholly-owned subsidiaries of ISA or for
the grant of options under the ISA Share Option Schemes or
pursuant to the exercise of options granted under the ISA Share
Option Schemes on, or prior to, 7 May 2002, issued or agreed to
issue, authorised or proposed the issue of securities convertible
into shares of any class or rights, warrants or options to
subscribe for, or acquire, any such shares or convertible
securities;
(iii) other than to another member of the ISA Group, recommended,
declared, paid or made or proposed to recommend, declare, pay or
make any bonus, dividend or other distribution whether payable in
cash or otherwise;
(iv) save for intra-ISA Group transactions, merged or demerged with any
body corporate or acquired or disposed of or transferred,
mortgaged or charged or created any security interest over any
assets or any right, title or interest in any asset (including
shares and trade investments) or authorised or proposed or
announced any intention to propose any merger, demerger,
acquisition or disposal, transfer, mortgage, charge or security
interest (in each case) other than in the ordinary course of
business;
(v) save for intra-ISA Group transactions, made or authorised or
proposed or announced an intention to propose any change in its
share or loan capital;
(vi) issued, authorised or proposed the issue of any debentures or
(save for intra-ISA Group transactions) save in the ordinary
course of business incurred or increased any indebtedness or
become subject to any contingent liability;
(vii) purchased, redeemed or repaid or announced any proposal to
purchase, redeem or repay any of its own shares or other
securities or reduced or, save in respect to the matters mentioned
in sub-paragraph (i) above made any other change to any part of
its share capital;
28
(viii) implemented, or authorised, proposed or announced its
intention to implement, any reconstruction, amalgamation,
scheme, commitment or other transaction or arrangement
otherwise than in the ordinary course of business;
(ix) entered into or varied or authorised, proposed or announced
its intention to enter into or vary any contract, transaction
or commitment (whether in respect of capital expenditure or
otherwise) which is or could be materially restrictive on the
business of any member of the Wider ISA Group or the Wider
Daisytek UK Group or which involves or could involve an
obligation of such a nature or magnitude or which is other
than in the ordinary course of business and which is material
in the context of the Wider ISA Group taken as a whole;
(x) (other than in respect of a member which is dormant and was
solvent at the relevant time) taken any corporate action or
had any legal proceedings started or threatened against it for
its winding-up, dissolution or reorganisation or for the
appointment of a receiver, administrative receiver,
administrator, trustee or similar officer of all or any of its
assets or revenues or any analogous proceedings in any
jurisdiction or had any such person appointed;
(xi) waived or compromised any claim otherwise than in the ordinary
course of business;
(xii) entered into or made an offer (which remains open for
acceptance) to enter into or changed the terms of any service
agreement, contract or any other agreement or arrangement with
any of the ISA directors or any connected person of any such
person (within the meaning of section 346 of the Act) or of
any member of the Wider ISA Group;
(xiii) been unable or admitted in writing that it is unable to pay
its debts or has stopped or suspended (or threatened to stop
or suspend) payment of its debts generally or ceased or
threatened to cease carrying on all or a substantial part of
its business;
(xiv) made any material alterations to its Memorandum of Association
or Articles of Association; or
(xv) entered into any contract, commitment, arrangement or
agreement otherwise than in the ordinary course of business or
passed any resolution or made any offer (which remains open
for acceptance) with respect to, or announced any intention to
effect, or to propose to effect, any of the transactions,
matters or events referred to in this condition,
and, for the purposes of paragraphs (iii), (iv), (v) and (vi) of this
condition, the term "ISA Group" shall mean ISA and its wholly-owned
subsidiaries;
(i) save as disclosed in writing to Daisytek UK or Daisytek or their
respective advisers prior to 7 May 2002 and/or save as disclosed in the
annual report and accounts of ISA for the year ended 31 December 2000,
the interim statement of ISA for the six months ended 30 June 2001, the
preliminary statement of results for the year ended 31 December 2001 or
as publicly announced to the Company Announcements Office of the London
Stock Exchange prior to 7 May 2002 and since 31 December 2001:
(i) no adverse change or deterioration having occurred in the
business, assets, financial or trading position or profits or
prospects of any member of the Wider ISA Group;
(ii) no litigation, arbitration proceedings, prosecution or other
legal proceedings or investigation to which any member of the
Wider ISA Group is or may become a party (whether as a
plaintiff, defendant or otherwise) and no investigation by any
Third Party against or in respect of any member of the Wider
ISA Group having been instituted announced or threatened by or
against or remaining outstanding in respect of any member of
the Wider ISA Group which in any such case might reasonably be
expected to adversely affect any member of the Wider ISA
Group; or
(iii) no contingent or other liability having arisen or become
apparent to Daisytek or Daisytek UK which might reasonably be
likely to adversely affect any member of the Wider ISA Group,
which in any such case is material in the context of the Wider ISA
Group taken as a whole;
(j) Daisytek and Daisytek UK not having discovered:
(i) that any material financial, business or other information
concerning the Wider ISA Group as contained in the information
publicly disclosed at any time or (in relation to information
which has been disclosed by ISA to Daisytek or Daisytek UK or
their respective advisers in writing) disclosed to it by or on
behalf of any member of the Wider ISA Group is materially
misleading, contains a material misrepresentation of fact or
omits to state a fact necessary to make that
29
information not misleading and in any such case to an extent
which is material in the context of the Wider ISA Group taken
as a whole;
(ii) that any member of the Wider ISA Group which is not a
Subsidiary Undertaking of ISA and any partnership, company or
other entity in which any member of the Wider ISA Group has a
significant economic interest is subject to any liability
(contingent or otherwise) which is not disclosed in the annual
report and accounts of ISA for the year ended 31 December 2001
and is material in the context of the Wider ISA Group taken as
a whole; or
(iii) any information which affects the import of any information
disclosed at any time by or on behalf of any member of the
Wider ISA Group and which is material in the context of the
Wider ISA Group taken as a whole;
(k) Daisytek and Daisytek UK shall have received all United States federal
or state securities permits and other authorisations necessary to issue
New Daisytek Restricted Common Stock and to consummate the Offer;
(l) Daisytek and Daisytek UK not having discovered, in respect of the Wider
ISA Group, that:
(i) any past or present member of the Wider ISA Group has not
complied in all material respects with all applicable
legislation or regulations of any jurisdiction with regard to
the use, treatment, handling, storage, transport, disposal,
discharge, spillage, leak or emission of any waste or
hazardous substance or any substance likely to impair the
environment or harm human health, or otherwise relating to
environmental matters or the health and safety of any person,
nor that there has otherwise been any such use, treatment,
handling, storage, transport, disposal, discharge, spillage,
leak or emission (whether or not the same constituted a
non-compliance by any person with any such legislation or
regulations and wherever the same may have taken place) which,
in any such case, would be likely to give rise to any
liability (whether actual or contingent) or cost on the part
of any member or former member of, as appropriate, the Wider
Daisytek UK Group or the Wider ISA Group which is material in
the context of, as appropriate, the Wider Daisytek UK Group
taken as a whole or the Wider ISA Group taken as a whole;
(ii) there has been an emission, disposal, discharge, deposit,
spillage or leak of waste or hazardous or harmful substances
on or about or from any property or asset now or previously
owned, occupied or made use of by any past or present member
of the Wider ISA Group which would be likely to give rise to
any liability (whether actual or contingent) or cost on the
part of any member of, as appropriate, the Wider Daisytek UK
Group or the Wider ISA Group which is material in the context,
as appropriate, of the Wider Daisytek UK Group or the Wider
ISA Group taken as a whole;
(iii) there is, or is likely to be, any liability, whether actual or
contingent, to make good, repair, reinstate or clean up any
property now or previously owned, occupied or made use of by
any past or present member of the Wider ISA Group or any
controlled waters under any environmental legislation,
regulation, notice, circular or order of any relevant
authority or Third Party or otherwise which is material in the
context of the Wider ISA Group taken as whole or the Wider
Daisytek UK Group taken as whole;
(iv) circumstances exist whereby a person or class of persons would
be likely to have any claim or claims in respect of any
product or service provided by or materials used therein now
or previously provided, sold or carried out by any past or
present member of the Wider ISA Group which is material in the
context of, as appropriate, the Wider ISA Group taken as a
whole or the Wider Daisytek UK Group taken as whole; or
(v) any circumstances which might reasonably be expected to
indicate that any of sub-paragraphs (i) to (iv) of this
condition (l) may not be satisfied.
2. WAIVER OF CONDITIONS
(a) Daisytek UK reserves the right to waive, in whole or in part, the
precondition and all or any of the above conditions, except condition
(a).
(b) Conditions (b) to (l) (inclusive) must be fulfilled or waived by,
midnight on the 21st day after the later of the Initial Closing Date of
the Offer and the date on which condition (a) is fulfilled (or in each
such case such later date as Daisytek UK may, with the consent of the
Panel, decide). Daisytek UK shall be under no obligation to waive or
treat as satisfied any of the conditions (b) to (l) (inclusive), by a
date
30
earlier than the latest date specified above for the satisfaction
thereof, notwithstanding that the other conditions of the Offer may at
such earlier date have been waived or fulfilled and that there are at
such earlier date no circumstances indicating that any of such
conditions may not be capable of fulfilment.
3. GENERAL
If the Offer lapses for any reason, it will cease to be capable of further
acceptance and Daisytek, Daisytek UK and the ISA Shareholders will thereupon
cease to be bound by prior acceptances.
If Daisytek UK is required by the Panel to make an offer for ISA Ordinary Shares
under the provisions of Rule 9 of the Code, Daisytek UK may make such
alterations to any of the above conditions, as are necessary to comply with the
provisions of that Rule.
The Offer will lapse if the acquisition of ISA or any matter arising in relation
to the Offer is referred to the Competition Commission before the Initial
Closing Date of the Offer or the date on which the Offer becomes or is declared
unconditional as to acceptances, whichever is the later. In such circumstances,
the Offer will cease to be capable of further acceptance and persons accepting
the Offer and Daisytek UK shall thereupon cease to be bound by acceptances
delivered on or before the date on which the Offer so lapses.
The New Daisytek Restricted Common Stock will be issued credited as fully paid
and will be of the same class and rank as all of the existing Daisytek Common
Stock (except that the New Daisytek Restricted Common Stock will not be
registered under the Securities Act and will be subject to restrictions on
transfer that may not be applicable to existing shares of Daisytek Common
Stock).
If the Offer becomes or is declared unconditional in all respects, fractions of
a share of New Daisytek Restricted Common Stock will not be issued to ISA
Shareholders accepting the Restricted Share Offer who will instead receive from
Daisytek an amount in cash of 7.5 pence per Ordinary Share in respect of
fractional entitlements.
The ISA Ordinary Shares to be acquired pursuant to the Offer are to be acquired
fully paid and free from all liens, charges, equitable interests, encumbrances,
rights of pre-emption and other third party rights or interests of any nature
whatsoever, and together with all rights now or hereafter attached to them,
including the right to receive and retain the benefit of all dividends and other
distributions (if any) declared, made or paid hereafter.
4. UNREGISTERED SHARES; TRANSFER RESTRICTIONS
The New Daisytek Restricted Common Stock will not be listed on the London Stock
Exchange or traded on AIM. Further details of settlement are set out in Part B
of Appendix I of this Offer Document.
THE SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK BEING OFFERED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT, OR ANY APPLICABLE UNITED
STATES STATE SECURITIES OR FOREIGN SECURITIES LAWS AND, UNLESS SO REGISTERED,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS AND UPON DELIVERY TO DAISYTEK OF A LEGAL
OPINION THAT REGISTRATION IS NOT REQUIRED, AND THE SHARES OF NEW DAISYTEK
RESTRICTED COMMON STOCK BEING OFFERED HEREBY WILL BEAR A LEGEND TO THAT EFFECT.
THIS OFFERING IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION
UNDER RULE 802 OF THE SECURITIES ACT. ISA SHAREHOLDERS SHOULD BE AWARE THAT THEY
WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THEIR INVESTMENT IN SHARES OF
NEW DAISYTEK RESTRICTED COMMON STOCK FOR AN INDEFINITE PERIOD OF TIME.
THE SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK OFFERED HEREBY HAVE NOT BEEN
RECOMMENDED OR APPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION") OR ANY OTHER UNITED STATES FEDERAL OR STATE OR FOREIGN
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
OFFER DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
IN MAKING AN INVESTMENT DECISION REGARDING THE SHARES OF NEW DAISYTEK RESTRICTED
COMMON STOCK OFFERED HEREBY, ISA SHAREHOLDERS MUST RELY ON THEIR OWN EXAMINATION
OF DAISYTEK AND THE TERMS OF THE OFFERING,
31
INCLUDING THE MERITS AND RISKS INVOLVED. NO REPRESENTATION IS MADE TO ANY ISA
SHAREHOLDER REGARDING THE LEGALITY OF AN INVESTMENT HEREIN BY SUCH ISA
SHAREHOLDER UNDER ANY APPLICABLE LEGAL INVESTMENT OR SIMILAR LAWS OR
REGULATIONS. THE CONTENTS OF THIS OFFER DOCUMENT ARE NOT TO BE CONSTRUED AS
LEGAL, BUSINESS OR TAX ADVICE. EACH ISA SHAREHOLDER SHOULD CONSULT ITS OWN
COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX, BUSINESS, FINANCIAL AND
RELATED ASPECTS OF AN ACQUISITION OF SHARES OF NEW DAISYTEK RESTRICTED COMMON
STOCK.
THE DISTRIBUTION OF THIS OFFER DOCUMENT AND THE OFFER OR SALE OF THE SHARES OF
NEW DAISYTEK RESTRICTED COMMON STOCK BEING OFFERED HEREBY MAY BE RESTRICTED BY
LAW IN CERTAIN JURISDICTIONS. PERSONS INTO WHOSE POSSESSION THIS OFFER DOCUMENT
OR ANY OF SUCH SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK COMES MUST INFORM
THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. IN PARTICULAR, THERE ARE
RESTRICTIONS ON THE OFFER AND SALE OF SHARES OF NEW DAISYTEK RESTRICTED COMMON
STOCK IN THE UNITED STATES AND THE UNITED KINGDOM.
IT IS THE RESPONSIBILITY OF EACH ISA SHAREHOLDER WHO ELECTS TO ACQUIRE SHARES OF
NEW DAISYTEK RESTRICTED COMMON STOCK TO COMPLY WITH ALL APPLICABLE LAWS AND
REGULATIONS IN FORCE IN ANY JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS
THE SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK AND TO OBTAIN ANY CONSENT,
APPROVAL OR PERMISSION REQUIRED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF
SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK UNDER THE LAWS AND REGULATIONS IN
FORCE IN ANY JURISDICTION TO WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH
PURCHASES, OFFERS OR SALES, AND NEITHER DAISYTEK NOR ISA OR DAISYTEK UK SHALL
HAVE ANY RESPONSIBILITY THEREFOR.
THIS OFFER DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SHARES OF NEW DAISYTEK RESTRICTED COMMON STOCK TO ANY PERSON IN
ANY JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
32
PART B --- FURTHER TERMS OF THE OFFER
The following further terms apply in this Part B and Part C of this Appendix I
and in the Form of Acceptance, unless the context otherwise requires, and
references to:
(a) the "OFFER" shall mean the Offer and any revision thereof or extension
thereto;
(b) "THE OFFER BECOMING UNCONDITIONAL" shall include references to the
Offer being declared unconditional;
(c) "THE OFFER BECOMING OR BEING DECLARED UNCONDITIONAL" shall be construed
as the Offer becoming or being declared unconditional as to
acceptances, whether or not any other condition of the Offer remains to
be fulfilled;
(d) the "ACCEPTANCE CONDITION" shall mean the condition as to acceptances
set out in paragraph (a) of Part A of this Appendix I; and
(e) "ACCEPTANCES OF THE OFFER" shall include deemed acceptances of the
Offer.
1. ACCEPTANCE PERIOD
(a) The Offer will initially be open for acceptance until 3.00 p.m. (UK
time) on 13 June 2002. Although no revision is envisaged, if the Offer
is revised it will remain open for acceptance for a period of at least
14 days from the date on which written notification of the revision is
posted to ISA Shareholders (or such other period as may be permitted by
the Panel). Except with the consent of the Panel, no such written
notification may be posted after 8 July 2002 or if later, the date
falling 14 days prior to the last date on which the Offer is capable of
becoming unconditional.
(b) The Offer, whether revised or not, shall not be capable of becoming
unconditional after midnight (UK time) on 22 July 2002 (or any earlier
time and/or date beyond which Daisytek UK has stated, and has not
withdrawn such statement, that the Offer will not be extended) nor of
being kept open after that time unless it has previously become
unconditional, provided that Daisytek UK reserves the right, with the
permission of the Panel, to extend the Offer to a later time(s) and/or
date(s). Except with the permission of the Panel, Daisytek UK may not,
for the purpose of determining whether the acceptance condition has
been satisfied, take into account acceptances received or purchases of
shares made unless all relevant documentation is received by Capita IRG
Plc no later than 1.00 p.m. (UK time) on 22 July 2002 (or any earlier
time and/ or date beyond which Daisytek UK has stated that the Offer
will not be extended and in respect of which it has not withdrawn that
statement) or such later time(s) and/or date(s) as Daisytek UK, with
the permission of the Panel, may determine.
(c) If the Offer becomes unconditional, it will remain open for acceptance
for not less than 14 days from the date on which it would otherwise
have expired. If the Offer has become unconditional and it is stated
that the Offer will remain open until further notice, then not less
than 14 days written notice will be given prior to the closing of the
Offer. If a competitive situation arises after Daisytek UK has made a
"no increase" and/or "no extension" statement in relation to the Offer,
Daisytek UK may, if it specifically reserves the right to do so at the
time such statement is made, withdraw such statement if it announces
such withdrawal within four business days after the announcement of the
competing offer and notifies ISA Shareholders in writing thereof (or,
in the case of ISA Shareholders with registered addresses outside the
UK, or whom Daisytek UK knows to be a nominee, trustee or custodian
holding ISA Ordinary Shares for such persons, by an announcement in the
UK) at the earliest opportunity. Daisytek UK may choose not to be bound
by the terms of a "no increase" or "no extension" statement if, having
reserved the right to do so, it posts an increased or improved offer
which is recommended for acceptance by the Board of ISA or in other
circumstances permitted by the Panel.
(d) Unless otherwise determined by the Panel, Daisytek UK shall be entitled
at any particular time to decide that the acceptance condition is then
satisfied taking account only of those ISA Ordinary Shares which have
been unconditionally allotted or issued before that time and written
notice of the allotment or issue of which, containing all relevant
details, has been received before that time by Capita IRG Plc on behalf
of Daisytek UK from ISA or its agents at the address specified in sub-
paragraph 3(b) of this Part B. Telex, e-mail or facsimile transmission
will not be sufficient.
2. ANNOUNCEMENTS
(a) Without prejudice to sub-paragraph 3(b) of this Part B ("Rights of
Withdrawal"), by 8.00 a.m. (UK time) on the business day (the "Relevant
Day") following the day on which the Offer is due to expire or become
unconditional or is revised or extended, as the case may be, (or such
later time(s) or date(s) as
33
the Panel may agree), Daisytek UK will make an appropriate announcement
and simultaneously inform the London Stock Exchange of the position.
Such announcement will (unless otherwise permitted by the Panel) state
(as nearly as practicable) the total number of ISA Ordinary Shares and
rights over ISA Ordinary Shares:
(i) for which acceptances of the Offer have been received
(and to what extent such acceptances have been received from
persons acting in concert with Daisytek UK for the purposes of
the Offer);
(ii) acquired or agreed to be acquired by or on behalf of
Daisytek UK (or by persons acting in concert with Daisytek UK
for the purposes of the Offer) during the Offer Period; and
(iii) held by or on behalf of Daisytek UK (or by persons
acting in concert with Daisytek UK for the purposes of the
Offer) prior to the Offer Period,
and will specify the percentage of ISA's ordinary share capital
represented by each of these figures.
(b) Any decision to extend the date by which the acceptance condition has
to be fulfilled may be made at any time up to, and will be announced
not later than, 8.00 a.m. (UK time) on the Relevant Day (or such later
time(s) and/or date(s) as the Panel may agree). The announcement will
state the next expiry date (unless the Offer is unconditional, in which
case a statement may instead be made that the Offer will remain open
until further notice). In computing the number of ISA Ordinary Shares
represented by acceptances and purchases there may be included or
excluded for announcement purposes, subject to sub-paragraph 5(a) of
this Part B, acceptances and purchases not in all respects in order or
subject to verification.
(c) In this Appendix I, references to the making of an announcement by or
the giving of notice by or on behalf of Daisytek UK include the release
of an announcement to the press by public relations consultants or by
Baird and the delivery by hand or telephone, facsimile, telex or other
electronic transmission of an announcement to the London Stock
Exchange. An announcement made otherwise than to the London Stock
Exchange shall be notified simultaneously to the London Stock Exchange.
3. RIGHTS OF WITHDRAWAL
(a) Except as otherwise provided in this paragraph 3, acceptances of the
Offer by holders of ISA Ordinary Shares are irrevocable.
(b) If Daisytek UK, having announced the Offer to be unconditional, fails
to comply by 3.00 p.m. (UK time) on the Relevant Day (or such later
time(s) and/or date(s) as the Panel may agree) with any of the other
relevant requirements specified in sub-paragraph 2(a) of this Part B,
an accepting ISA Shareholder may (unless the Panel otherwise agrees)
immediately thereafter withdraw his acceptance(s) of the Offer by
written notice signed by such ISA Shareholder given by post or by hand
to Capita IRG Plc New Issues Department, PO Box 166, Bourne House, 34
Beckenham Road, Beckenham, Kent BR3 4TH. Subject to sub-paragraph 1(b)
of this Part B, this right of withdrawal may be terminated not less
than eight days after the Relevant Day by Daisytek UK confirming, if
such be the case, that the Offer is still unconditional and complying
with the other requirements specified in sub-paragraph 2(a) of this
Part B. If any such confirmation is given, the first period of 14 days
referred to in sub-paragraph 1(a) of this Part B will run from the date
of such confirmation and compliance.
(c) If by 3.00 p.m. (UK time) on 4 July 2002 (or such later time(s) and/or
date(s) as the Panel may agree) the Offer has not become unconditional,
an accepting ISA Shareholder may withdraw his acceptance(s) at any time
thereafter by written notice received by Capita IRG Plc on behalf of
Daisytek UK at the address and in the manner referred to in
sub-paragraph 3(b) of this Part B, until the earlier of: (i) the time
when the Offer becomes unconditional; and (ii) the final time for
lodgement of acceptances of the Offer which can be taken into account
in accordance with sub-paragraph 1(b) of this Part B.
(d) If a "no increase" and/or "no extension" statement has been withdrawn
in accordance with sub-paragraph 1(c) of this Part B, any ISA
Shareholder who accepts the Offer after such statement is made may
withdraw that acceptance thereafter in the manner referred to in
sub-paragraph 3(b) of this Part B not later than the eighth day after
the posting of written notice of such withdrawal to ISA Shareholders.
(e) To be effective, a written notice of withdrawal must be mailed in good
time to Capita IRG Plc and must specify the name of the person who
accepted the Offer, the number of ISA Ordinary Shares to be withdrawn
and (if certificates have been submitted) the name of the registered
holder of the relevant ISA Ordinary Shares.
34
(f) In this paragraph 3, "written notice" (including any letter of
appointment, direction or authority) means notice in writing bearing
the original signature(s) of the relevant accepting ISA Shareholder(s),
or his/their agent(s) duly appointed in writing (evidence of whose
appointment is produced with the notice in a form reasonably
satisfactory to Daisytek UK). Telex, e-mail or facsimile transmission
or copies will not be sufficient to constitute written notice. No
notice which is postmarked in, or otherwise appears to Daisytek UK or
its agents to have been sent from, Canada, Australia or Japan will be
treated as valid.
(g) All questions as to the validity (including time of receipt) of any
notice of withdrawal will be determined by Daisytek UK, whose
determination (except as required by the Panel) will be final and
binding. None of Daisytek UK, ISA, Baird, KPMG Corporate Finance or
Capita IRG Plc or any other person will be under any duty to give any
notification of any defects or irregularities in any notice of
withdrawal or bear any liability for failure to give such notification.
4. REVISED OFFER
(a) Although no such revision is envisaged, if the Offer (in its original
or any previously revised form) is revised and such revision
represents, on the date on which such revision is announced, (on such
basis as Baird may consider appropriate) an improvement (or no
diminution) in the value of the Offer as so revised compared with the
value of the overall consideration or terms previously offered, the
benefit of the revised Offer will, subject as provided in
sub-paragraphs 4(b) and 4(c) and paragraph 7 of this Part B, be made
available to ISA Shareholders who have accepted the Offer in its
original or any previously revised form(s) (each a "Previous
Acceptor"). The acceptance by or on behalf of a Previous Acceptor of
the Offer in its original or any previously revised form(s) shall,
subject as provided in sub-paragraphs 4(b), (c), (d) and (e) of this
Part B and subject to any election for alternative forms of
consideration made as provided in the remainder of this paragraph 4(a),
be treated as an acceptance of the Offer so revised and shall also
constitute the separate appointment of Daisytek UK and/or any director
of Daisytek UK and/or Baird and/or any director of Baird as his
attorney and agent with authority to accept any such revised Offer on
behalf of the Previous Acceptor and, if such revised Offer includes
alternative forms of consideration, to make an election as to the form
of consideration and/or the proportion thereof on behalf of a Previous
Acceptor as such attorney and agent in his absolute discretion thinks
fit and to execute on behalf of and in the name of such Previous
Acceptor all such further documents (if any) as may be required to give
effect to such acceptances and/or elections. In making any such
election, such attorney and agent shall take into account the nature of
any previous acceptances and/or elections made by the Previous Acceptor
and such other facts or matters as he may reasonably consider relevant.
(b) The deemed acceptance referred to and authorities conferred by sub-
paragraph 4(a) of this Part B shall not apply or (as the case may be)
be exercised if as a result thereof the Previous Acceptor would (on
such basis as Baird may consider appropriate) thereby receive less in
aggregate in consideration under the revised Offer than he would have
received in aggregate in consideration as a result of acceptance of the
Offer in the form in which it was originally accepted by him having
regard to any election or previous acceptance originally made by him,
unless the Previous Acceptor has previously agreed in writing to
receive less aggregate consideration.
(c) The deemed acceptance referred to and exercise of the powers of
attorney and agency so conferred by this paragraph 4 shall be
ineffective to the extent that a Previous Acceptor shall lodge, within
14 days of the posting of this Offer Document pursuant to which the
revision of the Offer is made available to ISA Shareholders (or such
later date as Daisytek UK may determine), a form in which he validly
elects (to the extent possible) to receive the consideration receivable
by him under the revised Offer in some other manner.
(d) Subject to sub-paragraph 4(c) of this Part B, the authorities referred
to in this paragraph 4 and any acceptance of a revised Offer and any
election pursuant thereto shall be irrevocable unless and until the
Previous Acceptor becomes entitled to withdraw his acceptance under
paragraph 3 of this Part B and duly does so.
(e) Daisytek UK reserves the right to treat an executed Form of Acceptance
relating to the Offer (in its original or any previously revised
form(s)) which is received after the announcement or issue of the Offer
in any revised form as a valid acceptance of the revised Offer and/or,
where applicable, a valid election for or acceptance of any of the
alternative forms of consideration and such acceptance shall constitute
an authority and request in the terms of sub-paragraph 4(a) of this
Part B, mutatis mutandis, on behalf of the relevant ISA Shareholder.
35
5. ACCEPTANCES AND PURCHASES
Except as otherwise agreed by the Panel:
(a) an acceptance of the Offer shall not be treated as valid for the
purposes of the acceptance condition unless the requirements of Note 4
and, if applicable, Note 6 of Rule 10 of the City Code are satisfied in
respect of it;
(b) a purchase of ISA Ordinary Shares by Daisytek UK or its nominee(s) or
any person acting in concert with it or its or their nominees will only
be treated as valid for the purposes of the acceptance condition if the
requirements of Note 5 and, if applicable, Note 6 of Rule 10 of the
City Code are satisfied in respect of it; and
(c) before the Offer may become unconditional, Capita IRG Plc must have
issued a certificate to Daisytek UK and/or to Baird which states the
number of ISA Ordinary Shares in respect of which acceptances have been
received and which complies with sub-paragraph 5(a) of this Part B, and
the number of ISA Ordinary Shares otherwise acquired, whether before or
during the Offer Period, which complies with sub-paragraph 5(b) of this
Part B. Copies of such certificate will be sent to the Panel and to the
financial advisers of ISA as soon as possible after issue.
6. GENERAL
(a) Save with the consent of the Panel, the Offer will lapse unless all the
conditions have been satisfied or (if capable of waiver) waived or,
where appropriate, have been determined by Daisytek UK in its
reasonable opinion to be or remain satisfied by, or where appropriate
at, midnight (UK time) on 12 August 2002 or on the date which is 21
days after the date on which the Offer becomes unconditional, whichever
is the later, or such later date as Daisytek UK may, with the consent
of the Panel, decide. In such a case the Offer shall cease to be
capable of further acceptance and Daisytek UK and Baird and ISA
Shareholders shall thereupon cease to be bound by prior acceptances.
(b) If the Offer lapses pursuant to the City Code, neither Daisytek UK nor
any person acting in concert with Daisytek UK (for the purposes of the
City Code) may make an offer for ISA for a period of one year following
such lapse, except with the consent of the Panel.
(c) The Offer will lapse if the acquisition of ISA or any matter arising in
relation to the Offer is referred to the Competition Commission before
the Initial Closing Date of the Offer or the date on which the Offer
becomes or is declared unconditional as to acceptances, whichever is
the later. In such circumstances, the Offer will cease to be capable of
further acceptance and persons accepting the Offer and Daisytek and
Daisytek UK shall thereupon cease to be bound by acceptances delivered
on or before the date on which the Offer so lapses.
(d) Except with the consent of the Panel, settlement of the consideration
to which any ISA Shareholder is entitled under the Offer will be
implemented in full in accordance with the terms of the Offer without
regard to any lien, right of set-off, counterclaim or other analogous
right to which Daisytek UK may otherwise be, or claim to be, entitled
as against any such shareholder.
(e) The Offer is made on 23 May 2002 and is capable of acceptance
thereafter. The Offer is being made by means of this Offer Document and
is being notified to ISA Shareholders by means of an advertisement to
be placed in the UK Financial Times on 24 May 2002. Copies of this
Offer Document, the Form of Acceptance and any related documents are
available from Capita IRG Plc from that time at either of the addresses
set out in sub- paragraph 3(b) of this Part B.
(f) The terms, provisions, instructions and authorities contained in or
deemed to be incorporated in the Form of Acceptance constitute part of
the terms of the Offer. Words and expressions defined in this Offer
Document have the same meanings when used in the Form of Acceptance
unless the context otherwise requires.
(g) The Offer and the Form of Acceptance and all acceptances of the Offer
and elections in respect thereof and all contracts made pursuant to the
Offer and action taken or deemed to be taken under any of the foregoing
shall be governed by and construed in accordance with English law.
Execution by or on behalf of an ISA Shareholder of a Form of Acceptance
will constitute his submission, in relation to all matters arising out
of the Offer and the Form of Acceptance, to the jurisdiction of the
courts of England and the relevant shareholder's agreement that nothing
shall limit the right of Daisytek UK or Baird to bring any action, suit
or proceeding arising out of or in connection with the Offer and the
Form of Acceptance in any other manner permitted by law or in any court
of competent jurisdiction.
36
(h) All references in this Offer Document and in the Form of Acceptance to
13 June 2002 shall (except in sub-paragraphs 6(b) and 6(c) of this Part
B and except where the context otherwise requires) be deemed, if the
expiry date of the Offer be extended, to refer to the expiry date of
the Offer as so extended.
(i) Any omission to despatch the Offer Document and/or the Form of
Acceptance or any notice required to be despatched under the terms of
the Offer to, or any failure to receive the same by, any person to whom
the Offer is made, or should be made, shall not invalidate the Offer in
any way or create any implication that the Offer has not been made to
any such person. The Offer extends to any such person to whom the Offer
Document, the Form of Acceptance and any related documents may not be
despatched or who may not receive such documents, and such persons may
collect copies of such documents from Capita IRG Plc at either of the
addresses set out in sub-paragraph 3(b) of this Part B.
(j) Daisytek UK and Baird reserve the right to notify ISA Shareholders
regarding any matter, including the making of the Offer, to all or any
ISA Shareholders with a registered address outside the UK or whom ISA
knows to be a nominee holding ISA Ordinary Shares for such persons, by
announcement or paid advertisement in a daily newspaper published and
circulated in the UK, or any part thereof, in which event such notice
shall be deemed to have been sufficiently given, notwithstanding any
failure by any such shareholder(s) to receive or see such notice, and
all references in the Offer Document to notice or the provision of
information in writing by or on behalf of Daisytek UK and/or Baird
and/or their respective agents shall be construed accordingly.
(k) Due completion of a Form of Acceptance will constitute an instruction
to Daisytek UK, on the Offer becoming unconditional in all respects, to
cancel all mandates and other instructions entered in the records of
ISA in force relating to holdings of ISA Ordinary Shares. Such mandates
and other instructions will not continue in force in relation to New
Daisytek Restricted Common Stock issued to such shareholders.
(l) Without prejudice to any other provisions of this Part B, Daisytek UK
and Baird reserve the right to treat acceptances as valid if received
by or on behalf of either of them at any place or places or in any
manner which may be otherwise than as set out herein or in the Form of
Acceptance.
(m) If sufficient acceptances are received and/or sufficient ISA Ordinary
Shares are otherwise acquired, Daisytek UK intends to apply the
provisions of Sections 428-430F of the Act to acquire compulsorily any
outstanding ISA Shares to which the Offer relates and to apply for the
cancellation of ISA's admission to trading of the ISA Ordinary Shares
on AIM.
(n) All powers of attorney, appointment of agents and authorities on the
terms conferred by or referred to in this Appendix I or in the Form of
Acceptance are given by way of security for the performance of the
obligations of the ISA Shareholder concerned and are irrevocable in
accordance with Section 4 of the Powers of Attorney Act 1971 except in
the circumstances where the grantor of such power of attorney,
appointment or authority is entitled to withdraw his acceptance in
accordance with paragraph 3 of this Part B and duly does so.
(o) No acknowledgement of receipt of any Form of Acceptance, transfer by
means of CREST, share certificate(s) and other document(s) will be
given by or on behalf of Daisytek UK. All communications, notices,
certificates, documents of title and remittances to be delivered by or
sent to or from ISA Shareholders (or their designated agent(s)) will be
delivered by or sent to or from them (or their designated agent(s)) at
their own risk.
(p) If the Offer does not become unconditional in all respects or lapses:
(i) the Form of Acceptance, share certificate(s) and other
document(s) of title will be returned by post (or by such
other method as may be approved by the Panel) immediately (or
within such longer period as the Panel may permit, not
exceeding 14 days of the lapsing of the Offer); and
(ii) Capita IRG Plc will, immediately after the lapsing of the
Offer (or within such longer period as the Panel may permit,
not exceeding 14 days of the lapsing of the Offer), give
instructions to CRESTCo to transfer all ISA Ordinary Shares
held in escrow balances and in relation to which it is the
escrow agent for the purposes of the Offer to the original
available balances of ISA Shareholders concerned.
(q) The ISA Shares to which the Offer relates will be acquired free from
all liens, charges, restrictions (including restrictions imposed by
law), third party rights, and encumbrances and together with all
37
rights now or hereafter attaching thereto, including voting rights and
the right to all dividends and other distributions declared, paid or
made after the date of the announcement of the Offer.
(r) The New Daisytek Restricted Common Stock will be issued free from all
liens, charges and other encumbrances or other equitable interests and
will be of the same class and rank as all of the existing Daisytek
Common Stock (except that the New Daisytek Restricted Common Stock will
not be registered and will be subject to restrictions on transfers that
may not be applicable to existing shares of Daisytek Common Stock),
including the right to receive in full all dividends (which are payable
in US dollars), if any, and other distributions declared and paid or
made on such shares after the date on which the New Daisytek Restricted
Common Stock is issued.
(s) In relation to any acceptance of the Offer in respect of a holding of
ISA Ordinary Shares which are in uncertificated form, Daisytek UK
reserves the right to make such alterations, additions or modifications
as may be necessary or desirable to give effect to any purported
acceptance of the Offer, whether in order to comply with the facilities
or requirements of CREST or otherwise, provided such alterations,
additions or modifications are consistent with the requirements of the
City Code or are otherwise made with the consent of the Panel.
(t) All references in this Appendix I to statutory provisions shall include
a statute or statutory provision which corrects, consolidates or
replaces the same (whether before or after the date of this Offer
Document).
7. OVERSEAS SHAREHOLDERS
(a) The availability of the Offer to persons outside of the United Kingdom
("Overseas Shareholders") may be affected by the laws of the relevant
jurisdiction. Such persons should inform themselves about and observe
any applicable requirements. Unless otherwise determined by Daisytek
UK, the Offer will not be made, directly or indirectly, in or into or
by use of the mail or by any means or instrumentality (including,
without limitation, telephonically or electronically) of inter-state or
foreign commerce of or any facilities of a national securities exchange
of Canada, Australia or Japan. Accordingly, copies of this announcement
and any related offering documents are not being, and must not be
mailed or otherwise distributed or sent in or into or from Canada,
Australia or Japan and doing so may invalidate any purported acceptance
of the Offer.
(b) ISA Shareholders in the US should note that the Offer is made for the
securities of a non-US company. The Offer is subject to the disclosure
requirements of a country that are different from those of the United
States. The financial information relating to ISA included in this
announcement has been prepared in accordance with accounting standards
that may not be comparable to the financial statements of US companies.
(c) Unless an exemption under the relevant securities laws is available as
aforesaid, Daisytek UK will not issue New Daisytek Restricted Common
Stock or authorise the delivery of any document(s) of title in respect
of New Daisytek Restricted Common Stock: (i) to any person who is
unable or fails to give the warranty set out in paragraph (b) of Part C
below; or (ii) to any person with a registered address in Canada,
Australia or Japan.
(d) These provisions and any other terms of the Offer relating to Overseas
Shareholders may be waived, varied or modified as regards specific
Overseas Shareholders or on a general basis by Daisytek UK in its
absolute discretion. Subject thereto, the provisions of this paragraph
7 supersede any terms of the Offer inconsistent therewith. References
in this paragraph 7 to an Overseas Shareholder include references to
the person or persons executing a Form of Acceptance and, in the event
of more than one person executing the Form of Acceptance, the
provisions of this paragraph 7 shall apply to them jointly and
severally.
38
PART C --- FORM OF ACCEPTANCE
Each ISA Shareholder by whom, or on whose behalf, a Form of Acceptance is
executed irrevocably undertakes, represents, warrants and agrees to and with
Daisytek, Daisytek UK, Baird and Capita IRG Plc, so as to bind such shareholder,
such shareholder's personal representatives, heirs, successors and assigns, to
the following effect:
(a) that the execution of a Form of Acceptance (whether or not any boxes
therein are completed) shall constitute:
(i) an acceptance of the Cash Offer in respect of the number of
ISA Ordinary Shares validly inserted or deemed to be inserted
in Box 2 of the Form of Acceptance;
(ii) an election for the Restricted Share Offer in respect of the
number of ISA Ordinary Shares validly inserted or deemed to be
inserted in Box 3 of the Form of Acceptance; and
(iii) an undertaking to execute any further documents and give any
further assurances which may be required to enable Daisytek UK
to obtain the full benefit of this Part C and for Daisytek and
Daisytek UK and/or any of their directors and/or Baird and/or
any of its directors and/or Capita IRG Plc to perfect any of
the authorities to be given hereunder,
in each case on and subject to the terms and conditions set out in this
Offer Document and the Form of Acceptance and, subject only to the
rights of withdrawal set out in paragraph 3 of Part B of this Appendix
I, each such acceptance shall be irrevocable;
(b) unless "NO" is put in Box 7 of the Form of Acceptance, such ISA
Shareholder has not received or sent copies of this Offer Document, the
Form of Acceptance or any related offering documents in, into or from
Canada, Australia or Japan;
(c) that the ISA Ordinary Shares in respect of which the Offer is accepted
or deemed to be accepted are fully paid up and are sold free from all
liens, equitable interests, charges, restrictions (including
restrictions imposed by law), third party rights and encumbrances and
together with all rights now or attaching thereto after the
announcement of the Offer, including voting rights and the right to all
dividends and other distributions hereafter declared, paid or made;
(d) that the execution of the Form of Acceptance constitutes, subject to
the Offer becoming unconditional in all respects in accordance with its
terms and to the accepting ISA Shareholder not having validly withdrawn
his acceptance, the irrevocable separate appointments of Daisytek UK
and/or any of its directors and/or Baird and/or any of its directors as
such ISA Shareholder's attorney and/or agent and an irrevocable
instruction to the attorney and/or agent:
(i) to complete and execute all or any form(s) of transfer and/or
other document(s) at the attorney's and/or agent's discretion
in relation to the ISA Ordinary Shares referred to in
sub-paragraph (a) of this Part C held in (or subsequently
converted into) certificated form in favour of Daisytek UK or
such other person or persons as Daisytek UK may direct; and
(ii) to deliver such form(s) of transfer and/or other document(s)
at the attorney's and/or agent's discretion together with the
share certificate(s) and/or other document(s) relating to such
ISA Ordinary Shares for registration within six months of the
Offer becoming or being declared unconditional in all respects
and to do all such other acts and things as may in the opinion
of such attorney and/or agent be necessary or expedient for
the purposes of or in connection with the acceptance of the
Cash Offer and/or any election to accept the Restricted Share
Offer and to vest the ISA Ordinary Shares in Daisytek,
Daisytek UK or any subsidiary or nominee(s) of such companies;
(e) that the execution of the Form of Acceptance constitutes the
irrevocable appointment of Capita IRG Plc as such shareholder's
attorney and/or agent and an irrevocable instruction and authority to
the attorney and/or agent:
(i) subject to the Offer becoming unconditional in all respects in
accordance with its terms and to the accepting ISA Shareholder
not having validly withdrawn his acceptance, to transfer to
itself (or to such other person or persons as Daisytek UK or
its agents may direct) by means of CREST all or any of the
Relevant ISA Ordinary Shares (as defined in sub-paragraph (ii)
below) (but not exceeding the number of ISA Ordinary Shares in
respect of which the Offer is accepted or deemed to be
accepted); and
39
(ii) if the Offer does not become unconditional in all respects, to
give instructions to CRESTCo, immediately after the lapsing of
the Offer (or within such longer period as the Panel may
permit, not exceeding 14 days of the lapsing of the Offer), to
transfer all Relevant ISA Ordinary Shares to the original
available balance of the accepting ISA Shareholder. "Relevant
ISA Ordinary Shares" means ISA Ordinary Shares in
uncertificated form and in respect of which a transfer or
transfers to escrow has or have been effected pursuant to the
procedures described in the letter from Baird contained in
this Offer Document and where the transfer(s) to escrow was or
were made in respect of ISA Ordinary Shares held under the
same member account ID and participant ID as the member
account ID and participant ID relating to the Form of
Acceptance concerned (but irrespective of whether or not any
Form of Acceptance Reference Number, or a Form of Acceptance
Reference Number corresponding to that appearing on the Form
of Acceptance concerned, was included in the TTE instruction
concerned);
(f) that the execution of the Form of Acceptance constitutes, subject to
the Offer becoming or being declared unconditional in all respects in
accordance with its terms and to the accepting ISA Shareholder not
having validly withdrawn his acceptance, separate irrevocable
authorities and requests:
(i) to ISA or its agents to procure the registration of the
transfer of the ISA Ordinary Shares pursuant to the Offer and,
if applicable, the delivery of the share certificate(s) and/or
other document(s) of title in respect thereof to Daisytek UK
or as it may direct;
(ii) to Daisytek or its agents to procure that such ISA
Shareholder's name is entered on the share register of
Daisytek in respect of New Daisytek Restricted Common Stock
(if any) to which such shareholder becomes entitled pursuant
to acceptance of the Restricted Share Offer (subject to the
provisions of Daisytek's certificate of incorporation and
bylaws);
(iii) to Daisytek or its agents to procure the despatch by post (or
by such other method as may be approved by the Panel) of the
document(s) of title for any New Daisytek Restricted Common
Stock to which an accepting ISA Shareholder becomes entitled
pursuant to such ISA Shareholder's acceptance of the
Restricted Share Offer, at the risk of such ISA Shareholder,
to the person whose name and address is set out in Box 1 of
the Form of Acceptance or, if none is set out, to the
first-named holder at such holder's registered address
provided that this is outside Canada, Australia and Japan;
(iv) if the ISA Ordinary Shares are in certificated form, or if the
proviso to sub-paragraph (v) below applies, to Daisytek or its
agents, to procure the despatch by post (or by such other
method as may be approved by the Panel) of a cheque for any
cash to which an accepting ISA Shareholder becomes entitled
pursuant to his acceptance of the Cash Offer (or Restricted
Share Offer in the case of fractional entitlements, as the
case may be), at the risk of such ISA Shareholder, to the
person whose name and address is set out in Box 1 of the Form
of Acceptance or, if none is set out, to the first-named
holder at such holder's registered address provided that this
is outside Canada, Australia and Japan; and
(v) if the ISA Ordinary Shares concerned are in uncertificated
form, to Daisytek or its agents, to procure the creation of an
assured payment obligation in favour of the ISA Shareholder's
payment bank in accordance with the CREST assured payment
arrangements in respect of any cash consideration to which
such Shareholder is entitled pursuant to his acceptance of the
Cash Offer (or Restricted Share Offer in respect of fractional
entitlements, as the case may be), provided that Daisytek may
(if, for any reason, it wishes to do so) determine that all or
any part of any such consideration shall be paid by cheque
despatched by post (or by such other method as may be approved
by the Panel), at the risk of such ISA Shareholder, to the
person whose name and address is set out in Box 1 of the Form
of Acceptance or, if none is set out, to the first- named
holder at such holder's registered address provided that this
is outside Canada, Australia and Japan.
(g) that the execution of the Form of Acceptance constitutes separate
authority to Daisytek UK and/or its directors and/or Baird and/or its
directors and/or their respective agents and the irrevocable
appointment of Daisytek UK and/or its directors and/or Baird and/or its
directors as such shareholder's attorney and agent within the terms of
paragraph 4 of Part B of this Appendix I in respect of those ISA
Ordinary Shares in respect of which the Offer has been accepted and
such acceptance has not been validly withdrawn;
40
(h) that, subject to the Offer becoming unconditional in all respects (or
if the Offer would become or be declared unconditional in all respects
or lapse immediately upon the outcome of the resolution in question or
if the Panel otherwise gives its consent) and pending registration:
(i) Daisytek UK shall be entitled to direct the exercise of any
votes and any or all other rights and privileges (including
the right to requisition the convening of a general meeting of
ISA or of any class of its shareholders) attaching to any ISA
Ordinary Shares in respect of which the Offer has been
accepted and such acceptance has not been validly withdrawn;
(ii) with regard to any such ISA Ordinary Shares, the execution of
the Form of Acceptance will constitute:
(1) an authority to ISA from such ISA Shareholder to send
any notice, warrant or other document or
communication (including any share certificate(s)
and/or other document(s) of title issued as a result
of conversion of such ISA Ordinary Shares into
certificated form) which may be required to be sent
to him (as a member of ISA) to Daisytek UK at its
registered office or such other address nominated by
Daisytek UK;
(2) an authority to Daisytek UK or any person appointed
by Daisytek UK to sign any consent to short notice of
a general or separate class meeting on his behalf
and/or execute a form of proxy in respect of such ISA
Ordinary Shares appointing and/or to appoint any
person determined by Daisytek UK to attend general
meetings and separate class meetings of ISA or its
members or any of them (and any adjournment thereof)
and to exercise the votes attaching to such ISA
Ordinary Shares on his behalf, where relevant, such
votes to be cast so far as possible to satisfy any
outstanding condition of the Offer; and
(3) (subject as aforesaid) the agreement of such ISA
Shareholder not to exercise any of such rights
without the consent of Daisytek UK and the
irrevocable undertaking of such shareholder not to
appoint a proxy for or to attend any such general
meetings or separate class meetings;
(i) that he will deliver to Capita IRG Plc at the address given in sub-
paragraph 3(b) of Part B of this Appendix I his share certificate(s)
and or other document(s) of title in respect of the ISA Ordinary Shares
referred to in sub-paragraph (a)(i) of this Part C held by him in (or
subsequently converted into) certificated form or an indemnity
acceptable to Daisytek UK in lieu thereof, as soon as possible and in
any event within six months of the Offer becoming or being declared
unconditional in all respects;
(j) that he will take (or procure to be taken) the action set out in
paragraph 17 of the letter from Baird contained in this Offer Document
to transfer all ISA Ordinary Shares in respect of which the Offer has
been accepted or is deemed to have been accepted and not validly
withdrawn held by him in (or subsequently converted into)
uncertificated form to an escrow balance as soon as possible and in any
event so that the transfer to escrow settles within six months of the
Offer becoming unconditional in all respects;
(k) that if, for any reason, any ISA Ordinary Shares in respect of which a
transfer to an escrow balance has been effected in accordance with
paragraph 17 of the letter from Baird contained in this Offer Document
are converted to certificated form, he will (without prejudice to
paragraph (f) of this Part C) immediately deliver or procure the
immediate delivery of the share certificate(s) or other document(s) of
title in respect of all such ISA Ordinary Shares as so converted to
Capita IRG Plc at the address referred to in sub-paragraph 3(b) of Part
B of this Appendix I or to Daisytek UK at its registered office or as
Daisytek UK or its agents may direct;
(l) that the execution of the Form of Acceptance constitutes his
submission, in relation to all matters arising out of the Offer and the
Form of Acceptance, to the jurisdiction of the courts of England and
Wales;
(m) that on execution the Form of Acceptance shall take effect as a deed;
(n) that the terms of this Part C and the Offer generally shall be
incorporated in and form part of the Form of Acceptance, which shall be
read and construed accordingly;
(o) that, if he accepts the Offer, he shall do all such acts and things as
shall be necessary or expedient to vest in Daisytek UK or its
subsidiaries or nominees or such other persons as it may decide the ISA
Ordinary Shares aforesaid and all such acts and things as may be
necessary or expedient to enable Capita IRG Plc to perform its
functions as escrow agent for the purposes of the Offer;
41
(p) that he agrees to ratify each and every act or thing which may be done
or effected by Daisytek UK and/or any of its directors and/or Baird
and/or any of its directors or their respective agents or ISA or its
agents, as the case may be, in the proper exercise of any of his or its
powers and/ or authorities hereunder;
(q) that he undertakes, if any provisions of Part B of this Appendix I or
this Part C shall in any way be unenforceable, invalid or not operate
so as to afford Daisytek UK and/or Baird and/or their respective agents
the full benefit of the authorities expressed be given herein, with all
practicable speed to do all such acts and things and execute all such
documents as may be required or desirable to enable Daisytek UK and/or
any of its directors and/or Baird and/or any of its directors and/or
Capita IRG Plc to secure the full benefit of the authorities and powers
of attorney conferred by or referred to in Part B of this Appendix I or
this Part C;
(r) that, if the ISA Shareholder is electing to receive shares of New
Daisytek Restricted Common Stock in the Offer, the execution of the
Form of Acceptance by the accepting ISA Shareholder constitutes a
representation and warranty by the ISA Shareholder to Daisytek and
Daisytek UK that:
(i) by reason of the ISA Shareholder's business or financial
experience, or that of the ISA Shareholder's professional
advisor, the ISA Shareholder is capable of evaluating the
merits and risks of an investment in the New Daisytek
Restricted Common Stock and of protecting its own interests in
connection with the transaction;
(ii) the ISA Shareholder is aware that the New Daisytek Restricted
Common Stock has not been registered under the Securities Act
or any state or foreign securities laws and that transfer
thereof is restricted by the Securities Act and applicable
state or foreign securities laws and will bear a legend to
that effect;
(iii) the ISA Shareholder is acquiring shares of New Daisytek
Restricted Common Stock for its or his own account, and not
with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act;
(iv) the ISA Shareholder will not offer, sell or otherwise transfer
such shares of New Daisytek Restricted Common Stock within the
United States except (A) to Daisytek, (B) pursuant to a
registration statement which has been declared effective under
the Securities Act, or (C) pursuant to an applicable exemption
under the Securities Act (including without limitation Rule
144 under the Securities Act) from the registration
requirements of the Securities Act;
(v) the ISA Shareholder has been advised that Daisytek may
require, in the case of any shares of New Daisytek Restricted
Common Stock that are transferred other than pursuant to an
effective registration statement, a legal opinion from counsel
to such ISA Shareholder in a form and substance satisfactory
to Daisytek that such registration is not required;
(vi) Daisytek is under no obligation to prepare, file or maintain a
registration statement under the Securities Act to register
the resale of shares of New Daisytek Restricted Common Stock
into the United States;
(vii) the ISA Shareholder is prepared to treat the shares of New
Daisytek Restricted Common Stock being acquired by him as a
long-term investment and expects to bear the economic risk of
the ownership of such shares for an indefinite period of time
and no assurances have been made by Daisytek, Daisytek UK or
ISA, or can be made, that such shares can be resold by the
holder thereof for a price equal to the current market prices
of Daisytek Common Stock, or for any price; and
(viii) the ISA Shareholder has reviewed the Offer Document (including
without limitation, the risk factors described in Appendix III
of this Offer Document relating to an investment in New
Daisytek Restricted Common Stock) and is fully aware of the
contents of this Offer Document; and
(s) that, if the ISA Shareholder is receiving shares of New Daisytek
Restricted Common Stock in the Offer and elects pursuant to the Form of
Acceptance to have such shares registered for resale in the US under
the Registration Statement, the execution of the Form of Acceptance by
the ISA Shareholder constitutes a covenant, agreement and undertaking
by the ISA Shareholder with Daisytek that:
(i) the ISA Shareholder will furnish to Daisytek such information
regarding the ISA Shareholder, the shares of New Daisytek
Restricted Common Stock held by him and the intended methods
of
42
disposition of such shares as is reasonably required by
Daisytek to effect the registration of such shares (which
information shall include the name and address of such
shareholder (including the address for contacting the ISA
Shareholder), the number of shares of New Daisytek Restricted
Common Stock owned beneficially by and of record by such
shareholder and the number of shares that such shareholder
desires to register for resale);
(ii) if the ISA Shareholder does not provide all of the information
described in clause (i) above to Daisytek within three days
after a request by Daisytek for such information, then
Daisytek may file the Registration Statement without including
the shares of New Daisytek Restricted Common Stock held by the
ISA Shareholder;
(iii) the ISA Shareholder will provide comments on the portions of
the Registration Statement that include such information
within three days after Daisytek provides a draft of such
Registration Statement to the ISA Shareholder and requests
comments from the ISA Shareholder on such draft;
(iv) if the Registration Statement is filed and becomes effective
and Daisytek, while the Registration Statement remains
effective, notifies (in writing, by telephone, by facsimile,
in person or by e-mail) the ISA Shareholder of the happening
of any event of which Daisytek has knowledge as a result of
which the prospectus included in the Registration Statement as
then in effect includes an untrue statement of a material fact
or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading, then the ISA Shareholder, upon receipt of such
notice, will keep such information confidential and will
immediately discontinue disposition of the shares of New
Daisytek Restricted Common Stock held by the ISA Shareholder
and covered by the Registration Statement until the ISA
Shareholder receives copies from Daisytek of a supplemented or
amended prospectus that corrects such untrue statement or
omission;
(v) if the Registration Statement is filed and becomes effective
and Daisytek, while the Registration Statement remains
effective, notifies (in writing, by telephone, by facsimile,
in person or by e-mail) the ISA Shareholder that in the good
faith judgment of Daisytek it would be detrimental to Daisytek
and its stockholders for further resales of shares of New
Daisytek Restricted Common Stock to be made pursuant to the
Registration Statement due to the existence of a material
non-public development or potential material non-public
development involving Daisytek, then the ISA Shareholder, upon
receipt of such notice, will keep such information
confidential and will immediately discontinue disposition of
the shares of New Daisytek Restricted Common Stock held by the
ISA Shareholder and covered by the Registration Statement
until the ISA Shareholder receives a subsequent notice from
Daisytek that sales of shares may be recommenced under the
Registration Statement;
(vi) the ISA Shareholder will indemnify and hold harmless Daisytek,
each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls
Daisytek within the meaning of the Securities Act or the
Exchange Act, and any other stockholder selling securities
pursuant to the Registration Statement and any of its
directors and officers and any person who controls such
stockholder within the meaning of the Securities Act or the
Exchange Act (each, a "Daisytek Indemnified Person") against
any losses, claims, damages, expenses or liabilities (joint or
several) (collectively, and together with actions, proceedings
or inquiries by any regulatory or self- regulatory
organisation, whether commenced or threatened in respect
thereof, "Claims") to which any of them may become subject
under the Securities Act, the Exchange Act or otherwise,
insofar as such Claim arises out of or is based upon: (a) any
alleged untrue statement of any material fact contained in the
Registration Statement on the effective date thereof, any
preliminary prospectus or final prospectus contained therein,
or any summary prospectus contained therein or any amendment
or supplement thereto or any alleged omission to state in any
such document a material fact required to be stated therein or
necessary to make the statements therein not misleading, but
only insofar as any such Claim is caused by or results from
any information furnished in writing to Daisytek by the ISA
Shareholder expressly for use in connection with such
registration; (b) any failure by the ISA Shareholder to
deliver a copy of the Registration Statement or prospectus or
any amendment or supplement thereto as required by the
Securities Act or the rules or regulations thereunder; or (c)
any failure by the ISA Shareholder to stop using the
Registration Statement or prospectus or any amendment or
supplement thereto after receipt of notice (as described in
clauses (iv) and (v) above) from Daisytek to stop (the
indemnity made by the ISA Shareholder in this clause (vi) will
remain in full force and effect
43
regardless of any investigation made by or on behalf of a
Daisytek Indemnified Person and will survive the transfer of
the shares of the New Daisytek Restricted Common Stock by the
ISA Shareholder); and
(vii) the ISA Shareholder will do and perform, or cause to be done
and performed, all such further acts and things, and will
execute and deliver all other agreements, certificates,
instruments and documents, as Daisytek may reasonably request
in order to effect the registration of the shares of New
Daisytek Restricted Common Stock held by the ISA Shareholder
pursuant to the Registration Statement.
References in this Part C to an ISA Shareholder shall include references to the
person or persons executing a Form of Acceptance and in the event of more than
one person executing a Form of Acceptance the provisions of this Part C shall
apply to them jointly and to each of them.
44
APPENDIX II
FINANCIAL INFORMATION RELATING TO THE DAISYTEK GROUP
PART A: FINANCIAL INFORMATION
FOR THE THREE FINANCIAL YEARS ENDED 31 MARCH 2001
The financial information set out below has been extracted from the audited
financial statements of Daisytek for the financial years ended March 31, 2001,
2000 and 1999, as filed with the SEC on Form 8-K, without material adjustment.
The auditors of Daisytek for the financial year ended March 31, 2001 and for the
adjustments described in Note 4 that were applied to restate the 2000 and 1999
financial statements were Ernst & Young LLP. The auditors of Daisytek for the
two financial years ended March 31, 2000 and March 31, 1999 were Arthur Andersen
LLP. For each of the three years ended March 31, 2001 the auditors have made
reports in accordance with auditing standards generally accepted in the United
States which were unqualified.
45
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31,
--------------------------
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,971 $ 28,172
Accounts receivable, net of allowance for doubtful accounts of $4,979 and
$5,784 at March 31, 2001 and 2000, respectively 134,966 143,693
Inventories, net 83,615 71,308
Prepaid expenses and other current assets 7,194 7,450
Income taxes receivable -- 3,714
Deferred tax asset, net -- 249
Current assets of discontinued subsidiary 94,682 49,451
---------- ----------
Total current assets 322,428 304,037
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment 23,325 52,491
Leasehold improvements 3,641 5,692
---------- ----------
26,966 58,183
Less -- Accumulated depreciation and amortization (15,569) (27,523)
---------- ----------
Net property and equipment 11,397 30,660
OTHER ASSETS 550 1,046
EXCESS OF COST OVER NET ASSETS ACQUIRED, net 46,493 37,003
---------- ----------
Total assets $ 380,868 $ 372,746
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,436 $ 42,392
Trade accounts payable 39,762 44,568
Accrued expenses 8,940 13,821
Income taxes payable 1,172 --
Deferred tax liability, net 359 --
Current liabilities of discontinued subsidiary 93,490 49,335
---------- ----------
Total current liabilities 145,159 150,116
---------- ----------
LONG-TERM DEBT, less current portion 76,607 2,431
COMMITMENTS AND CONTINGENCIES (Note 12)
MINORITY INTEREST -- 9,513
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorised at March 31, 2001
and 2000, none issued and outstanding -- --
Common stock, $0.01 par value; 30,000,000 shares authorised and 17,689,850
and 17,600,164 shares issued at March 31, 2001 and 2000, respectively 177 176
Additional paid-in capital 94,663 136,736
Retained earnings 92,415 76,340
Accumulated other comprehensive loss (6,043) (2,566)
Treasury stock at cost, 3,352,305 shares at March 31, 2001 (22,110) --
---------- ----------
Total shareholders' equity 159,102 210,686
---------- ----------
Total liabilities and shareholders' equity $ 380,868 $ 372,746
========== ==========
The accompanying notes are an integral part of these consolidated statements.
46
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
FISCAL YEARS ENDED
MARCH 31,
-----------------------------------------
2001 2000 1999
Net revenues $1,012,130 $ 987,206 $ 916,518
Cost of revenues 894,766 880,471 808,151
---------- ---------- ----------
Gross profit 117,364 106,735 108,367
Selling, general and administrative expenses 88,193 95,471 70,648
Nonrecurring costs 6,940
Acquisition related costs -- 619 1,111
Loss of disposition of business -- (1,000) 2,800
---------- ---------- ----------
Income from operations 22,231 11,645 33,808
Interest expense 3,857 3,186 2,797
---------- ---------- ----------
Income from continuing operations before income taxes and
minority interest 18,374 8,459 31,011
Provision for income taxes 7,384 4,602 11,823
---------- ---------- ----------
Income from continuing operations before minority interest 10,990 3,857 19,188
Minority interest 47 566 --
---------- ---------- ----------
Income from continuing operations 11,037 4,423 19,188
Discontinued operations (Note 4):
Income from operations of discontinued subsidiary, net of tax 389 116 --
---------- ---------- ----------
Income before cumulative effect of accounting change 11,426 4,539 19,188
Cumulative effect of accounting change, net of tax -- -- (405)
---------- ---------- ----------
Net income $ 11,426 $ 4,539 $ 18,783
========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic
Income from continuing operations $ 0.69 $ 0.26 $ 1.12
Income from operations of discontinued subsidiary, net of tax 0.03 -- --
---------- ---------- ----------
Income before cumulative effect of accounting change 0.72 0.26 1.12
Cumulative effect of accounting change, net of tax -- -- (0.02)
---------- ---------- ----------
Net income $ 0.72 $ 0.26 $ 1.10
========== ========== ==========
Diluted
Income from continuing operations $ 0.69 $ 0.24 $ 1.08
Income from operations of discontinued subsidiary, net of tax 0.02 0.01 --
---------- ---------- ----------
Income before cumulative effect of accounting change 0.71 0.25 1.08
Cumulative effect of accounting change, net of tax -- -- (0.02)
---------- ---------- ----------
Net income $ 0.71 $ 0.25 $ 1.06
========== ========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Basic 15,904 17,248 17,101
Diluted 16,108 18,186 17,789
The accompanying notes are an integral part of these consolidated statements.
47
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS
BALANCE AT MARCH 31, 1998 16,935,896 $ 170 $ 85,501 $ 53,991 $ (1,931)
Net income -- -- -- 18,783 --
Other comprehensive income foreign
currency translation adjustment -- -- -- -- (266)
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 AT MARCH 31, 1999 17,162,382 172 87,394 71,801 (2,197)
Net income -- -- -- 4,539 --
Other comprehensive income foreign
currency translation adjustment -- -- -- -- (369)
Comprehensive income
PFSweb offering -- -- 42,955 -- --
Deferred compensation expense on PFSweb
stock options -- -- 48 -- --
Employee stock purchase plan 31,823 -- 368 -- --
Net proceeds from exercise of
common stock options 402,548 4 5,926 -- --
Issuance of common stock 3,411 -- 45 -- --
---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2000 17,600,164 176 136,736 76,340 (2,566)
Net income -- -- -- 11,426 --
Other comprehensive income --
foreign currency translation adjustment -- -- -- -- (3,789)
Disposition of PFSweb -- -- (42,826) 4,649 312
Comprehensive income
Treasury stock purchases -- -- -- -- --
Employee stock purchase plan 42,801 1 328 -- --
Net proceeds from exercise of
common stock options 39,333 -- 360 -- --
Issuance of common stock 7,552 -- 65 -- --
---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2001 17,689,850 $ 177 $ 94,663 $ 92,415 $ (6,043)
========== ========== ========== ========== ==========
48
TREASURY STOCK
-------------------------- TOTAL COMPREHENSIVE
SHARES AMOUNT EQUITY INCOME
BALANCE AT MARCH 31, 1998 -- -- $ 137,731 --
Net income -- -- 18,783 $ 18,783
Other comprehensive income --
foreign currency translation adjustment -- -- (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 AT MARCH 31, 1999 -- -- 157,170
Net income -- -- 4,539 $ 4,539
Other comprehensive income --
foreign currency translation adjustment -- -- (369) (369)
-----------
Comprehensive income $ 4,170
===========
PFSweb offering -- -- 42,955
Deferred compensation expense on PFSweb stock
options -- -- 48
Employee stock purchase plan -- -- 368
Net proceeds from exercise of common stock
options -- -- 5,930
Issuance of common stock -- -- 45
----------- ---------- -----------
BALANCE AT MARCH 31, 2000 -- -- 210,686
Net income -- -- 11,426 $ 11,426
Other comprehensive income --
foreign currency translation adjustment -- -- (3,789) (3,789)
Disposition of PFSweb -- -- (37,865) 312
-----------
Comprehensive income $ 7,949
===========
Treasury stock purchases (3,352,305) (22,110) (22,110)
Employee stock purchase plan -- -- 329
Net proceeds from exercise of common stock options -- -- 360
Issuance of common stock -- -- 65
----------- ---------- -----------
BALANCE AT MARCH 31, 2001 (3,352,305) $ (22,110) $ 159,102
=========== ========== ===========
The accompanying notes are an integral part of these consolidated statements.
49
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FISCAL YEARS ENDED
MARCH 31,
------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (excluding operations of discontinued subsidiary) $ 11,037 $ 4,423 $ 18,783
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of acquisitions and dispositions:
Depreciation and amortization 7,438 9,242 6,048
Provision for doubtful accounts 3,360 7,670 2,863
Minority interest (47) (566) --
Other 16 48 --
Deferred income tax benefit (394) (112) (1,683)
Change in operating assets and liabilities, net of effects of acquisitions and
dispositions:
Accounts receivable 4,142 1,357 (12,564)
Inventories, net (3,787) 49,762 (16,279)
Prepaid expenses and other current assets 3,621 1,765 (1,222)
Trade accounts payable and accrued expenses (19,390) (64,656) 17,923
Income taxes payable 2,016 (4,302) (884)
---------- ---------- ----------
Net cash provided by operating activities from continuing operations 8,012 4,631 12,985
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,549) (15,175) (10,523)
Acquisitions of businesses, net of cash acquired (17,131) (21,132) (20,585)
Disposition of subsidiary (22,113) -- --
Disposition of business -- -- 4,736
Decrease (increase) in notes receivable and other assets 1,615 8,618 (12,187)
---------- ---------- ----------
Net cash used in investing activities (45,178) (27,689) (38,559)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) revolving lines of credit, net 36,647 (910) 28,686
Payments to acquire treasury stock (22,110) -- --
Payments on capital leases and notes payable (4,650) (8,533) (4,787)
Net proceeds of PFSweb initial public offering -- 53,014 --
Net proceeds from sale of stock, exercise of stock options and issuance of
common stock 738 6,343 1,906
Distributions to former shareholders of The Tape Company -- -- (973)
---------- ---------- ----------
Net cash provided by financing activities 10,625 49,914 24,832
---------- ---------- ----------
Effect of exchange rates on cash 340 (235) 206
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,201) 26,621 (536)
CASH AND CASH EQUIVALENTS at beginning of year 28,172 1,551 2,087
---------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year $ 1,971 $ 28,172 $ 1,551
========== ========== ==========
Net cash provided by operating activities from discontinued operations $ 671 $ 14 $ --
The accompanying notes are an integral part of these consolidated statements.
50
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Daisytek International Corporation ("Daisytek" or the "Company") is a leading
wholesale distributor of computer and office supplies and professional tape
products, in addition to providing marketing and demand generation services. The
Company sells its products and services in the United States, Canada, Australia,
Mexico, South America and Europe. Prior to the spin-off of PFSweb, Inc.
("PFSweb") during July 2000, the Company also provided transaction management
services to both traditional and electronic commerce companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statement and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognises 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. PFSweb service fee revenues were recognised at the time the service
was provided to the client.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
INVENTORIES
Inventories (merchandise held for resale, all of which are finished goods) are
stated at the lower of weighted average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is computed by a
straight-line method over estimated useful lives of the respective assets which
range from three to seven years. Expenditures for maintenance and repairs are
charged to operations as incurred, whereas expenditures for renewal and
betterments are capitalised and depreciated over the remaining useful lives of
the assets.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is generally amortised by the
straight-line method over estimated useful lives of 15 to 40 years. Amortization
expense for each of the fiscal years 2001, 2000 and 1999 was approximately $2.0
million, $1.5 million and $0.7 million, respectively. Accumulated amortization
of intangible assets was $5.2 million at March 31, 2001 and $3.2 million at
March 31, 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates whether events or circumstances have occurred
that indicate that excess of cost over net assets acquired and other long-lived
assets may not be recoverable or that the remaining useful life may warrant
revision. When such events or circumstances are present, the Company assesses
the recoverability of long-lived assets by determining whether the carrying
value will be recovered through the expected undiscounted future cash flows. In
the event the sum of the expected undiscounted future cash flows resulting from
the use of the asset is less than the carrying value of the asset, an impairment
loss equal to the
51
excess of the asset's carrying value over its fair value is recorded. To date,
no such impairment has been recognised.
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.
For the Company's Mexican and European subsidiaries, the United States 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 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.
INTEREST RATE SWAPS
The Company's interest rate swap agreements are used to manage well-defined
interest rate risks related to the Company's outstanding debt and are not used
for trading purposes. Under interest rate contracts, the differential to be paid
or received is recognised in income or expense over the life of the contract as
an adjustment to interest expense.
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, requiring these
costs to be accounted for as period expenses. During fiscal 1999, the Company
adopted this pronouncement and recorded a cumulative effect charge to income,
net of income taxes, as of April 1, 1998, of $0.4 million.
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, reserves for inventory, book versus tax
depreciation differences, and certain accrued expenses deducted for book
purposes but not yet deductible for tax purposes. A valuation allowance must be
provided when it is more likely than not that the deferred income tax asset will
not be realised.
STOCK OPTION PLANS
The Company accounts for its stock-based award plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, under which compensation expense is
recorded to the extent that the current market price of the underlying stock
exceeds the exercise price at the date of grant. Note 8 provides pro forma net
income and pro forma earnings per share disclosures as if the stock-based awards
had been accounted for using the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock- Based Compensation.
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. During the fourth quarter of
fiscal year 2001, Daisytek restated all prior periods to classify freight costs
billed to customers and rebates paid to customers as components of net revenues
in compliance with Emerging Issues Task Force Issues No. 00-10, Accounting for
Shipping and Handling Fees and Costs, and No. 00-14, Accounting for Certain
Sales Incentives. Freight costs billed to customers and rebates paid to
customers had previously been recorded as a component of cost of sales.
Freight costs incurred by the Company continue to be recorded as a component of
cost of sales.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, was adopted by the Company effective
April 1, 2001. This statement establishes accounting and reporting
52
standards for derivative instruments and hedging activities and requires the
Company to recognise all derivative instruments on the balance sheet at fair
value. The adoption of SFAS 133 did not have a material impact on the Company's
financial statements.
The Financial Accounting Standards Board has proposed new accounting for
business combinations that, among other things, would change the accounting for
goodwill recorded in business acquisitions as of the date of the new Statement.
An important part of the proposed Statement is that amortization of goodwill
would cease for both assets acquired prior to the effective date of the
Statement and for any new goodwill acquired after the effective date of the
Statement. Rather than amortising these assets, goodwill would be reviewed for
impairment using a "market value" approach. The proposed Statement is expected
to be issued in July 2001. As the amortization of the excess of cost over net
assets acquired is a significant non-cash expense of the Company, this proposed
Statement, if finalised in its current form, could have a material impact on the
financial statements.
NOTE 2 -- BUSINESS COMBINATIONS
During June 1998, the Company completed the acquisition of The Tape Company
through a stock-for-stock merger. Under the terms of the acquisition, accounted
for as a pooling of interests, the Company exchanged 974,864 shares of Daisytek
common stock for all of The Tape Company's common stock. The Tape Company is an
independent distributor of professional grade audio and video media products.
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 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 amortised over 25 years. In
connection with this transaction, the Company recorded a $2.8 million one-time
charge relating to the disposition of its hardware division. In fiscal year
2000, the Company reversed $1.0 million of this charge as management was able to
avoid some of the costs associated with this disposition. The accompanying
consolidated financial statements include the results of this entity from the
date of acquisition. This acquisition is not material to the financial position
or results of operations of the Company.
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc., a specialty wholesaler of copier and fax
consumables, for an initial price of approximately $19.5 million. This
transaction was accounted for using the purchase method of accounting and the
related goodwill is being amortised over 20 years. The purchase agreement
provides for an adjustment to the purchase price based on certain performance
criteria for each of the twelve-month periods ended September 30, 2000 and 2001.
The first performance period has been achieved and the Company has increased the
original purchase price and goodwill by approximately $1.6 million, which is
being amortised over the remaining life of the asset. The entire cost of the
acquisition was funded through the Company's available cash. The accompanying
consolidated financial statements include the results of this entity from the
date of acquisition. This acquisition is not material to the financial position
or results of operations of the Company.
On May 3, 2000, the Company acquired certain assets and liabilities of B.A.
Pargh Company, LLC, a wholesaler of office products and customer of PFSweb, for
approximately $2.5 million. In addition, as part of this acquisition, the
Company paid off approximately $6.5 million in assumed debt. The acquisition was
accounted for by the purchase method of accounting for business combinations and
the related cost in excess of fair value of approximately $3.6 million is being
amortised over 20 years. The entire cost of the acquisition was funded through
the Company's credit facility. The accompanying consolidated financial
statements include the results of this entity from the date of acquisition. This
acquisition is not material to the financial position or results of operations
of the Company.
Effective October 1, 2000, the Company acquired the capital stock of Etertin Y
CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor of computer
supplies and accessories, for approximately $5.8 million, of which $1.0 million
is subject to adjustment for realisation of assets at lower than book value
acquired. In addition, the Company assumed approximately $4.7 million in debt.
The acquisition was accounted for by the purchase method of accounting for
business combinations and the related goodwill of approximately $6.5 million is
being amortised over 20 years. The entire cost of the acquisition was funded
through the Company's credit facility. The accompanying consolidated financial
statements include the results of this entity from the date of acquisition. This
acquisition is not material to the financial position or results of operations
of the Company.
53
NOTE 3 -- PFSWEB SPIN-OFF
Daisytek completed the spin-off PFSweb, its international provider of
transaction management services to both traditional and e-commerce companies,
during July 2000. In December 1999, PFSweb completed an initial public offering
("IPO") of 3,565,000 shares of its common stock. On July 7, 2000, the Company
announced the completion of the spin-off of PFSweb by means of a tax-free
distribution of Daisytek's remaining 80.1 per cent. ownership of PFSweb. The pro
rata distribution of 14,305,000 shares of PFSweb was made at the close of
business July 6, 2000 to Daisytek shareholders of record as of June 19, 2000.
Based on the shares outstanding of each company on the record date, Daisytek
shareholders received approximately 0.81 shares of PFSweb stock for each share
of Daisytek stock they owned on the record date. In June 2000, the Company
received a favourable private letter ruling from the Internal Revenue Service
regarding the tax-free treatment of the distribution of Daisytek's remaining
ownership in PFSweb. Daisytek and PFSweb are party to a tax indemnification and
allocation agreement, which governs the allocation of tax liabilities and sets
forth provisions with respect to other tax matters.
As part of the IPO, PFSweb and Daisytek entered into various agreements
governing the transaction management services that PFSweb provided for Daisytek.
Additionally, PFSweb purchased from Daisytek certain fixed assets in the central
distribution complex in Memphis, Tennessee. On May 25, 2001, the Company
completed a transaction to terminate certain transaction management services
agreements between the two companies and to purchase certain Memphis
distribution assets from PFSweb, including those assets previously sold to
PFSweb at the time of the IPO. The aggregate cost of this transaction is
estimated to be approximately $16 million, including $11 million payable to
PFSweb and $5 million to implement segregated information technology platforms
and to expand fulfilment capabilities. The Company expects to recognise a
special charge of approximately $2.7 million after taxes during the first
quarter of fiscal year 2002 related to this transaction. Prior to completion of
the transaction, the Company received a favourable supplemental ruling from the
Internal Revenue Service that the acquisition of certain fixed assets would not
adversely affect the June 2000 Internal Revenue Service ruling. PFSweb will
continue to offer services to Daisytek under a new, separate fee agreement for a
six-month period to support the transfer of fulfilment operations and
transaction processing back to Daisytek, including the transition to a separate
information technology platform.
The following table represents the balance sheet information for PFSweb as of
the date of the spin-off, and is provided to assist in understanding the impact
of the disposition on the consolidated balance sheet of the Company (amounts in
thousands):
ASSETS
Cash $22,113
Accounts receivable, net 10,879
Prepaid expenses and other current assets 3,420
Property and equipment, net 21,557
Other assets 501
-------
Total assets $58,470
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 281
Trade accounts payable 5,190
Accrued expenses 3,336
Long-term debt, less current portion 2,342
Shareholders' equity -- minority interest 9,456
Shareholders' equity -- Daisytek 37,865
-------
Total liabilities and shareholders' equity $58,470
=======
NOTE 4 -- DISCONTINUED OPERATIONS
During June 2001, the Company announced its decision to exit the IBM master
distribution agreements, under which the Company's subsidiary Business Supplies
Distributors ("BSD") provided financing to enable the Company's former
subsidiary PFSweb to service logistics contracts with IBM. As part of the
Company's plan to completely exit this business, Daisytek completed the sale of
BSD during September 2001 for net proceeds of approximately $0.9 million. The
Company recorded a gain on sale of approximately $0.2 million.
54
The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective as of April 1, 2001. Under the provisions of SFAS
No. 144, the results of operations of BSD, which were previously included in the
Company's computer and office supplies business segment, are presented as
discontinued operations in the accompanying financial statements. The income
from operations of discontinued subsidiary are presented net of tax expense of
approximately $0.2 million, $0.1 million and $0 for the fiscal years ended March
31, 2001, 2000 and 1999, respectively, and include net revenues of approximately
$177.5 million, $83.1 million and $0 for the fiscal years ended March 31, 2001,
2000 and 1999, respectively.
NOTE 5 -- DEBT
Debt as of March 31, 2001 and 2000 consists of the following (in thousands):
MARCH 31,
----------------------
2001 2000
Revolving line of credit, United States $ 74,000 $ 32,800
Revolving term loan, Canada 1,332 --
Revolving line of credit, Canada 1,275 7,948
Revolving line of credit, Australia 1,287 1,365
Other 149 2,710
-------- --------
$ 78,043 $ 44,823
Less: Current portion of long-term debt (1,436) (42,392)
-------- --------
Long-term debt, less current portion $ 76,607 $ 2,431
======== ========
REVOLVING LINE OF CREDIT, UNITED STATES
In December 2000, the Company entered into an agreement with certain banks for a
revolving line of credit facility in the United States that has a maximum
borrowing availability of $120.0 million and expires on December 19, 2003.
Availability under the credit facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as defined.
This credit facility replaced the Company's previous United States credit
facility, which would have expired on January 1, 2001. Borrowings under the
credit facility accrue interest, at the Company's option, at the prime rate of
the lead bank or a Eurodollar rate, plus an adjustment ranging from 1.05 per
cent. to 2.0 per cent. depending on the Company's financial performance. The
Company pays fees ranging from 0.20 per cent. to 0.375 per cent. on the entire
credit facility. The credit facility contains various covenants including, among
other things, the maintenance of certain financial ratios including the
achievement of a minimum fixed charge ratio and minimum level of net worth, and
restrictions on certain activities, including loans and payments to related
parties, incurring additional debt, acquisitions, investments and asset sales.
The credit facility is secured by a pledge of 100 per cent. of the stock of the
Company's United States subsidiaries and 65 per cent. of the stock of the
Company's material foreign subsidiaries. Upon the occurrence of a default, the
credit facility would also be secured by the Company's other assets. As of March
31, 2001, the outstanding balance under the Company's United States credit
facility was $74.0 million with a weighted average interest rate of 6.63 per
cent. Based on the Company's borrowing limit at March 31, 2001, $43.8 million
was available for future borrowings.
The credit facility also includes an expandable feature to increase the maximum
borrowing to $170 million, subject to various conditions precedent. During April
2001, the Company added another $30.0 million of available credit under this
feature, increasing the maximum borrowing availability to $150.0 million.
REVOLVING TERM LOAN AND REVOLVING LINE OF CREDIT, CANADA
During August 1999, the Company's Canadian subsidiary entered into an agreement
with a Canadian bank for a revolving term loan. The term loan, which expires on
August 31, 2001, allows the Company to borrow Canadian or U.S. dollars up to a
maximum of 10.0 million Canadian dollars, or approximately $6.3 million. The
term loan accrues interest at the Company's option at either the bank's prime
rate plus 0.10 per cent. or the bank's U.S. dollar commercial loan rate plus
0.10 per cent. A commitment fee of 0.25 per cent. is charged on the unused
portion of the term loan. As of March 31, 2001, the outstanding balance under
the Company's Canadian revolving term loan was 2.1 million Canadian dollars, or
approximately $1.3 million, at an interest rate of 6.85 per cent. The Company
had 7.9 million Canadian dollars, or approximately $5.0 million, available for
future borrowings.
55
In December 2000, the Company's Canadian subsidiary entered into an agreement
with a Canadian bank for an unsecured revolving line of credit facility in
addition to the term loan. The Canadian credit facility expires on January 1,
2002 and replaced the Company's previous Canadian revolving line of credit
facility, which would have expired on December 31, 2000. The Canadian credit
facility allows the Company to borrow Canadian or U.S. dollars up to a maximum
of 5.0 million Canadian dollars, or approximately $3.2 million. For Canadian
dollar borrowings, the Canadian credit facility accrues interest at the bank's
prime rate or the bank's cost of funds plus an adjustment ranging from 1.3 per
cent. to 2.0 per cent. depending on the Company's financial performance. For
U.S. dollar borrowings, the Canadian credit facility accrues interest at the
prime rate of the bank or a Eurodollar rate plus an adjustment ranging from 1.3
per cent. to 2.0 per cent. depending on the Company's financial performance. A
facility fee of 0.20 per cent. to 0.375 per cent. is charged on the entire
amount of the Canadian credit facility. As of March 31, 2001, the outstanding
balance under the Company's Canadian revolving line of credit facility was 2.0
million Canadian dollars, or approximately $1.3 million, at an interest rate of
6.75 per cent. The Company had 3.0 million Canadian dollars, or approximately
$1.9 million, available for future borrowings.
During April 2001, the Company refinanced the Canadian revolving term loan and
Canadian revolving credit facility with a single credit facility of 20.0 million
Canadian dollars, or approximately $12.7 million, expiring during April 2004.
Availability under the credit facility is subject to certain borrowing base
limitations, as defined. For Canadian dollar borrowings, the Canadian credit
facility accrues interest at the bank's prime rate plus 50 basis points. For
U.S. dollar borrowings, the Canadian credit facility accrues interest at the
bank's U.S. dollar base rate in New York plus 50 basis points. The credit
facility includes a standby fee of 0.25 per cent. on the unused portion of the
credit facility.
REVOLVING LINE OF CREDIT, AUSTRALIA
In December 2000, the Company's Australian subsidiary entered into an agreement
with an Australian bank for an unsecured revolving line of credit facility
allowing the Company to borrow Australian dollars up to a maximum of 15.0
million Australian dollars, or approximately $7.3 million. The Australian credit
facility expires on January 1, 2002 and replaced the Company's previous
Australian revolving line of credit facility, which would have expired on
December 31, 2000. The Australian credit facility accrues interest at the
Australian Bill Rate plus an adjustment ranging from 1.3 per cent. to 2.0 per
cent. depending on the Company's financial performance. A facility fee of 0.20
per cent. to 0.375 per cent. is charged on the entire amount of the Australian
facility. As of March 31, 2001, the outstanding balance under the Company's
Australian credit facility was 2.7 million Australian dollars, or approximately
$1.3 million, at an interest rate of 7.18 per cent. The Company had 12.3 million
Australian dollars, or approximately $6.0 million, available for future
borrowings.
During May 2001, the Company amended its Australian credit facility to add
another 5.0 million Australian dollars, or approximately $2.4 million, to its
available credit for total maximum credit availability of 20.0 million
Australian dollars, or approximately $9.7 million.
OTHER
At March 31, 2001, other debt represents notes payable assumed in connection
with the acquisition of Etertin in Argentina, effective October 1, 2000. At
March 31, 2000, other debt represents non-cancellable capital lease agreements
involving warehouse equipment and computer equipment. The Company's property
held under capital leases at March 31, 2000, included in furniture, fixtures and
equipment in the balance sheet, amounted to approximately $2.7 million, net of
accumulated amortization of approximately $0.1 million.
Future maturities of long-term debt at March 31, 2001, giving effect to the
refinancing of the Canadian credit facility, are as follows (in thousands):
Fiscal year ended March 31,
2002 $ 1,436
2003 --
2004 74,000
2005 2,607
2006 --
Thereafter --
-------
$78,043
=======
56
NOTE 6 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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.
In the opinion of management, credit risk with respect to trade receivables is
limited due to a large number of diversified customers and the geographic
diversification of the Company's customer base. The Company performs ongoing
credit evaluations of its customers and believes that adequate allowances for
any uncollectible trade receivables are maintained. The Company's derivative
instruments are subject to credit risk of non-performance by counterparties
under such agreements. However, this risk is minimal as the Company selects
counterparties with high credit ratings and the majority of the Company's
derivative instruments are with participating banks under its credit facilities.
CURRENCY RATE MANAGEMENT
During fiscal year 2001 and 2000, the Company periodically entered into foreign
currency exchange contracts to manage its foreign currency exchange risk related
to the net investment and intercompany balances applicable to its foreign
subsidiaries. These contracts typically require the exchange of a foreign
currency for U.S. dollars at a fixed rate at a future date. At March 31, 2001,
many of the Company's outstanding hedges were offset by contracts to exchange
U.S. dollars for a foreign currency at a fixed rate at a future date. At March
31, 2001, the outstanding contract amounts in U.S. dollars totalled $16.3
million, including $12.4 million for Eurodollars, $2.6 million for Australian
dollars, and $1.3 million for Canadian dollars. At March 31, 2000, the
outstanding contract amounts in U.S. dollars totalled $19.7 million, including
$11.5 million for Australian dollars and $8.2 million for Canadian dollars. The
Company had incurred net unrealised gains (losses) on its foreign currency
exchange contracts of ($0.5) million and $0.6 million at March 31, 2001 and
2000, respectively, which are included as a component of shareholders' equity.
Due to the short-term nature of these contracts, fair value approximates the
recorded net unrealised gain (loss).
INTEREST RATE MANAGEMENT
The Company may enter into interest rate swaps to diversify its risk associated
with interest rate fluctuations. Under these interest rate swaps, the Company
agrees with other parties to exchange, at specified intervals, the difference
between fixed rate and floating rate interest amounts calculated by reference to
an agreed notional principal amount. At March 31, 2001, the Company had an
interest rate swap agreement with a notional amount of $25.0 million and a fair
value loss position of $0.7 million.
NOTE 7 -- SHAREHOLDERS' EQUITY
PUBLIC OFFERINGS
In December 1999, PFSweb successfully completed the IPO of 19.9 per cent. of its
outstanding stock and sold 3,565,000 shares of common stock at $17 per share.
Net proceeds from the IPO aggregated $53 million and were used to repay PFSweb's
intercompany payable to Daisytek of approximately $27 million and to acquire
from Daisytek all fixed assets in its Memphis distribution facility, as well as
certain assets providing information technology services, for $5.0 million.
Daisytek used these proceeds to repay bank debt. As a result of the IPO, the
Company's additional paid-in capital increased by approximately $43 million.
On July 7, 2000, Daisytek completed the spin-off of PFSweb and distributed
approximately 0.81 shares of PFSweb common stock for each share of Daisytek
common stock owned by Daisytek shareholders. Daisytek's stock price was adjusted
on July 7, 2000 to exclude the value of PFSweb.
SHAREHOLDER RIGHTS PLAN
On October 15, 1999, the Daisytek Board of Directors declared a dividend
distribution of one Daisytek preferred stock purchase right (a "right") for each
share of the Company's common stock outstanding on October 25, 1999. Each right
entitles the registered shareowners to purchase from the Company one one-
thousandth of a share of preferred stock at an exercise price of $70.00, subject
to adjustment. The rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or group acquiring
or attempting to acquire 15 per cent. or more of the outstanding shares of
common stock. The rights expire on October 25, 2009, unless redeemed or
exchanged by the Company earlier.
57
STOCK REPURCHASE
On July 10, 2000, the Company announced the authorisation by the Board of
Directors of the repurchase of up to 10 per cent. of the outstanding shares of
its common stock, and on September 13, 2000, the Company announced the
authorisation of the repurchase of up to an additional 10 per cent. of the then
outstanding shares of common stock. As of March 31, 2001, the two approved share
buy-back programs were completed and a total of approximately 3.4 million shares
have been repurchased using cash of approximately $22 million.
RECONCILIATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts). Weighted-average shares excluded
from the calculation that related to potentially dilutive securities amount to
approximately 1.3 million, 0.7 million and 0.6 million for the years ended March
31, 2001, 2000 and 1999, respectively.
FISCAL YEARS ENDED
MARCH 31,
----------------------------------------------
2001 2000 1999
NUMERATOR:
Income from continuing operations $ 11,037 $ 4,423 $ 19,188
Income from operations of discontinued subsidiary 389 116 --
------------ ------------ ------------
Income before cumulative effect of accounting change 11,426 4,539 19,188
Cumulative effect of accounting change -- -- (405)
------------ ------------ ------------
Net income $ 11,426 $ 4,539 $ 18,783
============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share --
Weighted average shares 15,904 17,248 17,101
Effect of dilutive securities:
Stock options 204 938 688
------------ ------------ ------------
Denominator for diluted earnings per share --
Adjusted weighted average shares 16,108 18,186 17,789
Net income per common share:
Basic:
Income from continuing operations $ 0.69 $ 0.26 $ 1.12
Income from operations of discontinued subsidiary 0.03 -- --
------------ ------------ ------------
Income before cumulative effect of accounting change 0.72 0.26 1.12
Cumulative effect of accounting change -- -- (0.02)
------------ ------------ ------------
Net income $ 0.72 $ 0.26 $ 1.10
============ ============ ============
Diluted:
Income from continuing operations $ 0.69 $ 0.24 $ 1.08
Income from operations of discontinued subsidiary 0.02 0.01 --
------------ ------------ ------------
Income before cumulative effect of accounting change 0.71 0.25 1.08
Cumulative effect of accounting change -- -- (0.02)
------------ ------------ ------------
Net income $ 0.71 $ 0.25 $ 1.06
============ ============ ============
NOTE 8 -- STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN
Daisytek provides its employees an opportunity to acquire a proprietary interest
in the company under its 1998 Employee Stock Purchase Plan qualified under
Section 423 of the Internal Revenue Code of 1986. The stock purchase plan
provides for acquisition of Daisytek common stock at a 15 per cent. discount of
market value and permits each employee of Daisytek's domestic subsidiaries who
have completed ninety days of service to elect to participate in the plan.
Eligible employees may elect to contribute up to 10 per cent. of their
compensation with after-tax dollars up to a maximum annual contribution of
$25,000. The Company has
58
reserved 250,000 shares of its common stock under the stock purchase plan. As of
March 31, 2001, 74,624 shares of common stock had been purchased under the plan.
STOCK OPTION PLANS
The Company has established various stock option plans which provide for the
grant of incentive awards in the form of stock options to directors, executive
management, key employees and outside consultants of Daisytek. These plans are
administered by the Compensation Committee of the Board of Directors. Options
issued under these stock option plans have exercise prices equal to the fair
market value of the Company's common stock on the date of issuance, generally
vest over a three-year period from the date of grant and expire ten years after
the date of grant.
In connection with the completion of the PFSweb spin-off as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options"). The exercise price and the number
of shares subject to each of the Replacement Options was established pursuant to
a formula designed to ensure that: (1) the aggregate "intrinsic value" (i.e.,
the difference between the exercise price of the option and the market price of
the common stock underlying the option) of the Replacement Option did not exceed
the aggregate intrinsic value of the outstanding Daisytek Pre-spin Option which
is replaced by such Replacement Option immediately prior to the spin-off and (2)
the ratio of the exercise price of each option to the market value of the
underlying stock immediately before and after the spin-off was preserved. Other
terms and conditions of each Replacement Option, including the time or times
when, and the manner in which, each option is exercisable, the duration of the
exercise period, the permitted method of exercise, settlement and payment, the
rules that apply in the event of the termination of employment of the employee,
the events, if any, that may give rise to an employee's right to accelerate the
vesting or the time or exercise thereof and the vesting provisions, are the same
as those of the replaced Daisytek Pre-spin Option, except that option holders
who are employed by one company are permitted to exercise, and are subject to
all of the terms and provisions of, options to acquire shares in the other
company as if such holder was an employee of such other company.
As of March 31, 2001, Daisytek has authorised an aggregate of 5,550,000 shares
of common stock for issuance under the various stock option plans. Additionally,
the Company's Board of Directors authorised an additional 1,999,026 shares for
issuance outside the existing plans. The aggregate number of options available
for issuance under the Company's plans at March 31, 2001 is 1,523,953.
The following table summarises the Company's stock option activity for the
fiscal years ended March 31, 1999, 2000 and 2001:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
Balance at March 31, 1998 1,725,974 $11.66
Granted 2,773,892 $15.68
Exercised (223,953) $7.18
Cancelled (291,844) $16.41
-----------
Balance at March 31, 1999 3,984,069 $14.37
Granted 473,500 $9.83
Exercised (402,548) $11.73
Cancelled (97,226) $16.46
-----------
Balance at March 31, 2000 3,957,795 $13.07
Granted 25,000 $10.69
Exercised (28,800) $10.78
Cancelled (70,721) $16.20
Terminated -- PFSweb spin-off (3,883,274) $14.00
Reissued -- PFSweb spin-off 3,634,736 $8.00
Granted 2,441,000 $6.43
Exercised (10,533) $7.44
Cancelled (356,932) $8.00
-----------
Balance at March 31, 2001 5,708,271 $7.33
===========
59
The following table summarises information about stock options outstanding at
March 31, 2001:
OUTSTANDING EXERCISABLE
- ------------------------------------------------------------------ ------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE OPTIONS EXERCISE
PRICES OPTIONS CONTRACTUAL LIFE PRICE PRICE
$1.65 288 2.0 years $1.65 288 $1.65
$4.88 -- $7.04 2,823,164 8.7 years 6.20 638,867 6.16
$7.38 -- $10.17 2,684,657 7.4 years 8.00 1,628,767 8.00
$11.10 -- $14.31 200,162 7.0 years 13.73 99,321 14.00
---------- ---------
5,708,271 $7.33 2,367,243 $7.76
========== =========
As of March 31, 2001, 2000 and 1999, 2,367,243, 1,038,568 and 413,766,
respectively, of options outstanding were exercisable. The weighted-average fair
value of options granted during fiscal years 2001, 2000 and 1999 was $3.44,
$5.41 and $7.93, respectively.
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no compensation cost is recognised in the consolidated
financial statements for stock options which have exercise prices equal to or in
excess of the market value of the Company's common stock on the date of
issuance. Had the Company determined compensation cost based on the fair value
of stock options at the grant date under SFAS No. 123, the Company's pro forma
net income and earnings per share would have been as follows:
FISCAL YEARS ENDED
MARCH 31,
------------------------------------
2001 2000 1999
Net income (loss):
As reported $11,426 $ 4,539 $18,783
Pro forma $ 5,586 $(3,801) $14,169
Earnings (loss) per share:
Basic:
As reported $ 0.72 $ 0.26 $ 1.10
Pro forma $ 0.35 $ (0.22) $ 0.83
Diluted
As reported $ 0.71 $ 0.25 $ 1.06
Pro forma $ 0.35 $ (0.22) $ 0.80
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal years 2001, 2000 and 1999: risk-free interest rates
ranging from 4.6 per cent. to 6.0 per cent.; dividend yields of 0 per cent.;
expected stock volatility ranging from 41.4 per cent. to 56.9 per cent.; and
expected lives ranging from five to six years.
NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
FISCAL YEARS ENDED
MARCH 31,
------------------------------------
2001 2000 1999
Cash paid during the period for:
Interest $5,664 $3,853 $ 2,718
Income taxes $3,892 $7,669 $14,607
Fixed assets acquired under capital leases $ -- $2,400 $ 347
NOTE 10 -- 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, capitalisation of inventory costs, reserves
for inventory, book versus tax depreciation differences, and certain accrued
expenses deducted for book purposes but not
60
yet deductible for tax purposes. A reconciliation of the difference between the
expected income tax provision, before operations of discontinued subsidiary and
cumulative effect of accounting change, at the U.S. Federal statutory corporate
tax rate of 35 per cent., 34 per cent. and 35 per cent. for fiscal year 2001,
2000 and 1999, respectively, and the Company's effective tax rate is as follows
(in thousands):
FISCAL YEARS ENDED
MARCH 31,
------------------------------------
2001 2000 1999
Provision computed at statutory rate $ 6,431 $ 2,876 $ 10,854
Impact of foreign taxation at different rate 487 264 538
State income taxes, net of federal benefit 373 410 694
Expenses not deductible for tax purposes 352 420 346
Impact of acquired subchapter S corporation accounted for as a
pooling of interests -- -- (291)
Change in valuation reserve -- 807 (203)
Other (259) (175) (115)
-------- -------- --------
Provision for income taxes $ 7,384 $ 4,602 $ 11,823
======== ======== ========
The provision (benefit) for income taxes is summarised as follows (in
thousands):
FISCAL YEARS ENDED
MARCH 31,
------------------------------------
2001 2000 1999
Current
Domestic $ 3,744 $ 1,395 $ 9,857
State 547 623 1,068
Foreign 3,487 2,696 2,581
-------- -------- --------
Total current 7,778 4,714 13,506
-------- -------- --------
Deferred
Domestic (278) (151) (1,683)
Foreign (116) 39 --
-------- -------- --------
Total deferred (394) (112) (1,683)
-------- -------- --------
Total $ 7,384 $ 4,602 $ 11,823
======== ======== ========
The components of the deferred tax asset (liability) as of March 31, 2001 and
2000 are as follows (in thousands):
MARCH 31,
--------------------
2001 2000
Deferred tax assets:
Allowance for doubtful accounts $ 1,570 $ 1,568
Inventory 885 880
Foreign net operating loss carryforwards 3,809 1,974
Other 376 1,113
------- -------
6,640 5,535
Less -- Valuation reserve -- (915)
------- -------
Total deferred tax assets 6,640 4,620
------- -------
Deferred tax liabilities:
Accounts receivable discount 571 1,038
Foreign inventory purchases 2,954 2,437
Intangibles 810 391
Other 2,664 505
------- -------
Total deferred tax liabilities 6,999 4,371
------- -------
Net deferred tax asset (liability) $ (359) $ 249
======= =======
61
In assessing the realisability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realised. The foreign net operating loss carryforwards at
March 31, 2001 and 2000 relate primarily to taxable losses of the Company's
Mexican subsidiary. These loss carryforwards begin to expire in fiscal year
2013. The foreign net operating loss carryforwards at March 31, 2000 also
include taxable losses related to PFSweb's European subsidiary.
As of March 31, 2000, a valuation allowance was recorded due to uncertainties
regarding the Company's ability to utilise PFSweb deferred tax assets following
its spin-off from the Company. During fiscal year 2001, the valuation allowance
and related deferred tax assets were transferred to PFSweb upon completion of
the PFSweb spin-off.
The Company received a tax benefit due to the exercise of certain stock options
of $1.1 million during fiscal year 2000 and $0.4 million during fiscal year
1999. The Company recorded income tax expense related to operations of
discontinued subsidiary of approximately $0.2 million and $0.1 million for the
fiscal year 2001 and 2000, respectively.
NOTE 11 -- RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The Company makes available one-year and three-year loans to its executive
officers and non-employee directors. The one-year loans accrue interest at the
Company's effective borrowing rate (6.9 per cent. at March 31, 2001 and 8.0 per
cent. at March 31, 2000) and the three-year loans accrue interest at the
Company's effective borrowing rate plus one per cent. Loan amounts classified as
short-term under these contracts are included in prepaid expenses and other
current assets on the Company's consolidated balance sheets and totalled $0.5
million and $0.3 million at March 31, 2001 and 2000, respectively. Loan amounts
classified as long-term under these contracts are included in other assets on
the Company's consolidated balance sheets and totalled $0.6 million and $0.5
million at March 31, 2001 and 2000, respectively.
NOTE 12 -- COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company and its subsidiaries lease facilities and warehouse, office,
transportation and other equipment under operating leases expiring in various
years. In most cases, management expects that, in the normal course of business,
leases will be renewed or replaced by other leases. As discussed in Note 3, the
Company completed a transaction during June 2001 to purchase certain
distribution assets from PFSweb and to terminate certain transaction management
services agreements with PFSweb. As a result, sublease rentals of approximately
$4.8 million that, as of March 31, 2001, were scheduled to be paid by PFSweb
will be now be paid by the Company. Minimum future annual rental payments under
non-cancellable operating leases having original terms in excess of one year are
as follows (in thousands):
2002 $ 8,549
2003 7,031
2004 6,176
2005 3,225
2006 2,653
Thereafter 3,891
-------
Total minimum lease payments 31,525
Less: sublease rentals 7,004
-------
$24,521
=======
Total rental expense under operating leases approximated $6.0 million, $8.8
million and $5.8 million for the fiscal years ended March 31, 2001, 2000 and
1999, respectively.
Although the Company carries products and accessories supplied by numerous
vendors, the Company's net revenues from products manufactured by its ten
largest suppliers were approximately 76 per cent., 78 per cent. and 69 per cent.
of total net revenues during fiscal years 2001, 2000 and 1999, 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. 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
62
or stock balancing privileges under which the Company can return slow-moving
inventory in exchange for other products.
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, results of operations or
cash flows.
In connection with the IPO of PFSweb, the Company has guaranteed certain PFSweb
operating lease obligations. The Company does not expect to make any payments
under its guarantee of the PFSweb operating leases; however, if performance were
required, the amounts listed below would be mitigated by terminations and/or
subleases. The total minimum payments for the PFSweb operating leases which are
guaranteed by the Company are as follows (in thousands):
2002 $ 4,071
2003 4,158
2004 2,771
2005 1,735
2006 1,731
Thereafter 2,871
-------
Total $17,337
=======
NOTE 13 -- 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 2001, 2000 and 1999, the Company matched 10
per cent. of employee contributions resulting in a charge against income of
approximately $143,000, $91,000 and $88,000, respectively.
NOTE 14 -- SEGMENT DATA
The Company currently operates in two reportable business segments -- computer
and office supplies and professional tape products. Prior to the spin-off of
PFSweb during July 2000, the Company also provided transaction management
services to both traditional and electronic commerce companies. The Company's
reportable segments are strategic business units that offer different products
and services and are managed separately based on the fundamental differences in
their operations. PFSweb segment revenue includes revenue earned for certain
services provided to the computer and office supplies segment, which is
eliminated in consolidation. The accounting policies of the segments are the
same as those described in Note 1. No single customer accounted for more than 10
per cent. of the Company's annual net revenues for the fiscal years ended March
31, 2001, 2000 and 1999.
COMPUTER AND OFFICE SUPPLIES
The computer and office supplies segment distributes over 17,000 nationally
known, name-brand computer and office supplies products to more than 35,000
customer locations. Customers include value-added resellers, computer supplies
dealers, office product dealers, contract stationers, buying groups, computer
and office product superstores, grocery stores, drugstores, web-based resellers,
and other retailers who resell the products to end-users. This segment also
includes Virtual Demand, the Company's wholly-owned subsidiary which provides
marketing and demand generation services. The Company began computer and office
supplies distribution in the United States in the 1980s and expanded
internationally into Canada in 1989, Mexico in 1994, Australia in 1996 and
Argentina in 2000. In addition, the Company began distribution to Central and
South America in 1996 from its Miami facility. Computer and office supplies
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.
PROFESSIONAL TAPE PRODUCTS
The professional tape products segment is headquartered in Elmhurst, Illinois
and operates as a distributor of media products to the film, entertainment and
multimedia industries. Daisytek began operating the professional tape products
segment in 1998 and currently distributes more than 2,800 professional tape
products to over 23,500 customers. Professional tape products customers
primarily include production and broadcast companies, advertising and
governmental agencies, cable television providers, educational
63
institutions and healthcare providers. Professional tape products include
videotape, audiotape, motion picture film and data storage media.
PFSweb
The Company's subsidiary PFSweb provided transaction management services to both
traditional and e-commerce companies and sold products and services primarily in
the United States, Canada and Europe. The Company completed the spin-off of
PFSweb during July 2000, as discussed in Note 3.
Separate financial data for each of the Company's operating segments is provided
below (in thousands):
2001 2000 1999
Net revenues:
Computer and office supplies, excluding discontinued operations $ 921,793 $ 869,458 $ 802,191
Professional tape products 81,790 93,723 103,346
PFSweb 15,836 38,619 16,009
Intersegment eliminations (7,289) (14,594) (5,028)
---------- ---------- ----------
Consolidated 1,012,130 987,206 916,518
---------- ---------- ----------
Operating contribution (loss):
Computer and office supplies, excluding discontinued operations 26,593 25,330 32,956
Professional tape products 3,541 5,085 4,383
PFSweb (505) (7,940) (238)
Intersegment eliminations (458) (79) 618
---------- ---------- ----------
Consolidated 29,171 22,396 37,719
---------- ---------- ----------
Identifiable assets:
Computer and office supplies, excluding discontinued operations 247,377 219,356 198,527
Professional tape products 38,809 43,638 48,295
PFSweb -- 64,840 69,057
Intersegment eliminations -- (4,539) --
Assets of discontinued subsidiary 94,682 49,451 --
---------- ---------- ----------
Consolidated 380,868 372,746 315,879
---------- ---------- ----------
The Company's computer and office supplies segment includes certain expenses and
assets that relate to the professional tape products segment which are not
allocated by management to this segment. These expenses primarily represent: (1)
costs related to the Company's centralised management information, warehouse and
telephone systems and (2) executive, administrative and other corporate costs.
The assets not allocated to the professional tape products segment primarily
relate to the Company's centralised management information and telephone systems
and leasehold improvement on shared facilities.
Transition and certain other costs recorded by the Company have not been
allocated to the reportable segments. These expenses primarily relate to certain
repositioning and separation activities associated with the spin-off of PFSweb.
Other unallocated expenses include certain bad debt allowance increases, legal
and professional fees related to an unsolicited acquisition offer, costs related
to the closing of Singapore, write-downs of inventory, certain charges related
to the closure B.A. Pargh's Nashville headquarters and restructuring activities
for the professional tape products segment. Additionally, certain costs incurred
by the professional tape products segment during fiscal years 2000 and 1999,
including acquisition related costs and a loss on disposition of the
professional tape hardware business, are not included in this segment's
operating contribution.
A reconciliation of segment operating contribution to consolidated income from
operations follows (in thousands):
2001 2000 1999
Segment operating contribution (loss) $ 29,171 $ 22,396 $ 37,719
Transition and other unallocated costs (6,940) (11,132) --
Acquisition related costs -- (619) (1,111)
Loss on disposition of business -- 1,000 (2,800)
-------- -------- --------
Consolidated income from operations 22,231 11,645 33,808
-------- -------- --------
64
Geographic Information
The Company's computer and office supplies segment has significant international
operations. A summary of this segment by geographic region follows (in
thousands):
2001 2000 1999
Net revenues -- computer and office supplies:
United States $ 593,080 $ 586,191 $ 568,906
Canada 128,607 106,556 99,153
Latin America 133,418 113,020 87,740
Australia 66,409 55,378 39,103
Other 279 8,313 7,289
---------- ---------- ----------
$ 921,793 $ 869,458 $ 802,191
========== ========== ==========
Long-lived assets -- computer and office supplies:
United States $ 28,734 $ 15,336 $ 14,733
Canada 732 973 1,185
Latin America 1,715 1,090 1,027
Australia 1,910 2,528 2,734
Other -- 118 259
---------- ---------- ----------
$ 33,091 $ 20,045 $ 19,938
========== ========== ==========
NOTE 15 -- QUARTERLY DATA (UNAUDITED)
Summarised unaudited quarterly financial data for fiscal years 2001 and 2000 are
as follows (dollars in thousands, except per share data). Quarterly data as
previously presented in the Company's Form 10-Qs, as applicable, has been
restated to reflect the operations of the Company's subsidiary BSD as
discontinued operations (see Note 4).
FISCAL YEAR 2001
--------------------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
(UNAUDITED)
Net revenues $ 264,066 $ 251,034(a) $ 242,305(a) $ 254,725(a)
Income from operations(b) $ 6,155 $ 4,314 $ 6,077 $ 5,685
Operating margin 2.3% 1.7% 2.5% 2.2%
Income before minority interest $ 3,006 $ 2,004 $ 3,193 $ 2,787
Percent of net revenues 1.1% 0.8% 1.3% 1.1%
Income from continuing operations $ 3,006 $ 2,004 $ 3,193 $ 2,834
Percent of net revenues 1.1% 0.8% 1.3% 1.1%
Net income $ 3,119 $ 2,206 $ 3,121 $ 2,980
Net margin 1.2% 0.9% 1.3% 1.2%
Net income per common share:
Basic $ 0.21 $ 0.15 $ 0.19 $ 0.17
Diluted $ 0.21 $ 0.15 $ 0.19 $ 0.17
FISCAL YEAR 2000
---------------------------------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
(UNAUDITED)
Net revenues $ 264,375(a) $ 247,580(a) $ 239,504(a) $ 235,747(a)
Income (loss) from operations(b) $ 3,853 $ (2,318) $ 2,502 $ 7,608
Operating margin 1.5% (0.9)% 1.0% 3.2%
Income (loss) before minority interest $ 2,153 $ (3,420) $ 941 $ 4,183
Percent of net revenues 0.8% (1.4)% 0.4% 1.8%
Income (loss) from continuing operations $ 2,231 $ (2,932) $ 941 $ 4,183
Percent of net revenues 0.8% (1.2)% 0.4% 1.8%
Net income (loss) $ 2,303 $ (2,899) $ 952 $ 4,183
Net margin 0.9% (1.2)% 0.4% 1.8%
Net income (loss) per common share:
Basic $ 0.13 $ (0.17) $ 0.06 $ 0.24
Diluted $ 0.12 $ (0.17) $ 0.05 $ 0.24
65
(a) The Company has restated all periods prior to the fourth quarter of fiscal
year 2001 to classify freight costs billed to customers and rebates paid to
customers as components of net revenues in compliance with Emerging Issues
Task Force Issues No. 00-10, Accounting for Shipping and Handling Fees and
Costs, and No. 00-14, Accounting for Certain Sales Incentives. Freight
costs billed to customers and rebates paid to customers had previously been
recorded as a component of cost of sales.
(b) The quarterly data includes certain unusual charges that affect
comparability, including certain bad debt allowance increases, legal and
professional fees related to an unsolicited acquisition offer, costs
related to the closing of Singapore, write-downs of inventory, certain
charges related to the closure B.A. Pargh's Nashville headquarters and
restructuring activities for the professional tape products segment. These
costs totalled $6.9 million for fiscal year 2001, including $1.9 million,
$2.8 million, $1.6 million and $0.6 million for the quarters ended March
31, 2001, December 31, 2000, September 30, 2000 and June 30, 2000,
respectively. These costs totalled $11.1 million for fiscal year 2000,
including $1.8 million, $1.9 million and $7.4 million for the quarters
ended March 31, 2000, December 31, 1999, and September 30, 1999.
66
PART B: UNAUDITED FINANCIAL RESULTS
FOR THE NINE MONTHS ENDED 31 DECEMBER 2001
The financial information set out in this Part B of Appendix II constitutes the
unaudited financial statements of Daisytek for the nine months ended 31 December
2001 in the form filed with the SEC on Form 10-Q on 14 February 2002.
67
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
2001 2001
------------ ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,328 $ 1,971
Accounts receivable, net of allowance for doubtful accounts of $4,195 and
$4,979 at December 31, 2001 and March 31, 2001, respectively 156,131 134,966
Inventories, net 105,033 83,615
Prepaid expenses and other current assets 14,844 7,194
Deferred tax asset, net 1,874 --
Current assets of discontinued subsidiary -- 94,682
------------ ----------
Total current assets 283,210 322,428
------------ ----------
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 37,096 23,325
Leasehold improvements 3,929 3,641
------------ ----------
41,025 26,966
Less accumulated depreciation and amortization (19,923) (15,569)
------------ ----------
Net property and equipment 21,102 11,397
Other assets 20,448 550
Goodwill, net 53,766 46,493
------------ ----------
Total assets $ 378,526 $ 380,868
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,212 $ 1,436
Trade accounts payable 78,451 39,762
Accrued expenses and other liabilities 17,694 10,471
Current liabilities of discontinued subsidiary -- 93,490
------------ ----------
Total current liabilities 103,357 145,159
------------ ----------
Long-term debt, less current portion 81,570 76,607
Other liabilities, commitments and contingencies 2,217 --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none issued and
outstanding -- --
Common stock, $0.01 par value; 30,000,000 shares authorized; 19,272,437
shares 193 177
issued at December 31, 2001 and 17,689,850 shares issued at March 31, 2001
Additional paid-in capital 114,002 94,663
Retained earnings 99,391 92,415
Accumulated other comprehensive loss (10,512) (6,043)
Treasury stock at cost, 1,773,905 at December 31, 2001 and 3,352,305 shares
at March 31, 2001 (11,692) (22,110)
------------ ----------
Total shareholders' equity 191,382 159,102
------------ ----------
Total liabilities and shareholders' equity $ 378,526 $ 380,868
============ ==========
The accompanying notes are an integral part of these financial statements.
68
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited)
Net revenues $ 309,338 $ 251,034 $ 861,059 $ 748,064
Cost of revenues 278,400 222,662 769,052 662,001
---------- ---------- ---------- ----------
Gross profit 30,938 28,372 92,007 86,063
Selling, general and administrative expenses 20,639 19,593 63,666 59,723
Depreciation and amortization 1,537 1,622 3,901 5,233
Restructuring and nonrecurring costs 2,044 2,843 6,469 5,031
---------- ---------- ---------- ----------
Income from operations 6,718 4,314 17,971 16,076
Interest expense, net 1,850 1,050 5,190 2,513
---------- ---------- ---------- ----------
Income from continuing operations before
income taxes 4,868 3,264 12,781 13,563
Provision for income taxes 1,752 1,260 4,720 5,579
---------- ---------- ---------- ----------
Income from continuing operations before
minority interest 3,116 2,004 8,061 7,984
Minority interest -- -- -- 47
---------- ---------- ---------- ----------
Income from continuing operations 3,116 2,004 8,061 8,031
Discontinued operations (Note 2)
Income (loss) from operations of discontinued
subsidiary, net of tax -- 202 (1,085) 276
---------- ---------- ---------- ----------
Net income $ 3,116 $ 2,206 $ 6,976 $ 8,307
========== ========== ========== ==========
Net income per common share:
Basic
Income from continuing operations $ 0.20 $ 0.13 $ 0.52 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax -- 0.02 (0.07) 0.02
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.15 $ 0.45 $ 0.51
========== ========== ========== ==========
Diluted
Income from continuing operations $ 0.18 $ 0.13 $ 0.48 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax -- 0.02 (0.07) 0.01
---------- ---------- ---------- ----------
Net income $ 0.18 $ 0.15 $ 0.41 $ 0.50
========== ========== ========== ==========
Weighted average common and common share
equivalents outstanding:
Basic 15,899 14,989 15,378 16,356
Diluted 17,315 15,065 16,811 16,453
The accompanying notes are an integral part of these financial statements.
69
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
December 31,
--------------------------
2001 2000
---------- ----------
Net cash provided by operating activities from continuing operations $ 11,562 $ 21,451
Cash flows from investing activities:
Purchases of property and equipment (9,158) (5,310)
Proceeds from the sale and leaseback of equipment 8,000 --
Disposition of subsidiary 923 (22,113)
Acquisition of Memphis distribution assets (10,700) --
Acquisitions of businesses, net of cash acquired (16,249) (16,729)
Payment for investment in and advances to ISA (18,553) --
(Increase) decrease in note receivable and other assets (525) 1,610
---------- ----------
Net cash used in investing activities (46,262) (42,542)
---------- ----------
Cash flows from financing activities:
Proceeds from lines of credit, net 8,095 14,505
Net proceeds from private placement of common stock 16,430 --
Purchase of treasury stock -- (18,795)
Net proceeds from exercise of stock options and issuance of common stock 13,338 707
Other (334) (1,318)
---------- ----------
Net cash provided by (used in) financing activities 37,529 (4,901)
Effect of exchange rates on cash and cash equivalents 528 (442)
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,357 (26,434)
Cash and cash equivalents, beginning of period 1,971 28,172
---------- ----------
Cash and cash equivalents, end of period $ 5,328 $ 1,738
========== ==========
Net cash provided by (used by) operating activities from discontinued
operations $ (685) $ 163
Activities not affecting cash:
Property and equipment acquired under capital leases $ 3,088 $ --
The accompanying notes are an integral part of these financial statements.
70
NOTE 1 --- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Interim period results are not necessarily indicative of results
to be expected for the year.
These financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Daisytek
International Corporation ("Daisytek" or the "Company") Annual Report on Form
10-K for the year ended March 31, 2001. The year-end consolidated balance sheet
data was derived from the audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.
NOTE 2 --- DISCONTINUED OPERATIONS
During June 2001, the Company announced its decision to exit the IBM master
distribution agreements, under which the Company's subsidiary Business Supplies
Distributors ("BSD") provided financing to enable the Company's former
subsidiary PFSweb, Inc. ("PFSweb") to service logistics contracts with IBM. As
part of the Company's plan to completely exit this business, Daisytek completed
the sale of BSD during September 2001 for net proceeds of approximately $0.9
million. The Company recorded a gain on the sale of approximately $0.2 million.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective
as of April 1, 2001. Under the provisions of SFAS No. 144, the results of
operations of BSD, which were previously included in the Company's computer and
office supplies business segment, are presented as discontinued operations in
the accompanying financial statements. The income (loss) from operations of
discontinued subsidiary are presented net of a tax benefit (expense) of
approximately ($0.1) million for the three months ended December 31, 2000, and
$0.6 million and ($0.2) million for the nine months ended December 31, 2001 and
2000, respectively, and include net revenues of approximately $48.9 million for
the three months ended December 31, 2000, and $66.6 million and $125.9 million
for the nine months ended December 31, 2001 and 2000, respectively.
NOTE 3 --- ACQUISITIONS AND GOODWILL
During May 2001, the Company completed a transaction to terminate certain
transaction management services agreements between the Company and PFSweb and to
purchase certain Memphis distribution assets from PFSweb, including assets
previously sold to PFSweb at the time of its initial public offering in December
1999. The Company recorded goodwill of approximately $2.5 million related to
this transaction.
The Company acquired certain assets and liabilities of Digital Storage, LLC, a
value-added distributor of computer media, accessories and supplies, during the
quarter ended June 30, 2001. This acquisition was accounted for using the
purchase method of accounting for business combinations and increased the
Company's goodwill by approximately $5.5 million.
During the quarter ended September 30, 2001, the Company acquired certain assets
and liabilities of General Stationery Supplies, an Australian office products
wholesaler. This acquisition was accounted for using the purchase method of
accounting for business combinations and increased the Company's goodwill by
approximately $1.7 million.
During September 2001, the Company invested 8.0 million British pounds, or
approximately $11.6 million, in ISA International plc ("ISA"), a publicly- held
European computer consumables distributor based in the United Kingdom which
indirectly owns 47% of Kingfield Heath Limited, a privately-owned wholesaler of
office products based in the United Kingdom. The investment in ISA is in the
form of preferred shares convertible into 50% of ISA's outstanding shares plus
one share at the Company's option any time over the next five years. The Company
receives a quarterly variable rate cumulative preferential dividend. Daisytek
was also granted warrants to purchase an additional 15.4 million common shares
for 2 million British pounds, or approximately $2.9 million, at the Company's
option any time over the next five years. As of December 31, 2001, the Company
has advanced additional funds to ISA of approximately 4.0 million British
pounds, or approximately $5.8 million, for pro-rata participation in a
shareholder rights issue by Kingfield Heath. Subsequent to December 31, 2001,
the Company advanced additional funds to ISA of 2.9 million
71
British pounds, or approximately $4.2 million, for working capital purposes. The
advances to ISA earn interest. The investment in ISA, including applicable
acquisition costs, is carried at cost and categorized as other assets in the
Company's condensed consolidated balance sheets.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective April 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise. The Company has completed the transitional impairment test required upon
adoption of SFAS No. 142 and determined that there is no impairment to its
recorded goodwill balances. Had the Company been accounting for its goodwill
under SFAS No. 142 for all periods presented, the Company's net income (in
thousands) and earnings per share would have been as follows:
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Reported net income $ 3,116 $ 2,206 $ 6,976 $ 8,307
Add back goodwill amortization, net of tax -- 383 -- 989
---------- ---------- ---------- ----------
Adjusted net income $ 3,116 $ 2,589 $ 6,976 $ 9,296
========== ========== ========== ==========
Basic earnings per share:
Reported net income $ 0.20 $ 0.15 $ 0.45 $ 0.51
Goodwill amortization, net of tax -- 0.02 -- 0.06
---------- ---------- ---------- ----------
Adjusted net income $ 0.20 $ 0.17 $ 0.45 $ 0.57
========== ========== ========== ==========
Diluted earnings per share:
Reported net income $ 0.18 $ 0.15 $ 0.41 $ 0.50
Goodwill amortization, net of tax -- 0.02 -- 0.06
---------- ---------- ---------- ----------
Adjusted net income $ 0.18 $ 0.17 $ 0.41 $ 0.56
========== ========== ========== ==========
NOTE 4 --- DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Effective April 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
value. Derivative instruments that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in its fair value will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Any ineffective portion of a derivative instrument's change in fair
value will be immediately recognized in earnings.
Interest Rate Management
To diversify its risk associated with interest rate fluctuations, the Company
has entered into interest rate swap agreements under which the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed rate and floating rate interest amounts calculated by reference to an
agreed notional principal amount. As of December 31, 2001, interest rate swaps
are hedging underlying variable-rate obligations with a principal amount of
$50.0 million. Under SFAS No. 133, the Company accounts for its interest rate
swap contracts as cash flow hedges whereby the fair value of the interest rate
swap agreement is reflected in the balance sheet with the corresponding offset,
net of tax, to accumulated other comprehensive income. The interest rate swap
agreements are perfect hedges and meet the criteria for accounting under the
short-cut method as defined in SFAS No. 133. Upon adoption of SFAS No. 133 on
April 1, 2001, the Company recorded a derivative liability of approximately $0.7
million. At December 31, 2001, the outstanding interest rate swap agreements had
a fair value loss position of approximately $2.2 million.
Currency Rate Management
As of April 1, 2001, the Company had outstanding foreign currency exchange
contracts to manage foreign currency exchange risk related to its net investment
in Canadian and Australian subsidiaries, which were settled during the quarter
ended June 30, 2001. The gains upon settlement of these contracts during the
quarter ended June 30, 2001 were reflected as a cumulative translation
adjustment within accumulated other
72
comprehensive income. As of December 31, 2001, the Company had no outstanding
foreign currency exchange contracts to manage risk associated with its net
investment in foreign subsidiaries.
The Company's subsidiary Business Supplies Distributors Europe BV entered into
foreign currency exchange contracts to manage foreign currency exchange risk
related to its intercompany loan denominated in United States dollars. These
contracts terminated during the quarter ended September 30, 2001 and were not
designated as hedges under SFAS No. 133. Changes in the fair value of the
intercompany loan were recorded as foreign currency transaction gains or losses
and changes in the fair value of the foreign currency exchange contracts were
recorded as derivative gains and losses. The net income statement impact of
these transactions during the nine months ended December 31, 2001 was not
material to the operations of the Company.
The Company's Canadian subsidiary enters into foreign currency exchange
contracts to manage its risk related to intercompany inventory purchases in the
United States. These hedges are designated as cash flow hedges under SFAS No.
133, with changes in the fair value of the contract recorded as a component of
accumulated other comprehensive income. The fair value of these contracts was
not material at December 31, 2001. In addition, the Company entered into a
foreign currency exchange contract to manage risk associated with its advances
to ISA. This contract was not designated as a hedge and the value of the
contract was not material at December 31, 2001.
NOTE 5 --- COMPREHENSIVE INCOME
The Company includes currency translation adjustments and changes in the fair
value of certain derivative financial instruments which qualify for hedge
accounting in comprehensive income.
Effective July 1, 2001, the functional currency for the Company's Mexican
subsidiary was changed from the United States dollar to the Mexican peso.
The functional currency for the Company's Argentina subsidiary is the
Argentinian peso. During January 2002, Argentina abandoned the fixed
dollar-to-peso exchange rate and devalued the Argentinian peso. The Company
began accounting for the devaluation effective December 21, 2001 at a rate of
1.65 Argentinian pesos to $1. As a result of the devaluation, the Company
recorded translation losses of $4.5 million as a component of accumulated other
comprehensive income during the quarter ended December 31, 2001.
The following table sets forth comprehensive income (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 3,116 $ 2,206 $ 6,976 $ 8,307
Comprehensive income adjustments:
Foreign currency translation adjustment (3,142) 256 (3,073) (525)
Cumulative effect of adoption of SFAS 133 as of
April 1, 2001, net of tax of $240 -- -- (445) --
Change in fair value of derivative financial
instruments, net of tax of $81 and $512 for the
three months and nine months ended
December 31, 2001, respectively 151 -- (951) --
-------- -------- -------- --------
Comprehensive income $ 125 $ 2,462 $ 2,507 $ 7,782
======== ======== ======== ========
73
NOTE 6 --- EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Income from continuing operations $ 3,116 $ 2,004 $ 8,061 $ 8,031
Income (loss) from operations of discontinued
subsidiary, net of tax -- 202 (1,085) 276
---------- ---------- ---------- ----------
Net income $ 3,116 $ 2,206 $ 6,976 $ 8,307
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share ---
Weighted average shares 15,899 14,989 15,378 16,356
Effect of dilutive securities:
Stock options 1,416 76 1,433 97
---------- ---------- ---------- ----------
Denominator for diluted earnings per share ---
Adjusted weighted average shares 17,315 15,065 16,811 16,453
========== ========== ========== ==========
Basic earnings per common share:
Income from continuing operations $ 0.20 $ 0.13 $ 0.52 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax -- 0.02 (0.07) 0.02
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.15 $ 0.45 $ 0.51
========== ========== ========== ==========
Diluted earnings per common share:
Income from continuing operations $ 0.18 $ 0.13 $ 0.48 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax -- 0.02 (0.07) 0.01
---------- ---------- ---------- ----------
Net income $ 0.18 $ 0.15 $ 0.41 $ 0.50
========== ========== ========== ==========
Employees and former employees exercised stock options to acquire 342,207 shares
for proceeds of approximately $3.9 million and 1,504,658 shares for proceeds of
approximately $12.9 million during the three months and nine months ended
December 31, 2001, respectively.
NOTE 7 --- DEBT
The Company's revolving line of credit facility in the United States, which
expires on December 19, 2003, includes an expandible feature to increase the
maximum borrowing to $170 million, subject to various conditions precedent.
During April 2001, the Company added another $30.0 million of available credit
under this feature, increasing the maximum borrowing availability from $120.0
million to $150.0 million (subject to certain borrowing limitations). As of
December 31, 2001, the outstanding balance under this credit facility was $68.0
million and, based on the Company's borrowing base limit at December 31, 2001,
$44.3 million was available for future borrowings.
During April 2001, the Company refinanced a revolving term loan with a Canadian
bank expiring on August 31, 2002 and an unsecured revolving line of credit
facility with a Canadian bank expiring on January 1, 2002 with a single
revolving credit facility of 20.0 million Canadian dollars expiring during April
2004. Availability under the credit facility is subject to certain borrowing
base limitations, as defined. For Canadian dollar borrowings, the Canadian
credit facility accrues interest at the bank's prime rate plus 50 basis points.
For U.S. dollar borrowings, the Canadian credit facility accrues interest at the
bank's U.S. dollar base rate in New York plus 50 basis points. The credit
facility includes a standby fee of 0.25% on the unused portion of the credit
facility. During October 2001, the Company amended its Canadian credit facility
to add another 10.0 million Canadian dollars to its available credit for total
maximum credit availability of 30.0 million Canadian dollars, or approximately
$18.8 million. As of December 31, 2001, the outstanding balance under the
Canadian credit facility was 18.6 million Canadian dollars, or approximately
74
$11.7 million, and 11.4 million Canadian dollars, or approximately $7.2 million,
was available for future borrowings.
During May 2001, the Company amended its unsecured revolving line of credit
facility with an Australian bank expiring on January 1, 2002 to add another 5.0
million Australian dollars to its available credit for total maximum credit
availability of 20.0 million Australian dollars, or approximately $10.2 million.
During December 2001, the Company extended the Australian credit facility to
January 1, 2003. As of December 31, 2001, the outstanding balance under the
Australian credit facility was 12.3 million Australian dollars, or approximately
$6.3 million, and 7.7 million Australian dollars, or approximately $3.9 million,
was available for future borrowings.
NOTE 8 --- RESTRUCTURING AND NONRECURRING COSTS
Restructuring and nonrecurring costs consist of the following for the three and
nine month periods ended December 31, 2001 and 2000 (in thousands):
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Restructuring charges (a) $ 2,044 $ -- $ 2,044 $ --
Final PFSweb separation charges (b) -- -- 4,425 --
PFSweb spin-off charges (c) -- 2,501 -- 4,689
Other -- 342 -- 342
-------- -------- -------- --------
$ 2,044 $ 2,843 $ 6,469 $ 5,031
======== ======== ======== ========
(a) During the quarter ended December 31, 2001, the Company commenced a
restructuring plan that includes (1) information technology
enhancements to ensure growth in the business will be technologically
supported; (2) distribution improvements and consolidation of
subsidiary computer and office supplies warehouses into five new
regional hub facilities in order to leverage distribution costs; and
(3) centralization of certain back-office resources into a shared
services organization to reduce costs and improve efficiencies.
Daisytek expects to complete the projects in approximately 18 months.
The Company incurred pre-tax charges of approximately $2.0 million
during the third quarter, including (1) $0.7 million related to
warehouse and distribution initiatives, including the integration of
office products at the Company's central distribution center in
Memphis; (2) $1.1 million related to employees severed during the third
quarter; and (3) $0.2 million related to other back-office
improvements. In addition, inventory costs of $0.9 million related to
the warehouse and distribution initiatives of the restructuring plan
are included in cost of revenues.
(b) As part of the Company's May 2001 transaction to terminate certain
transaction management services agreements between the Company and its
former subsidiary PFSweb and to purchase certain Memphis distribution
assets from PFSweb, the Company recognized a pre-tax nonrecurring
charge of $4.4 million. This charge included transaction costs, a
separation payment and finalization of other balances between the
Company and PFSweb.
(c) The Company incurred pre-tax charges of $2.5 million and $4.7 million
for the three months and nine months ended December 31, 2000 related to
reorganization and separation activities following the spin-off of the
Company's subsidiary PFSweb during July 2000.
NOTE 9 --- PRIVATE PLACEMENT OF COMMON STOCK
During December 2001, the Company completed the private placement of
approximately 1.6 million shares of Daisytek common stock to a group of
institutional investors for total gross proceeds of approximately $17.7 million.
Offering costs of approximately $1.2 million were incurred as of December 31,
2001.
75
NOTE 10 --- SEGMENT DATA
The Company currently operates in two reportable business segments --- (1)
computer and office supplies and (2) professional tape products. Prior to the
spin-off of the Company's subsidiary PFSweb during July 2000, the Company also
provided transaction management services to both traditional and electronic
commerce companies. Separate financial data for each of the Company's operating
segments, excluding discontinued operations, is provided below (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net revenues:
Computer and office supplies, excluding
discontinued operations $ 291,984 $ 231,140 $ 807,195 $ 677,157
Professional tape products 17,354 19,894 53,864 62,360
PFSweb -- -- -- 15,836
Intersegment eliminations -- -- -- (7,289)
---------- ---------- ---------- ----------
Consolidated 309,338 251,034 861,059 748,064
========== ========== ========== ==========
Operating contribution (loss):
Computer and office supplies, excluding
discontinued operations 8,776 6,427 21,967 18,790
Professional tape products 886 730 3,373 2,822
PFSweb -- -- -- (505)
---------- ---------- ---------- ----------
Consolidated 9,662 7,157 25,340 21,107
========== ========== ========== ==========
The Company's computer and office supplies segment includes certain expenses
that relate to the professional tape products segment which are not allocated by
management to this segment. These expenses primarily represent: (1) costs
related to the Company's centralized management information, warehouse and
telephone systems and (2) executive, administrative and other corporate costs.
Restructuring and nonrecurring costs of $2.9 million and $2.8 million for the
three months ended December 31, 2001 and 2000, respectively, and $7.4 million
and $5.0 million for the nine months ended December 31, 2001 and 2000,
respectively, have not been allocated to the reportable segments and must be
included to reconcile to the income from operations reported in the Company's
consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this document. Unless otherwise indicated, all references to "Daisytek,"
"we," "us," and "our" refer to Daisytek International Corporation, a Delaware
corporation, and its direct and indirect subsidiaries, including Daisytek,
Incorporated, which is Daisytek's primary operating subsidiary. References in
the Report to Daisytek's fiscal year mean the twelve-month period ending on
March 31 of such fiscal year.
Daisytek is a leading global wholesale distributor of computer and office
supplies and professional tape products. To enhance our relationship with our
computer and office supplies customers worldwide, we also provide unique,
value-added services such as direct marketing, merchandising and demand
generation. We sell our products and services in the United States, Canada,
Australia, Mexico and South America. Prior to the spin-off of our subsidiary
PFSweb, Inc. ("PFSweb") during July 2000, we also provided transaction
management services to both traditional and electronic commerce companies.
Recent Developments
During May 2001, we terminated certain transaction management services
agreements between Daisytek and PFSweb and purchased certain Memphis
distribution assets from PFSweb, including assets previously sold to PFSweb at
the time of its initial public offering in December 1999. In connection with
this transaction, PFSweb continued to offer services to Daisytek under a
separate fee agreement for a six-month period in order to support the transfer
of fulfillment operations and transaction processing back to Daisytek, including
the transition to a separate information technology platform. During October
2001, we announced the completion of our transition to an information technology
platform separate from PFSweb.
76
During June 2001, we announced our decision to exit the IBM master distribution
agreements, under which our subsidiary Business Supplies Distributors ("BSD")
provided financing to enable PFSweb to service logistics contracts with IBM. As
part of our plan to completely exit this business, we completed the sale of BSD
during September 2001. The exit of this business has allowed us to redeploy the
working capital required by this business to other strategic business
opportunities that provide higher returns on our investments. We adopted
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective as of April 1, 2001.
Under the provisions of SFAS No. 144, the results of operations of BSD, which
were previously included in our computer and office supplies business segment,
are presented as discontinued operations in the accompanying financial
statements.
During September 2001, we invested 8.0 million British pounds, or approximately
$11.6 million, in ISA International plc ("ISA"), a publicly-held European
computer consumables distributor based in the United Kingdom which indirectly
owns 47% of Kingfield Heath Limited, a privately-owned wholesaler of office
products based in the United Kingdom. The investment in ISA is in the form of
preferred shares convertible into 50% of ISA's outstanding shares plus one share
at our option any time over the next five years. We receive a quarterly variable
rate cumulative preferential dividend. We were also granted warrants to purchase
an additional 15.4 million common shares for 2 million British pounds, or
approximately $2.9 million, at our option any time over the next five years. As
of December 31, 2001, we have advanced additional funds to ISA of approximately
4.0 million British pounds, or approximately $5.8 million, for pro-rata
participation in a shareholder rights issue by Kingfield Heath. Subsequent to
December 31, 2001, we advanced additional funds to ISA of 2.9 million British
pounds, or approximately $4.2 million, for working capital purposes. The
advances to ISA earn interest.
Additionally, we acquired certain assets and liabilities of Digital Storage, LLC
("Digital Storage"), a value-added distributor of computer media, accessories
and supplies, during the first quarter of fiscal year 2002 and acquired certain
assets and liabilities of office products wholesaler General Stationery Supplies
in Australia during the second quarter of fiscal year 2002.
During the quarter ended September 30, 2001, we expanded our computer and office
supplies product line to include computer peripheral and connectivity products,
announcing agreements to distribute products from Logitech International and
iBIZ Technology Corp. During the quarter ended December 31, 2001, we announced a
strategic alliance with eCommerce Industries Inc. (ECI2) to provide technology
tools to help our resellers and the acquisition of exclusive rights to
distribute OpenSupply, a software that monitors toner and ink usage.
Argentina has recently undergone significant economic and political change.
During January 2002, Argentina abandoned the fixed dollar-to-peso exchange rate
and devalued the Argentinian peso. Our Argentina subsidiary began accounting for
the effect of the devaluation effective December 21, 2001 at a rate of 1.65
Argentinian pesos to $1. As a result of the devaluation, we recorded translation
losses of $4.5 million as a component of accumulated other comprehensive income
during the quarter ended December 31, 2001. Although we are working closely with
customers and vendors in Argentina, we anticipate some earnings impact in the
short term.
We are working to build a centralized distribution and business support platform
that will position Daisytek for continued growth, improve financial performance
and support us in our vision to be the largest distributor of computer supplies,
office products and accessories in the world. During the third quarter of fiscal
year 2002, we commenced a restructuring plan that includes (1) information
technology enhancements to ensure growth in the business will be technologically
supported; (2) distribution improvements and consolidation of subsidiary
computer and office supplies warehouses into five new regional hub facilities in
order to leverage distribution costs; and (3) centralization of certain
back-office resources into a shared services organization to reduce costs and
improve efficiencies. We expect that the projects will take about 18 months to
complete.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31,
2000
Net Revenues. Net revenues for the three months ended December 31, 2001
increased 23.2% to $309.3 million compared to $251.0 million for the three
months ended December 31, 2000. Computer and office supplies net revenues
increased 26.3% for the quarter ended December 31, 2001 compared to the prior
year as a result of (1) growth in the emerging customer channels such as web-
based resellers, drug and grocery stores, mass merchants and direct marketers;
(2) growth in the international computer supplies business; and
77
(3) the acquisitions of Digital Storage and General Stationery Supplies.
Increases were primarily volume-related. Within the computer and office supplies
segment, domestic operations increased approximately 30% compared to the prior
year and international operations increased approximately 22% in U.S. dollars
compared to the prior year. For comparative purposes, we continue to see a
deterioration in the value of both the Canadian and Australian dollar relative
to the U.S. dollar, which has negatively impacted growth in U.S. dollars. Using
local currencies for both interim periods, growth for the three months ended
December 31, 2001 was approximately 27% compared to the prior year. Our
divisions in Australia, Canada and Mexico, which represent approximately 80% of
our international business, all experienced revenue growth relative to the same
quarter in the prior year. Our Latin American business continues to be impacted
(on a comparable basis with prior year results) due to the change in certain
tariffs, which has made it more attractive for our customers to source product
locally rather than import from our Miami facility. Also, as previously
mentioned, our Argentinian division was negatively impacted during the quarter
ended December 31, 2001 due to the political and economic uncertainties in that
country. See "Recent Developments."
The computer and office supplies revenue increase for the quarter ended December
31, 2001 was partially offset by a 12.8% revenue decrease in our professional
tape products segment, due to decreases in volume and prior year industry price
decreases which continued to impact our revenues on a comparable basis. We have
recently completed our restructuring plan to improve both revenues and earnings
for the professional tape products segment, which has focused on new leadership
for the business, rationalizing warehouses to reduce costs and improve customer
service, utilizing more efficient inside telemarketing teams versus outside
sales people and developing new sales and marketing initiatives.
Gross Profit. Gross profit as a percentage of net revenues was 10.0% for the
quarter ended December 31, 2001 compared to 11.3% for the prior year. This
decrease in margin percentage is primarily attributable to the lower
contributions from foreign product sourcing opportunities following the events
of September 11, 2001 and the acquisition of Digital Storage, which typically
operates at lower gross margins than the remainder of our business. In addition,
we incurred restructuring charges of $0.9 million related to our warehouse and
distribution initiatives which are included in cost of sales for the quarter
ended December 31, 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended December 31, 2001 were
$20.6 million, or 6.7% of net revenues, as compared to $19.6 million, or 7.8% of
net revenues, for the quarter ended December 31, 2000. SG&A, in both dollars and
as a percentage of revenues, was impacted by (1) the acquisition of our Memphis
distribution assets and termination of the transaction services agreement with
PFSweb in May 2001, which has allowed us to operate the facility rather than pay
an outsourcing service fee; (2) the acquisition of certain assets and
liabilities of Digital Storage, which operates at lower SG&A percentages than
our other business; and (3) improvements resulting from our restructuring
activities.
Depreciation and Amortization. Depreciation and amortization for the quarter
ended December 31, 2001 was $1.5 million compared to $1.6 million for the prior
year quarter. The decrease is due to our adoption during the first quarter of
fiscal year 2002 of SFAS No. 142, Goodwill and Other Intangible Assets, under
which goodwill is no longer amortized but reviewed for impairment at least once
a year. As a result, we discontinued amortization of goodwill effective April 1,
2001. This benefit is partially offset by depreciation related to new capital
expenditures and business acquisitions during the year.
Restructuring and Nonrecurring costs. During the quarter ended December 31,
2001, we incurred pre-tax restructuring charges of $2.0 million, including $0.7
million related to warehouse and distribution initiatives (including the
integration of office products at our central distribution center in Memphis),
$1.1 million related to employees severed during the third quarter and $0.2
million related to other back-office improvements. During the quarter ended
December 31, 2000, we recognized pre-tax costs of $2.8 million primarily related
to reorganization and separation activities following the spin-off of our
subsidiary PFSweb during July 2000.
Interest Expense, net. Interest expense was $1.9 million for the quarter ended
December 31, 2001 and $1.1 million for the quarter ended December 31, 2000.
Comparatively, debt levels increased due to: (1) the repurchase of 20% of our
outstanding shares under terms of a share buyback program we completed during
the last fiscal year; (2) the impact of the acquisitions of Digital Storage and
General Stationery Supplies during fiscal year 2002; (3) the acquisition of our
Memphis distribution assets; and (4) our investment in ISA. These increases to
debt levels and corresponding impact to interest expense were partially offset
by lower interest rates during the most recent quarter and debt reductions using
cash proceeds from the exercise of stock options and the completion of a private
placement of common stock on December 20, 2001. The
78
weighted average interest rate, including the effects of our interest rate
swaps, was 6.3% and 8.4% for the three-month periods ended December 31, 2001 and
2000, respectively.
Income Taxes. Our effective income tax rate was 36.0% and 38.6% for the three
months ended December 31, 2001 and 2000, respectively. This decline is
attributable to the finalization of prior year tax returns, which favorably
impacted foreign taxes at higher marginal tax rates as well as certain state tax
liabilities. Additionally, eliminating the book amortization of non-deductible
goodwill has improved the overall effective tax rate compared to the prior year.
Based on these results, we expect our effective tax rate to approximate 38% in
future quarters.
Nine months Ended December 31, 2001 Compared to Nine months Ended December 31,
2000
Net Revenues. Net revenues for the nine months ended December 31, 2001 increased
15.1% to $861.1 million compared to $748.1 million for the nine months ended
December 31, 2000. Results for the prior year include our former subsidiary
PFSweb, which was spun off during July 2000. Excluding PFSweb revenues (net of
intercompany eliminations) in the first quarter of fiscal year 2001, revenue
growth was 16.4%. Computer and office supplies net revenues increased 19.2% for
the nine months ended December 31, 2001 compared to the prior year, attributable
to (1) growth in the emerging customer channels such as web-based resellers,
drug and grocery stores, mass merchants and direct marketers; (2) growth in the
international computer supplies business; and (3) the acquisitions of Digital
Storage, General Stationery Supplies and Etertin y CIA, S.A. ("Etertin").
Increases were primarily volume-related. Within the computer and office supplies
segment, domestic operations increased approximately 18.9% and international
operations increased approximately 19.7% in U.S. dollars compared to the prior
year. For comparative purposes, we continue to see a deterioration in the value
of both the Canadian and Australian dollar relative to the U.S. dollar, which
has negatively impacted growth in U.S. dollars.
The computer and office supplies revenue increase for the nine months ended
December 31, 2001 was also partially offset by a 13.6% revenue decrease in our
professional tape products segment, due to decreases in volume and prior year
industry price decreases which continued to impact our revenues on a comparable
basis.
The growth in net revenues for the nine months ended December 31, 2001 was also
partially offset by operational disruptions following the United States
terrorist attacks on September 11, 2001. All United States subsidiaries
experienced declines in orders and sales immediately subsequent to this date.
Gross Profit. Gross profit as a percentage of net revenues was 10.7% for the
nine months ended December 31, 2001 compared to 11.5% for the prior year.
Excluding PFSweb revenues and gross margin in the first quarter of fiscal year
2001, gross profit percentage was 11.4%. PFSweb's service fee based business
typically operated at higher margins than the consolidated Daisytek business.
The decline in gross margin percentage from 11.4% to 10.7% is attributable to
(1) the lower contributions from foreign product sourcing opportunities
following the events of September 11, 2001; (2) the acquisition of certain
assets and liabilities of Digital Storage, which typically operates at lower
gross margins than the remainder of our business; and (3) the reduction in
revenue in the professional tape products segment, which typically operates at
higher gross margin percentages. The sell-off during the first quarter of fiscal
2002 of certain overstocked inventory (purchased in anticipation of a price
increase) at lower than expected margins also contributed to the decreased
margin. In addition, we incurred restructuring charges of $0.9 million related
to our warehouse and distribution initiatives which are included in cost of
revenues for the nine months ended December 31, 2001.
Selling, General and Administrative Expenses. SG&A for the nine months ended
December 31, 2001 was $63.7 million, or 7.4% of net revenues, as compared to
$59.7 million, or 8.0% of net revenues, for the nine months ended December 31,
2000. Excluding SG&A costs related to PFSweb in the first quarter of fiscal year
2001, SG&A was $58.5 million, or 7.9% of net revenues. As mentioned previously,
the service-based component of PFSweb's business operated at higher gross
margins and higher SG&A percentages and is reflected in the prior year results,
but not the current year due to the spin-off of PFSweb during July 2000.
Excluding PFSweb, the increase in SG&A was impacted by (1) the acquisition of
our Memphis distribution assets and termination of the transaction services
agreement with PFSweb in May 2001, which has allowed us to operate the facility
rather than pay an outsourcing service fee; (2) the acquisition of Digital
Storage, which operates at lower SG&A percentages than our other business; and
(3) improvements resulting from our restructuring activities. This favorable
impact was partially offset by certain incremental costs incurred relative to
the events of September 11, 2001.
79
Depreciation and Amortization. Depreciation and amortization for the nine months
ended December 31, 2001 was $3.9 million compared to $5.2 million for the
comparable prior year period. The decrease is due to our adoption during the
first quarter of fiscal year 2002 of SFAS No. 142, under which goodwill is no
longer amortized but reviewed for impairment at least once a year. As a result,
we discontinued amortization of goodwill effective April 1, 2001. This benefit
is partially offset by depreciation related to new capital expenditures and
business acquisitions during the year.
Restructuring and Nonrecurring costs. During the nine months ended December 31,
2001, we recognized pre-tax charges of (1) $2.0 million related to restructuring
activities, including $0.7 million related to warehouse and distribution
initiatives (including the integration of office products at our central
distribution center in Memphis), $1.1 million related to employees severed
during the third quarter and $0.2 million related to other back-office
improvements and (2) $4.4 million related to the acquisition of the Memphis
distribution assets and the termination of certain transaction management
service agreements between PFSweb and Daisytek, including transaction costs, a
separation payment and finalization of other balances with PFSweb. During the
nine months ended December 31, 2000, we recognized charges of $5.0 million
primarily related to reorganization and separation activities following the
spin-off of our subsidiary PFSweb during July 2000.
Interest Expense, net. Interest expense increased to $5.2 million for the nine
months ended December 31, 2001 compared to $2.5 million for the nine months
ended December 31, 2000. Of this increase, $0.3 million represents a reduction
in net interest expense in the first quarter of the prior year due to interest
income earned by PFSweb on their existing cash balances. The remaining increase
in interest expense is attributable to increases in our debt levels due to: (1)
the repurchase of 20% of our outstanding shares under terms of a share buyback
program we completed during the last fiscal year; (2) the impact of the
acquisitions of Etertin during fiscal year 2001 and Digital Storage and General
Stationery Supplies during fiscal year 2002; (3) the acquisition of our Memphis
distribution assets; and (4) our investment in ISA. These increases to debt
levels and corresponding impact to interest expense were partially offset by
lower interest rates during the current fiscal year and debt reductions using
cash proceeds from the exercise of stock options and the completion of a private
placement of common stock on December 20, 2001. The weighted average interest
rate, including the effect of our interest rate swaps, was 6.6% and 8.2% for the
nine-month periods ended December 31, 2001 and 2000, respectively.
Income Taxes. Our effective income tax rate was 36.9% and 41.1% for the nine
months ended December 31, 2001 and 2000, respectively. The income tax provision
was negatively impacted during the first quarter of last fiscal year primarily
due to losses generated by PFSweb's European subsidiary for which no income tax
benefit was recorded. Due to PFSweb's limited operating history in Europe at
that time, it was uncertain whether it was "more likely than not" that we would
be able to utilize these cumulative tax losses and therefore no tax benefit was
recorded. In fiscal 2002, we experienced a decline in our effective tax rate
attributable to the finalization of prior year tax returns, which favorably
impacted foreign taxes at higher marginal tax rates as well as certain state tax
liabilities. Additionally, eliminating the book amortization of non-deductible
goodwill has improved the overall effective tax rate compared to the prior year.
Based on these results, we expect our effective tax rate to approximate 38% in
future quarters.
Seasonality. Although historically we have experienced our greatest sequential
quarter revenue growth in our fourth fiscal quarter, management has not been
able to determine the specific or, if any, seasonal factors that may cause
quarterly variability in operating results. As the international portion of our
business grows, seasonality may become more of a factor due to holidays and work
patterns in these countries. Management believes that factors that may influence
quarterly variability include the overall growth in the non-paper computer
supplies industry and shifts in demand for computer supplies products due to a
variety of factors, including sales increases resulting from the introduction of
new products. We generally experience a relative slowness in sales during the
summer months, which may adversely affect our first and second fiscal quarters
in relation to sequential quarter performance.
80
DILUTION
Because of the wide range of exercise prices on outstanding stock options, the
number of shares included in our dilutive earnings per share calculation and the
resulting diluted earnings per share could vary greatly depending on the average
market price of our common stock. The following table summarizes the diluted
shares outstanding at various price points using common stock outstanding at
December 31, 2001 of 17,498,532.
Diluted Shares
Average Share Price Outstanding
------------------- --------------
$12.00 18,686,825
$13.00 18,832,851
$14.00 18,958,125
$15.00 19,070,625
$16.00 19,170,666
$17.00 19,258,938
$18.00 19,337,401
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities from continuing operations for the
nine months ended December 31, 2001 was $11.6 million, compared with $21.5
million for the same period in the prior year. Working capital, excluding the
current portion of long-term debt and cash balances, increased to $181.7 million
at December 31, 2001 from $176.7 million at March 31, 2001, attributable
primarily to our acquisitions of Digital Storage and General Stationery
Supplies, partially offset by a decrease in working capital as a result of our
decision to exit the IBM master distribution agreements. The working capital
requirements were funded primarily with proceeds from our credit facilities.
Net cash used in investing activities during the nine months ended December 31,
2001 was $46.3 million. Payments during the nine months ended December 31, 2001
included cash paid for the acquisitions of Digital Storage and General
Stationery Supplies, the investment in ISA, and the transaction to acquire the
Memphis distribution assets from PFSweb, which were funded with proceeds from
our credit facilities and the sale and leaseback of certain Memphis distribution
assets. Capital expenditures for the nine months ended December 31, 2001 were
$12.2 million, including $3.1 million acquired under a capital lease and $9.1
million funded with proceeds from our credit facilities. Proceeds from the
exercise of stock options and the issuance of common shares were $13.3 million
for the nine months ended December 31, 2001, which were used to reduce
outstanding balances under our credit facilities.
During December 2001, we completed the private placement of approximately 1.6
million shares of Daisytek common stock to a group of institutional investors
for total gross proceeds of approximately $17.7 million. Offering costs of
approximately $1.2 million were incurred as of December 31, 2001. The proceeds
from the private placement were initially used to reduce outstanding balances
under our credit facility.
Financing Activities
Domestic Credit Facilities. Our revolving line of credit facility in the United
States, which expires on December 19, 2003, includes an expandible feature to
increase the maximum borrowing to $170 million, subject to various conditions
precedent. During April 2001, we added another $30.0 million of available credit
under this feature, increasing the maximum borrowing availability from $120.0
million to $150.0 million (subject to certain borrowing limitations). As of
December 31, 2001, the outstanding balance under this credit facility was $68.0
million and, based on our borrowing base limit at December 31, 2001, $44.3
million was available for future borrowings.
Foreign Credit Facilities. During April 2001, we refinanced a revolving term
loan with a Canadian bank expiring on August 31, 2001 and an unsecured revolving
line of credit facility with a Canadian bank expiring on January 1, 2002 with a
single revolving credit facility of 20.0 million Canadian dollars expiring
during April 2004. During October 2001, we amended the Canadian credit facility
to add another 10.0 million Canadian dollars to its available credit for total
maximum credit availability of 30.0 million Canadian dollars, or approximately
$18.8 million. Availability under the credit facility is subject to certain
borrowing base limitations, as defined. As of December 31, 2001, the outstanding
balance under the Canadian credit facility was 18.6 million Canadian dollars, or
approximately $11.7 million, and we had 11.4 million Canadian dollars, or
approximately $7.2 million, available for future borrowings.
81
During May 2001, we amended our unsecured revolving line of credit facility with
an Australian bank expiring on January 1, 2002 to add another 5.0 million
Australian dollars to its available credit for total maximum credit availability
of 20.0 million Australian dollars, or approximately $10.2 million. As of
December 31, 2001, the outstanding balance under our Australian credit facility
was 12.3 million Australian dollars, or approximately $6.3 million, and we had
7.7 million Australian dollars, or approximately $3.9 million, available for
future borrowings. During December 2001, we extended this Australian credit
facility to January 1, 2003.
Contractual Obligations and Guarantees. Obligations under long-term debt,
capital leases and non-cancelable operating leases are as follows (in millions):
Payments Due by Period
-------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- ------- --------- --------- --------- -------
Long-term debt $ 85.9 $ 6.2 $ 79.7 $ -- $ --
Capital lease obligations 2.9 1.0 1.9 -- --
Operating leases 35.4 8.8 14.1 8.1 4.4
------- --------- --------- --------- -------
Total $ 124.2 $ 16.0 $ 95.7 $ 8.1 $ 4.4
======= ========= ========= ========= =======
In connection with the IPO of PFSweb, we have guaranteed certain PFSweb
operating lease obligations. Total minimum payments for the guaranteed leases
are $17.3 million, including $4.1 million due in less than one year, $6.9
million due in one to three years, $3.4 million due in four to five years and
$2.9 million due after five years. We do not expect to make payments under these
guarantees; however, if performance were required, we would seek to mitigate our
exposure with lease terminations and/or subleases.
FORWARD-LOOKING STATEMENTS
Certain statements used in this Quarterly Report on Form 10-Q are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements about the financial condition,
prospects, operations and business of Daisytek are generally accompanied by
words such as "anticipates," "expects," "estimates," "believes," "intends,"
"plans" or similar expressions. These forward-looking statements are subject to
numerous risks, uncertainties and other factors, some of which are beyond the
control of Daisytek that could cause actual results to differ materially from
those forecasted or anticipated in such forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to:
general economic conditions; industry trends; the loss of or inability to hire
skilled personnel; the loss of key suppliers or customers; the loss or material
decline in service of strategic product shipping relationships; customer demand;
product availability; competition (including pricing and availability); risks
inherent in acquiring, integrating and operating new businesses and investments;
concentrations of credit risk; distribution efficiencies; capacity constraints;
technological difficulties, including equipment failure or a breach of our
security measures; the volatility of our common stock; economic and political
uncertainties arising as a result of terrorist attacks; seasonality; exchange
rate fluctuations; foreign currency devaluations; and the regulatory and trade
environment (both domestic and foreign). These risks and others are more fully
described in Daisytek's Annual Report of Form 10-K for the year ended March 31,
2001.
Because such forward-looking statements are subject to risks, uncertainties and
assumptions, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's view only as of the date
of this Quarterly Report on Form 10-Q. We undertake no obligation to update
publicly any forward-looking statement for any reason, even if new information
becomes available or other events occur in the future.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed in Item 2 --- Management's Discussion and Analysis of Financial
Condition and Results of Operations, Argentina has recently undergone
significant economic and political change and, during January 2002, the country
abandoned the fixed dollar-to-peso exchange rate and devalued the Argentinian
peso. We have experienced no other material changes in interest rate risk or
foreign exchange risk during the nine months ended December 31, 2001. Our market
risk is described in more detail in our Annual Report on Form 10-K for the year
ended March 31, 2001.
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PART C: UNAUDITED FINANCIAL RESULTS FOR THE DAISYTEK GROUP
FOR THE FINANCIAL YEAR ENDED 31 MARCH 2002
The financial information set out in this Part C of Appendix II for the
financial year ended 31 March 2002 has been extracted, without material
adjustment, from the announcement by Daisytek of its unaudited results for the
three months to, and the financial year ended, 31 March 2002 which were
announced on 7 May 2002.
83
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES,
EXCLUDING RESTRUCTURING AND NONRECURRING CHARGES AND
RESULTS OF OPERATIONS FOR PFSWEB, INC. AND DISCONTINUED OPERATIONS
The following is an unaudited adjusted historical financial presentation of the
results of operations of Daisytek excluding restructuring and nonrecurring
charges, the results of operations of PFSweb, Inc., and the income (loss) from
operations of a discontinued subsidiary. First quarter 2002 adjusted historical
financial results exclude a nonrecurring charge of $4.4 million related to
Daisytek's May 2001 acquisition of distribution assets in its Memphis superhub
facility from PFSweb and the termination of certain transaction management
service agreements between Daisytek and PFSweb shown as nonrecurring costs in
the GAAP financial statements. Restructuring charges of $2.9 million and $2.1
million, respectively, are excluded from third quarter and fourth quarter
adjusted historical financial results. Daisytek completed the spin-off of its
subsidiary PFSweb during July 2000. The fiscal year 2001 financial presentation
excludes the results of operations of PFSweb and nonrecurring charges including
activities related to the spin-off of PFSweb and certain other charges.
Daisytek based the following unaudited adjusted historical financial data on
available information and certain estimates and assumptions. Daisytek believes
that such assumptions provide a reasonable basis for presenting the results of
Daisytek on a stand-alone basis. This unaudited adjusted financial information
does not reflect what Daisytek's results of operations may be in the future.
UNAUDITED ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year 2002
-----------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, FY
2001 2001 2001 2002 Total
Net sales $ 272,952 $ 278,769 $ 309,338 $ 323,971 $1,185,030
Cost of sales 241,504 249,148 277,500 290,487 1,058,639
---------- ---------- ---------- ---------- ----------
Gross profit 31,448 29,621 31,838 33,484 126,391
Selling, general and administrative
expenses 22,649 22,742 22,176 23,143 90,710
---------- ---------- ---------- ---------- ----------
Income from operations 8,799 6,879 9,662 10,341 35,681
Interest expense 1,554 1,786 1,850 2,031 7,221
---------- ---------- ---------- ---------- ----------
Income before income taxes 7,245 5,093 7,812 8,310 28,460
Provision for income taxes 2,784 1,884 2,811 3,133 10,612
---------- ---------- ---------- ---------- ----------
Net income $ 4,461 $ 3,209 $ 5,001 $ 5,177 $ 17,848
========== ========== ========== ========== ==========
Net income per common share:
Basic $ 0.30 $ 0.21 $ 0.31 $ 0.29 $ 1.12
Diluted $ 0.28 $ 0.19 $ 0.29 $ 0.27 $ 1.03
Fiscal Year 2001
-----------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, FY
2001 2001 2001 2002 Total
---------- ---------- ---------- ---------- ----------
Net sales $ 246,178 $ 242,305 $ 251,034 $ 264,066 $1,003,583
Cost of sales 218,319 214,058 222,662 232,765 887,804
---------- ---------- ---------- ---------- ----------
Gross profit 27,859 28,247 28,372 31,301 115,779
Selling, general and administrative
expenses 20,993 20,615 21,215 23,237 86,060
---------- ---------- ---------- ---------- ----------
Income from operations 6,866 7,632 7,157 8,064 29,719
Interest expense 839 940 1,050 1,344 4,173
---------- ---------- ---------- ---------- ----------
Income before income taxes 6,027 6,692 6,107 6,720 25,546
Provision for income taxes 2,320 2,534 2,355 2,520 9,729
---------- ---------- ---------- ---------- ----------
Net income $ 3,707 $ 4,158 $ 3,752 $ 4,200 $ 15,817
========== ========== ========== ========== ==========
Net income per common share:
Basic $ 0.21 $ 0.25 $ 0.25 $ 0.29 $ 0.99
Diluted $ 0.21 $ 0.25 $ 0.25 $ 0.28 $ 0.98
84
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED ADJUSTED CONSOLIDATED BALANCE SHEET DATA,
EXCLUDING DISCONTINUED OPERATIONS
(in thousands)
March 31, March 31,
2002 2001
Total assets, including net interest in BSD at March 31, 2001 $ 414,390 $ 315,364
Working capital from continuing operations, excluding debt and cash $ 206,264 $ 175,542
Total net debt, excluding cash $ 111,640 $ 76,072
Shareholders' equity $ 196,020 $ 159,102
85
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The following presentation of Daisytek International Corporation is based on
generally accepted accounting principles.
Three Months Ended Fiscal Year Ended
March 31, March 31,
----------------------------- ------------------------------
2002 2001 2002 2001
Net revenues $ 323,971 $ 264,066 $ 1,185,030 $ 1,012,130
Cost of revenues 290,487 232,765 1,059,539 894,766
------------ ------------ ------------ ------------
Gross profit 33,484 31,301 125,491 117,364
Selling, general and administrative expenses 23,143 23,237 90,710 88,193
Restructuring and nonrecurring costs 2,087 1,909 8,556 6,940
------------ ------------ ------------ ------------
Income from continuing operations 8,254 6,155 26,225 22,231
Interest expense, net 2,031 1,344 7,221 3,857
------------ ------------ ------------ ------------
Income from continuing operations before income
taxes 6,223 4,811 19,004 18,374
Provision for income taxes 2,346 1,805 7,066 7,384
------------ ------------ ------------ ------------
Income from continuing operations before
minority interest 3,877 3,006 11,938 10,990
Minority interest -- -- -- 47
------------ ------------ ------------ ------------
Income from continuing operations 3,877 3,006 11,938 11,037
Discontinued operations
Income (loss) from operations of discontinued
subsidiary, net of tax -- 113 (1,085) 389
------------ ------------ ------------ ------------
Net income $ 3,877 $ 3,119 $ 10,853 $ 11,426
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic
Income from continuing operations $ 0.22 $ 0.21 $ 0.75 $ 0.69
Income (loss) from operations of discontinued
subsidiary, net of tax -- -- (0.07) 0.03
------------ ------------ ------------ ------------
Net income $ 0.22 $ 0.21 $ 0.68 $ 0.72
============ ============ ============ ============
Diluted
Income from continuing operations $ 0.20 $ 0.20 $ 0.69 $ 0.69
Income (loss) from operations of discontinued
subsidiary, net of tax -- 0.01 (0.07) 0.02
------------ ------------ ------------ ------------
Net income $ 0.20 $ 0.21 $ 0.62 $ 0.71
============ ============ ============ ============
Weighted-average common and common share
equivalents outstanding:
Basic 17,748 14,525 15,963 15,904
Diluted 19,177 15,050 17,396 16,108
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APPENDIX III
RISK FACTORS
This Offer Document contains forward-looking statements that involve risks and
uncertainties. Daisytek's actual results could differ materially from those
discussed here or incorporated by reference. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this Appendix III, as well as those discussed elsewhere in this Offer
Document and in any other documents incorporated by reference.
You should carefully read and consider the risk factors set forth below. You
should be prepared to accept the occurrence of any and all of the risks
associated with this Offer and acquiring shares of Daisytek Common Stock,
including a loss of all of your investment.
RISKS RELATING TO THE OFFER
We may experience difficulty integrating ISA.
The Offer involves integrating two companies that have previously operated
independently. This integration will require significant effort from each
company, including the co-ordination of their sales and marketing efforts. We
cannot assure you that Daisytek UK will be able to integrate the operations of
ISA without encountering difficulties or experiencing the loss of ISA or
Daisytek UK personnel or that the benefits expected from integrating the two
companies will be realised. This integration will require the dedication of
management resources that may distract management's attention from the
day-to-day business of the combined companies. Any difficulties encountered in
the integration process (including the interruption of, or a loss of momentum
in, ISA's activities, problems associated with integration of management
information and reporting systems and delays in implementation of consolidation
plans) could adversely impact Daisytek UK's ability to realise the anticipated
benefits of the Offer.
Full integration of ISA's operations with our operations may not be achieved if
we cannot compulsorily acquire all outstanding ISA Ordinary Shares.
The Offer is subject to a condition that, before the end of the Offer Period, we
and our associates have relevant interests in at least 90 per cent. (or such
lower percentage as Daisytek UK may decide) of the ISA Shares to which the Offer
relates. To effect the compulsory acquisition of all outstanding ISA Ordinary
Shares under Sections 428-430F of the Act, we are required to have a relevant
interest in at least 90 per cent. of all of the ISA Shares to which the Offer
relates. At the end of the Offer Period, we may not hold a sufficient number of
ISA Ordinary Shares in order to effect a compulsory acquisition of the remaining
outstanding ISA Ordinary Shares under the Act. This could prevent or delay us
from realising some or all of the anticipated benefits from the integration of
ISA's operations with our operations.
Our stock price has been and may continue to be volatile.
Each ISA Shareholder accepting the Offer will elect to take either New Daisytek
Restricted Common Stock or cash. The market prices of Daisytek Common Stock and
ISA Ordinary Shares are set out herein in paragraph 10 of Appendix V ---
"Additional Information." ISA Shareholders should obtain recent market
quotations for Daisytek Common Stock and ISA Ordinary Shares. Daisytek Common
Stock and ISA Ordinary Shares historically have experienced price volatility. We
cannot guarantee you the market prices of Daisytek Common Stock or ISA Ordinary
Shares at any time. In addition, there can be no assurances that the current
market prices of the Daisytek Common Stock will be indicative of the value of
shares of New Daisytek Common Stock, which will not be registered and will be
subject to restrictions on transfer that may not be applicable to existing
shares of Daisytek Common Stock.
You may be unable to resell the shares of New Daisytek Restricted Common Stock
at current market prices, or at all.
The New Daisytek Restricted Common Stock issued pursuant to the Offer will not
be registered under the United States Securities Act or under any applicable
United States' State Securities Act or under the securities laws of any
jurisdiction outside the United States and will contain a legend to that effect.
Such shares may not be offered or sold within the U.S. except pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and upon the other conditions described
herein. Daisytek intends, following the completion of the Offer, to use its
reasonable commercial endeavours to file a Registration Statement on Form S-3 to
register for resale into the United States the shares of New Daisytek Restricted
Common Stock issued in the Offer; however, Daisytek is under no obligation to
prepare,
87
file or maintain any such registration statement and, accordingly, no assurance
can be made that any such registration statement will be filed or, if filed,
whether it will be declared effective or for how long it will remain effective.
As a result of the resale restrictions applicable to the New Daisytek Restricted
Common Stock, ISA Shareholders who elect to receive New Daisytek Restricted
Common Stock in the Offer must be prepared to treat such shares as a long-term
investment and expect to bear the economic risk of the ownership of such shares
for an indefinite period of time. No assurances can be made that the current
values of Daisytek Common Stock should be regarded as an indication of any
future market price for the New Daisytek Restricted Common Stock. As a result of
the resale restrictions applicable to the New Daisytek Restricted Common Stock,
no assurances can be made that such shares can be resold by the holder thereof
for a price equal to the current market prices of Daisytek Common Stock, or for
any price, and no representations or warranties are being (or can be) made in
this Offer Document by Daisytek or ISA as to the future value, if any, of the
New Daisytek Restricted Common Stock or the profitability or success of the
business of Daisytek.
Exchange rates fluctuate and may impact the value of your consideration.
The value of all investments and the outcome from them can fall as well as rise
and not all the amount invested may be realised. ISA Shareholders accepting the
Offer and electing to receive consideration in US dollars should be aware that
they will be exposed to foreign currency risk as a result of fluctuations in the
relative exchange rate between US dollars and UK pounds sterling.
The Offer may impact the liquidity and value of ISA Ordinary Shares.
The issuance of shares of New Daisytek Restricted Common Stock in exchange for
ISA Ordinary Shares pursuant to the Offer will reduce the number of holders of
ISA Ordinary Shares and the number of ISA Ordinary Shares that might otherwise
trade publicly and, depending upon the number of ISA Ordinary Shares tendered in
the Offer, could adversely affect the liquidity and market value of the
remaining ISA Ordinary Shares held by the public. In addition, when the Offer
becomes or is declared unconditional in all respects, Daisytek UK intends to
procure the making of an application by ISA for the cancellation of trading in
ISA Ordinary Shares on AIM. It is anticipated that cancellation of listing from
the Official List and cancellation of trading on the AIM will take effect no
earlier than 20 business days after the Offer becomes or is declared
unconditional in all respects.
ISA's customers may react adversely to the combination with us.
Any number of ISA's existing customers or strategic partners may, following a
change of control of ISA, choose to review their contractual or business
relationships with ISA. This review could result in delayed or lost sales to
either Daisytek or ISA.
Our stockholders have different rights under US law.
After the Offer, ISA Shareholders will hold shares of Daisytek Common Stock. The
rights of ISA Shareholders under ISA's Articles of Association are different
from the rights of Daisytek Stockholders under our Certificate of Incorporation
and our Bylaws. See APPENDIX VI --- "DESCRIPTION OF DAISYTEK CAPITAL STOCK AND
CHANGES IN CERTAIN RIGHTS OF ISA SHAREHOLDERS."
Resales of New Daisytek Restricted Common Stock could decrease Daisytek's stock
price.
Assuming the Offer is successfully completed, up to 537,234 shares of New
Daisytek Restricted Common Stock will be issued. Resales of a substantial number
of such shares of New Daisytek Restricted Common Stock (whether pursuant to an
effective registration statement under the Securities Act or pursuant to an
exemption from registration) could decrease the per share market price of
Daisytek Common Stock.
Antitrust and competition authorities in various jurisdictions may attempt to
delay or prevent our acquisition of voting and control rights or may require
divestitures.
We and ISA conduct operations in a number of jurisdictions where antitrust
filings or approvals may be required in connection with the Offer. We have made
or will make antitrust filings with the relevant authorities in Germany. Until
the applicable waiting period in Germany expires or is terminated, we may not
purchase ISA Ordinary Shares under the Offer. We are currently in the process of
reviewing whether any other filings will be required or advisable in other
jurisdictions, and we intend to make the appropriate regulatory filings and
applications if we decide that such filings are required or advisable. We are
confident
88
that the necessary regulatory approvals will be obtained. Nevertheless, we
cannot provide any assurance that the necessary approvals will be obtained or
that there will not be any adverse consequences to our or ISA's business
resulting from the failure to obtain these regulatory approvals or from
conditions that could be imposed in connection with obtaining these approvals,
including divestitures or other operating restrictions upon our business.
ISA Shareholders will have limited withdrawal rights with respect to the Offer,
which means that a decision to accept the Offer may be irrevocable.
Once you have accepted the Offer for your ISA Ordinary Shares, you will only
have limited rights to withdraw your acceptance of the Offer. You may be unable
to withdraw your acceptance of the Offer even if the market value of shares of
our common stock or ISA Ordinary Shares varies significantly from their value on
the date of your acceptance of the Offer.
RISKS RELATED TO OUR BUSINESS
We face competition from many sources that could adversely affect our business.
We operate in a highly competitive environment. Our current and potential
competitors include:
(a) national, regional and specialty wholesalers of technology and office
products and consumables;
(b) large hardware wholesalers who sell supplies as an ancillary product line;
and
(c) manufacturers wishing to sell direct to resellers or end-users.
Some of these competitors are larger than we are and have greater financial and
other resources available to them than we do. We cannot assure you that we can
continue to compete successfully against these or other competitors in the
future. In addition, increased competition in the business products industry,
together with increased advertising, has heightened price awareness among end
users. This heightened price awareness has led to margin pressure on business
products. In the event that this trend continues, our business, financial
condition and results of operations could be adversely affected.
The loss of key suppliers and/or shipping companies could adversely affect our
business.
We depend on our suppliers to provide us with the products and services we need
to serve our customers. Our agreements with our suppliers are generally
terminable at any time or on short notice, with or without cause, and, while we
consider our relationships with our suppliers to be good, we cannot assure you
that any or all of our relationships will not be terminated or that such
relationships will continue as presently in effect. Foreign-sourced product may
be impacted by macroeconomic or international events. Termination of such
relationships or changes by our suppliers in their policies regarding wholesale
distributors or volume discount schedules, other marketing programs applicable
to us or product pricing generally may have a material adverse effect on our
business. In addition, we rely on strategic product shipping relationships to
ship our products from our distribution centers to our customers. Loss of any of
these relationships could reduce our ability to deliver our products to our
customers on a timely basis and material changes in delivery terms and pricing
could adversely affect our business, financial condition and results of
operations.
Our business could be adversely affected by a systems or equipment failure.
Our business depends upon the reliability of our systems and equipment, some of
which is operated by third parties. Although we have disaster recovery plans in
place, sustained or repeated system failures could significantly impair our
ability to take orders and reduce the traffic on our website. We may, from time
to time, experience interruptions due to several factors including hardware
failures, unsolicited bulk e-mail and operating system failures. If delays or
interruptions continue to occur, our reputation may be impaired, our customers
could perceive our network as being unreliable, traffic on our website could
deteriorate, customers may become less inclined to purchase from us, suppliers
may be less inclined to sell to us and our brand could be adversely affected.
Any failure on our part to minimize or prevent capacity constraints or system
interruptions could have an adverse effect on our business, financial condition
and results of operations.
We depend on the continued operation of our distribution and fulfilment center
in Memphis, Tennessee.
We conduct a significant amount of our distribution and fulfilment operations
and our order processing and fulfilment functions from our facility in Memphis,
Tennessee. Any disruption in the operations at our Memphis distribution and
fulfilment center for any reason, including due to damage from fire, natural
disaster, power loss, telecommunications failure or similar events, could cause
us to be unable to fulfil orders. This failure could cause us to lose customers,
would harm our business and would lead to a decline in
89
revenues. Additionally, we operate regional sales and distribution centers in
Toronto, Ontario; Vancouver, British Columbia; Montreal, Quebec; Mexico City and
Monterrey, Mexico; Sydney, Brisbane and Perth, Australia; and Buenos Aires,
Argentina and other regional facilities in the United States. To the extent we
open additional distribution facilities in the future, we may face significant
logistical and inventory management issues. We cannot assure you that we will be
able to successfully manage these issues in the future or that we will be able
to deal effectively with a disruption in the operation of our Memphis facility.
A significant portion of our business is conducted in foreign countries,
exposing us to additional risks.
A significant portion of our operations is conducted in foreign countries and
completion of the acquisition of ISA would expand our operations into Europe.
There are several risks inherent in doing business internationally, including:
o changing regulatory requirements;
o legal uncertainty regarding foreign laws, tariffs and other trade barriers;
o political instability;
o potentially adverse tax consequences;
o foreign currency fluctuations; and
o cultural differences.
Any one or more of these factors may materially and adversely affect our
business, financial condition and results of operations in a number of ways,
such as increased costs, operational difficulties and reduction in revenue and
may affect the carrying value of our investments.
Changing manufacturers' prices and price fluctuations due to inflationary and
other market conditions could adversely impact our net sales, gross margins and
net income.
We maintain substantial inventories to accommodate the prompt service and
delivery requirements of our customers. Accordingly, we purchase our products on
a regular basis in an effort to maintain our inventory at levels that we believe
to be sufficient to satisfy the anticipated needs of our customers based upon
historic buying practices and market conditions. Although we have historically
been able to pass through manufacturers' price increases to our customers on a
timely basis, competitive conditions will influence how much of future price
increases can be passed on to our customers. Conversely, when manufacturers'
prices decline, lower sales prices could result in lower margins as we sell
existing inventory. Changes in the prices paid by us for our products therefore
could have a material adverse effect on our business, financial condition and
results of operations, including our net sales, gross margins and net income,
and the timing of such changes throughout the year could adversely impact
quarterly results.
A breach of our e-commerce security measures could reduce demand for our
services.
We offer several products through our SOLOnet service on our website and may
offer additional products in the future. Advances in computer capabilities and
new discoveries in the field of cryptography may compromise the security
measures we use to protect our website, access to our databases, and
transmissions to and from our website. A party who is able to circumvent our
security measures could misappropriate proprietary information or interrupt our
operations. Any compromise or elimination of our security could reduce demand
for our services.
We may be required to expend significant capital and other resources to protect
against security breaches or to address any problem they may cause. Because our
activities involve the storage and transmission of proprietary information, such
as credit card numbers, security breaches could damage our reputation and expose
us to litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent security breaches may disrupt our
operations.
We may engage in future acquisitions or investments that could dilute our
existing stockholders, cause us to incur significant expenses or harm our
business.
Our growth strategy is dependent to a substantial degree on our ability to
effect acquisitions. Some of our major competitors have similar acquisition
strategies, and the office products distribution industry is consolidating
rapidly. As a result, there is substantial competition for suitable acquisition
candidates in many markets. Future acquisitions or investments by us could
result in risks such as the following:
o we may be exposed to unknown liabilities of acquired companies;
90
o our acquisition and integration costs may be higher than we anticipated and
may cause our quarterly and annual operating results to fluctuate;
o we may experience difficulty and expense in assimilating the operations and
personnel of the acquired businesses, disrupting our business and diverting
management's time and attention;
o we may be unable to integrate or complete the development and application
of acquired technology;
o we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
o our relationships with key customers of acquired businesses may be impaired
due to changes in management and ownership of the acquired businesses;
o we may be unable to retain key employees of the acquired businesses;
o we may incur amortization expenses if an acquisition results in significant
identifiable intangible assets with finite lives; and
o our stockholders may be diluted if we pay for the acquisition with equity
securities.
Any of these factors could harm our business, financial condition and results of
operations. In addition, we cannot assure you that we will be able to acquire
other computer supplies and office products businesses on terms favourable to
us, that acquired companies will perform as anticipated, or that investments
will permanently retain their value.
Our credit facilities impose restrictions with respect to various business
matters.
Our credit agreements contain numerous restrictive covenants that limit the
discretion of management with respect to certain business matters. These
covenants place significant restrictions on, among other things, our ability to
incur additional indebtedness, to create liens or other encumbrances, to pay
dividends or make other payments in respect of our capital stock, to engage in
transactions with affiliates, to make certain payments and investments and to
merge or consolidate with another entity. The credit agreements also contain a
number of financial covenants that require us to meet certain financial ratios
and tests. A failure to comply with the obligations in the credit agreements
could result in an event of default under the credit agreements, which, if not
cured or waived, could permit acceleration of the indebtedness thereunder and
acceleration of indebtedness under other instruments that may contain cross-
acceleration or cross-default provisions, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Our quarterly operating results may be subject to significant fluctuation.
Our operating results may fluctuate from quarter to quarter as a result of any
of the following:
o the mix of products and services sold;
o pricing actions of our competitors and us;
o pricing actions of our freight providers;
o pricing actions of manufacturers;
o seasonality;
o accounts receivable collectibility issues;
o charges associated with acquisitions and investments; and
o events such as those on September 11, 2001 disrupting domestic and
international business and trading environments.
A significant portion of our operating expenses, such as rent expense,
depreciation and employee salaries, do not vary directly with the amount of our
sales and are difficult to adjust in the short term. As a result, if our sales
in a particular quarter are below expectations for that quarter, we may not
proportionately reduce operating expenses for that quarter, and therefore any
sales shortfall would have a disproportionate effect on our net income for the
quarter.
91
We are dependent on our key personnel, and we need to hire and retain skilled
personnel to sustain our business.
Our performance is highly dependent on the continued services of our executive
officers and other key personnel, the loss of any of whom could materially
adversely affect our business. We currently do not have employment agreements
with our executive officers and key personnel. In addition, we need to attract
and retain other highly-skilled technical and managerial personnel for whom
there is intense competition. We cannot assure you that we will be able to
attract and retain the personnel necessary for the continuing growth of our
business. Our inability to attract and retain qualified technical and managerial
personnel would materially adversely affect our ability to maintain and grow our
business.
Our certificate of incorporation, our bylaws and Delaware corporate law make it
difficult for a third party to acquire us, despite the possible benefit to our
stockholders.
Provisions of our certificate of incorporation, our bylaws and Delaware General
Corporate Law, as well as our share rights purchase plan and change in control
agreements we have with various Daisytek executives, could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, our certificate of incorporation provides for
a classified board of directors, meaning that only approximately one-third of
our directors will be subject to re-election at each annual stockholder meeting.
Our certificate of incorporation also permits our Board of Directors to issue
one or more series of preferred stock which may have rights and preferences
superior to those of the common stock. The availability to issue preferred stock
could have the effect of delaying or preventing a third party from acquiring us.
In addition, we have a share rights purchase plan pursuant to which preferred
stock will be issued upon the occurrence of certain triggering events, including
a change in control of Daisytek (defined as a person or group acquiring, or
announcing a tender offer to acquire, 15 per cent. or more of our common stock).
Finally, our change in control agreements provide various benefits to our
executives upon the occurrence of an acquisition or other change in control of
Daisytek. These anti-takeover measures could discourage takeover attempts and
could materially adversely affect the price of our stock.
The price of our stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control, including:
o quarterly variations in operating results;
o changes in financial estimates by securities analysts; and
o announcements by us of significant contracts, acquisitions, strategic
partnerships, investments, joint ventures or capital commitments.
In addition, stock markets in general, and the NASDAQ National Market, have
experienced extreme price and volume fluctuations recently. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. These broad market and industry factors may decrease the market
price of our common stock, regardless of our actual operating performance.
If our stock price proves to be volatile, we may be subject to securities class
action litigation, which could result in substantial costs. In the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. In the
future, we may be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could adversely affect our business, financial condition and results of
operations.
The terrorist attacks that took place in the United States on September 11, 2001
and the resulting war on terrorism are unprecedented events that have created
many economic and political uncertainties.
The terrorist attacks that took place in the United States on September 11, 2001
and the resulting war on terrorism have adversely impacted many businesses,
including ours, in some way. There could be further acts of terrorism in the
United States or elsewhere that could have a similar impact. In addition, the
national global responses to these terrorist attacks and the resulting war on
terrorism may materially adversely affect us in ways we cannot predict at the
present. Some of the possible material adverse impacts to our business include,
but are not limited to: lower order levels from our customers; difficulties or
delays related to our receipt or shipment of products by common carrier both
within the United States and internationally; the lengthening of our sales
cycles and implementations, which might result from a number of factors such as
changes in security measures and disruptions to our business as a result of
these changes; increased credit and
92
business risk for customers in industries that were severely impacted by the
attacks; and further instability in financial markets caused by armed
hostilities or further acts of terrorism.
RISKS RELATED TO OUR INDUSTRY
Consolidation in the business products industry could adversely affect our
business.
Consolidation continues throughout all levels of the business products industry.
Consolidation has resulted in (a) an increased ability of resellers and
end-users to buy goods directly from manufacturers on their own or through their
participation in buying groups, (b) the ability of larger resellers who grow
primarily through acquisitions to qualify for larger volume rebates than the
acquired companies would have qualified for on a stand-alone basis and (c) fewer
independent resellers to purchase from wholesalers. In addition, over the last
decade, office products superstores (which largely buy directly from
manufacturers) have entered virtually every major metropolitan market.
Continuing consolidation could adversely affect our business, financial
condition and results of operations.
Our market is subject to rapid change and to compete we must continually enhance
our systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, our business could be
adversely affected. We must continue to address the increasingly sophisticated
and varied needs of our clients and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
Our industry is subject to seasonality and end-user demands may change rapidly.
Although historically we have experienced our greatest sequential quarter
revenue growth in our fourth fiscal quarter, our management has not been able to
determine the specific or, if any, seasonal factors that may cause quarterly
variability in operating results. Our management believes, however, that factors
that may influence quarterly variability include the overall growth in the
computer and office supplies industry and shifts in demand for our computer and
office supplies products due to a variety of factors, including sales increases
resulting from the introduction of new products. We generally experience a
relative slowness in sales during the summer months, which may adversely affect
our first and second fiscal quarter results in relation to sequential quarter
performance. Any impact upon sales during this peak season could have a
disproportionate effect on our results of operations for the full year.
In addition, our sales and profitability are largely dependent on our ability to
continually enhance our product offerings in order to meet changing end-user
demands. End-users' traditional demands for business products have changed over
the last several years as a result of, among other things, the widespread use of
computers and other technological advances (resulting in the reduction in use of
traditional office products), efforts by various businesses to establish
"paperless" work environments, increased recycling efforts and a trend toward
non-traditional offices (such as home offices). Our ability to continually
monitor and react to such trends and changes in end-user demands will be
necessary to avoid adverse effects on our sales and profitability. In addition,
our business, financial condition and results of operations could be adversely
affected if and to the extent that end-user demand for a broad product selection
or the need for overnight delivery were to diminish substantially or end-user
demand for a higher proportion of low margin products were to increase
substantially.
We operate in an uncertain regulatory and legal environment. New laws and
regulations could harm our business.
Our business is either subject to or may be affected by current and future
governmental regulation in many different jurisdictions. These rules,
regulations, policies and procedures are constantly subject to change. Our
business could suffer depending on the extent to which our activities are
regulated or proposed to be regulated. Various jurisdictions already have
enacted laws covering intellectual property, privacy and taxation that could
affect our business. If we become subject to claims that we have violated any
laws, even if we successfully defend against these claims, our business could
suffer. Moreover, new laws that impose restrictions on our ability to follow
current business practices or increase our costs of doing business could
adversely effect our business, financial condition and results of operations.
93
APPENDIX IV
FINANCIAL INFORMATION RELATING TO THE ISA GROUP
ISA GROUP FINANCIAL STATEMENTS
NATURE OF FINANCIAL INFORMATION
The financial information set out below does not constitute statutory accounts
within the meaning of section 240 of the Companies Act, but has been extracted
from the published audited accounts of ISA for the three financial years ended
31 December 2001, without material adjustment. The auditors of ISA for the two
years ended 31 December 2000 were Arthur Andersen. The auditors of ISA for the
year ended 31 December 2001 were KPMG Audit Plc. For each of the three years
ended 31 December 2001, the auditors have made reports under Section 235 of the
Act in respect of each set of statutory accounts and each such report was an
unqualified report and did not contain a statement under Section 237 (2) or (3)
of the Companies Act. Attention is drawn to the fundamental uncertainty
paragraph in respect of going concern as explained in the "Basis of accounting"
note in this Appendix IV of this document and contained in the audit report on
the financial statements for the year ended 31 December 2001.
94
CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE YEARS ENDED 31 DECEMBER 1999, 2000
AND 2001
<Table>
<Caption>
Years ended
------------------------------------------------
2001 2000 1999
Notes L.'000 L.'000 L.'000
TURNOVER 1,2 361,554 296,803 371,600
------------ ------------ ------------
COST OF SALES
Normal (308,333) (248,916) (301,421)
Exceptional 3 -- (2,836) (1,532)
------------ ------------ ------------
(308,333) (251,752) (302,953)
------------ ------------ ------------
GROSS PROFIT 53,221 45,051 68,647
------------ ------------ ------------
OPERATING EXPENSES
Distribution costs -- normal (2000: as restated) 4 (30,527) (27,308) (28,706)
-- exceptional 3 (1,013) (3,165) --
------------ ------------ ------------
(31,540) (30,473) (28,706)
------------ ------------ ------------
Administrative expenses -- normal (2000: as restated) 4 (21,301) (21,177) (35,328)
-- exceptional 3 (709) (1,701) (3,968)
------------ ------------ ------------
(22,010) (22,878) (39,296)
------------ ------------ ------------
Amortisation of goodwill -- -- (526)
------------ ------------ ------------
(53,550) (53,351) (68,528)
------------ ------------ ------------
OPERATING (LOSS)/PROFIT 4 (329) (8,300) 119
Share of associates' normal operating profit
(2000: as restated) 5 1,001 1,527 546
Share of associates' exceptional operating items
(2000: as restated) 5 (2,636) (1,245) (1,366)
Amortisation of goodwill arising on associates 14 (814) (799) --
Loss on disposal of associate 16(b) (71) -- --
------------ ------------ ------------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION (2,849) (8,817) (701)
Interest receivable 6 128 115 143
Interest payable and similar charges (2000: as restated) 7 (4,069) (3,199) (2,346)
------------ ------------ ------------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (6,790) (11,901) (2,904)
Tax on loss on ordinary activities 10 (631) (449) (987)
------------ ------------ ------------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (7,421) (12,350) (3,891)
Dividends -- Non-equity 12 (208) -- --
------------ ------------ ------------
TRANSFER FROM RESERVES 25 (7,629) (12,350) (3,891)
============ ============ ============
(LOSSES)/EARNINGS PER ORDINARY SHARE 13
Basic (13.0)p (21.4)p (7.3)p
Before exceptional items (2000: as restated) (6.1)p (5.9)p 4.1p
Diluted (13.0)p (21.0)p (6.6)p
============ ============ ============
All of the above results for the years ended 31 December 2000 and 2001 derive
from continuing activities and there were no acquisitions in those years. The
analysis between continuing activities, acquisitions and discontinued operations
for the year ended 31 December 1999 is presented within the detailed group
profit and loss account.
A statement of movement in reserves is given in note 25.
There is no material difference between the reported loss on ordinary activities
before taxation and the historical cost equivalents.
The accompanying notes form an integral part of these financial statements.
95
DETAILED GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 1999
<Table>
<Caption>
Continuing Discontinued
operations operations
1999 1999 1999
Notes L.'000 L.'000 L.'000
TURNOVER 1,2 288,027 83,573 371,600
------------ ------------ ------------
COST OF SALES
Normal (239,206) (62,215) (301,421)
Exceptional 3 (1,532) -- (1,532)
------------ ------------ ------------
(240,738) (62,215) (302,953)
------------ ------------ ------------
GROSS PROFIT 47,289 21,358 68,647
------------ ------------ ------------
OPERATING EXPENSES
Distribution costs (18,481) (10,225) (28,706)
Administrative expenses -- normal (28,123) (7,205) (35,328)
-- exceptional 3 (2,701) (1,267) (3,968)
------------ ------------ ------------
(30,824) (8,472) (35,854)
------------ ------------ ------------
Amortisation of goodwill (197) (329) (526)
------------ ------------ ------------
(49,502) (19,026) (68,528)
------------ ------------ ------------
OPERATING (LOSS)/PROFIT 4 (2,213) 2,332 119
Share of associates' normal operating profit 5 546 -- 546
Share of associates' exceptional operating items 5 (1,366) -- (1,366)
------------ ------------ ------------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION (3,033) 2,332 (701)
Interest receivable 6 122 21 143
Interest payable and similar charges 7 (1,413) (933) (2,346)
------------ ------------ ------------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (4,324) 1,420 (2,904)
------------ ------------
Tax on loss on ordinary activities 10 (987)
------------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (3,891)
Dividends 12 --
------------
TRANSFER FROM RESERVES 25 (3,891)
============
(LOSSES)/EARNINGS PER ORDINARY SHARE 13
Basic (7.3)p
Before exceptional items 4.1p
Diluted (6.6)p
============
</Table>
The accompanying notes form an integral part of these financial statements.
96
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 1999, 2000 AND 2001
<Table>
<Caption>
Years ended
------------------------------------------------
2001 2000 1999
Notes L.'000 L.'000 L.'000
FIXED ASSETS
Intangible assets -- goodwill 14 13,965 14,993 15,437
Tangible assets 15 5,777 6,085 4,706
Investments 16 2,297 2,609 3,262
------------ ------------ ------------
22,039 23,687 23,405
------------ ------------ ------------
CURRENT ASSETS
Stocks 18 22,320 18,488 18,873
Debtors 19 56,116 46,268 45,968
Cash at bank and in hand 4,178 4,153 1,860
------------ ------------ ------------
82,614 68,909 66,701
CREDITORS DUE WITHIN ONE YEAR 20 (88,521) (79,233) (63,382)
------------ ------------ ------------
NET CURRENT (LIABILITIES)/ASSETS (5,907) (10,324) 3,319
------------ ------------ ------------
TOTAL ASSETS LESS CURRENT (LIABILITIES)/ASSETS 16,132 13,363 26,724
CREDITORS DUE AFTER MORE THAN ONE YEAR 21 (4,202) (544) (618)
PROVISIONS FOR LIABILITIES AND CHARGES 23 -- (81) (37)
------------ ------------ ------------
NET ASSETS 11,930 12,738 26,069
============ ============ ============
CAPITAL AND RESERVES
Called up share capital 24 3,739 2,939 2,660
Share premium account 25 7,154 1,041 1,034
Shares to be issued -- -- 3,976
Merger reserve 25 5,069 5,069 1,370
Profit and loss account 25 (4,032) 3,689 17,029
------------ ------------ ------------
11,930 12,738 26,069
============ ============ ============
Equity shareholders' funds 5,017 12,738 26,069
Non-equity shareholders' funds 6,913 -- --
------------ ------------ ------------
TOTAL SHAREHOLDERS' FUNDS 11,930 12,738 26,069
============ ============ ============
</Table>
The accompanying notes form an integral part of these financial statements.
97
COMPANY BALANCE SHEET AS AT 31 DECEMBER 1999, 2000 AND 2001
<Table>
<Caption>
Years ended
------------------------------------------------
2001 2000 1999
Notes L.'000 L.'000 L.'000
FIXED ASSETS
Tangible assets 15 1,109 1,474 697
Investments 17 47,131 44,591 44,430
------------ ------------ ------------
48,240 46,065 45,127
------------ ------------ ------------
CURRENT ASSETS
Debtors 19 42,059 33,567 26,126
CREDITORS DUE WITHIN ONE YEAR 20 (26,953) (27,412) (19,278)
------------ ------------ ------------
NET CURRENT ASSETS 15,106 6,155 6,848
------------ ------------ ------------
TOTAL ASSETS LESS CURRENT LIABILITIES 63,346 52,220 51,975
CREDITORS DUE AFTER MORE THAN ONE YEAR 21 (3,982) -- --
------------ ------------ ------------
NET ASSETS 59,364 52,220 51,975
============ ============ ============
CAPITAL AND RESERVES
Called up share capital 24 3,739 2,939 2,660
Share premium account 25 7,154 1,041 1,034
Shares to be issued -- -- 3,976
Other reserves 25 40,663 40,663 36,964
Profit and loss account 25 7,808 7,577 7,341
------------ ------------ ------------
59,364 52,220 51,975
============ ============ ============
Equity shareholders' funds 52,451 52,220 51,975
Non-equity shareholders' funds 6,913 -- --
------------ ------------ ------------
TOTAL SHAREHOLDERS' FUNDS 59,364 52,220 51,975
============ ============ ============
</Table>
The accompanying notes form an integral part of these financial statements.
98
CONSOLIDATED CASHFLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 1999, 2000 AND
2001
<Table>
<Caption>
Years ended
------------------------------------------------
2001 2000 1999
Notes L.'000 L.'000 L.'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES 28(a) (9,159) 2,427 2,172
Returns on investments and servicing of finance 28(c) (3,147) (1,639) (2,645)
Taxation 28(c) (915) (55) (1,349)
Capital expenditure and financial investment 28(c) (1,812) (2,983) (529)
Acquisitions and disposals 28(c) (3,285) (161) 16,111
Equity dividends paid 28(c) -- -- --
------------ ------------ ------------
Cash (outflow)/inflow before management of liquid
resources and financing (18,318) (2,411) 13,760
Financing 28(c) 10,537 (434) (16,989)
------------ ------------ ------------
DECREASE IN CASH IN THE YEAR (7,781) (2,845) (3,229)
============ ============ ============
</Table>
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE THREE YEARS ENDED
31 DECEMBER 1999, 2000 AND 2001
<Table>
<Caption>
Years ended
------------------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
LOSS FOR THE FINANCIAL YEAR (7,421) (12,350) (3,891)
Translation differences on foreign currency net investments (92) (808) 120
Adjustment to unrealised (loss)/gain on disposal of subsidiary -- (182) 815
------------ ------------ ------------
Total gains and losses recognised since the last annual report (7,513) (13,340) (2,956)
============ ============ ============
</Table>
The accompanying notes form an integral part of these financial statements.
99
NOTES TO THE FINANCIAL STATEMENTS
STATEMENT OF ACCOUNTING POLICIES
The principal accounting policies are summarised below. They have all been
applied consistently throughout the year and preceding two years:
BASIS OF ACCOUNTING
(a) The financial statements are prepared under the historical cost convention
and in accordance with applicable accounting standards.
(b) The financial statements in respect of the financial year ended 31 December
2001 have been prepared on a going concern basis which the Directors
believe to be appropriate for the reasons summarised below.
The Directors have prepared cashflow forecasts for the period up to 31
December 2003 which show that the Group requires further funding in order
to be able to continue as a going concern. An Offer has been announced for
the group by Daisytek and, as explained below, the directors believe that
the various matters that cause the Group to require further funding will be
resolved as a consequence of the Offer having been announced and under the
terms of the loan agreement with Daisytek.
Having taken all of the factors set out in (c) below into consideration,
the Directors have prepared the financial statements on the basis of a
going concern as they expect that either the Offer will become
unconditional in due course or that, if it does not, then the resolutions
described in that note to effect a fund raising in the form of equity
shares would be passed. Under either of these circumstances, the directors
believe that the necessary funds would become available to the Group.
However, there can be no certainty about these events and, without the
continued financial support of Daisytek, in whatever form, it is unlikely
that the Group would be able to continue to operate as a going concern. The
financial statements do not include any adjustments that may be necessary
in these circumstances such as the revision of the carrying values of
assets, the requirement for further provisions for additional liabilities
that may arise and the reclassification of fixed assets and long term
liabilities as current.
(c) The Directors have prepared cashflow forecasts for the period up to 31
December 2003 which show that the Group requires further funding in order
to be able to continue as a going concern. An Offer has been announced for
the Group by Daisytek and, as explained below, the Directors believe that
the various matters that cause the Group to require further funding will be
resolved as a consequence of the Offer having been announced and the terms
of the loan agreement with Daisytek detailed below. The Offer is
preconditional upon the approval and signing by the Board of these
Financial Statements.
Under the terms of the Preference Shares, Daisytek was entitled to receive
a preference dividend of L.141,278 on 1 April 2002, which was not paid. If
a preference dividend is not paid on the due date and remains in arrears
for more than 14 days, this constitutes an event of default under the
provisions of the Company's Articles of Association unless waived by
Daisytek. Daisytek agreed to defer the outstanding payment but this
agreement expired on 6 May 2002, at which point an event of default
occurred.
The consequences of the event of default are that Daisytek is entitled to
exercise voting rights in respect of its Preference Shares such that it may
cast a majority of the votes at any General Meeting of the Company; it may
appoint additional Directors to the Board so that up to 50 per cent. of the
Board is appointed by Daisytek; and it may within 120 days call for the
payment of a Special Dividend.
The amount of the Special Dividend is to be equivalent to the "Kaye Value",
defined by the Articles as the value, at the date the Special Dividend is
required, of the ordinary shares, rights to shares or warrants of Kaye held
by the Company less the costs incurred by the Company in subscribing or
acquiring such shares, rights to shares or warrants after 9 August 2001. If
the Kaye Value is not agreed between the Company and Daisytek, it is to be
determined by the Company's auditors as an appropriate percentage of the
value of the whole of the issued share capital of Kaye (provided that the
value of any shares, rights to shares or warrants which have been sold by
the Company shall be equal to the proceeds of sale). At 31 December 2001,
the carrying value of Kaye in the Company's balance sheet was L.21.8
million and the cost incurred by the Company in subscribing for further
shares in Kaye after 9 August 2001 (all of which shares were subscribed
prior to 31 December 2001) was L.3.2 million. However, the carrying value
in the Company's balance sheet may not be relevant to the valuation process
described above, which may ascribe a lower value to the Company's interest
in Kaye at the time
100
when the payment of the Special Dividend is required. Upon receipt of
notice that the Special Dividend is to be called for, it is deemed as
payable. The settlement of the Special Dividend is by way of cash or, with
the consent of the preference shareholders, by the distribution in specie
of assets equivalent to the Special Dividend payable. If this Special
Dividend was called for then, dependent upon its value, it is uncertain
whether the Company would have sufficient distributable reserves to make
the payment. No further rights are acquired by Daisytek in the
circumstances where the Special Dividend is unable to be paid. If this
Special Dividend was called for in cash, then it would be funded under the
terms of the loan agreement set out below.
Daisytek has agreed to not exercise its right to vote, as described above,
until the earlier of 30 June 2002 or the date when clearance is obtained
from German competition authorities in relation to the Offer by Daisytek.
It has also waived its right to call for a Special Dividend until 30 June
2002 and has indicated that it does not presently intend to appoint
directors to the Board of the Company.
Under a loan agreement with Daisytek effective from 12 October 2001,
borrowings amounting to L.7.9 million (advanced in 2002) fall due for
repayment on or before 30 June 2002. If this repayment has not been made,
then the Directors are obliged to procure that a fund raising be proposed
to the members in the form of a placing of ordinary equity shares to
Daisytek, subject to clawback to the extent members subscribe as part of
this fund-raising. The agreement prescribes that the amount to be raised be
sufficient, net of expenses of the issue, to repay in full the amounts
outstanding under the loan agreement, any cash payment due in respect of
the Special Dividend and an amount, to be determined by the Directors, to
provide additional working capital for the Group (subject to this amount
being less than L.10.0 million). If the Company is seeking to procure the
fund-raising then Daisytek has agreed not to seek repayment of the loans
(other than following an event of default), nor to seek payment of the
Special Dividend if it has been called for, until 30 September 2002. If the
required resolutions to effect this fund raising are not passed at the
meeting called for members to consider them, then it is unlikely that the
Group would be in a position to repay the amount owed to Daisytek or to pay
the Special Dividend in cash.
The Group is currently operating at or around the maximum limit of its
borrowing facilities which it expects to continue to be made available to
the Group in the current circumstances of the Offer announcement and
associated terms of the loan agreement. Daisytek, as part of the terms of
the Offer announcement, has provided L.3.0 million of interim funding to
support the cash needs of the business during the Offer process.
Consequently, between now and 30 September 2002 (the later of the likely
dates when the Offer, if made, is expected to be declared unconditional and
the date when any fund-raising proceeds are expected to be received), the
Directors believe that the Group has sufficient funds to be able to
continue to meet its debts as they fall due.
Once the Offer from Daisytek is made and becomes unconditional, the
Directors believe that, on the basis of current discussions with Daisytek,
the following will occur:
A That the right to receive the Special Dividend will be waived.
B That either:
o The repayment date of the loans due under the loan agreement with
Daisytek will be extended with any further funding that is
necessary also being made available from Daisytek; or
o If the loans are required to be repaid, the required resolutions
to effect a fund-raising in the form of a placing of equity
shares will be passed and the funds necessary to provide
sufficient working capital to the Group, including funding the
Special Dividend payment if A does not happen, would be
available.
Should the Offer be made but not become unconditional, then the Directors
believe that the Special Dividend will be called for and the loans will be
required to be repaid. Following the event of default, and taking account
of the voting rights conferred by this, Daisytek would control 50 per cent.
plus one vote of the voting rights of the Company. In these circumstances,
it is not certain that the required resolutions to effect a fund-raising in
the form of a placing of equity shares would be passed since these
resolutions require a 75 per cent. majority. Without the passing of these
resolutions, it is unlikely that the Group would be able to continue as a
going concern and consequently, the Directors would expect the resolutions
to be passed as it would be in shareholders' best interests to do so, and
that the funds necessary to provide sufficient working capital to the
Group, to repay the loans and to fund any payment, if required, of the
Special Dividend in cash, would be available.
101
On the basis of the information currently available to them the Directors
believe that the Offer will be made and will not subsequently lapse.
On these bases, whether or not the Offer becomes unconditional, the
Directors believe that the Group will have sufficient funds for the
foreseeable future.
Should the Offer not be made, lapse, become unconditional but B above not
then occur, or not become unconditional and the resolutions to effect a
fund-raising in the form of equity shares as set out above not then be
passed, then the Directors would need to consider what other funding
options were available to them. In these circumstances, if the Special
Dividend became payable in cash, then it is unlikely that the Group would
be able to continue as a going concern. If the Special Dividend were not
payable the Group would still require additional funding and the Directors
would seek alternative forms of funding but it is unlikely that such
funding would be available and any such funding would require the consent
of Daisytek in accordance with the Articles of Association.
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements of
the Company and all its subsidiary undertakings all of which are made up to the
end of each financial year.
The results of subsidiary undertakings acquired or disposed of are included
from, or to, the date that control passes to, or from the Group.
GOODWILL
Goodwill arising on consolidation, representing the excess of the purchase
consideration, including related costs, over the fair value of the net assets
acquired, is capitalised and written off on a straight line basis over its
useful economic life, normally 20 years.
Goodwill that arose from acquisitions prior to 31 December 1997 was written off
to reserves in accordance with the accounting standards then applicable. As
permitted by Financial Reporting Standard 10, goodwill previously written off to
reserves has not been reinstated in the balance sheet.
On the subsequent disposal or termination of a business acquired since 1 January
1998, the profit or loss on disposal or termination is calculated after charging
the unamortised amount of any related goodwill.
TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided on all fixed assets at rates calculated to write off
the cost, less estimated residual value, of such assets evenly over their
expected useful lives. The estimated useful lives used for this purpose are:
Freehold buildings 40 years
Leasehold improvements Shorter of 10 years or remaining life of lease
Plant and machinery 2 to 10 years
Fixtures and fittings 4 to 7 years
LEASE AND HIRE PURCHASE COMMITMENTS
Assets held under hire purchase or finance lease contracts that transfer
substantially all the risks and rewards of ownership to the Group are
capitalised and depreciated over their useful lives.
The capital element of the related liability is included in creditors. The
interest element is charged to the profit and loss account so as to produce a
constant period rate of charge on the capital outstanding. Rentals in respect of
all operating leases are charged to the profit and loss account on a straight
line basis over the term of the lease.
INVESTMENTS
Fixed asset investments are stated at cost less provision for permanent
diminution in value where appropriate.
ASSOCIATED UNDERTAKINGS
The consolidated profit and loss account includes the Group's share of the
results of its associated undertakings where there is substantial holding in the
equity and participation in financial and operating
102
policy decisions. Investments in associated undertakings are included in the
consolidated balance sheet at cost, less goodwill, plus the Group's share of
post-acquisition retained reserves.
STOCKS
Stocks are stated at the lower of cost and net realisable value. Cost is taken
as the average purchase price plus carriage and freight costs. Cost of
manufactured goods includes materials, direct labour and production overheads.
Net realisable value is the price at which stocks can be sold in the normal
course of business after allowing for costs of realisation. Provision is made
for slow moving and defective stocks where appropriate.
TAXATION
Corporation tax is provided at amounts expected to be paid (or recovered) using
the tax rates and legislation that has been enacted or substantially enacted by
the balance sheet date.
Deferred taxation relating to the excess of capital allowances over depreciation
and other timing differences is provided in the financial statements to the
extent that a liability is expected to crystallise.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction. Assets and liabilities denominated in foreign currencies and
the balance sheets of overseas subsidiary undertakings are translated at the
rate of exchange ruling at the balance sheet date.
Exchange differences arising on the re-translation of the opening net assets of
overseas subsidiary undertakings at the closing rate are taken directly to
reserves. The profit and loss accounts of overseas subsidiary undertakings are
translated using average rates of exchange with the adjustment arising from
closing rates taken to reserves.
Gains and losses arising on forward exchange contracts are deferred and
recognised in the profit and loss account at the same time as the hedged
transaction.
All other exchange differences are dealt with in the profit and loss account.
PENSION COSTS
The Group operates a defined contribution pension scheme for senior employees in
the UK. The assets of the scheme are held separately from those of the Group and
are administered independently. The Group's contribution to the scheme is
charged to the profit and loss account as it falls due.
A subsidiary disposed of during 1999, John Heath & Company Ltd, also operates a
defined benefit pension scheme which is now closed to new members. For defined
benefit schemes the amount charged to the profit and loss account in respect of
pension costs and other post-retirement benefits is the estimated regular cost
of providing the benefits accrued in the year, adjusted to reflect variations
from that cost. The regular cost is calculated so that it represents a
substantially level percentage of current and future payroll costs.
Variations from regular cost are charged or credited to the profit and loss
account as a constant percentage of the payroll over the estimated remaining
working lives of scheme members. Defined benefit schemes are externally funded,
with the assets of the scheme held separately from those of the company in a
separate trustee administered fund.
Any difference between amounts charged to the profit and loss account and
amounts payable in respect of the Group's pension schemes are shown as either
provisions or prepayments in the balance sheet. There are no Group pension
arrangements in respect of overseas operations.
NOTES TO THE FINANCIAL STATEMENTS
1. TURNOVER
Turnover comprises the invoiced value of goods and services supplied by the
Group, exclusive of value added taxation and intra-group transactions, and is
attributable to the distribution of consumables products for information
processing, telecommunications and computer equipment and other products for the
office.
103
2. ANALYSIS OF TURNOVER AND PROFIT
<Table>
<Caption>
Years ended
--------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
TURNOVER BY DESTINATION
United Kingdom and Ireland 132,398 104,053 161,896
Continental Europe 176,066 140,855 158,406
Scandinavia 44,416 43,798 46,166
Other areas 8,674 8,097 5,132
-------- -------- --------
361,554 296,803 371,600
======== ======== ========
</Table>
UNITED KINGDOM AND IRELAND
<Table>
<Caption>
Continuing operations Discontinued operations United Kingdom Total
--------------------------------- ------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
TURNOVER BY ORIGIN
Total sales 144,353 113,107 97,262 -- -- 88,003 144,353 113,107 185,265
Inter-segment sales (2,872) (1,686) (5,323) -- -- (4,430) (2,872) (1,686) (9,753)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Sales to third parties 141,481 111,421 91,939 -- -- 83,573 141,481 111,421 175,512
========= ========= ========= ========= ========= ========= ========= ========= =========
PROFIT BEFORE TAXATION
Segment operating
profit before exceptional 5,589 4,430 1,280 -- -- 3,599 5,589 4,430 4,879
items
Exceptional items (1,101) (45) (892) -- -- (1,267) (1,101) (45) (2,159)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit 4,488 4,385 388 -- -- 2,332 4,488 4,385 2,720
========= ========= ========= ========= ========= ========= ========= ========= =========
NET ASSETS
Segmental net assets 10,007 8,912 31,556 -- -- -- 10,007 8,912 31,556
========= ========= ========= ========= ========= ========= ========= ========= =========
</Table>
104
CONTINENTAL EUROPE, SCANDINAVIA AND GROUP TOTAL
<Table>
<Caption>
Continental Europe Scandinavia Group Total
--------------------------------- -------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
TURNOVER BY ORIGIN
Total sales 180,318 142,834 153,371 46,682 45,195 46,121 371,353 301,136 384,757
Inter-segment sales (4,661) (1,250) (3,272) (2,266) (1,397) (132) (9,799) (4,333) (13,157)
-------- -------- -------- ------- ------- ------- -------- -------- --------
Sales to third
parties 175,657 141,584 150,099 44,416 43,798 45,989 361,554 296,803 371,600
======== ======== ======== ======= ======= ======= ======== ======== ========
(LOSS)/PROFIT BEFORE
TAXATION
Segment operating
(loss)/profit before
exceptional items (4,165) (4,348) (641) 1,072 504 1,381 2,496 586 5,619
Exceptional items (301) (7,936) (3,248) -- -- (93) (1,402) (7,981) (5,500)
-------- -------- -------- ------- ------- ------- -------- -------- --------
Operating (loss)/profit (4,466) (12,284) (3,889) 1,072 504 1,288 1,094 (7,395) 119
======== ======== ======== ======= ======= ======= ======== ======== ========
Unallocated central
costs:
Operating loss (1,103) (1,184) --
Exceptional items (320) 279 --
-------- -------- --------
Operating (loss)/profit (329) (8,300) 119
Share of associates loss after exceptional items and goodwill
amortisation (2,520) (517) (820)
Net interest (3,941) (3,084) (2,203)
-------- -------- --------
Group loss before
taxation (6,790) (11,901) (2,904)
-------- -------- --------
NET ASSETS
Segmental net assets 18,794 9,167 13,352 3,910 3,091 3,714 32,711 21,170 48,622
======== ======== ======== ======= ======= =======
Investments and
goodwill 16,262 17,602 --
Unallocated liabilities (37,043) (26,034) (22,553)
-------- -------- --------
Total net assets 11,930 12,738 26,069
======== ======== ========
</Table>
Unallocated liabilities represent net borrowings and taxation which are not
applicable to the operations of any individual segment.
105
3. EXCEPTIONAL ITEMS
<Table>
<Caption>
Discontinued
Continuing operations operations Group Total
------------------------- ------------ --------------------------
2001 2000 1999 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
COST OF SALES
Stock losses and customer
claims -- 2,836 1,532 -- -- 2,836 1,532
------ ------ ------ ------ ------ ------ ------
DISTRIBUTION COSTS
Relocation of distribution
centre 939 -- -- -- 939 -- --
Duplicated costs during
logistics transfer -- 1,745 -- -- -- 1,745 --
Contract termination
costs 74 1,420 -- -- 74 1,420 --
------ ------ ------ ------ ------ ------ ------
1,013 3,165 -- -- 1,013 3,165 --
------ ------ ------ ------ ------ ------ ------
ADMINISTRATIVE EXPENSES
Board and senior
management settlements 592 513 1,305 120 592 513 1,425
Property and location
rationalisation 117 270 838 151 117 270 989
Non-recoverable debts -- 1,197 -- -- -- 1,197 --
Exceptional bad debts -- (279) -- 996 -- (279) 996
Accelerated IT deprecation -- -- 558 -- -- -- 558
------ ------ ------ ------ ------ ------ ------
709 1,701 2,701 1,267 709 1,701 3,968
------ ------ ------ ------ ------ ------ ------
TOTAL EXCEPTIONAL ITEMS
Total before share of
associates 1,722 7,702 4,233 1,267 1,722 7,702 5,500
Share of associates
(2000: as restated) 2,636 1,245 1,366 -- 2,636 1,245 1,366
------ ------ ------ ------ ------ ------ ------
4,358 8,947 5,599 1,267 4,358 8,947 6,866
====== ====== ====== ====== ====== ====== ======
</Table>
4. OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging/(crediting):
<Table>
<Caption>
Years ended
-------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Depreciation
- --on owned assets 1,670 1,453 3,085
- --on hire purchased assets 388 356 338
Loss/(profit) on disposal of fixed assets 1 39 (51)
Goodwill amortisation -- -- 526
Auditors' remuneration
- --audit 172 169 198
- --other services 535 44 186
Operating lease rentals
- --land and buildings 2,225 1,904 3,265
- --plant and machinery 1,535 1,577 551
====== ====== ======
</Table>
The auditors' remuneration figure given above for other services provided in the
financial year ended 31 December 2001, relates to work performed by KPMG Audit
Plc, their associates, and Arthur Andersen. Principally this related to
assisting the Group with the formation of the strategic alliance with Daisytek
International Corporation and the issue of the Preference Shares (see note 24
for further details), and preparation of other necessary financial information
and reports.
In the financial year ended 31 December 2001 the definition of distribution
costs and administrative expenses has been refined to apply a consistent measure
throughout the Group, following the termination of the
106
outsourced logistics contract and an ongoing project to standardise accounts
coding structures. The comparative figures for 2000 have been restated to take
account of this revised definition.
5. SHARE OF RESULTS OF ASSOCIATED UNDERTAKINGS
<Table>
<Caption>
Years ended
---------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Operating profit (excluding exceptional items) 1,001 1,527 702
Exceptional items (note 3) (2,636) (1,245) (1,366)
Net interest payable (1,076) (1,075) (156)
------- ------- ------
Loss before tax (2,711) (793) (820)
Tax (145) 334 (40)
------- ------- ------
Loss after tax (2,856) (459) (860)
======= ======= ======
</Table>
In 1999, tax includes a credit of L.151,000 attributable to exceptional items.
Further details are given in note 16.
The allocation of the Kaye result for 2000 between operating profit, exceptional
items and interest was altered in the period between the Group accounts being
signed and the Kaye accounts being signed, although the overall result for this
associate remained the same as that previously disclosed. The comparative
figures for 2000 have been restated as a result of these amendments.
6. INTEREST RECEIVABLE
<Table>
<Caption>
Years ended
----------------------
2001 2000 1999
L.'000 L.'000 L.'000
Bank interest 58 41 20
Other interest 70 74 123
----- ----- -----
128 115 143
===== ===== =====
</Table>
7. INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
<Caption>
Years ended
----------------------
2001 2000 1999
L.'000 L.'000 L.'000
Bank loans and overdrafts 2,778 2,051 2,239
Hire purchase charges 26 50 69
Other interest 189 23 38
------ ------ ------
Total before share of associated undertakings 2,993 2,124 2,346
Share of associated undertakings (2000: as restated) 1,076 1,075 --
------ ------ ------
4,069 3,199 2,346
====== ====== ======
</Table>
107
8. DIRECTORS' REMUNERATION, INTERESTS AND TRANSACTIONS
Aggregate directors' remuneration
<Table>
<Caption>
Years ended
------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Executive directors
- --Salary and fees 407 322 270
- --Performance related bonus 20 -- --
Fees for non-executive directors 25 17 75
Compensation for loss of office 100 -- 164
Other benefits 21 18 19
---- ---- ----
573 357 528
Group contributions to money purchase pension schemes 18 15 22
---- ---- ----
591 372 550
==== ==== ====
</Table>
AGGREGATE DIRECTORS' EMOLUMENTS
<Table>
<Caption>
Compensation
Salary for loss
and fees Benefits Bonus Pension of office Total
2001 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Name of director
EXECUTIVE
B Robinson 187 10 -- -- -- 197
MJ Murphy 120 11 20 18 -- 169
DA Heap
(resigned 31 December 2001) 100 -- -- -- 100 200
NON-EXECUTIVE
BV Triebel
(resigned 26 June 2001) 8 -- -- -- -- 8
H Fristedt 17 -- -- -- -- 17
----- ----- ----- ----- ----- -----
432 21 20 18 100 591
===== ===== ===== ===== ===== =====
</Table>
<Table>
<Caption>
Salary
and fees Benefits Pension Total
2000 L.'000 L.'000 L.'000 L.'000
Name of director
EXECUTIVE
DA Heap 100 -- -- 100
B Robinson (appointed 26 January 2000) 122 8 -- 130
MJ Murphy 100 10 15 125
NON-EXECUTIVE
BV Triebel 17 -- -- 17
MC Layton (resigned 2 June 2000) -- -- -- --
H Fristedt* -- -- -- --
----- ----- ----- -----
339 18 15 372
===== ===== ===== =====
</Table>
*H Fristedt was a representative of CHISA LLC in 2000 and 1999, and only
received expenses.
108
<Table>
<Caption>
Compensation
Salary and for loss
fees Benefits Pension of office Total
1999 L.'000 L.'000 L.'000 L.'000 L.'000
Name of director
EXECUTIVE
DA Heap 97 -- -- -- 97
MJ Murphy
(appointed 20 September 1999) 30 3 5 -- 38
TE Blyth
(resigned 9 March 1999) 36 4 4 75 119
GR Stevens
(resigned 20 September 1999) 90 12 13 89 204
PPJ Vikanis
(resigned 29 November 1999) 17 -- -- -- 17
NON-EXECUTIVE
BV Triebel 17 -- -- -- 17
MC Layton 45 -- -- -- 45
JK Hewson
(resigned 30 September 1999) 13 -- -- -- 13
----- ----- ----- ----- -----
345 19 22 164 550
===== ===== ===== ===== =====
</Table>
In addition to salary, executive directors are provided with private health
cover and a company car.
DETAILS OF DIRECTORS' SHARE OPTIONS
Options held by the directors to subscribe for the company's ordinary shares are
shown in note 24.
DIRECTORS' INTERESTS
The directors who held office at the respective year ends had the following
interests in the ordinary shares of the Company:
<Table>
<Caption>
Ordinary shares of 5p each
----------------------------------------
2001 2000 1999
Beneficial Beneficial Beneficial
DA Heap -- 12,278,029 12,118,029
B Robinson -- -- --
MJ Murphy 120,000 120,000 --
BV Triebel -- 40,000 40,000
H Fristedt 90,000 90,000 100,000
MC Layton -- -- 500,000
GR Stevens -- -- --
PPJ Vikanis -- -- --
JK Hewson -- -- --
TE Blyth -- -- --
======= ========== ==========
</Table>
DIRECTORS' TRANSACTIONS
DA Heap is a director (resigned 31 December 2001) and significant shareholder in
Virtual Village Limited and Torres Limited, from which the Company purchased and
sold goods as detailed in note 30.
109
9. PARTICULARS OF EMPLOYEES
The average monthly number of persons employed by the Group during the year was:
<Table>
<Caption>
Years ended
------------------------------
2001 2000 1999
Number Number Number
Sales 642 627 702
Administration 301 316 421
Distribution 217 152 499
Manufacturing -- -- 76
------ ------ ------
1,160 1,095 1,698
====== ====== ======
</Table>
Staff costs, including executive directors' remuneration, during the year
amounted to:
<Table>
<Caption>
Years ended
-------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Wages and salaries 23,071 21,445 30,201
Social security costs 4,441 4,069 4,935
Pension costs 270 172 460
------- ------- -------
27,782 25,686 35,596
======= ======= =======
</Table>
10. TAX ON LOSS ON ORDINARY ACTIVITIES
<Table>
<Caption>
Years ended
------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
UK Corporation tax at 30% (2000: 30%, 1999: 30.25%) 1,115 677 1,179
Double taxation relief (893) (207) (484)
Transfer (from)/to deferred tax (52) 52 (31)
Overseas taxation 505 (5) 605
Share of associates tax 145 (334) 40
Adjustment relating to prior years UK Corporation tax (189) 266 (322)
----- ----- -----
631 449 987
===== ===== =====
</Table>
The tax charge for the year has been reduced by tax relief in respect of
exceptional items amounting to L.394,000 (2000: L.31,000, 1999: L.792,000).
11. COMPANY PROFIT FOR THE FINANCIAL YEAR
The profit attributable to the Company which has been dealt with in its own
accounts is L.231,000 (2000: L.236,000, 1999: L.1,251,000). In accordance
with the exemption given under Section 230 of the Companies Act 1985 the Company
does not present its own profit and loss account.
12. DIVIDENDS
<Table>
<Caption>
Years ended
---------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Non-equity --- Preference Shares
Declared (see note 24) 208 -- --
=== === ===
</Table>
110
13. (LOSSES)/EARNINGS PER ORDINARY SHARE
The calculation of basic loss per ordinary share is based on the loss after
taxation and non-equity dividends of L.7,629,000 (2000: L.12,350,000, 1999:
L.3,891,000) and on 58.8 million (2000: 57.8 million, 1999: 53.2 million)
ordinary shares, being the weighted average number of shares in issue during the
year.
The calculation of (loss)/earnings before exceptional items per ordinary share
is based on a loss of L.3,594,000 (2000: L.3,434,000, 1999: profit of
L.2,183,000), arrived at as follows:
<Table>
<Caption>
2001 2000 1999
Loss after taxation and non-equity dividends (7,629) (12,350) (3,891)
Exceptional items (note 3) 4,385 8,947 6,866
Tax effect of exceptional items (note 10) (394) (31) (792)
Loss or disposal of associate 71 -- --
------- ------- ------
(Loss)/profit before exceptional items (3,594) (3,434) 2,183
======= ======= ======
</Table>
The calculation of fully diluted losses per share is based on 58.8 million
(2000: 58.9 million, 1999: 58.9 million) ordinary shares, the 1999 dilution
reflects the issue of 5.5 million shares under the terms of the acquisition of
John Heath (Holdings) Limited (see note 24) and the dilutive effect of
outstanding share options.
14. GOODWILL
<Table>
<Caption>
L.'000
COST
At 31 December 1998 9,015
Reassessment of fair value of assets acquired in prior year 2,770
Additions 15,634
Disposals (11,785)
-------
At 31 December 1999 15,634
Reassessment of fair value of assets acquired in prior year 194
Additions 161
-------
At 31 December 2000 15,989
Additions 292
Disposals (565)
-------
At 31 December 2001 15,716
-------
AMORTISATION
At 31 December 1998 355
Charge for the year 526
Disposals (684)
-------
At 31 December 1999 197
Charge for the year 799
-------
At 31 December 2000 996
Charge for the year 814
Disposals (59)
-------
At 31 December 2001 1,751
-------
NET BOOK VALUE
At 31 December 1999 15,437
======
At 31 December 2000 14,993
======
At 31 December 2001 13,965
======
</Table>
In 1999, the fair value of certain assets in John Heath (Holdings) Limited,
acquired in 1998, were reassessed. Adjustments relate to freehold property
valuation and provision for dilapidation liabilities in certain leasehold
properties.
111
In 2000, the fair value of certain assets in EXY Group Limited ("EXY"), acquired
in 1999, were reassessed, following completion of the audited accounts of EXY
for the period ended 31 March 2000.
From 2000 onwards, all of the goodwill arose on the acquisition of the
associated undertakings and therefore the amortisation is shown in the profit
and loss account in accordance with Financial Reporting Standard 9.
An impairment review was performed in 2001 in respect of the investment in Kaye.
The recoverable amount of the goodwill has been assessed by reference to the net
present value of estimated future cash flows, incorporating the planned costs
and expected benefits of the reorganisation (that was planned at the time of
acquisition of the Group's interest in Kaye and that is currently in process)
and applying a discount rate of 10 per cent.. This review demonstrated that no
provision is required in relation to this investment.
15. TANGIBLE FIXED ASSETS
GROUP
<Table>
<Caption>
Plant Fixtures
Freehold Leasehold and and
buildings improvements machinery fittings Total
L.'000 L.'000 L.'000 L.'000 L.'000
COST
At 31 December 1998 1,712 5,253 11,909 7,992 26,866
Additions 12 38 1,520 711 2,281
Disposals (2) (223) (3,694) (419) (4,338)
Disposal of subsidiaries (1,395) (4,596) (2,838) (4,221) (13,050)
Exchange adjustments -- (5) (246) (227) (478)
------ ------- ------- ------- -------
At 31 December 1999 327 467 6,651 3,836 11,281
Additions 1 413 1,947 1,109 3,470
Disposals -- (201) (248) (492) (941)
Exchange adjustments -- (5) (24) (12) (41)
------ ------- ------- ------- -------
At 31 December 2000 328 674 8,326 4,441 13,769
Additions -- 108 493 1,302 1,903
Disposals -- -- (1,930) (37) (1,967)
Exchange adjustments -- (1) (113) (89) (203)
------ ------- ------- ------- -------
At 31 December 2001 328 781 6,776 5,617 13,502
------ ------- ------- ------- -------
DEPRECIATION
At 31 December 1998 190 3,138 5,319 5,524 14,171
Charge for the year 38 195 2,378 812 3,423
Disposals (2) (188) (2,121) (362) (2,673)
Disposal of subsidiaries (105) (2,950) (1,425) (3,540) (8,020)
Exchange adjustments -- (2) (178) (146) (326)
------ ------- ------- ------- -------
At 31 December 1999 121 193 3,973 2,288 6,575
Charge for the year 10 50 1,212 537 1,809
Disposals -- (36) (232) (408) (676)
Exchange adjustments -- (1) (18) (5) (24)
------ ------- ------- ------- -------
At 31 December 2000 131 206 4,935 2,412 7,684
Charge for the year 9 54 1,494 501 2,058
Disposals -- -- (1,847) (28) (1,875)
Exchange adjustments -- 1 (87) (56) (142)
------ ------- ------- ------- -------
At 31 December 2001 140 261 4,495 2,829 7,725
------ ------- ------- ------- -------
NET BOOK VALUE
At 31 December 1998 1,522 2,115 6,590 2,468 12,695
====== ======= ======= ======= =======
At 31 December 1999 206 274 2,678 1,548 4,706
====== ======= ======= ======= =======
At 31 December 2000 197 468 3,391 2,029 6,085
====== ======= ======= ======= =======
At 31 December 2001 188 520 2,281 2,788 5,777
====== ======= ======= ======= =======
</Table>
The net book value of tangible fixed assets includes L.351,000 (2000:
L.738,000, 1999: L.865,000) in respect of assets held under hire purchase or
finance lease contracts.
112
COMPANY
<Table>
<Caption>
Fixtures
Leasehold Plant and and
improvements machinery fittings Total
L.'000 L.'000 L.'000 L.'000
COST
At 31 December 1998 98 2,495 69 2,662
Additions 5 650 17 672
Disposals -- (652) (26) (678)
------ ------- ------ -------
At 31 December 1999 103 2,493 60 2,656
Additions -- 1,151 2 1,153
Disposals -- (69) -- (69)
------ ------- ------ -------
At 31 December 2000 103 3,575 62 3,740
Additions 16 224 36 276
Disposals -- (1,894) (3) (1,897)
------ ------- ------ -------
At 31 December 2001 119 1,905 95 2,119
------ ------- ------ -------
DEPRECIATION
At 31 December 1998 1 1,249 32 1,282
Charge for the year 10 1,078 13 1,101
Disposals -- (408) (16) (424)
------ ------- ------ -------
At 31 December 1999 11 1,919 29 1,959
Charge for the year 10 287 12 309
Disposals -- (2) -- (2)
------ ------- ------ -------
At 31 December 2000 21 2,204 41 2,266
Charge for the year 12 532 20 564
Disposals -- (1,815) (5) (1,820)
------ ------- ------ -------
At 31 December 2001 33 921 56 1,010
------ ------- ------ -------
NET BOOK VALUE
At 31 December 1998 97 1,246 37 1,380
====== ======= ====== =======
At 31 December 1999 92 574 31 697
====== ======= ====== =======
At 31 December 2000 82 1,371 21 1,474
====== ======= ====== =======
At 31 December 2001 86 984 39 1,109
====== ======= ====== =======
</Table>
16. INVESTMENTS -- GROUP
<Table>
<Caption>
L.'000
INVESTMENT IN ASSOCIATED UNDERTAKINGS
At 31 December 1998 --
Additions 4,122
Share of loss after tax for year (860)
------
At 31 December 1999 3,262
Reassessment of fair value of assets acquired in prior year (194)
Share of loss after tax for year (459)
------
At 31 December 2000 2,609
Additions 3,285
Disposals (449)
Goodwill arising on additions in the year (292)
Share of loss after tax for year (2,856)
------
At 31 December 2001 2,297
======
</Table>
113
(a) Kaye Office Supplies Limited ("Kaye")
Kaye is a private company registered in England. The Group acquired a holding of
46.85 per cent. of the issued ordinary L.1 shares on 30 September 1999.
This percentage shareholding was increased to 47 per cent. in 2001 by purchasing
shares, which were offered for sale by a director of Kaye, and then maintained
at this level by participating in a rights issue, which was completed on 12
October 2001.
Kaye is the parent undertaking of a group of companies, which trade as wholesale
distributors of office products.
The summarised profit and loss account of Kaye for the three years ended 31
December 2001 and the share attributable to the Group comprises:
<Table>
<Caption>
Group share Kaye
----------------------------------- -------------------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Turnover 97,245 97,127 23,400 206,420 207,320 119,036
------- ------- ------- -------- -------- --------
Profit before exceptional items,
amortisation of goodwill and tax (432) 375 546 (918) 799 471
Exceptional items (2,636) (1,245) (1,366) (5,609) (2,657) (3,865)
Amortisation of goodwill -- -- -- (308) (307) (77)
------- ------- ------- -------- -------- --------
Loss before tax (3,068) (870) (820) (6,835) (2,165) (3,471)
Tax -- 353 (40) -- 754 (410)
------- ------- ------- -------- -------- --------
Loss after tax (3,068) (517) (860) (6,835) (1,411) (3,881)
======= ======= ======= ======== ======== ========
</Table>
The table below summarises the exceptional items incurred by Kaye, and the share
attributable to the Group:
<Table>
<Caption>
Group share Kaye
----------------- -----------------
2001 2000 2001 2000
L.'000 L.'000 L.'000 L.'000
Integration costs following the acquisition of
John Heath (Holdings) Limited
Integration costs 170 676 361 1,443
Redundancy -- 569 -- 1,214
------ ------ ------ ------
170 1,245 361 2,657
------ ------ ------ ------
Costs of a fundamental restructuring of continuing
operations
Establishment and set-up of Arrow 1,486 -- 3,162 --
Redundancy costs relating to closure of depots 779 -- 1,657 --
Professional fees associated with the refinancing 201 -- 429 --
------ ------ ------ ------
2,466 -- 5,248 --
------ ------ ------ ------
Total exceptional items for Kaye 2,636 1,245 5,609 2,657
====== ====== ====== ======
</Table>
Arrow is the new automated distribution centre, located in Lutterworth,
Leicestershire.
114
The summarised balance sheet of Kaye at 31 December and the share attributable
to the Group comprises:
<Table>
<Caption>
Group share Kaye
----------------------------------- ------------------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Fixed assets 5,679 3,311 2,007 12,083 7,068 4,284
Investments 5 5 64 10 10 136
Goodwill -- -- -- 5,455 5,763 5,067
Current assets 30,999 36,922 35,298 65,957 78,810 75,343
------- ------- ------- ------- ------- -------
36,683 40,238 37,369 83,505 91,651 84,830
Creditors due within one year (33,131) (36,728) (34,448) (70,492) (78,395) (73,529)
Creditors due after one year and
provisions (1,255) (1,224) (59) (2,669) (2,612) (125)
------- ------- ------- ------- ------- -------
Equity shareholders' funds 2,297 2,286 2,862 10,344 10,644 11,176
======= ======= ======= ======= ======= =======
</Table>
(b) EXY Group Limited ("EXY")
EXY is a private company registered in England. The Group acquired its holding
of 32 per cent. of the issued ordinary L.1 shares on 22 November 1999.
EXY is the parent undertaking of a group of companies whose trading activities
principally consists of the recycling, manufacture and distribution of
consumable products for the office.
EXY acquired all its subsidiary undertakings in November 1999 and has a
financial year end of 31 March.
Consequently there were no published accounts for EXY in 1999. The results of
EXY between 22 November and 31 December 1999 were not significant to the Group.
On 24 December 2001, the Group disposed of the whole of the 32 per cent. holding
in EXY for a total consideration of L.888,000. Of the total consideration,
L.444,000 was received in cash in February 2002, with the balance in the form
of non-voting redeemable 7 per cent. preference shares of L.1 each, redeemable
in equal amounts on 30 April and 31 August 2002. The first redemption has now
taken place. The carrying value of the associate at the time of disposal was
L.955,000, of which L.506,000 was in goodwill and L.449,000 in investments,
which after taking account of associated legal costs of L.4,000, resulted in a
loss on disposal of L.71,000. During the year, EXY had contributed L.211,000
profit after tax to the Group's results.
17. INVESTMENTS -- COMPANY
<Table>
<Caption>
Share in Share in
associated subsidiary
undertakings undertaking Total
L.'000 L.'000 L.'000
At 31 December 1998 -- as previously reported -- 38,321 38,321
-- adjustment -- 3,976 3,976
------- ------- -------
-- as restated -- 42,297 42,297
Additions 19,093 500 19,593
Disposals -- (17,460) (17,460)
------- ------- -------
At 31 December 1999 19,093 25,337 44,430
Additions 161 -- 161
------- ------- -------
At 31 December 2000 19,254 25,337 44,591
Additions 3,285 -- 3,285
Disposals (745) -- (745)
------- ------- -------
At 31 December 2001 21,794 25,337 47,131
======= ======= =======
</Table>
115
<Table>
<Caption>
Name of principal subsidiary undertaking and
country of incorporation of registration Description of shares held Trading activity
1999, 2000 AND 2001
ISA Wholesale plc (England)* Ordinary L.1 shares Trading
ISA International Holdings Limited (England)* Ordinary L.1 shares Holding company
PAR Beteiligungs GmbH (Germany) Common stock of no par value Holding and
management
ISA Deutschland GmbH (Germany) Common stock of no par value Trading
Supplies Team GmbH (Germany) Common stock of no par value Trading
ASDV SA (France) Ordinary E.48 shares Holding and
management
GDIS Sarl (France) Ordinary E.15 shares Trading
UNISOURCE Sarl (France) Ordinary E.15 shares Trading
Supplies Team Sarl (France) Ordinary E.76 shares Trading
Oscar Dellert AB (Sweden) Ordinary SEK 100 shares Trading
Supplies Team Norge AS (Norway) Ordinary Nok 1,000 shares Trading
ISA Scandinavia AS (Norway) Ordinary Nok 1,000 shares Trading
Supplies Team Srl (Italy) Common stock of no par value Trading 2001 only
Supplies Team EDV-Zubeho(0)r Handel GmbH (Austria) Common stock of no par value Trading
</Table>
*Shares of companies held by ISA International plc. Shares of other companies
are held by subsidiary undertakings.
The trading activity of the principal subsidiary undertakings is the
distribution of consumable products for information processing,
telecommunications and computer equipment.
Each undertaking operates in its country of incorporation or registration.
The Group's shareholding in each of the above subsidiary undertakings represents
100 per cent. of the voting rights and nominal value of issued shares.
All of the shares held in Supplies Team EDV-ZubehIr Handel GmbH, were disposed
of by the Group on 22 January 2002 (see note 31 for further details).
18. STOCKS
Stocks comprise finished goods and goods held for resale.
19. DEBTORS
<Table>
<Caption>
Group Company
----------------------------- -----------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Trade debtors 50,432 42,193 38,862 -- -- --
Amounts owed by subsidiary undertakings 40,476 32,770 24,978
Amounts owed by associated undertakings 6 512 142 -- 4 4
Other debtors 1,900 1,203 2,911 662 206 316
Prepayments and accrued income 2,706 1,761 3,168 -- -- --
Corporation tax recoverable 628 599 885 477 587 828
Short term investments (see note 16(b)) 444 -- -- 444 -- --
------- ------- ------- ------- ------- -------
56,116 46,268 45,968 42,059 33,567 26,126
======= ======= ======= ======= ======= =======
</Table>
116
20. CREDITORS DUE WITHIN ONE YEAR
<Table>
<Caption>
Group Company
------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Bank loans and overdrafts (see note 22) 37,066 29,186 23,225 21,006 20,173 13,250
Obligations under hire purchase and
finance lease contracts (see note 22) 322 358 447 -- -- --
Trade creditors 38,549 37,384 30,039 -- -- --
Amounts owed to subsidiary
undertakings 4,330 4,875 4,761
Amounts owed to associated
undertakings -- 1,173 631 -- -- --
Corporation tax payable 358 719 447 -- -- --
Other taxes and social security 3,094 2,651 2,548 -- -- --
Other creditors 3,846 3,574 2,317 936 1,817 490
Accruals and deferred income 5,078 4,188 3,728 473 547 777
Dividends payable 208 -- -- 208 -- --
------- ------- ------- ------- ------- -------
88,521 79,233 63,382 26,953 27,412 19,278
======= ======= ======= ======= ======= =======
</Table>
Bank loans and overdrafts amounting to L.15,944,000 (2000: L.16,546,000, 1999:
L.13,441,000) are secured by fixed and floating charges over the assets of the
Company and its subsidiary undertakings in the UK and bear interest at
commercial rates linked to LIBOR. Bank loans and overdrafts amounting to
L.20,846,000 (2000: L.11,590,000, 1999: L.nil) are secured by charges over
the assets of certain overseas subsidiary undertakings. The Company has
guaranteed bank loans and overdrafts of subsidiary undertakings amounting at 31
December 2001 to L.135,000 (2000: L.16,000, 1999: L.1,633,000).
21. CREDITORS DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
Group Company
---------------------------- ---------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Medium term loans (see note 22) 3,982 -- -- 3,982 -- --
Obligations under hire purchase and
finance lease contracts (see note 22) 121 443 539 -- -- --
Other creditors 99 101 79 -- -- --
------ ------ ------ ------ ----- -----
4,202 544 618 3,982 -- --
====== ====== ====== ====== ===== =====
</Table>
22. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Group's treasury policy aims to ensure that the Group has sufficient
resources while monitoring and minimising risk. The Group does not engage in
speculative transactions.
The main risks arising from the Group's financial instruments are interest rate
risk, liquidity risk and foreign exchange. The Board reviews and agrees policies
for managing each of these risks and they are summarised below:
Interest rate risk
The Group finances its operations through a mixture of previously retained
profits and bank borrowings. Interest rates are managed by borrowing from
various funding sources at a variable rate. The Board reviews the interest rates
that the Group is paying and where appropriate purchases hedging tools.
Liquidity risk
Financial flexibility is critical to this business and is achieved through
managing loans and overdrafts on a short-term basis. It is the Group's policy to
fund the purchase of long-term assets by financing lines of a similar maturity
where available. Around 40 per cent. of the Group's bank facilities are in the
form of invoice discounting as this form of financing flexes with the level of
business being generated.
117
Foreign exchange risk
The Group has significant subsidiaries in Europe whose revenues and expenses are
denominated in local currency. In order to provide some protection of the
Group's Sterling Balance Sheet from movements in these primarily Euro based
currencies, the Group finances its intra-group debts to the largest subsidiaries
by borrowing in the local currencies of these operating units. Unrealised
differences arising from structural currency exposures are recognised in the
Statement of Total Recognised Gains and Losses.
A significant amount of the Group's cost of sales is denominated in currencies
other than that of the local operating unit. The Group's policy is to manage
currency exposure on purchase commitments through a combination of forward
currency contracts and currency options. This will both eliminate currency
exposure at the time of purchase and reduce the uncertainty of the price to be
paid for imported products. In 2001, the Company took out a number of Average
Rate Currency Options, to partially hedge future purchase commitments.
FINANCIAL ASSETS
The Group has no financial assets other than short-term debtors and cash at
bank.
FINANCIAL LIABILITIES
As permitted by FRS13, short term creditors have been excluded from this note.
The currency profile of the Group's bank loans and overdrafts is as follows:
<Table>
<Caption>
Years ended
----------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Sterling (6,054) 1,032 (1,168)
Euro based currencies (30,204) (29,937) (22,057)
Other currencies (808) (281) --
------- ------- -------
(37,066) (29,186) (23,225)
======= ======= =======
</Table>
In the UK, any sterling balance in hand, is pooled by the UK bankers with those
euro based currency borrowings held within the UK as a net bank facility.
All borrowings are repayable within 3 months of the year end and are financed
using floating interest rates. All facilities are uncommitted. All borrowings
are linked to relevant national LIBOR or base rate equivalents. All facilities
are uncommitted.
The maturity profile of the Group's and Company's financial liabilities at 31
December was:
<Table>
<Caption>
Finance lease and hire
Bank loans and overdrafts Medium term loans purchase obligations
--------------------------- --------------------------- ---------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
GROUP
In one year or less, or on demand 37,066 29,186 23,225 -- -- -- 322 358 447
Between one and two years -- -- -- 3,982 -- -- 121 322 539
Between two and five -- -- -- -- -- -- -- 121 --
------- ------- ------- ------ ----- ----- ----- ----- -----
37,066 29,186 23,225 3,982 -- -- 443 801 986
======= ======= ======= ====== ===== ===== ===== ===== =====
COMPANY
In one year or less, or on demand 21,006 20,173 13,250 -- -- -- -- -- --
Between one and five years -- -- -- 3,982 -- -- -- -- --
After five years -- -- -- -- -- -- -- -- --
------- ------- ------- ------ ----- ----- ----- ----- -----
21,006 20,173 13,250 3,982 -- -- -- -- --
======= ======= ======= ====== ===== ===== ===== ===== =====
</Table>
FAIR VALUES OF FINANCIAL INSTRUMENTS
Except as disclosed below, the book, and fair value, for both the financial
assets (cash and cash equivalents) and the financial liabilities (short and long
term debt) were equal. Where available, market values have been used to
determine fair values.
118
FORWARD CURRENCY CONTRACTS AND CURRENCY OPTIONS
The Group's policy is to manage the impact of currency movements by using a
combination of forward currency contracts and currency options. This both
eliminates currency exposure at the time of purchase and reduces the uncertainty
of the price to be paid on imported products. In November 2000, the Company took
out an Average Rate Currency Option to partially hedge future purchase
commitments. There are 26 weekly fixing dates and fixing amounts throughout the
period of the option, with the settlement date being 27 September 2001.
The book value at 31 December 2000 was L.nil, as there was no premium payment
in relation to this option. The theoretical fair value of the option at 31
December 2000 based upon market value was L.405,000. As the transactions being
hedged had not taken place none of this theoretical value was recognised at 31
December 2000.
23. PROVISION FOR LIABILITIES AND CHARGES
<Table>
<Caption>
Group Company
L.'000 L.'000
DEFERRED TAXATION
At 31 December 1998 406 --
Transfer to profit and loss account (31) --
Disposals (331) --
Exchange adjustments (7) --
----- -----
At 31 December 1999 37 --
Transfer from profit and loss account 52 --
Exchange adjustments (8) --
----- -----
At 31 December 2000 81 --
Transfer to profit and loss account (52) --
Exchange adjustments (29) --
----- -----
At 31 December 2001 -- --
===== =====
</Table>
The potential liability to deferred taxation, together with the amounts for
which provision has been made, is as follows:
<Table>
<Caption>
Potential Provided
------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
GROUP
Accelerated capital allowances (273) (296) (305) (273) (296) (305)
Other timing differences 273 377 342 273 377 342
----- ----- ----- ----- ----- -----
-- 81 37 -- 81 37
===== ===== ===== ===== ===== =====
COMPANY
Accelerated capital allowances (128) (144) (251) -- -- --
===== ===== ===== ===== ===== =====
</Table>
In addition, the Company has a potential liability to tax on chargeable gains
rolled over amounting to L.4,200,000 (2000: L.4,200,000, 1999: L.4,200,000)
following the intra-group transfer of subsidiary undertakings. A tax liability
would only crystallise on any subsequent sale of those subsidiary undertakings.
119
24. CALLED UP SHARE CAPITAL
<Table>
<Caption>
Years ended
------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Authorised:
175,000,000 (1999 and 2000: 80,000,000) ordinary shares of
5p each 8,750 4,000 4,000
80,000,000 (1999 and 2000: nil) variable rate convertible
cumulative redeemable preference shares 2006 of 10p each 8,000 -- --
------- ------- -------
16,750 4,000 4,000
======= ======= =======
Allotted, called up and fully paid:
58,778,398 (2000: 58,778,398, 1999: 53,206,524) ordinary shares
of 5p each 2,939 2,939 2,660
8,000,000 (1999 and 2000: nil) variable rate convertible
cumulative redeemable preference shares 2006 of 10p each 800 -- --
------- ------- -------
3,739 2,939 2,660
======= ======= =======
</Table>
CHANGES IN SHARE CAPITAL
On 9 March 2000, deferred consideration of L.3,976,000 due under the terms of
the agreement to acquire John Heath (Holdings) Limited was satisfied by the
issue of 5,542,553 ordinary shares.
Options in respect of 29,321 ordinary shares with an aggregate nominal value of
L.2,000 were exercised during 2000 for a consideration of L.9,000.
PREFERENCE SHARES
The 8,000,000 variable rate convertible cumulative redeemable preference shares
of 10p each ("Preference Shares"), were issued to Daisytek UK Limited on the 3
September 2001 at L.1 per share, resulting in consideration after costs, of
L.6,913,000. The Preference Shares will mature on the fifth anniversary of
their issue and are convertible at any time during their term at the option of
Daisytek UK Limited into ordinary shares of ISA representing 50 per cent. plus
one share of the Company's issued ordinary share capital as enlarged by the
conversion of the Preference Shares. The conversion is equivalent to a
subscription price per ordinary share of approximately 13p. The Preference
Shares carry a variable annual coupon of 3 per cent. over 3 month LIBOR, payable
quarterly in arrears, and can be redeemed early at the option of ISA after the
third year on payment of a 10 per cent. redemption premium. On a return of
capital on a winding-up or otherwise the holders of the Preference Shares will
be entitled to receive out of the available assets all arrears of Preference
Dividend together with an amount equal to the paid up capital and any premium on
the Preference Shares. The holders of the Preference Shares shall be entitled to
receive notice of and attend all general meetings of the Company but not to vote
unless an event of default has occurred. An event of default occurred on 6 May
2001 (see the "Basis of accounting" on page 100 for further details).
WARRANT
A warrant was issued to Daisytek UK Limited on the 3 September, 2001, under
which at any time during a period of five years from the date of issue, Daisytek
UK Limited may give notice in writing to subscribe for up to 15,384,615 ordinary
shares for an aggregate subscription price of L.2,000,000. The warrant may be
exercised in whole or in part and on more than one occasion. It is also freely
transferable.
120
SHARE OPTION SCHEMES -- APPROVED AND UNAPPROVED
Under the terms of the Approved and Unapproved Share Option Scheme of ISA
International plc, options to subscribe for Ordinary shares were outstanding as
follows:
<Table>
<Caption>
2001
Number of shares Exercise price Exercisable between
39,725 97.0p 01.01.02--15.03.02 *
20,000 150.0p 01.01.02--07.09.04 *
30,000 26.75p 01.01.02--29.06.10
56,625 36.0p 24.03.02--23.03.09
892,000 26.75p 01.04.02--29.06.10
25,000 26.75p 01.04.03--29.06.10
3,078,000 13.0p 01.04.03--14.10.11
536,500 23.75p 09.11.03--08.11.10
661,000 13.0p 09.11.03--14.10.11
3,787,500 13.0p 15.10.04--14.10.11
7,518,807 13.0p 15.10.04--14.10.11 +
</Table>
Other than those marked * the above options are subject to performance criteria,
which had not been satisfied at 31 December 2001.
The options marked + above are subject to a further condition that the
Preference Shares (detailed above) must have been converted to ordinary shares.
<Table>
<Caption>
2000
Number of shares Exercise price Exercisable between
39,725 97.0p 01.01.01--15.03.02
20,000 150.0p 01.01.01--07.09.04
113,000 26.75p 01.04.01--29.06.10
56,625 36.0p 24.03.02--23.03.09
3,722,500 26.75p 01.04.02--29.06.10
675,000 26.75p 01.04.03--29.06.10
1,532,500 23.75p 09.11.03--08.11.10
</Table>
Of the options above, those first exercisable 1 April 2001 or later are subject
to performance criteria, which had not been satisfied at 31 December 2000.
<Table>
<Caption>
1999
Number of shares Exercise price Exercisable between
39,725 97.0p 01.01.00--15.03.02
65,000 150.0p 08.09.00--07.09.04
28,000 150.0p 08.09.00--07.09.07
55,000 59.0p 01.09.01--31.08.08
3,211,875 36.0p 24.03.02--23.03.09
500,000 46.5p 09.06.02--08.06.09
500,000 41.0p 01.10.02--30.09.09
50,000 33.5p 22.11.02--21.11.09
</Table>
Of the options above, those first exercisable 1 September 2001 or later are
subject to performance criteria.
121
SHARE OPTION SCHEMES -- HELD BY DIRECTORS
Included in the above are options held by directors as follows:
<Table>
<Caption>
2001 At At
Director 01.01.01 Granted Surrendered 31.12.01 Exercise price Exercisable between
B Robinson 500,000 -- (500,000) -- 26.75p Surrendered
500,000 -- (500,000) -- 26.75p Surrendered
-- 1,000,000 -- 1,000,000 13.0p 01.04.03--14.10.11
-- 1,200,000 -- 1,200,000 13.0p 15.10.04--14.10.11
-- 2,200,000 -- 2,200,000 13.0p 15.10.04--14.10.11 +
MJ Murphy 500,000 -- (500,000) -- 26.75p Surrendered
250,000 -- (250,000) -- 23.75p Surrendered
-- 500,000 -- 500,000 13.0p 01.04.03--14.10.11
-- 250,000 -- 250,000 13.0p 09.11.03--14.10.11
-- 1,100,000 -- 1,100,000 13.0p 15.10.04--14.10.11
-- 1,842,307 -- 1,842,307 13.0p 15.10.04--14.10.11 +
========= ========== ========= ========== ========= ==================
</Table>
No options were exercised during the year.
<Table>
<Caption>
2000 At At Exercise
Director 01.01.00 Granted Surrendered 31.12.00 price Exercisable between
B Robinson 500,000 -- (500,000) -- 46.5p Surrendered
-- 500,000 -- 500,000 26.75p 01.04.02--29.06.10
-- 500,000 -- 500,000 26.75p 01.04.03--29.06.10
MJ Murphy 500,000 -- (500,000) -- 41p Surrendered
-- 500,000 -- 500,000 26.75p 01.04.02--29.06.10
-- 250,000 -- 250,000 23.75p 09.11.03--08.11.10
========= ========== ========= ========== ========= ==================
</Table>
No options were exercised during the year.
<Table>
<Caption>
1999 At At Exercise
Director 01.01.99 Granted Lapsed 31.12.99 price Exercisable between
B Robinson -- 500,000 -- 500,000 46.5p 09.06.02--08.06.09
MJ Murphy -- 500,000 -- 500,000 41.0p 01.10.02--30.09.09
GR Stevens 200,000 -- (200,000) -- 107.5p Lapsed
(resigned) 100,000 -- (100,000) -- 59.0p Lapsed
-- 400,000 (400,000) -- 36.0p Lapsed
TE Blyth
(resigned) 100,000 -- (100,000) -- 59.0p Lapsed
========= ========== ========= =========== ========= ==================
</Table>
No options were exercised during the year.
SHARE OPTION SCHEMES -- SAVINGS RELATED
Under the terms of the Savings Related Share Option Schemes of ISA International
plc, options to subscribe for ordinary shares were outstanding as follows:
<Table>
<Caption>
2001
Number of shares Exercise price Exercisable between
555,334 35.0p 01.08.02--31.01.03
489,447 25.5p 01.07.03--31.12.03
</Table>
<Table>
<Caption>
2000
Number of shares Exercise price Exercisable between
826,467 35.0p 01.08.02--31.01.03
672,702 25.5p 01.07.03--31.12.03
</Table>
<Table>
<Caption>
1999
Number of shares Exercise price Exercisable between
1,323,995 35.0p 01.08.02--31.01.03
</Table>
122
SHARES -- MARKET PRICE
The market price of the shares were as follows:
<Table>
<Caption>
Date Market price Range for year
31 December 2001 6.25p 5.75p--20.25p
31 December 2000 20.25p 20.25p--50.5p
31 December 1999 37.0p 33.5p--55.0p
</Table>
25. RESERVES
<Table>
<Caption>
Profit and
Share Merger Other loss
premium reserve reserves account
L.'000 L.'000 L.'000 L.'000
GROUP
At 31 December 1998 -- as previously reported 12,939 -- (10,535) 19,985
-- reclassification (11,905) 11,905 -- --
-- transfer -- (10,535) 10,535 --
------- ------- ------- -------
-- as restated 1,034 1,370 -- 19,985
Loss for the year -- -- -- (3,891)
Unrealised gains on disposal of subsidiaries -- -- -- 815
Exchange adjustment -- -- -- 120
------- ------- ------- -------
At 31 December 1999 1,034 1,370 -- 17,029
Premium on shares issued 7 3,699 -- --
Loss for the year -- -- -- (12,350)
Adjustment to unrealised gain on disposal of
subsidiaries recognised in prior year -- -- -- (182)
Exchange adjustments -- -- -- (808)
------- ------- ------- -------
At 31 December 2000 1,041 5,069 -- 3,689
Premium on shares issued 6,113 -- -- --
Loss for the year -- -- -- (7,629)
Exchange adjustments -- -- -- (92)
------- ------- ------- -------
At 31 December 2001 7,154 5,069 -- (4,032)
======= ======= ======= =======
</Table>
The premium on certain shares issued in 2000 has been included in the merger
reserve in accordance with Section 131 of the Companies Act 1985.
Amounts transferred from other reserves represent cumulative goodwill written
off prior to the adoption of Financial Reporting Standard No. 10.
The premium arising in 2001 on the issue of the Preference Shares of
L.7,200,000 has been taken to the share premium account, with issue costs of
L.1,087,000 having been charged against it.
The cumulative amount of goodwill written off directly to reserves in respect of
subsidiary undertakings at 31 December 2001 was L.23,202,000 (2000:
L.23,202,000, 1999: L.23,202,000).
<Table>
<Caption>
Profit and
Share Merger Other loss
premium reserve reserves account
L.'000 L.'000 L.'000 L.'000
COMPANY
At 31 December 1998 -- as previously reported 12,939 -- 25,059 6,090
-- reclassification (11,905) 11,905 -- --
-------- -------- -------- -------
-- as restated 1,034 11,905 25,059 6,090
Profit for the year -- -- -- 1,251
-------- -------- -------- -------
At 31 December 1999 1,034 11,905 25,059 7,341
Premium on shares issued 7 3,699 -- --
Profit for the year -- -- -- 236
-------- -------- -------- -------
At 31 December 2000 1,041 15,604 25,059 7,577
Premium on shares issued 6,113 -- -- --
Profit for the year -- -- -- 231
-------- -------- -------- -------
At 31 December 2001 7,154 15,604 25,059 7,808
======== ======== ======== =======
</Table>
123
26. RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
<Table>
<Caption>
Years ended
---------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Loss for the financial year (7,421) (12,350) (3,891)
Dividends -- Non-equity (208) -- --
------- -------- --------
(7,629) (12,350) (3,891)
Other recognised net gains and losses relating to the year (92) (990) 935
New share capital subscribed (net of costs) 6,913 9 --
------- -------- --------
Net deduction from shareholders' funds (808) (13,331) (2,956)
Opening shareholders' funds 12,738 26,069 29,025
------- -------- --------
Closing shareholders' funds 11,930 12,738 26,069
======= ======== ========
</Table>
27. FINANCIAL COMMITMENTS
The annual commitments of the Group and Company under non-cancellable operating
leases was as follows:
<Table>
<Caption>
Land and buildings Plant and machinery
---------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
GROUP
Leases expiring:
Within one year 575 211 194 81 66 183
Within two to five years 560 935 1,092 1,329 1,062 1,237
After five years 1,612 865 230 -- -- --
------ ------ ------ ------ ------ ------
2,747 2,011 1,516 1,410 1,128 1,420
====== ====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
Plant and machinery
-------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
COMPANY
Leases expiring:
Within one year 4 11 --
Within two to five years 99 53 --
After five years -- -- --
----- ---- -----
103 64 --
===== ==== =====
</Table>
At 31 December 1999, 2000 and 2001, neither the Group nor the Company had any
commitment to future capital expenditure.
28. CASH FLOW STATEMENT
(a) Reconciliation of operating (loss)/profit to net cash (outflow)/inflow from
operating activities
<Table>
<Caption>
Years ended
--------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Operating (loss)/profit (329) (8,300) 119
Amortisation of goodwill -- -- 526
Depreciation 2,058 1,809 3,423
Loss/(profit) on sale of tangible fixed assets 1 39 (51)
(Increase)/decrease in stocks (3,832) 385 6,815
(Increase) in debtors (8,929) (866) (5,265)
Increase/(decrease) in creditors 1,872 9,360 (3,395)
------- ------- -------
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (9,159) 2,427 2,172
======= ======= =======
</Table>
124
(b) Analysis of net cash outflow from exceptional items
<Table>
<Caption>
Years ended
----------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Operating loss (1,722) (7,702) (5,500)
Depreciation -- -- 669
Decrease in stocks -- -- 690
Decrease in debtors -- 242 1,863
(Decrease)/increase in creditors (48) 537 595
------- ------- -------
NET CASH OUTFLOW (1,770) (6,923) (1,683)
======= ======= =======
</Table>
(c) Analysis of cash flows netted in the cash flow statement
<Table>
<Caption>
Years ended
-----------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 125 116 143
Interest paid (3,235) (1,706) (2,715)
Interest element of hire purchase and finance lease payments (37) (49) (73)
------- ------- --------
(3,147) (1,639) (2,645)
======= ======= ========
TAXATION
UK Corporation tax (paid)/received (224) 191 (560)
Overseas tax paid (691) (246) (789)
------- ------- --------
(915) (55) (1,349)
======= ======= ========
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (1,903) (3,209) (2,245)
Proceeds of sale of tangible fixed assets 91 226 1,716
------- ------- --------
(1,812) (2,983) (529)
======= ======= ========
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings -- -- (139)
Sales of subsidiary undertakings -- -- 40
Pre-sale dividend -- -- 2,500
Repayment of intra-group debt -- -- 16,500
Net cash transferred with subsidiaries -- -- (2,142)
Investment in associates (3,285) (161) (648)
------- ------- --------
(3,285) (161) 16,111
======= ======= ========
FINANCING
Issue of ordinary share capital 6,913 9 --
Repayment of amounts borrowed -- -- (16,500)
New loans 3,982 -- --
Capital element of hire purchase and finance lease payments (358) (443) (489)
------- ------- --------
10,537 (434) (16,989)
======= ======= ========
</Table>
125
(d) Analysis of net debt
<Table>
<Caption>
Opening Exchange Closing net
net debt Cash flow movement debt
L.'000 L.'000 L.'000 L.'000
2001
Cash at bank and in hand 4,153 13 12 4,178
Overdrafts (29,186) (7,794) (86) (37,066)
Loans -- (3,982) -- (3,982)
-------- -------- ------- --------
(25,033) (11,763) (74) (36,870)
Hire purchase and finance lease contracts (801) 358 -- (443)
-------- -------- ------- --------
(25,834) (11,405) (74) (37,313)
======== ======== ======= ========
</Table>
<Table>
<Caption>
Other
Opening non-cash Exchange Closing
net debt Cash flow changes movement net debt
L.'000 L.'000 L.'000 L.'000 L.'000
2000
Cash at bank and in hand 1,860 3,034 -- (741) 4,153
Overdrafts (23,225) (5,879) -- (82) (29,186)
(21,365) (2,845) -- (823) (25,033)
-------- ------- ------ ------ --------
Hire purchase and finance lease contracts (986) 443 (261) 3 (801)
-------- ------- ------ ------ --------
(22,351) (2,402) (261) (820) (25,834)
======== ======= ====== ====== ========
</Table>
<Table>
<Caption>
Other
Opening non-cash Exchange Closing
net debt Cash flow changes movement net debt
L.'000 L.'000 L.'000 L.'000 L.'000
1999
Cash at bank and in hand 6,346 (3,612) -- (874) 1,860
Overdrafts (24,825) 383 -- 1,217 (23,225)
-------- ------- ------ ------ --------
(18,479) (3,229) -- 343 (21,365)
Loans due after one year (16,500) 16,500 -- -- --
Hire purchase and finance lease contracts (1,453) 489 (26) 4 (986)
-------- ------- ------ ------ --------
(36,432) 13,760 (26) 347 (22,351)
======== ======= ====== ====== ========
</Table>
(e) Reconciliation of net cash flow to movement in net debt
<Table>
<Caption>
Years ended
---------------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Decrease in cash in year (7,781) (2,845) (3,229)
Cash outflow from decrease in debt and lease financing 358 443 16,989
New loans (3,982) -- --
-------- -------- --------
Change in net debt resulting from cash flows (11,405) (2,402) 13,760
Loans, hire purchase and finance leases disposed of with subsidiaries -- -- 10
New hire purchase contracts -- (261) (36)
Translation difference (74) (820) 347
-------- -------- --------
MOVEMENT IN NET DEBT IN THE YEAR (11,479) (3,483) 14,081
Net debt at beginning of year (25,834) (22,351) (36,432)
-------- -------- --------
NET DEBT AT END OF YEAR (37,313) (25,834) (22,351)
======== ======== ========
</Table>
126
29. DISPOSAL OF SUBSIDIARY UNDERTAKINGS
During 1999 the Group disposed of the whole of the share capital of the
following companies:
John Heath (Holdings) Ltd. ("Heath") disposed on 30 September 1999. The Little
Red Book Company (UK) Ltd. ("LRB") disposed on 22 November 1999.
The assets and liabilities of these companies at the date of disposal were as
follows:
NET ASSETS DISPOSED OF AT BOOK VALUE
<Table>
<Caption>
Heath LRB Total
L.'000 L.'000 L.'000
Tangible fixed assets 3,346 306 3,652
Stocks 11,538 533 12,071
Debtors 26,561 847 27,408
Cash at bank 1,973 169 2,142
Obligations under hire purchase contracts -- (10) (10)
Creditors (36,268) (1,240) (37,508)
Taxation (727) -- (727)
Deferred tax (331) -- (331)
------- ------ -------
6,092 605 6,697
Unrealised gain on disposal 815 -- 815
Related goodwill 11,101 -- 11,101
------- ------ -------
Consideration 18,008 605 18,613
------- ------ -------
Satisfied by:
Share in associated undertakings 17,968 605 18,573
Cash 40 -- 40
------- ------ -------
18,008 605 18,613
======= ====== =======
</Table>
The subsidiary undertakings disposed of during 1999 contributed L.4,275,000 to
the Group's net operating cash flows, paid L.34,000 in respect of net returns
on investments and servicing of finance, paid L.589,000 in respect of taxation
and utilised L.4,000 for capital expenditure.
30. RELATED PARTY TRANSACTIONS
<Table>
<Caption>
Years ended
------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
The Group purchased goods or services in the ordinary course of
business from the following related parties:
EXY Group Limited and subsidiary undertakings ("EXY") 5,443 5,500 --
Kaye Office Supplies Limited and subsidiary undertakings ("Kaye") -- 57 --
Daisytek International Corporation and subsidiary undertakings ("Daisytek") 17 -- --
Torres Limited -- -- 22
Virtual Village Limited 7 3 174
====== ====== ======
</Table>
127
The Group sold goods in the ordinary course of business to the following related
parties:
<Table>
<Caption>
Years ended
-------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
EXY 2,580 1,453 --
Daisytek 269 -- --
Kaye 31 30 --
Virtual Village Limited 11 5 3
Torres Limited 2 -- --
====== ====== ======
</Table>
EXY and Kaye are related parties as they are or have been associated
undertakings during the year (see note 16 for further details regarding
associated undertakings).
Virtual Village Limited and Torres Limited are related parties as DA Heap has
been a director and significant shareholder in both companies. Daisytek is a
related party as it holds 8,000,000 variable rate convertible cumulative
redeemable preference shares 2006 of 10 pence each in the capital of the
Company. It has also formed a strategic alliance with the Group.
Virtual Village Limited provided the Company with information technology
services. The other related parties provide goods for re-sale.
The following balances are included in debtors:
<Table>
<Caption>
Years ended
------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Trade debtors:
- --Virtual Village Limited -- 2 --
- --EXY 449 -- --
----- ----- -----
449 2 --
===== ===== =====
Amounts owed by associates:
- --EXY -- 512 --
- --Kaye 6 -- --
----- ----- -----
6 512 --
===== ===== =====
</Table>
The following balances are included in creditors:
<Table>
<Caption>
Years ended
------------------------------
2001 2000 1999
L.'000 L.'000 L.'000
Trade creditors:
- --Virtual Village Limited -- 1 --
- --EXY 641 -- --
- --Daisytek 15 -- --
----- ----- -----
656 1 --
===== ===== =====
Amounts owed to associates:
- --EXY -- 1,157 --
- --Kaye -- 16 --
----- ----- -----
-- 1,173 --
===== ===== =====
Accruals and deferred income:
- --Daisytek 140 -- --
===== ===== =====
Medium term loans:
- --Daisytek 3,982 -- --
===== ===== =====
</Table>
128
31. SUBSEQUENT EVENT
On 22 January 2002, the Group disposed of the whole of the share capital of its
Austrian subsidiary, Supplies Team EDV-ZubehIr Handel GmbH (`ST Austria'), for a
total cash consideration of L.1,432,000, of which L.698,000 was used to settle
intra-group balances. During the year ST Austria contributed L.7,408,000 to
Group turnover and generated a profit before tax of L.65,000. Its net assets at
31 December 2001 were L.549,000.
129
APPENDIX V
ADDITIONAL INFORMATION
1. RESPONSIBILITY
(a) The Daisytek Directors and the directors of Daisytek UK (whose names are set
out in sub-paragraphs 2(a) and 2(b) below respectively) accept
responsibility for the information contained in this Offer Document, except
for the information in this Offer Document concerning ISA, its associated
company, Kaye Office Supplies Limited, and their respective businesses, the
ISA Directors and their connected persons and persons acting in concert
with, and associates of, ISA. Subject as aforesaid, to the best of the
knowledge and belief of the Daisytek Directors and the directors of Daisytek
UK (who have taken all reasonable care to ensure that such is the case), the
information contained in this Offer Document for which they are responsible
is in accordance with the facts and does not omit anything likely to affect
the import of such information.
(b) The ISA Directors (whose names are set out in sub-paragraph 2(c) below)
accept responsibility for the information contained in this Offer Document
concerning ISA, Kaye and their respective businesses, themselves and their
connected persons and persons acting in concert with, and associates of,
ISA. To the best of the knowledge and belief of the ISA Directors (who have
taken all reasonable care to ensure that such is the case), the information
contained in this Offer Document for which they are responsible is in
accordance with the facts and does not omit anything likely to affect the
import of such information.
(c) The statements set out in paragraphs (a) and (b) above are included solely
to comply with the requirements of Rule 19.2 of the City Code and shall not
be deemed to establish or expand any liability under the Securities Act or
any state securities legislation in the United States.
2. DIRECTORS
(a) The members of the Board of Daisytek are as follows:
James R. Powell President, Chief Executive Officer
Dale A. Booth Director
Nicholas A. Giordano Director
Daniel T. Owen Director
Peter P. J. Vikanis Director
John D. Kearney Executive Vice President, Corporate Development
Peter D. Wharf Executive Vice President, Worldwide Supplies
The executive offices of Daisytek are located at: 1025 Central Expressway
South, Suite 200, Allen, Texas 75013, USA.
(b) The directors of Daisytek UK are as follows:
James R. Powell Chief Executive Officer
Peter D. Wharf Executive Vice President
John D. Kearney Executive Vice President
The registered office of Daisytek UK is located at 90 Fetter Lane, London,
EC4A 1JP, UK.
(c) The ISA Directors are as follows:
Bruce Robinson Chief Executive Officer
Mike Murphy Chief Financial Officer
Hans Fristedt Non-executive Director
The business address of each of the ISA directors is 66-70 Vicar Lane,
Bradford, West Yorkshire, BD1 5AG, UK.
3. DISCLOSURES OF INTERESTS AND DEALINGS
(a) For purposes of the following:
(i) "RELEVANT SECURITIES" include:
(A) ISA Ordinary Shares;
130
(B) Daisytek Common Stock;
(C) Securities of Daisytek which carry substantially the same rights
as those to be issued as consideration under the Restricted Share
Offer; and
(D) Securities convertible into (A), (B) or (C), rights to subscribe
for (A), (B) or (C) options (including traded options) in respect
of, or derivatives referenced to, (A), (B) or (C);
(ii) "BANK" means any bank whose relationship to any relevant party is not
solely the provision of normal commercial banking services; and
(iii) "DISCLOSURE PERIOD" means the period commencing on 16 April 2001 and
ending on 22 May 2002, being respectively the date 12 months preceding
the commencement of the Offer Period and the latest practicable date
prior to the posting of this Offer Document.
(b) At the close of business on 22 May 2002 (the latest practicable date prior
to the posting of this Offer Document), the interests of the ISA Directors
and their connected persons (within the meaning of Section 346 of the Act),
all of which are beneficial, in ISA Ordinary Shares which have been notified
to ISA pursuant to Sections 324 or 328 of the Act, or are required to be
entered in the register of ISA Directors' interests maintained under the
provisions of Section 325 of the Act, were as follows:
<Table>
<Caption>
Number of
ISA
Name Ordinary
Shares
Mike Murphy 120,000
Hans Fristedt 90,000
</Table>
(c) As of the close of business on 22 May 2002 (the latest practicable date
prior to the posting of this Offer Document), the following options and
awards over ISA Ordinary Shares had been granted under the ISA Share Option
Schemes to certain current ISA Directors and remained outstanding:
<Table>
<Caption>
Exercise
Name Date of Grant Number Price Period Exercisable
Bruce Robinson 1 Oct. 2000 1,000,000 13p 1 April 2003--14 Oct. 2011
Bruce Robinson 1 Oct. 2000 1,200,000 13p 15 Oct. 2004--14 Oct. 2011
Mike Murphy 1 Oct. 2000 500,000 13p 1 Apr. 2003--14 Oct. 2011
Mike Murphy 1 Oct. 2000 250,000 13p 9 Nov. 2003--14 Oct. 2011
Mike Murphy 1 Oct. 2000 1,100,000 13p 15 Oct. 2004--14 Oct. 2011
</Table>
(d) In addition, the following conversion options, which will only be
exercisable if the ISA Preference Shares are converted into ISA Ordinary
Shares, have been granted under the ISA Share Option Schemes:
<Table>
<Caption>
Exercise
Name Date of Grant Number Price Period Exercisable
Bruce Robinson 15 Oct. 2001 2,200,000 13p 15 Oct. 2004--14 Oct. 2011
Mike Murphy 15 Oct. 2001 1,842,307 13p 15 Oct. 2004--14 Oct. 2011
</Table>
(e) There have been no dealings by ISA Directors or their connected persons in
ISA Ordinary Shares during the disclosure period.
131
(f) Robert W. Baird & Co. Incorporated, a company under the same control as
Baird, has dealt for value in shares of Daisytek on a discretionary basis
during the past twelve months. These transactions are listed below.
<Table>
<Caption>
Period Nature of Transaction Quantity Low Price High Price
01/04/01--30/06/01 Sale 643,440 $ 7.25 $17.00
Purchase 632,727 $ 7.18 $17.09
01/07/01--31/09/01 Sale 542,116 $ 9.80 $17.21
Purchase 545,353 $ 9.90 $17.17
01/10/01--31/12/01 Sale 255,967 $11.30 $14.93
Purchase 246,538 $11.12 $14.71
01/01/02--31/01/02 Sale 58,073 $12.52 $14.60
Purchase 57,276 $12.50 $14.60
01/02/02--28/02/02 Sale 62,815 $12.87 $14.50
Purchase 67,383 $12.53 $14.50
01/03/02--31/03/02 Sale 762,533 $14.60 $18.01
Purchase 788,155 $14.60 $18.10
01/04/02--15/04/02 Sale 101,370 $14.98 $16.20
Purchase 101,470 $14.48 $16.10
16/04/02--21/05/02 Sale 398,588 $14.50 $16.50
Purchase 420,689 $14.30 $16.50
</Table>
Robert W. Baird & Co Incorporated, a company under the same control as
Baird, held 2,792 shares of Daisytek Common Stock for market making purposes
and 74,706 shares of Daisytek Common Stock on behalf of clients as at 21 May
2002, being the latest practicable date prior to the posting of this Offer
Document.
(g) There have been no dealings by Daisytek, Daisytek UK or Daisytek Directors
or the Directors of Daisytek UK or their respective connected persons in ISA
Ordinary Shares during the disclosure period.
(h) At the close of business on 22 May 2002 (the latest practicable date prior
to the posting of this Offer Document), the Directors of Daisytek and
Daisytek UK and their respective connected persons did not have any
beneficial interest in ISA Ordinary Shares save as follows:
<Table>
<Caption>
Number of
Name Shares
James Powell 50,000
Peter Vikanis 202,450
</Table>
(i) Daisytek UK has received irrevocable undertakings to accept the Offer from
the ISA Directors and certain other ISA Shareholders in respect of their
entire beneficial holdings of ISA Ordinary Shares representing approximately
56.5 per cent. of ISA's existing issued ordinary share capital.
<Table>
<Caption>
Percentage
Number of of issued
ISA ISA
Ordinary Ordinary
Name Shares Shares
Mike Murphy 120,000 0.20
Hans Fristedt 90,000 0.15
Chisa LLC 17,542,553 29.85
David Heap 12,278,029 20.90
Andrew Heap 3,196,284 5.44
</Table>
All of the irrevocable undertakings will continue to be binding even if a
higher competing offer is made for ISA.
(j) There have been no dealings for value in ISA Ordinary Shares by persons who
have given the irrevocable undertakings referred to in sub-paragraph 3(i)
above during the disclosure period.
132
(k) As at 22 May 2002 (the latest practicable date prior to the posting of this
Offer Document), Daisytek had a beneficial interest in 8,000,000 ISA
Preference Shares. These shares were subscribed for on 3 September 2001 for
an aggregate subscription price of L.8,000,000 as part of the strategic
alliance entered into, as described in a circular to ISA Shareholders dated
10 August 2001. The ISA Preference Shares issued to Daisytek UK are
convertible at any time during their 5 year term at the option of Daisytek
UK into ISA Ordinary Shares representing 50 per cent. plus one share of
ISA's issued ordinary share capital as enlarged by the conversion of the ISA
Preference Shares, subject to dilution by the exercise of certain share
options. In addition, Daisytek UK has rights granted under the Warrant to
subscribe for up to 15,384,615 ISA Ordinary Shares for an aggregate
subscription price of L.2,000,000. The Warrant may be exercised in whole or
in part and on more than one occasion. In the event of a variation of the
share capital of ISA by way of capitalisation or rights issue, or
sub-division, consolidation or reduction, appropriate adjustments shall be
made to the number of ISA Ordinary Shares in respect of which, and/or the
price per ISA Ordinary Share at which the Warrant may be exercised. The
Warrant is freely transferable.
(l) At the close of business on 22 May 2002 (the latest practicable date prior
to the posting of this Offer Document), the Directors of Daisytek and
Daisytek UK and their respective connected persons did not have any
beneficial interests in any shares in the capital of Daisytek UK. As at that
same date, the beneficial interests of the Daisytek and Daisytek UK
Directors and their connected persons in Daisytek Common Stock, were as
follows:
<Table>
<Caption>
Number of
Name Shares
James Powell 22,511
Peter Vikanis 13,083
John Kearney 10,288
Peter Wharf 200
Dale Booth 2,097
Nicholas Giordano 5,000
</Table>
(m) As at the close of business on 22 May 2002 (the latest practicable date
prior to the posting of this Offer Document) the Directors of Daisytek and
Daisytek UK had been granted no options over shares in the capital of
Daisytek UK. As at that same date, the following options and awards over
shares of Daisytek Common Stock had been granted to Daisytek and Daisytek UK
Directors and remain outstanding:
<Table>
<Caption>
Exercise
Price
Name Date of Grant Number (US$) Period Exercisable
Dale A. Booth 12 July 2000 50,000 $ 6.3125 12 Oct. 2000--12 July 2010
Dale A. Booth 25 February 2002 50,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 100,000
Nicholas A. Giordano 10 November 2000 50,000 $ 6.5000 10 Feb. 2001--10 Nov. 2010
Nicholas A. Giordano 25 February 2002 50,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 100,000
John D. Kearney 12 July 2000 150,000 $ 6.3125 12 Oct. 2000--12 July 2010
John D. Kearney 2 April 2001 125,000 $ 7.5000 2 July 2001--2 April 2011
John D. Kearney 24 March 1999 63,920 $ 9.7000 24 March 2000--24 March 2009
John D. Kearney 8 June 2000 39,950 $ 6.6800 8 Sept. 2000--8 June 2010
John D. Kearney 25 February 2002 75,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 453,870
Daniel T. Owen 12 July 2000 50,000 $ 6.3125 12 Oct. 2000--12 July 2010
Daniel T. Owen 25 February 2002 50,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 100,000
</Table>
133
<Table>
<Caption>
Exercise
Price
Name Date of Grant Number (US$) Period Exercisable
James R. Powell 17 April 1997 64,791 $ 7.8200 17 April 1998--17 April 2007
James R. Powell 15 December 1998 203,745 $ 8.0500 31 Dec. 1999--15 Dec. 2008
James R. Powell 8 September 1999 193,845 $ 5.7100 8 Sept. 2000--8 Sept. 2009
James R. Powell 12 July 2000 175,000 $ 6.3125 12 Oct. 2000--12 July 2010
James R. Powell 2 April 2001 125,000 $ 7.5000 2 July 2001--2 April 2011
James R. Powell 25 February 2002 75,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 837,381
Peter P. J. Vikanis 15 August 1997 2,480 $14.0400 15 Aug. 1998--15 Aug. 2007
Peter P. J. Vikanis 14 August 1998 2,998 $ 13.22 14 Aug. 1999--14 Aug. 2008
Peter P. J. Vikanis 12 July 2000 50,000 $ 6.3125 12 Oct. 2000--12 July 2010
Peter P. J. Vikanis 25 February 2002 50,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 105,478
Peter D. Wharf 9 May 1995 21,046 $ 6.1000 9 May 1996--9 May 2005
Peter D. Wharf 17 April 1997 77,251 $ 7.8200 17 April 1998--17 April 2007
Peter D. Wharf 15 December 1998 239,700 $ 8.0500 31 Dec. 1999--15 Dec. 2008
Peter D. Wharf 8 September 1999 159,800 $ 5.7100 8 Sept. 2000--8 Sept. 2009
Peter D. Wharf 12 July 2000 75,000 $ 6.3125 12 Oct. 2000--12 July 2010
Peter D. Wharf 2 April 2001 75,000 $ 7.5000 2 July 2001--2 April 2011
Peter D. Wharf 25 February 2002 75,000 $12.7600 25 Feb. 2003--25 Feb. 2012
Total 722,797
</Table>
(n) There have been no dealings for value by the Daisytek and Daisytek UK
Directors or their connected persons in shares in the capital of Daisytek UK
during the disclosure period. There have been no dealings for value by the
Daisytek and Daisytek UK Directors or their connected persons in Daisytek
Common Stock during the disclosure period, save as follows:
<Table>
<Caption>
Number of Type of
Name Date of Transaction Shares Price (US$) Transaction
James R. Powell 2 July 2001 2,511 $ 6.37 Purchase
James R. Powell 24 Sept. 2001 1,000 $ 10.84 Purchase
James R. Powell 24 Sept. 2001 1,300 $ 10.69 Purchase
James R. Powell 24 Sept. 2001 1,100 $ 10.54 Purchase
James R. Powell 24 Sept. 2001 1,000 $ 10.50 Purchase
James R. Powell 24 Sept. 2001 600 $ 10.23 Purchase
James R. Powell 25 Sept. 2001 1,000 $ 11.30 Purchase
James R. Powell 26 Sept. 2001 1,000 $ 10.41 Purchase
James R. Powell 27 Sept. 2001 500 $ 10.00 Purchase
James R. Powell 27 Sept. 2001 1,500 $ 10.13 Purchase
James R. Powell 27 Sept. 2001 500 $ 10.15 Purchase
James R. Powell 1 Oct. 2001 500 $ 11.80 Purchase
James R. Powell 2 Oct. 2001 500 $ 12.15 Purchase
James R. Powell 3 Oct. 2001 500 $11.9999 Purchase
James R. Powell 5 Oct. 2001 1,000 $ 12.00 Purchase
James R. Powell 5 Oct. 2001 500 $12.3599 Purchase
John D. Kearney 2 July 2001 1,873 $ 6.37 Purchase
John D. Kearney 24 Sept. 2001 500 $ 10.49 Purchase
John D. Kearney 24 Sept. 2001 200 $ 10.44 Purchase
John D. Kearney 24 Sept. 2001 100 $ 10.35 Purchase
John D. Kearney 24 Sept. 2001 200 $ 10.34 Purchase
John D. Kearney 24 Sept. 2001 400 $ 10.00 Purchase
Peter P. J. Vikanis 8 June 2001 68 $ 14.71 Purchase
Peter P. J. Vikanis 8 June 2001 70 $ 14.29 Purchase
</Table>
134
(o) There have been no dealings for value in Daisytek Common Stock by persons
who have given the irrevocable undertakings referred to in sub- paragraph
3(i) above during the disclosure period save as follows:
<Table>
<Caption>
Number of Type of
Name Date of Transaction Shares Price (US$) Transaction
David Heap 18 April 2001 5,000 7.2940 Sale
David Heap 25 April 2001 5,000 7.2200 Sale
David Heap 27 April 2001 3,000 7.4850 Sale
David Heap 2 May 2001 2,000 9.1500 Sale
David Heap 8 May 2001 1,500 9.1000 Sale
David Heap 9 May 2001 25,000 9.8958 Sale
David Heap 10 May 2001 20,000 10.2395 Sale
David Heap 11 May 2001 14,500 10.3714 Sale
David Heap 14 May 2001 3,000 10.4800 Sale
David Heap 15 May 2001 15,000 10.5533 Sale
David Heap 16 May 2001 13,500 10.5367 Sale
David Heap 17 May 2001 26,500 10.7145 Sale
David Heap 18 May 2001 10,000 10.6635 Sale
David Heap 21 May 2001 5,000 11.0260 Sale
David Heap 24 May 2001 12,000 12.0392 Sale
David Heap 25 May 2001 5,500 12.3927 Sale
David Heap 29 May 2001 25,000 12.3650 Sale
David Heap 30 May 2001 17,000 12.8935 Sale
David Heap 31 May 2001 26,629 13.6032 Sale
David Heap 9 Sept. 2001 4,700 13.3000 Sale
</Table>
(p) Save as disclosed above:
(i) none of Daisytek, Daisytek UK or any subsidiary of either of them
owns any ISA Ordinary Shares;
(ii) no director of Daisytek, Daisytek UK or ISA is interested (as
defined in Parts VI and X of the Act), directly or indirectly, in
relevant securities (as defined in sub-paragraph (a) above);
(iii) no person acting in concert with Daisytek UK or Daisytek owns or
controls any relevant securities;
(iv) no person who has irrevocably committed himself to accept the Offer
owns or controls any relevant securities;
(v) ISA owns no relevant securities;
(vi) no subsidiary of ISA, nor any pension fund of ISA or of any of its
subsidiaries, nor any bank, stockbroker, financial or other
professional adviser (excluding exempt market makers) to ISA or to
any subsidiary of ISA or to any associated company of ISA or any
persons controlling, controlled by, or under the same control as any
such bank, stockbroker, financial or other professional adviser, nor
any person whose investments are managed on a discretionary basis by
fund managers (other than exempt fund managers) connected with ISA,
nor any other person acting in concert with ISA owns or controls or
is interested, directly or indirectly in any relevant securities;
(vii) no person mentioned in sub-paragraphs 3(p)(i) to (v) above has dealt
for value in relevant securities during the disclosure period and no
person mentioned in sub-paragraph 3(p)(vi) has dealt for value in
relevant securities during the Offer Period.
4. SERVICE CONTRACTS OF ISA DIRECTORS
Save as disclosed below, there are no contracts of service between any ISA
Director and ISA or any of its subsidiaries having more than twelve months to
run and no such contract has been entered into or amended or replaced within the
six months preceding the date of this Offer Document:
(a) Mr Robinson has a service agreement with ISA dated 22 February 2001
whereby he is engaged to act as Chief Executive Officer of ISA. Mr
Robinson's service agreement is for an initial fixed period from
135
1 January 2001 to 31 December 2003 and shall continue thereafter unless it
is terminated by either party giving to the other not less than 12 months'
written notice or payment in lieu of notice. Mr Robinson's salary is
currently L.200,000 per annum, and will increase to L.220,000 per annum
for the year ending 31 December 2003. Mr Robinson is entitled to the use of
a company car and medical and life insurance benefits, but does not receive
any pension contributions. The service agreement contains post-termination
restrictive covenants in respect of the non-solicitation of employees,
non-solicitation of the provision of goods or services from clients or
customers, non-interference with supplies and a non-compete clause. These
restrictions apply for 12 months following the termination of Mr Robinson's
engagement.
(b) Mr Murphy has a service agreement with ISA dated 21 December 1999 whereby he
is engaged as Chief Financial Officer of ISA. The agreement shall continue
until it is terminated by either party giving to the other not less than 12
months' written notice. Mr Murphy's salary is currently L.140,000 per
annum. Mr Murphy is entitled to the use of a company car, medical and life
insurance benefits, and either to join ISA's executive pension scheme or to
receive pension contributions of 15 per cent. of gross salary into a
personal pension scheme. In the event of a change of control of ISA (other
than by way of conversion of the ISA Preference Shares), Mr Murphy may
terminate his service agreement by giving one months' written notice not
more than six months after such change of control. If Mr Murphy's employment
is terminated by either party within such six month period, other than by
ISA for cause in accordance with the terms of the service agreement, Mr
Murphy shall be entitled to a termination payment calculated as the
aggregate of twelve months' salary, twelve months' pension contributions and
the total value of benefits in kind provided under the service agreement,
together with the right to continue to use his company car for a further 12
months after such termination. The service contract contains
post-termination restrictive covenants in respect of the non-solicitation of
employees, non- solicitation of the provision of goods or services from
clients or customers, non-interference with supplies and a non-compete
clause. These restrictions apply for 6 months following the termination of
Mr Murphy's engagement.
(c) Mr Fristedt is a non-executive director and is entitled to receive
remuneration of US$25,000 per annum, plus expenses reasonably incurred in
the proper performance of his duties. He does not have a service contract or
other agreement with ISA.
5. MATERIAL CONTRACTS
(1) Daisytek
Daisytek and its subsidiaries have not entered into any material contracts
outside the ordinary course of business since 16 April 2000 (being the date two
years before the commencement of the Offer Period), except:
(a) The Subscription and Shareholders' Agreement dated 9 August 2001 between
ISA, Daisytek, David Heap and Chisa LLC. This agreement provides for the
investment of L.8,000,000 by Daisytek, through Daisytek UK, in ISA
Preference Shares.
The ISA Preference Shares will mature in 2006 and are convertible at any
time during their 5-year term at the option of Daisytek into ISA Ordinary
Shares representing 50 per cent. plus one share of ISA's issued share
capital as enlarged by the conversion of the ISA Preference Shares, subject
to dilution by certain share options which may have been exercised
("Dilutive Options").
Daisytek consented to the cancellation of certain options under ISA's
existing share option schemes at the time of signing this agreement, and to
the issue of 3,864,000 new options under those schemes. These options and
all options granted subsequent to the signing of this agreement (with the
prior written approval of Daisytek) are the Dilutive Options.
The ISA Preference Shares carry a variable annual coupon of 3 per cent. over
LIBOR, payable quarterly. Other than this, the ISA Preference Shares give no
further right to participate by way of dividend in ISA.
This agreement also gives Daisytek the right to appoint two observers to
attend and observe meetings of the Board of ISA for so as long as no
investor Directors have been appointed by the holders of the ISA Preference
Shares.
The ISA Preference Shares carry no voting rights unless an event of default
has occurred or the business of the meeting includes the consideration of a
resolution for winding up ISA or for the appointment of an administrator or
the approval of a voluntary arrangement or any resolution modifying the
rights and privileges attaching to the ISA Preference Shares.
136
(b) The Warrant constituted by Deed Poll issued by ISA dated 3 September 2001
under which Daisytek UK, at its option, subscribed for up to 15,384,615
ordinary shares for an aggregate subscription price of L.2,000,000, which
is equivalent to 13 pence per ordinary share. Any exercise of the Warrant
can be in whole or in part and on more than one occasion. While the Warrant
is exercisable ISA may not offer any shares or options for shares at any
price below Market Value (as defined therein). The Warrant is freely
transferable by Daisytek UK. If there is any inconsistency between the terms
of the Warrant and the Articles of Association of ISA, the Warrant is to
prevail. The Warrant will lapse on the later of when the Warrant Holder
ceases to be a legal or beneficial owner of shares in ISA or 3 September
2006.
(c) Loan Arrangements
The Loan Facility with effective date of 12 October 2001 between Daisytek UK
and ISA. This agreement consolidated all loan amounts which Daisytek UK had
made to ISA between October 2001 and May 2002 for the purpose of investment
in Kaye Office Supplies Limited and for ISA's general working capital. The
agreement was conditional on the acceptance of the agreements' terms and
conditions by the Board of ISA. The Interest Periods for the loans are fixed
for a period of 3 months, the rate of interest for each period being the
aggregate of 300 basis points per annum and the LIBOR for such Interest
Period for a corresponding amount to the loan amount and being payable in
arrears.
If the full amount owed to Daisytek UK is not repaid on or before the due
dates set out on each draw down then ISA has undertaken to take part in a
Share Issue whereby new ordinary shares of 1 pence each will be offered in
ISA at a price of not more than 1 pence per share in order to raise the
funds to repay the loan amount, any Special Dividend owed to Daisytek UK and
a further sum (not to exceed L.10,000,000).
The total amount drawn down, as set out in Schedule 3, is L.9,638,059 with
two further active guarantees set out in Schedule 4 of the agreement for
L.260,000 and E.260,000.
Subsequent to the signing of the agreement two further draw downs have been
requested of L.2,300,000 and L.200,000 on 29 and 30 April 2002
respectively.
(d) Guarantee Arrangements
A guarantee was entered into by Daisytek as regards a contract between ISA
and Memorex Products Europe Limited on 8 April 2002 which expires on 31 May
2002. This is limited to the consideration due to be paid by ISA under the
contract.
(e) Asset Purchase Agreement dated 25 May 2001 between Daisytek, Daisytek
Incorporated, Priority Fulfillment Services, Inc, a wholly-owned subsidiary
of PFSweb, Inc. ("PFSweb") a subsidiary of Daisytek, and PFSweb. Daisytek
Incorporated purchased certain assets of Priority Fulfillment Services, Inc
that were previously used by Priority Fulfillment Services, Inc to provide
fulfillment services to Daisytek Incorporated pursuant to the Transaction
Management Services Agreement described above. The consideration paid for
such assets was approximately US$11 million.
Daisytek Incorporated and Daisytek agreed to indemnify and hold harmless
Priority Fulfilment Services, Inc and PFSweb from any losses that result
from, relate to or arise out of: (i) any misrepresentation or breach of
warranty of Daisytek Incorporated and Daisytek, (ii) the failure of Daisytek
Incorporated or Daisytek to perform any agreement or covenant on their part
required to be performed on or after the closing, (iii) the failure to
discharge Assumed Liabilities (as such term is defined within the Asset
Purchase Agreement).
(f) Transition Services Agreement dated 25 May 2001 between Daisytek and PFSweb.
This agreement provides for the provision of services by PFSweb until 25
November 2001. The services to be provided primarily include information
technology services, but include other services as necessary to effectuate
the separation of Daisytek and PFSweb. The monthly fee to be paid by
Daisytek for such services is approximately US$430,000.
(g) Stock Purchase Agreement dated 25 September 2001 between Daisytek
Incorporated, PFSweb, Inc., Priority Fulfillment Services, Inc., a
wholly-owned subsidiary of PFSweb, Inc., BSD Acquisition Corp., an indirect
minority owned subsidiary of PFSweb, Inc., and Priority Fulfillment Services
Europe B.V. BSD Acquisition Corp. purchased all of the stock of three
wholly-owned subsidiaries of Daisytek Incorporated: Business Supplies
Distributors, Inc., Business Supplies Distributors Europe B.V. and BSD
(Canada) Inc. (collectively, the "BSD Companies "). The consideration
received by Daisytek Incorporated was US$923,000 and the grant of certain
rights to purchase products of International Business Machines Corporation.
Pursuant to the Stock Purchase Agreement, Daisytek Incorporated
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agreed to pay US$5,206,313.67 to Business Supplies Distributors, Inc.,
Business Supplies Distributors Europe B.V. and BSD (Canada) Inc. in order to
settle certain intercompany balances.
Each party to the Stock Purchase Agreement (in such capacity, an
"Indemnitor") agreed to indemnify each other party (in such capacity, an
"Indemnitee") from any losses that result from, relate to or arise out of
(i) any misrepresentation of or breach of warranty of the Indemnitor in the
Stock Purchase Agreement or any of the disclosure schedules provided
thereunder and (ii) the failure of the Indemnitor to perform any agreement
or covenant on its part required to be performed on or after the closing
date of the stock purchase. The minimum amount of such indemnification is
US$10,000 and shall not exceed $250,000. The indemnification obligations
expired 90 days after the closing date, except for indemnification
obligations for claims related to a breach of the representations and
warranties regarding capitalisation of the BSD Companies and the payment of
taxes and other tax matters related to the BSD Companies which shall survive
until the applicable statute of limitations has expired.
In addition, PFSweb, Inc., Priority Fulfilment Services, Inc., BSD
Acquisition Corp., and Priority Fulfilment Services Europe B.V. and their
affiliates (the "PFSweb Group") agreed to indemnify Daisytek, Daisytek
Incorporated and their affiliates from and against any losses arising from
any third party claim arising from any action or inaction taken by any
member of the PFSweb Group or the BSD Companies under any of the Master
Distribution Agreements, the Sales Force Services Agreements or the IBM
Guaranties to which the BSD Companies are a party. Such indemnification
shall not be subject to the limitations on indemnification set forth above.
(h) Agreement and Release, dated 26 September 2001, among Daisytek, Daisytek
Incorporated, International Business Machines Corporation ("IBM"),
International Sales and Services B.V. ("International") and Global Marketing
Services Inc. Daisytek had previously provided several guaranties to IBM and
International to guarantee payment of all sums, obligations, liabilities and
indebtedness due to IBM and International, including, but not limited to,
those incurred under certain master distribution agreements and sales force
services agreements entered into by the BSD Companies. The Agreement and
Release cancels, terminates, releases and discharges Daisytek and any other
guarantor under such guaranties from all obligations and liabilities under
such guaranties.
(i) Credit agreements
(A) Credit Facility dated 14 December 2000, from Bank One Canada, to
Daisytek (Canada), Inc., as borrower, and Daisytek Incorporated and
Daisytek as guarantors. The Credit Facility is for the purpose of
hedging against foreign exchange rate fluctuations. The Credit Facility
is a revolving credit facility and includes the issuance of standby
letters of credit. It expired on 1 January 2002. The obligations of
Daisytek Incorporated and Daisytek under the guarantee executed in
connection with this facility shall not exceed the principal sum of
Canadian $5,000,000 for the revolving credit facility and US$1,000,000
for the foreign exchange facility plus accrued interest and all costs,
fees and expenses (including attorneys' fees) incurred in collecting or
enforcing the obligations under the guarantee.
(B) Demand Note Agreement dated 14 December 2000, from Daisytek (Canada),
Inc. for the benefit of Bank One Canada. The Demand Note Agreement
provides for the repayment on demand of any obligation incurred by
Daisytek (Canada), Inc. of up to $5,000,000 (Canadian).
(C) Guarantee given by Daisytek Incorporated and Daisytek for the benefit of
Bank One, NA under the Credit Facility dated 14 December 2000. This
guarantee was executed in order to induce Bank One, NA to make loans and
extend or continue credit, including letters of credit and rate
management transactions to Daisytek (Canada), Inc. The guarantor's
obligations under the guarantee to the lender shall not exceed the
principal sum of $5,000,000 (Canadian) for the revolving credit facility
and US$1,000,000 for the foreign exchange facility plus accrued interest
and all costs, fees and expenses, including attorneys' fees, incurred in
collecting or enforcing the guarantor's obligations under this
guarantee.
(D) Credit Agreement dated 18 December 2000, between Daisytek Incorporated,
as borrower; Daisytek as guarantor; Bank One, Texas, NA, Bank of
America, NA, Citizens Bank of Massachusetts, IBM Credit Corporation,
Comerica Bank and Compass Bank, as lenders; Bank One, NA, as the Letter
of Credit Issuer; and Bank One, Texas, NA, as the administrative agent.
The Credit Agreement provided for a new revolving line of credit in the
United States (the "2000 Facility") that had a maximum borrowing
availability of US$120 million and expires on 19 December 2003. The 2000
Facility also included an expandable feature to increase the size of
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the 2000 Facility to US$170 million, subject to various conditions.
Availability under the 2000 Facility was subject to certain borrowing
base limitations, including eligible accounts receivable and inventory,
as defined. The 2000 Facility replaced Daisytek Incorporated's previous
U.S. credit facility, which would have expired on 1 January 2001. The
2000 Facility accrued interest, at Daisytek's option, at the prime rate
of the lead bank or a Eurodollar rate plus an adjustment ranging from
1.05 per cent. to 1.75 per cent. depending on financial performance. A
facility fee of 0.20 per cent. to 0.375 per cent. was charged on the
entire 2000 Facility. The 2000 Facility contains various covenants
including, among other things, the maintenance of certain financial
ratios including the achievement of a minimum fixed charge ratio and
minimum level of net worth and restrictions on certain activities,
including loans and payments to related parties, incurring additional
debt, acquisitions, investments and asset sales. The 2000 Facility was
secured by a pledge of 100 per cent. of the shares of Daisytek
Incorporated's US subsidiaries and 65 per cent. of the shares of
Daisytek Incorporated's material foreign subsidiaries. Upon the
occurrence of a default, the 2000 Facility would be secured by the
assets of Daisytek Incorporated and its domestic subsidiaries. Amounts
owed under the 2000 Facility were repaid upon entering into the 2002
Credit Facility as hereinafter described.
(E) Parent Guarantee dated 18 December 2000, given by Daisytek for the
benefit of Bank One, Texas, NA, Bank of America, NA, Citizens Bank of
Massachusetts, IBM Credit Corporation, Comerica Bank and Compass Bank,
as lenders; and Bank One Texas, NA and Bank One, NA, as the Letter of
Credit Issuer. Daisytek provided this Parent Guarantee in order to
induce the lenders and the letter of credit issuer to enter into the
2000 Facility with Daisytek. The Parent Guarantee was extinguished when
the 2000 Facility was replaced by the 2002 Credit Facility as
hereinafter described.
(F) Subsidiary Guarantee dated 18 December 2000, between Steadi- Systems,
Limited, a California corporation; Steadi-Systems New York, Limited, a
New York corporation; Steadi-Systems Miami, Inc, a Florida corporation;
The Tape Company, Inc, an Illinois corporation; The Tape Company, Inc, a
Georgia corporation; The Tape Company, Inc, a Pennsylvania corporation;
Tape Distributors of Texas, Inc, a Texas corporation; Tape Distributors
of Minnesota, Inc., a Minnesota corporation; Daisytek Latin America,
Inc, a Florida corporation; Arlington Industries, Inc, a Delaware
corporation; Virtual Demand, Inc, a Delaware corporation;
Tapebargains.com, Inc, a Delaware corporation; BA Pargh Company, a
Delaware corporation and Business Supplies Distributors, Inc, a Delaware
corporation ("Subsidiaries") for the benefit of the lenders and the
letter of credit Issuer under the 2000 Facility. The Subsidiaries
provided the guarantee in order to induce the lenders and the letter of
credit issuer to enter into the 2000 Facility with Daisytek
Incorporated. The guarantee from the subscribers was extinguished when
the 2000 Facility was replaced by the 2002 Facility as hereinafter
described.
(G) Pledge and Security Agreement dated 18 December 2000, between Daisytek
Incorporated and Steadi-Systems, Limited (the "Co- Pledgors"); and Bank
One, Texas, NA (the "Administrative Agent") for the lenders under the
2000 Facility. The Pledge and Security Agreement secured the 2000
Facility by a pledge of 100 per cent. of the stock owned by Daisytek
Incorporated in any of its US subsidiaries and 65 per cent. of the stock
owned by Daisytek Incorporated in Daisytek (Canada), Inc. Steadi-Systems
Limited also pledged 100 per cent. of the stock it owned in its domestic
subsidiaries. The Administrative Agent released the aforementioned
pledges upon receipt of all amounts owed under the 2000 Facility.
(H) Security Agreement dated 18 December 2000, between Daisytek Incorporated
and Daisytek Latin America, Inc.; Steadi-Systems, Limited; The Tape
Company, Inc, a Georgia corporation; The Tape Company Inc, an Illinois
corporation; The Tape Company, Inc, a Pennsylvania corporation; Tape
Distributors of Minnesota, Inc; Tape Distributors, Inc; Tape
Distributors of Texas, Inc; Arlington Industries, Inc; B.A. Pargh
Company, Inc; Virtualdemand, Inc; Steadi-Systems Miami, Inc;
Steadi-Systems New York, Limited; Tapebargains.com, Inc; Business
Supplies Distributors, Inc (the "Domestic Subsidiaries") and Bank One,
Texas, NA. The Security Agreement provided for a springing security
interest in all accounts, chattel paper, documents, general intangibles,
instruments, inventory and any proceeds thereof and other specified
assets owned by Daisytek Incorporated and its domestic subsidiaries. The
security interest only attaches in the event of a default by Daisytek
Incorporated under the 2000 Facility. The Security Agreement was
extinguished when the 2000 Facility was replaced by the 2002 Facility as
hereinafter described.
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(I) Credit Agreement dated 18 December 2000 between Daisytek Australia Pty
Limited, as the Borrower, and Bank One, NA, as the Lender. This
Australian facility expires on 1 January 2002. The Australian facility
allows Daisytek Australia Pty Limited to borrow Australian dollars up to
a maximum of $15 million (Australian) or approximately US$8.3 million.
The Australian Facility accrues interest at the Australian Bill Rate
plus an adjustment ranging from 1.3 per cent. to 2.0 per cent. depending
on Daisytek Incorporated's financial performance. A facility fee of 0.20
per cent. to 0.375 per cent. is charged on the entire amount of the
Australian facility.
(J) Commitment Letter dated 27 February 2001, between The Bank of Nova
Scotia and Daisytek (Canada), Inc. The Commitment Letter provides for a
revolving term credit extension of up to $10,000,000 (Canadian) to
assist with the financing of day-to-day operating requirements. Daisytek
(Canada), Inc. may draw down the credit by way of direct advances
evidenced by Demand Promissory Notes and/or Bankers' Acceptances in
multiples of $500,000 (Canadian) and having terms of maturity of 30 to
364 days.
(K) Commitment Letter dated 15 March 2001, between The Toronto-Dominion Bank
and Daisytek (Canada), Inc. The Commitment Letter provides for a
revolving term credit extension of up to $10,000,000 (Canadian) to
assist with the financing of day-to-day working capital requirements.
Daisytek (Canada), Inc. may draw down the credit by way of direct
advances evidenced by Bankers' Acceptances. The minimum amount of a
drawdown by way of a Bankers' Acceptance is $500,000 (Canadian) and in
multiples of $100,000 (Canadian) thereafter.
(L) Commitment Letter, dated 2 October 2001, between The Bank of Nova Scotia
and Daisytek (Canada), Inc. The Commitment Letter provides for a
revolving term credit extension of up to $15,000,000 (Canadian) to
assist with the financing of day-to-day operating requirements. Daisytek
(Canada), Inc. may draw down the credit by way of direct advances
evidenced by Demand Promissory Notes and/or Bankers' Acceptances in
multiples of $500,000 (Canadian) and having terms of maturity of 30 to
364 days.
(M) Letter Agreement, dated 12 October 2001, between The Toronto- Dominion
Bank and Daisytek (Canada), Inc. amending that certain Commitment Letter
dated 15 March 2001. The Letter Agreement increases the credit limit
under the Commitment Letter to $15,000,000 (Canadian). The term of the
credit facility is three years, until 20 March 2004.
(N) Letter Agreement, dated 13 December 2001, between Daisytek Australia Pty
Limited, as the Borrower, and Bank One, NA, as the Lender amending that
certain Credit Agreement dated 18 December 2000. The amendment extends
the expiration date of the Australian facility to 1 January 2003 and
increases the facility fee to 0.325 per cent. to 0.50 per cent. This fee
is charged on the entire amount of the Australian facility.
(O) Letter Agreement, dated 17 December 2001, between The Bank of Nova
Scotia and Daisytek (Canada), Inc. amending that certain Commitment
Letter dated 2 October 2001. The Letter Agreement increases the amount
of Forward Exchange Contracts permitted under the credit facility to
US$10,000,000.
(P) Letter Agreement, dated 25 March 2002, between The Toronto-Dominion Bank
and Daisytek (Canada), Inc. amending that certain Commitment Letter
dated 15 March 2001. The Letter Agreement increases the credit limit
under the Commitment Letter to $20,000,000 (Canadian). The term of the
credit facility expires on the earlier of 20 March 2004 or the
expiration of Daisytek Incorporated's loan facility, presently 19
December 2003.
(Q) Credit Agreement dated 24 April 2002, between Daisytek Incorporated,
Arlington Industries, Inc., B.A. Pargh Company, Daisytek Latin America,
Inc., Digital Storage, Inc., Tapebargains.Com. Inc., the Tape Company
and Virtual Demand, Inc. as borrowers; Daisytek as guarantor; Bank of
America, National Association and each of the other lenders party
thereto, as lenders; and Bank of America, National Association, as the
agent. The Credit Agreement provides for a new revolving line of credit
in the United States (the "2002 Facility") that has a maximum borrowing
availability of $200 million and expires on 24 April 2005. Availability
under the 2002 Facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as
defined. The 2002 Facility replaces the 2000 Facility which would have
expired on 19 December 2003. The 2002 Facility accrues interest, at
Daisytek's option, at (a) the prime rate of Bank of America, National
Association plus an adjustment ranging from 0.00 per cent. to 0.75 per
cent., depending on the obligated parties' fixed coverage ratio; or (b)
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LIBOR plus an adjustment ranging from 2.00 per cent. to 2.75 per cent.
depending on the obligated parties' fixed coverage ratio. The 2002
Facility contains various covenants including, among other things, the
maintenance of certain financial ratios including the achievement of a
minimum fixed charge ratio and minimum level of net worth and
restrictions on certain activities, including loans and payments to
related parties, incurring additional debt, acquisitions, investments
and asset sales. The 2002 Facility is secured by the property and assets
of Daisytek, Daisytek Incorporated and the obligated parties under the
2002 Credit Facility and a pledge of 100 per cent. of the shares of US
subsidiaries of Daisytek, Daisytek Incorporated and each of the other
obligated parties and 65 per cent. of the shares of Daisytek UK owned by
Daisytek.
(R) Guaranty Agreement dated 24 April 2002, given by Daisytek for the
benefit of Bank of America, National Association and each of the other
lenders under the 2002 Facility. Daisytek provided the Guaranty in order
to induce the lenders to enter into the 2002 Facility.
(S) Guaranty Agreement dated 24 April 2002, given by Daisytek Incorporated,
Arlington Industries, Inc., B.A. Pargh Company, Daisytek Latin America,
Inc., Digital Storage, Inc., Tapebargains.Com. Inc., the Tape Company
and Virtual Demand, Inc. (collectively, "Daisytek Obligated Parties ")
for the benefit of Bank of America, National Association and each of the
other lenders under the 2002 Facility. The Daisytek Obligated Parties
provided the Guaranty in order to induce the lenders to enter into the
2002 Facility.
(T) Security Agreement dated 24 April 2002, between Daisytek and Bank of
America, National Association (the "Administrative Agent") for the
lenders under the 2002 Facility. The Security Agreement secures the 2002
Facility by granting the Administrative Agent, for the benefit of the
lenders under the 2002 Facility, a security interest in all accounts,
chattel paper, documents, general intangibles, instruments, inventory
and any proceeds thereof and other specified assets of Daisytek and
pledging 100 per cent. of the investment property owned by Daisytek, but
specifically excluding capital stock of a foreign subsidiary or foreign
affiliate, except for 65 per cent. of the stock owned by Daisytek in
Daisytek UK.
(U) Security Agreement dated 24 April 2002, between the Daisytek Obligated
Parties and the Administrative Agent. The Security Agreement secures the
2002 Facility by granting the Administrative Agent, for the benefit of
the lenders under the 2002 Facility, a security interest in all
accounts, chattel paper, documents, general intangibles, instruments,
inventory and any proceeds thereof and other specified assets of the
Daisytek Obligated Parties and pledging 100 per cent. of the investment
property owned by the Daisytek Obligated Parties, but specifically
excluding capital stock of a foreign subsidiary or foreign affiliate.
(j) Asset purchase agreements
(A) Asset Purchase Agreement dated 3 May 2000 between BAP Acquisition Corp,
a wholly-owned subsidiary of Daisytek Incorporated (the "Buyer"), and BA
Pargh Company, LLC (the "Seller"). On 3 May 2000, the Buyer acquired
certain assets and liabilities of BA Pargh Company, LLC, a wholesaler of
office products for approximately US$3 million. The acquisition was
accounted for by the purchase method of accounting for business
combinations. The entire cost of the acquisition was financed using
Daisytek's available funds under the 2000 Facility.
Pursuant to the asset purchase agreement, after the closing, the Seller
agreed to indemnify the Buyer, and its parent corporation from any and
all damages from any misrepresentation or breach of warranty by the
Seller or the failure of the Seller to perform any agreement or covenant
on its part required to be performed on or before or after closing. The
Seller also agreed to indemnify the Buyer for any damages in connection
with any Retained Liabilities (as such term is defined within the Asset
Purchase Agreement) or Excluded Assets (as such term is defined within
the Asset Purchase Agreement); any taxes from the Seller, including all
taxes arising from or related to the operation of the business prior to
closing; any product liability claim with respect to products sold by
the Seller prior to closing and any failure of the Seller to comply with
bulk sales laws.
The Buyer agreed to indemnify Seller from any losses that result from,
relate to or arise out of: any misrepresentation or breach of warranty
of the Buyer, the failure of the Buyer to perform any agreement or
covenant on its part required to be performed on or before or after the
closing, Assumed Liabilities (as such term is defined within the Asset
Purchase Agreement); any and all taxes of the Buyer, including all taxes
arising from or related to the operation of the Business after
141
the closing; and any product liability claim with respect to products
sold by the Buyer after the closing.
The indemnification provisions will terminate following the first
anniversary of the closing except for the representations and warranties
of the Seller relating to (i) title to the assets which shall survive
indefinitely and (ii) taxes and tax matters which shall survive until
the applicable statute of limitations has expired.
(B) Asset Purchase Agreement dated 29 June 2001 between Digital Storage, LLC
("DSLLC"); Digital Storage Incorporated, ("DSI"); NCT Ventures LLC
("NCT"); Digital Storage Canada, Inc. ("DS Canada" and with DSLLC, the
"Seller"); Richard S. Langdale ("Langdale"); DS Acquisition ("DS
Acquisition"); Daisytek (Canada), Inc. ("Daisytek Canada" and with DS
Acquisition, "Buyer") and Daisytek. The Asset Purchase Agreement
provides for the purchase of substantially all of the assets of the
wholesale computer supplies and consumable distribution business
conducted by the Seller for consideration of approximately US$14 million
in the form of a cash payment plus (i) Assumed Liabilities (as defined
in the Asset Purchase Agreement); (ii) the Growth Earnout Payment, if
any (as defined in the Asset Purchase Agreement); (iii) the Holdback (as
defined in the Asset Purchase Agreement), less any applicable reductions
(the "Transaction"). The Asset Purchase Agreement was effective for
accounting purposes as of midnight, 5 May 2001. The cost of the
Transaction was financed by the Bank One and Canadian credit facilities.
After the closing, DSI, NCT, DSLLC, DS Canada and Langdale, jointly and
severally, agreed to indemnify the Buyer and Daisytek from: (i) any
damages from any representation or warranty made by DSI, NCT, DSLLC, DS
Canada or Langdale; (ii) any failure by DSI, NCT, DSLLC, DS Canada or
Langdale to observe or perform its or his covenants and agreements;
(iii) any failure by the Seller to satisfy and discharge any liability
or obligation of the Seller not expressly assumed by Buyer or Daisytek;
or (iv) any liability arising from or with respect to the Assets or the
Business before the Settlement Date (as defined within the Agreement).
The Buyer agreed to indemnify the Seller from any losses that result
from, relate to or arise out of: (i) any misrepresentation or breach of
warranty of the Buyer; (ii) the failure of the Buyer to perform any
agreement or covenant on its part required to be performed on or before
or after the closing; (iii) the Assumed Liabilities (as defined in the
Asset Purchase Agreement); (iv) any Taxes (as defined in the Asset
Purchase Agreement) of the Buyer and (v) any product liability claim
with respect to products sold by the Buyer after the closing.
The indemnification provisions will terminate following the second year
anniversary date of the closing except for certain of the
representations and warranties relating to due organisation, power and
authority to enter into the Transaction, title to property,
environmental laws and Taxes to which extended applicable periods apply.
(C) Business Sale Agreement dated 3 July 2001 between General Stationery
Supplies PTY Limited ABN 32 010 050 281 (the "Seller"); Daisytek
Australia (Queensland) PTY Limited CAN 097 222 163 (the "Purchaser");
John Francis Bolton, Jason Stanton Bolton, and Marcus Anthony Bolton
(collectively the "Guarantors"); Hazel Irene Bolton (collectively with
the Guarantors the "Covenantors"); Daisytek Australia PTY Limited CAN
075 675 795 ("DAPL") and Daisytek ("DIC", and with DAPL the "Daisytek
Guarantors"). The Business Sale Agreement provides for the purchase by
Purchaser of substantially all of the assets of the office supplies and
consumable distribution business conducted by Seller for $3,522,846
(Australian) plus Assumed Liabilities of $604,115 for total
consideration of $4,126,961 (Australian) Under the Growth Earn-out and a
Maintenance Earn-out (as defined in the Business Sale Agreement), the
Purchaser is obligated to pay additional consideration contingent upon
the purchased business achieving certain profit levels before taxes. The
entire cost of the acquisition was funded through the Purchaser's
Australian credit facility.
Pursuant to the Business Sale Agreement, the Seller agreed to indemnify
the Purchaser for all claims, losses or damages arising directly or
indirectly as a result of any breach of the Seller's warranties and
representations.
The Guarantors agreed jointly and severally to indemnify the Purchaser
against all liabilities or loss arising from, and any costs, charges or
expenses incurred in connection with, a breach by the Seller and each
Covenantor of this Agreement including a breach of any warranties and
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negligence or any other tort. The guarantee and indemnity provisions
survive the Business Sale Agreement and continue to the extent permitted
by law unless otherwise provided.
The Daisytek Guarantors agree jointly and severally to indemnify the
Seller against all liability or loss arising from, and any costs,
charges or expenses incurred in connection with, a breach by the
Purchaser of this Business Sale Agreement including negligence or any
other tort. The guarantee and indemnity provisions survive the Business
Sale Agreement and continue to the extent permitted by law unless
otherwise provided.
(k) Miscellaneous agreements
(A) Lease Agreement dated 7 February 2001 between Daisytek Australia
(Queensland) Pty. Ltd. CAN 097 222 163 and John Bolton Pty. Ltd. CAN 009
991 931, Trustee Under Instrument 702880923. The leased premises consist
of the land and improvements known as 16-24 Higgs Street, Albion, Qld.
The premises may be used for the purpose of storage, distribution and
general office administration. The Lease commences on 2 July 2001 and
expires on 7 July 2003. The rent for each year of the Lease is
$115,000(Australian).
(B) Industrial Lease Agreement between New York Life Insurance Company, as
landlord and Daisytek Incorporated, as tenant. Daisytek Incorporated was
assigned the obligations of Priority Fulfilment Services, Inc. under the
lease for a 400,000 square foot facility located in Memphis, Tennessee
in connection with the 2001 purchase of certain assets of Priority
Fulfilment Services, Inc. These obligations were previously assigned to
Priority Fulfilment Services, Inc. at the time of the separation in
December 1999. The Annual Base Rent is $1,144,734.60 and the Industrial
Lease Agreement expires on 31 March 2004.
(C) Securities Purchase Agreement, dated 19 December 2001, among Daisytek
and Renaissance US Growth and Income Trust PLC, BFS US Special
Opportunities Trust PLC, SF Capital Partners Ltd., Lincoln Partners, New
Salem Fund, L.P., New Salem Fund QP, L.P., Deephaven Private Placement
Trading Ltd, Bankers Trust Company Trustee for DaimlerChrysler Corp Emp.
#1 Pension Plan, State Street Bank Custodian for GE Pension Trust,
Mellon Trust Company Trustee for NYNEX Master Pension Trust, Capital
Blue Cross, Capital Blue Cross Retirement Plan, GE Institutional Small
Cap Value Fund, GE Small Cap Value Fund, GE Investments Funds Small Cap
Value Equity Fund (collectively, the "Investors"). The Securities
Purchase Agreement provides for the sale of 1,578,400 shares of
Daisytek's Common Stock to the Investors at a price of US$11.20 per
share and an aggregate purchase price of US$17,678,080.
(D) Registration Rights Agreement, dated 19 December 2001, among Daisytek
and Renaissance US Growth and Income Trust PLC, BFS US Special
Opportunities Trust PLC, SF Capital Partners Ltd., Lincoln Partners, New
Salem Fund, L.P., New Salem Fund QP, L.P., Deephaven Private Placement
Trading Ltd, Bankers Trust Company Trustee for DaimlerChrysler Corp Emp.
#1 Pension Plan, State Street Bank Custodian for GE Pension Trust,
Mellon Trust Company Trustee for NYNEX Master Pension Trust, Capital
Blue Cross, Capital Blue Cross Retirement Plan, GE Institutional Small
Cap Value Fund, GE Small Cap Value Fund, GE Investments Funds Small Cap
Value Equity Fund (collectively, the "Investors"). The Registration
Rights Agreement provides for the filing by Daisytek of a registration
statement on Form S-3 to register the shares purchased by the Investors
pursuant to the Securities Purchase Agreement.
Daisytek agreed to indemnify the Investors for losses, claims, damages,
expenses or liabilities that arise out of or are based upon any of the
following statements, omissions or violations in a registration
statement filed pursuant to the Registration Rights Agreement, any post
effective amendment thereof or any prospectus included therein: (i) any
untrue statement or alleged untrue statement of a material fact
contained in the registration statement or any post-effective amendment
thereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in the prospectus related to the registration
statement (as it may be amended or supplemented) or the omission or
alleged omission to state therein any material fact necessary to make
the statements made therein, in light of the circumstances under which
the statements therein were made, not misleading, or (iii) any violation
or alleged violation by Daisytek of the Securities Act of 1933, the
Securities Exchange Act of 1934 or any other law related to the
registration statement, including without limitation any state
securities law or any rule or regulation thereunder.
143
(E) Standard Industrial Lease, dated 25 March 2002, between Tejon Dermody
Industrial LLC, as landlord, and Daisytek Incorporated, as tenant. The
leased premises consist of 325,954 square feet located at 4049
Industrial Parkway, Unit 3, Wheeler Ridge, California. The term of the
lease is for a period of 15 years and 4 months, commencing on 1 March
2002 and expiring on 30 June 2017. The base rent is US$575,884 for the
first year, US$896,373 for the second year, $928,968.96 for the third
year, $951,785.64 for the fourth year and increases by 2 per cent. for
each year thereafter.
(F) Guaranty, dated 25 March 2002, by Daisytek for the benefit of Tejon
Dermody Industrial LLC, as landlord under that certain Standard
Industrial Lease, dated 25 March 2002, by and between Daisytek
Incorporated and Tejon Dermody Industrial LLC relating to the property
located at 4049 Industrial Parkway, Wheeler Ridge, California. In terms
of the Guaranty, Daisytek is liable for all of the payment obligations
of Daisytek Incorporated under that certain Standard Industrial Lease.
The base rent under the Standard Industrial Lease is US$575,884 for the
first year, US$896,373 for the second year, $928,968.96 for the third
year, $951,785.64 for the fourth year and increases by 2 per cent. for
each year thereafter. Daisytek's obligations under the Guaranty shall
expire upon the expiry of the Standard Industrial Lease on 30 June 2017.
(G) Lease Agreement, dated 15 March 2002, between Selkirk Ventures, LLC, as
landlord, and Daisytek Incorporated, as tenant. The leased premises
consist of 350,000 square feet located at 158 West Yard Road, Bethlehem,
New York. The term of the lease is for a period of 10 years, commencing
on the date a certificate of occupancy is issued for such premises,
subject to certain conditions, and expiring on the tenth anniversary of
such date. Daisytek Incorporated has three successive options to extend
the term by five years upon the exercise of each option. The rent is
$3.47 per square foot, triple net, for the first five years and $3.83
per square foot, triple net, for the last five years. The renewal rate
for each extension is 10 per cent. above the prior minimum rental rate.
(H) Guaranty of Lease, dated 14 March 2002, by Daisytek for the benefit of
Selkirk Ventures, LLC, as landlord under that certain Lease Agreement,
dated 15 March 2002, by and between Daisytek Incorporated and Selkirk
Ventures, LLC relating to the property located at 158 West Yard Road,
Bethlehem, New York. In terms of the Guaranty of Lease, Daisytek is
liable for all of the payment obligations of Daisytek Incorporated under
that certain Lease Agreement. The rent is $3.47 per square foot, triple
net, for the first five years and $3.83 per square foot, triple net, for
the last five years. The renewal rate for each extension is 10 per cent.
above the prior minimum rental rate. Daisytek's obligations under the
Guaranty shall expire upon the expiration of Daisytek Incorporated's
obligations under the Lease Agreement, including any extensions.
(I) Master Lease Agreement, dated 16 September 1999, between Daisytek, as
Lessee, and General Electric Capital Corporation, as Lessor. From time
to time, schedules shall be added to the Master Lease Agreement
evidencing equipment that is to be leased by the Lessee from the Lessor.
The Lessor will purchase the equipment from the manufacturer or supplier
and the Lessee will lease such equipment based on the terms set forth in
such schedule. The following schedules have been added to the Master
Lease Agreement:
(i) Schedule 001, dated 1 November 1999, for the lease of telephone
equipment. The capitalised Lessor's cost was US$174,644.10. The
term of the lease is 36 months with monthly rent based on a
schedule included therein.
(ii) Schedule 002, dated 29 November 2000, for the lease of telephone
equipment. The capitalised Lessor's cost was US$336,353.05. The
term of the lease is 60 months with monthly rent based on a
schedule included therein.
(iii) Schedule 003, dated 27 June 2001, for the lease of conveying
equipment and other handling equipment located at Daisytek's
primary operating facility in Memphis, Tennessee. The capitalised
Lessor's cost was US$8,000,000. The term of the lease is 84 months
with monthly rent based on a schedule included therein.
(iv) Schedule 004, dated 10 December 2001, for the lease of a variety
of equipment located at Daisytek's primary operating facility in
Memphis, Tennessee. The capitalised Lessor's cost was
US$1,098,828.53. The term of the lease is 84 months with monthly
rent based on a schedule included therein.
144
(2) ISA
Neither ISA nor any of its subsidiaries has entered into any material contracts
outside the ordinary course of business since 16 April 2000 (being the date two
years before commencement of the Offer Period), except:
(a) the Subscription and Shareholders Agreement, the Warrant, the Loan Facility
and the Guarantee Arrangement each summarised in paragraphs 5(1)(a) to (d)
(inclusive) respectively of this Appendix V;
(b) a Warranty Insurance Policy dated 9 August 2001 issued by Special Risk
Services Underwriting Agency pursuant to which ISA insured its liability
under the terms of the warranties given by ISA to Daisytek in the
Subscription and Shareholders Agreement. Daisytek is the loss payee and the
cover extends to 9 August 2003 for non-tax warranties and 9 August 2008 for
the tax warranties. The premium payable by ISA was L.110,000;
(c) a Deed of Release dated 9 August 2001 given by National Westminster Bank plc
(the "Bank") to ISA pursuant to which the Bank agreed to release part of any
proceeds of sale of ISA's shareholding in Kaye from security held by the
Bank if at that time Daisytek has requested the payment to it of a Special
Dividend equal in value to the value of that shareholding, under the terms
of the ISA Preference Shares. ISA gave undertakings not to subscribe for
further capital in Kaye without the consent of the Bank;
(d) a Fraud Insurance Policy dated 10 August 2001 issued by Special Risk
Services Underwriting Agency pursuant to which ISA insured Daisytek in
respect of liabilities of ISA under the terms of warranties given by ISA to
Daisytek in the Subscription and Shareholders Agreement. The insurance
relates to claims which would be covered under the warranty insurance policy
described in sub-paragraph (b) above but for fraud or dishonesty on the part
of ISA. The premium payable by ISA was L.44,625;
(e) on 15 October 2001 ISA subscribed for 3,071,128 Ordinary Shares in the
capital of Kaye Office Supplies Limited at an aggregate subscription price
of L.3,071,128;
(f) a lease dated 1 November 2001 for Unit 1, Tuscany Park, Wakefield Europort
made between Prologis Wakefield Limited (1) as landlord and ISA Wholesale
Plc (2) as tenant. The demise is of the whole of Unit 1. The rent is
L.540,000 per year and the term is ten years less one day from 28 September
2001. ISA Wholesale Plc is responsible for maintaining the whole of the
leased property and for insuring the building;
(g) an agreement dated 24 December 2001 with EXY Group Limited ("EXY") pursuant
to which ISA agreed to sell its entire holding of shares in the capital of
EXY back to EXY for a cash consideration (payable upon completion) of
L.888,000. On completion of the sale, ISA agreed to subscribe for 444,000
redeemable preference shares of L.1 each in EXY ("EXY Preference Shares")
for an aggregate subscription price of L.444,000. Except in limited
circumstances the EXY Preference Shares do not carry any voting rights or
rights to attend general meetings of EXY but carry a right to a cumulative
preferential dividend of 7 per cent. of their gross value (rising to 10 per
cent. in the event of default of payment of such dividend). EXY has the
right upon 3 months' written notice to redeem all or any of the EXY
Preference Shares at any one time. Otherwise the EXY Preference Shares are
redeemable as to 50 per cent. of the number in issue on 30 April 2002 (which
redemption has occurred) and all remaining EXY Preference Shares in issue on
31 August 2002. The agreement was completed and the consideration paid on 28
February 2002;
(h) an agreement entered into on 17 January 2002 between Item 2000 International
EDU-ZubehIr und Burobedarf Handles GmbH ("Item") (1) and ISA International
Holdings Limited ("IIH") a wholly owned subsidiary of ISA (2) by which IIH
agreed to sell the whole of the issued share capital of Supplies Team
EDU-ZubehIr Handel GmbH ("Supplies") to Item. The consideration for the sale
of Supplies was E.1,200,000. Item also assumed a loan of E.348,538.88 to
PAR Beteiligungs GmbH, the wholly owned intermediate German holding company,
and a loan of E.792,133.86 to ISA and indemnified IIH in respect of these
loans. IIH gave certain warranties to Item relating to the incorporation of
Supplies and IIH's ownership of the shares in Supplies, under which IIH's
maximum liability is E.1,200,000. IIH undertook to Item that it would not
compete with the business of Supplies in Austria for 3 years following
signature of the agreement. IIH also undertook not to disclose any trade
secrets or confidential information or to solicit any employees of Supplies.
If a breach of the restrictive covenants occurs then IIH is liable for lump
sum damages of E.20,000;
(i) a compromise agreement entered into on 18 April 2002 between ISA (1) Mr
David Heap ("Mr Heap") (2) and Virtual Village Limited ("VVL") (3) by which
Mr Heap's employment with ISA, under a service agreement dated 1 October
2001, and his position as director of all ISA Group companies, was
145
terminated with effect from 31 December 2001. Under the agreement ISA agreed
to pay to Mr Heap L. 100,000 in full and final settlement of any claims,
contractual, statutory or otherwise which Mr Heap may have against ISA; and
(j) on 7 May 2002 Daisytek UK wrote to ISA in respect of the following matters:
(A) to acknowledge that it had agreed that it would not exercise the voting
rights attaching to the ISA Preference Shares on or before 30 June 2002
or, if earlier, the date of receipt of clearance from the
Bundeskartellamt for Daisytek UK to exercise the right to vote and to
acquire control over ISA;
(B) to acknowledge that it had agreed that it would not call for the special
dividend payable on the ISA Preference Shares on or before 30 June 2002
and that it will not seek payment of such a special dividend (unless
there is a further event of default under the terms of the ISA
Preference Shares) before 30 September 2002, provided that ISA is at the
relevant time seeking to implement a discounted share issue of ordinary
shares pursuant to the terms of the Loan Facility.
6. DIRECTORS APPOINTMENT AND EMPLOYMENT ARRANGEMENTS
No directors of Daisytek have service contracts with any member of the Daisytek
Group having more than 12 months to run and no such contracts have been entered
into, replaced or amended within 6 months of the date of this Offer Document.
7. COMPULSORY ACQUISITION
If, on or before the expiration of four months from the date of posting of this
Offer Document, Daisytek UK has as a result of acceptances of the Offer, or,
subject to certain conditions, acquired or contracted to acquire, at least 90
per cent. in value of the ISA Shares to which the Offer relates then: (i)
Daisytek UK will be entitled, and intends, to acquire compulsorily the remainder
of the outstanding ISA Ordinary Shares in accordance with sections 428-430F of
the Act; and (ii) in such circumstances a holder of ISA Ordinary Shares may
require Daisytek UK to purchase his ISA Ordinary Shares in accordance with the
procedures and time limits described in Section 430A of the Act.
8. GENERAL
(a) Baird and KPMG Corporate Finance have given and not withdrawn their written
consent to the issue of this Offer Document with the reference to their
name, each in the form and context in which they are included.
KPMG Corporate Finance is a division of KPMG LLP. The principal place of
business of KPMG Corporate Finance is 8 Salisbury Square, London EC4Y 8BB
where a list of the partners' names is open to inspection.
(b) Save as disclosed in this Offer Document, no agreement, arrangement or
understanding (including any compensation arrangement) exists between
Daisytek UK or any party acting in concert with Daisytek UK (including
Daisytek) for the purposes of the Offer and any of the directors or recent
directors, shareholders or recent shareholders of ISA having any connection
with, or dependence on, the Offer.
(c) There is no agreement, arrangement or understanding whereby the beneficial
ownership of any of the ISA Ordinary Shares to be acquired by Daisytek UK
pursuant to the Offer will be transferred to any other person, except that
Daisytek UK reserves the right to transfer any ISA Ordinary Shares to
Daisytek or any of its subsidiaries.
(d) Save as disclosed in paragraph 3 above of this Appendix V, neither Daisytek
UK nor any person acting in concert with Daisytek UK (including Daisytek)
nor ISA nor any associate of ISA has any arrangement (including any
indemnity or option arrangement), agreement or understanding (formal or
informal) of whatever nature relating to relevant securities (as defined in
sub-paragraph 3(a) of this Appendix V), which may be an inducement to deal
or refrain from dealing.
In this sub-paragraph (d) references to an "associate" are to:
(i) subsidiaries and associated companies of Daisytek and ISA respectively
and companies of which any such subsidiaries or associated companies are
associated companies;
(ii) banks, financial and other professional advisers (including
stockbrokers) to Daisytek and ISA respectively or a company covered in
(i) above, including persons controlling, controlled by or under the
same control as such banks, financial or other professional advisers;
146
(iii) the directors (together with their close relatives and related trusts)
of Daisytek and ISA respectively or a company covered in (i) above;
(iv) the pension funds of Daisytek and ISA respectively or a company covered
in (i) above;
(v) references to a "bank" do not apply to a bank whose sole relationship
with Daisytek and ISA respectively or a company covered in (i) above is
the provision of normal commercial banking services or such activities
in connection with the Offer as handling acceptances and other
registration work; and
(vi) ownership or control of 20 per cent. or more of the equity share
capital of a company is regarded as the test of associated status and
"control" means a holding, or aggregate holdings, of shares carrying 30
per cent. or more of the voting rights attributable to the share
capital of a company which are currently exercisable at a general
meeting, irrespective of whether the holding or aggregate holding
gives de facto control.
(e) No proposal exists in connection with the Offer that any payment or other
benefit shall be made or given to any director of ISA as compensation for
loss of office or as consideration for or in connection with his retirement
from office.
(f) The total emoluments receivable by the directors of Daisytek or of Daisytek
UK will not be varied as a result of the proposed acquisition of ISA or by
any other associated transactions.
(g) So far as the directors of Daisytek are aware, and save as disclosed in this
Offer Document, there have been no material changes in the financial or
trading position of Daisytek since 31 March 2001 (the date to which its last
published audited accounts were prepared). Daisytek UK has not, since
incorporation, published accounts.
(h) So far as the ISA Directors are aware, and save as disclosed in this Offer
Document, there have been no material changes in the financial or trading
position of ISA since 31 December 2001 (the date to which its last published
audited accounts were prepared).
(i) The financial information on ISA contained within this Offer Document does
not constitute statutory accounts within the meaning of Section 240 of the
Act. Statutory accounts for each of the years ended 31 December 1999, 31
December 2000 and 31 December 2001 have been delivered to the Registrar of
Companies for England and Wales. The auditors of ISA for the two years ended
31 December 2000 were Arthur Andersen and for the year ended 31 December
2001 were KPMG Audit plc. For each of the three years ended 31 December 2001
the auditors have made reports under Section 235 of the Act on each of these
statutory accounts that were not qualified within the meaning of section 262
and did not contain any statements made under Section 237(2) or (3) of the
Act. Attention is drawn to the fundamental uncertainty paragraph in respect
of going concern as explained in the "Basis of accounting" note in Appendix
IV of this document and contained in the audit report on the financial
statements for the year ended 31 December 2001.
9. DIVIDEND POLICY
Daisytek has never paid cash dividends on Daisytek Common Stock and does not
anticipate the payment of cash dividends on Daisytek Common Stock in the
foreseeable future. Any payment of cash dividends in the future will depend upon
the financial condition, capital requirements, earnings and restrictive
covenants contained in credit facilities of Daisytek, as well as other factors
as the Board of Daisytek may deem relevant.
147
10. MARKET AND PRICE DATA
The following table sets out the closing middle market quotations for an ISA
Ordinary Share (as derived from the AIM section of the London Stock Exchange
Daily Official List) and the last sale price for a share of Daisytek Common
Stock on the NASDAQ National Market System, in each case for the first dealing
day that both AIM and NASDAQ were open for business in each month from December
2001 to May 2002, for 15 April 2002 (the last dealing day before the
commencement of the Offer Period) and for 22 May 2002 (the latest practicable
date prior to the posting of this Offer Document):
<Table>
<Caption>
Daisytek
ISA Share
Date Share Price Price
(in pence) (in dollars)
3 December 2001 7.75p $12.05
2 January 2002 6.25p $13.19
1 February 2002 7.50p $14.00
1 March 2002 7.50p $15.01
2 April 2002 7.25p $15.19
15 April 2002 7.50p $15.13
1 May 2002 7.75p $16.40
22 May 2002 7.50p $13.17
</Table>
11. BASIS OF CALCULATION AND SOURCES OF INFORMATION
The value of the Offer is based on 58,778,398 Ordinary Shares in issue as at 22
May 2002 (being the last practicable date prior to the posting of this Offer
Document).
The closing dealt prices of the ISA Ordinary Shares are derived from the middle
market quotation of the relevant shares at the close of business on the relevant
date as published in the Official List, in the case of ISA, and by NASDAQ in the
case of Daisytek.
12. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the
offices of Bird & Bird at 90 Fetter Lane, London EC1A 4JP during normal business
hours on any weekday (except Saturdays and public holidays) while the Offer
remains open for acceptance:
(a) the existing Memorandum and Articles of Association of ISA and of Daisytek
UK;
(b) the Certificate of Incorporation and the Bylaws of Daisytek;
(c) the service agreements of ISA Directors having more than 12 months to run;
(d) the published audited accounts of ISA for the two years ended 31 December
2001;
(e) the preliminary statement of results of ISA for year ending 31 December
2001;
(f) the published audited accounts of Daisytek for the two years ended 31 March
2001;
(g) the rules of the ISA Share Option Schemes;
(h) the material contracts of ISA, Daisytek UK and Daisytek referred to in
paragraph 5 above;
(i) the irrevocable undertakings referred to in paragraph 3(i) above;
(j) the written consents referred to in paragraph 8 above;
(k) a full list of the dealings referred to in paragraph 3(f) above;
(l) the circular to ISA Shareholders dated 7 May 2002; and
(m) this Offer Document and the Form of Acceptance.
148
APPENDIX VI
DESCRIPTION OF DAISYTEK CAPITAL STOCK AND
CHANGES IN CERTAIN RIGHTS OF ISA SHAREHOLDERS
The authorized capital stock of Daisytek consists of (i) 30,000,000 shares of
Daisytek Common Stock and (ii) 1,000,000 shares of Daisytek Preferred Stock. As
of 22 May 2002, there were 18,021,388 shares of Daisytek Common Stock
outstanding and held by 84 registered stockholders of record and no shares of
Daisytek Preferred Stock are issued and outstanding.
1. DAISYTEK COMMON STOCK
General
Holders of shares of Daisytek Common Stock are entitled to share ratably in such
dividends as may be declared by the Board of Daisytek and paid by Daisytek out
of funds legally available therefor, subject to prior rights of outstanding
shares of any Daisytek Preferred Stock and certain restrictions under agreements
governing Daisytek's indebtedness. In the event of any dissolution, liquidation
or winding up of Daisytek, holders of shares of Daisytek Common Stock are
entitled to share ratably in assets remaining after payment of all liabilities
and liquidation preferences, if any.
Except as otherwise required by law, the holders of Daisytek Common Stock are
entitled to one vote per share on all matters voted on by stockholders,
including the election of directors. The holders of a majority of Daisytek
Common Stock represented at a meeting of stockholders can elect all of the
directors to be elected at such a meeting.
Holders of shares of Daisytek Common Stock have no preemptive, cumulative
voting, subscription, redemption or conversion rights. All outstanding shares of
Daisytek Common Stock are fully paid and non-assessable, and the shares of
Daisytek Common Stock to be outstanding upon completion of the Offering will be
fully paid and non-assessable. The rights, preferences and privileges of holders
of Daisytek Common Stock are subject to the rights of any series of Daisytek
Preferred Stock which Daisytek may issue in the future.
Transfer Agent and Registrar
The transfer agent and registrar for the Daisytek Common Stock is Mellon
Investor Services LLC.
2. PREFERRED STOCK
The Board of Daisytek may, without further action by Daisytek's stockholders,
from time to time, authorize the issuance of up to 1,000,000 shares of Daisytek
Preferred Stock in one or more classes or series and may, at the time of
issuance, determine the powers, rights, preferences, qualifications and
limitations of any such class or series. Satisfaction of any dividend
preferences on outstanding shares of Daisytek Preferred Stock would reduce the
amount of funds available for the payment of dividends on Daisytek Common Stock.
Also, holders of Daisytek Preferred Stock could be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding up of
Daisytek before any payment is made to the holders of Daisytek Common Stock.
Under certain circumstances, the issuance of such Daisytek Preferred Stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of Daisytek's
securities or the removal of incumbent directors.
Of the 1,000,000 shares of Daisytek Preferred Stock authorized, Daisytek has
denominated 100,000 shares of the Daisytek Preferred Stock as Series A Preferred
Stock, par value $1.00 per share. Daisytek has authorized the issuance of shares
of Series A Preferred Stock upon exercise of certain Daisytek Preferred Stock
purchase rights associated with each share of Daisytek Common Stock outstanding.
See "Stockholder Rights Agreement" below. The issuance of Series A Preferred
Stock could adversely affect the voting power of holders of Daisytek Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Daisytek. Daisytek has no present plan to
issue any shares of Daisytek Preferred Stock.
3. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation and Bylaws include certain provisions that
could have anti-takeover effects. The provisions are intended to enhance the
likelihood of continuity and stability in the composition of, and in the
policies formulated by, the Board of Daisytek. These provisions also are
intended to help ensure that the Board of Daisytek, if confronted by an
unsolicited proposal from a third party that has acquired a block of
149
stock of Daisytek, will have sufficient time to review the proposal, to develop
appropriate alternatives to the proposal, and to act in what the Board of
Daisytek believes to be the best interests of Daisytek and its stockholders. The
foregoing provisions of the Certificate of Incorporation may not be amended or
repealed by the stockholders of Daisytek except upon the vote of the holders of
at least a majority of the outstanding shares of each class of Daisytek's
capital stock then entitled to vote thereon.
The following is a summary of the provisions of the Certificate of Incorporation
and Bylaws and is qualified in its entirety by reference to such documents in
the respective forms previously filed with the SEC. For information as to where
the Certificate of Incorporation and Bylaws of Daisytek may be obtained, see
paragraph 12 of Appendix V.
Amendment of Bylaw Provisions
The Certificate of Incorporation provides that Bylaw provisions may be adopted,
altered, amended or repealed only by the affirmative vote of (i) at least a
majority of the members of the Board of Daisytek who are elected by the holders
of Daisytek Common Stock or (ii) at least a majority of the outstanding shares
of each class of Daisytek's capital stock then entitled to vote thereon.
Classified Board of Daisytek.
The Certificate of Incorporation provides for the Board of Daisytek to be
divided into three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Board of Daisytek in a short
period of time. At least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in a majority of the Board of
Daisytek.
Number of Directors; Filling Vacancies; Removal
The Certificate of Incorporation provides that the Board of Daisytek will
consist of at least three and no more than ten members (plus such number of
directors as may be elected from time to time pursuant to the terms of any
series of Daisytek Preferred Stock that may be issued and outstanding from time
to time). The number of directors constituting the entire Board of Daisytek may
be changed only by an amendment to the applicable provision of the Certificate
of Incorporation (which will require the vote of the holders of at least a
majority of each class of Daisytek's outstanding voting securities then entitled
to vote thereon). Daisytek's Bylaws provide that the Board of Daisytek, acting
by majority vote of the directors then in office, may fill any newly created
directorships or vacancies on the Board of Daisytek.
Under Delaware law, in the case of a corporation having a classified board,
unless specifically provided otherwise, stockholders may remove a director only
for cause. Daisytek's Certificate of Incorporation provides that directors may
only be removed for cause. This provision, when coupled with the provision of
the Bylaws authorizing the Board of Daisytek to fill vacant directorships, will
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Daisytek by filling the vacancies
created by such removal with its own nominees.
Special Meetings of Stockholders
The Bylaws and Certificate of Incorporation provide that special meetings of
stockholders may be called by a majority of the Board of Daisytek, the Chairman
of the Board of Daisytek or any holder or holders of at least 25 per cent. of
Daisytek's outstanding capital stock then entitled to vote at the meeting.
Advance Notice Requirements for Stockholder Proposals and Director Nominees
The Bylaws establish an advance notice procedure with regard to business
proposed to be submitted by a stockholder at any annual or special meeting of
stockholders of Daisytek, including the nomination of candidates for election as
directors. The procedure provides that a notice of proposed stockholder business
must be timely given in writing to the Secretary of Daisytek prior to the
meeting. In all cases, to be timely, notice relating to an annual meeting must
be received at the principal executive office of Daisytek not less than 120 days
before the first anniversary of the prior year's annual meeting.
Notice to Daisytek from a stockholder who proposes to nominate a person at a
meeting for election as a director must contain all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected.
150
The chairman of a meeting of stockholders may determine that a person is not
nominated in accordance with the nomination procedure, in which case such
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business has not been properly brought before
such meeting in accordance with the Bylaw procedures, such business will not be
conducted at the meeting. Nothing in the nomination procedure or the business
will preclude discussion by any stockholder of any nomination or business
properly made or brought before the annual or any other meeting in accordance
with the foregoing procedures.
Limitations on Directors' Liability
Daisytek's Certificate of Incorporation provides that, to the fullest extent
permitted by Delaware law, no director shall be liable to Daisytek or its
stockholders for monetary damages for breach of fiduciary duty as a director. By
virtue of these provisions, a director of Daisytek is not personally liable for
monetary damages for a breach of such director's fiduciary duty except for
liability for (i) breach of the duty of loyalty to Daisytek or to its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) dividends or stock
repurchases or redemptions that are unlawful under the Delaware General
Corporation Law and (iv) any transaction from which such director receives an
improper personal benefit. In addition, the Certificate of Incorporation
provides that if the Delaware General Corporation Law is amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of the directors will be eliminated or limited to the fullest extent
permitted by the Delaware Corporation Law, as amended.
Delaware Statute
Daisytek has elected to be subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). Under Section 203, certain transactions and
business combinations between a corporation and an "interested stockholder"
owning 15 per cent. or more of the corporation's outstanding voting stock are
restricted for a period of three years from the date the stockholder becomes an
interested stockholder. Generally, Section 203 prohibits significant business
transactions such as a merger with, disposition of assets to, or receipt of
disproportionate financial benefits by, the interested stockholder, or any other
transaction that would increase the interested stockholder's proportionate
ownership of any class or series of Daisytek's capital stock unless: (i) the
transaction resulting in a person's becoming an interested stockholder, or the
business combination, has been approved by the Board of Daisytek before the
person becomes an interested stockholder, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85 per cent. or more of
the outstanding voting stock of Daisytek at the time the transaction commenced,
excluding those shares owned (x) by persons who are directors and also officers
and (y) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the Board of Daisytek and by the holders of at least two-thirds of Daisytek's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder.
4. STOCKHOLDER RIGHTS AGREEMENT
On October 15, 1999, the Board of Daisytek adopted and approved a stockholder
rights agreement between Daisytek and Mellon Investor Services LLC (f/k/a
ChaseMellon Shareholder Services, LLC) as Rights Agent (the "RIGHTS AGREEMENT")
and declared a dividend of one right (each a "RIGHT") for each share held by
stockholders of record at the close of business on October 25, 1999. Each Right
entitles the registered holder to purchase from Daisytek one one-thousandth of a
share of Series A Preferred Stock at a price of $70 (the "PURCHASE PRICE"),
subject to adjustment. The Purchase Price shall be paid in cash. The Rights are
not exercisable until the earlier to occur of (a) 10 business days following a
public announcement that a person or group of affiliated or associated person
(collectively, an "ACQUIRING PERSON") has acquired, or obtained the right to
acquire, beneficial ownership of 15 per cent. or more of the outstanding
Daisytek Common Stock or (b) 15 business days (or such later date as may be
determined by the action of the Board of Daisytek before any person becomes an
Acquiring Person) following the commencement of a tender offer or exchange offer
if, upon consummation thereof, such person or group would be the beneficial
owner of 15 per cent. or more of such outstanding Daisytek Common Stock. The
Rights will expire on October 25, 2009 unless earlier redeemed by Daisytek. The
Rights have certain anti-takeover effects and are intended to discourage
coercive or unfair takeover tactics and to encourage any potential acquirer to
negotiate a price fair to all Daisytek stockholders. The Rights may cause
substantial dilution to an acquiring party that attempts to acquire
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Daisytek on terms not approved by the Board of Daisytek, but they will not
interfere with any negotiated merger or other business combination.
In the event that any person or group acquires beneficial ownership of 15 per
cent. or more of the outstanding shares of Daisytek Common Stock, each holder of
a Right, other than a Right beneficially owned by the Acquiring Person, will
thereafter have the right to receive upon exercise of that number of shares of
Daisytek Common Stock having a market value of two times the exercise price of
the Right. In addition, if at any time following such acquisition of 15 per
cent. or more of the outstanding Daisytek Common Stock, Daisytek is acquired in
a merger or other business combination or transaction, or 50 per cent. or more
of its consolidated assets or earning power are sold, each holder of a Right
will receive, upon exercise of that Right, that number of shares of common stock
of the acquiring company which, at the time of such transaction, will have a
market value of two times the exercise price of the Right.
5. SUMMARY COMPARISON OF RIGHTS
The following is a summary comparison of material differences between the right
of a Daisytek stockholder and an ISA Shareholder arising from the differences
between the corporate laws of Delaware and of England and Wales, the governing
instruments of the two companies and the securities laws and regulations
governing the two companies. However, it is not intended to be a complete
description of the laws of Delaware or of England and Wales, nor of the other
rules or laws referred to in this summary. For information as to where the
governing instruments of Daisytek and ISA may be obtained, see paragraph 12 of
Appendix V. You are encouraged to obtain and read these documents.
(a) Authorised capital
(i) Daisytek Stockholders
The authorised share capital of Daisytek consists of (i) 30,000,000
shares of Daisytek Common Stock; and (ii) 1,000,000 shares of Daisytek
Preferred Stock. As of 22 May 2002, there are 18,021,388 shares of
Daisytek Common Stock issued and outstanding and no shares of Daisytek
Preferred Stock issued and outstanding.
(ii) ISA Shareholders
The authorised capital stock of ISA consists of (i) 175,000,000 Ordinary
Shares; and (ii) 8,000,000 ISA Preference Shares. As of 22 May 2002,
there were 58,778,398 Ordinary Shares in issue and all of the ISA
Preference Shares are issued.
(b) Anti-Takeover measures
(i) Daisytek Stockholders
Under Delaware law, directors generally have a duty to act without self-
interest, on a well-informed basis and in a manner they reasonably
believe to be in the best interests of the stockholders. Nevertheless, a
Delaware court will generally apply a policy of judicial deference to
board of directors' decisions to adopt anti-takeover measures in the
face of a potential takeover where the directors are able to show that:
(a) they had reasonable grounds for believing that there was a danger to
corporate policy and effectiveness from an acquisition proposal; and
(b) the board action taken was reasonable in relation to the threat
posed.
Daisytek has elected to be subject to the provisions of Section 203
of the Delaware General Corporation Law ("DGCL"). Under Section 203,
certain transactions and business combinations between a corporation
and an "interested stockholder" owning 15 per cent. or more of the
corporation's outstanding voting stock are restricted for a period
of three years from the date the stockholder becomes an interested
stockholder. Generally, Section 203 prohibits significant business
transactions such as a merger with, a disposition of assets to, or
receipt of disproportionate financial benefits by, the interested
stockholder, or any other transaction that would increase the
interested stockholder's proportionate ownership of any class or
series of Daisytek's capital stock except in certain circumstances.
See "Special Provisions of the Certificate of Incorporation and
Bylaws -- Delaware Statute" discussed above in this Appendix VI.
In addition, the Rights Agreement adopted by the Board of Daisytek
in October 1999 provides for Rights that have certain anti-takeover
effects and are intended to discourage coercive or
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unfair takeover tactics and to encourage any potential enquirer to
negotiate a price fair to all Daisytek stockholders. The Rights may
cause substantial dilution to an acquiring party that attempts to
acquire Daisytek on terms not approved by the Board of Daisytek, but
they will not interfere with any negotiated merger or other business
combination. See "Stockholder Rights Agreement" discussed above in
this Appendix VI.
(ii) ISA Shareholders
Under English law, directors of a company have a fiduciary duty to
take only those actions which are in the interests of the company.
Generally, anti-takeover measures are not actions which fall within
this category.
Under the City Code, at no time after:
(a) a bona fide offer has been communicated to the board of the
offeree company; or
(b) the board of the offeree company has reason to believe that a
bona fide offer might be imminent;
may any action be taken by the board of the offeree company in
relation to the affairs of the Company, without the approval of
the shareholders in general meeting, which could effectively
result in any bona fide offer being frustrated or in the
shareholders being denied an opportunity to decide on its
merits.
The ISA Preference Shares have rights to convert into Ordinary
Shares of ISA representing 50 per cent. plus one share of ISA's
issued ordinary share capital as enlarged by the conversion of
the ISA Preference Shares, subject to dilution by the exercise
of certain share options. In addition, Daisytek UK holds the
Warrant. As a result, whilst Daisytek UK remains the holder of
the ISA Preference Shares, no other person making a take-over
bid for ISA would be able to obtain a majority of ISA's issued
ordinary share capital without the acceptance of Daisytek UK.
In practice this is likely to frustrate any attempted
take-over.
(c) Appraisal rights
(i) Daisytek Stockholders
Delaware law provides stockholders of a corporation
involved in a merger the right to demand and receive
payment of the fair value of their stock in certain
mergers. However, appraisal rights are not available to
holders of shares:
(a) listed on a national securities exchange;
(b) designated as a national market system security on
an interdealer quotation system operated by the
National Association of Securities Dealers, Inc.; or
(c) held of record by more than 2,000 stockholders;
unless holders of stock are required to accept in the merger
anything other than any one of the following or a combination
thereof:
(a) shares of stock or depositary receipts of the
surviving corporation in the merger;
(b) shares of stock or depositary receipts of another
corporation that, at the effective date of the
merger, will be either:
(i) listed on a national securities exchange;
(ii) designated as a national market system
security on an interdealer quotation system
operated by the National Association of
Securities Dealers, Inc.; or
(iii) held of record by more than 2,000 holders;
or
(c) cash in lieu of fractional shares of the stock or
depositary receipts received.
In addition, appraisal rights are not available to the holders of
shares of the surviving corporation in the merger, if the merger
does not require the approval of the stockholders of that
corporation.
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(ii) ISA Shareholders
Under English law, shareholders do not generally have appraisal
rights, as the concept is understood under Delaware law, and ISA's
articles of association do not contain any appraisal rights.
Certain limited rights exist where an offeror who, pursuant to a
takeover offer for a company, has acquired or contracted to acquire
not less than 90 per cent. in value of the shares to which the
offer relates, seeks to acquire outstanding minority shareholdings
pursuant to the compulsory acquisition provisions under the Act.
Similarly, under a scheme of reconstruction under Section 110 of
the Insolvency Act 1986, a shareholder can require the liquidator
to abstain from carrying the resolution into effect, or to purchase
his/her interest at a price agreed or determined by arbitration.
Additionally, any shareholder who complains that the affairs of the
company are being conducted, or that the directors' powers are
being exercised, in a manner unfairly prejudicial to him/her or
some group of shareholders (including himself/herself), or in
disregard of his/her proper interests as a shareholder, or that any
actual or proposed act or omission of the company (including an act
or omission on its behalf) is or would be so prejudicial, may apply
to the High Court in England for relief. If the High Court finds
the complaint to be justified, it may exercise its discretion and
order the purchase of that person's shares on such terms, including
as to price, as the High Court may determine.
(d) Pre-emptive Rights
(i) Daisytek Stockholders
Under Delaware law, a stockholder is not entitled to pre-emptive
rights to subscribe for additional issues of stock or any security
convertible into stock unless they are specifically granted in the
certificate of incorporation. Such rights are not provided in
Daisytek's certificate of incorporation.
(ii) ISA Shareholders
Under English law, the issue for cash of:
(a) equity securities (as defined in the Act), being those which,
with respect to dividends or capital, carry a right to
participate beyond a specified amount; or
(b) rights to subscribe for, or to convert, securities into
relevant shares in the company not held by a person who
acquired them in pursuance of an employees' share scheme,
must be offered first to the existing shareholders in proportion
to the respective nominal value of their holdings, unless a special
resolution to the contrary has been passed by shareholders in a
general meeting, or the articles of association provide otherwise.
It is customary for many English companies admitted to trading on
AIM to pass a resolution on an annual basis to disapply pre-emption
rights generally in respect of issues of equity securities for cash
up to a specified aggregate amount of share capital, generally 5
per cent. of issued equity share capital.
(e) Board of Directors
(i) Daisytek Stockholders
General
The members of the Board of Daisytek are elected by the affirmative
vote of a majority of the votes present, in person or by proxy, at
the annual meeting of Daisytek stockholders. The bylaws of Daisytek
provides that the Board of Daisytek shall consist of no fewer than
three and no more than ten directors (plus such number of directors
that may be elected from time to time pursuant to the terms of any
series of preferred stock that may be issued and outstanding from
time to time). The Board of Daisytek currently consists of 7 members
which are divided into three classes. See "Classified Board" below.
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Classified Board
Delaware law permits the certificate of incorporation or a stockholder-
adopted bylaw to provide that directors be divided into one, two or
three classes, with the term of office of one class of directors to
expire each year.
The Daisytek certificate of incorporation provides for classification of
its board of directors into three classes, as nearly equal in number as
possible. Each class is elected to a term expiring at the annual meeting
of stockholders held in the third year following the year of such
election. The Class I directors include James R. Powell, Daniel T. Owen
and Peter D. Wharf, whose terms expire at the 2004 annual meeting of
stockholders. The Class II director is John D. Kearney, whose term
expires at the 2002 annual meeting of stockholders. The Class III
directors include Peter P.J. Vikanis, Dale A. Booth and Nicholas
Giordano, whose terms expire at the 2003 annual meeting of stockholders.
(ii) ISA Shareholders
In accordance with Article 84 of the Articles of Association, the
minimum number of directors permitted is 2 and the maximum is 15 unless
determined otherwise by Ordinary Resolution (which requires that a
majority of the votes cast should be in favour).
There are currently 7 directors of Daisytek; their names and details
are set out in paragraph 2 of Appendix V.
There are no provisions under English law which govern the term of
office of directors, except that a director of a public limited company
must normally vacate office after the age of 70. This provision of the
Act is disapplied by ISA's Articles of Association. Shareholder
approval is required if a director's service contract is for a period
of more than five years and cannot be terminated by notice.
The Combined Code, to which ISA is subject whilst it remains on AIM,
recommends that the notice period under directors' service contracts
should ideally be set at one year or less.
ISA's Articles of Association provide that a third of the board of
directors must retire at every annual general meeting of the Company.
(f) Newly created directorships and vacancies
Daisytek Stockholders
Under Delaware law, unless otherwise provided in the certificate of
incorporation or the bylaws the following vacancies may be filled by a vote
of a majority of the directors then in office:
1. vacancies on a board of directors; and
2. newly created directorships resulting from an increase in the authorised
number of directors.
However, if the holders of any specific class of stock are entitled to elect
directors, vacancies and newly created directorships of the class may be
filled by a majority of the directors elected by the class. In the case of a
classified board, directors elected to fill vacancies or newly created
directorships will hold office until the next election of the class for
which the directors have been chosen.
The bylaws of Daisytek provide that newly created directorships resulting
from any increase in the authorised number of classified directors and any
vacancies created by death, resignation, retirement, disqualification,
removal, or other termination from office of any classified director may be
filled by the vote of a majority of the classified directors then in office,
though less than a quorum, or by the affirmative vote, at any annual or
special meeting of the stockholders called for the purpose of filling such
directorship, of the holders of a majority of the outstanding shares of each
class of capital stock then entitled to vote. Each director so chosen shall
hold office for the remainder of the full term of the class of directors in
which the vacancy occurred and until such director's successor shall have
been duly elected and qualified.
Unless otherwise provided in the rights of a class or series of preferred
stock having preference over common stock under specified circumstances, the
bylaws of Daisytek provide that vacancies created by death, resignation,
retirement, disqualification, removal, or other termination from office of
any director other than a classified director may be filled by the vote of a
majority of the directors then in office, though less than a quorum, or by
the affirmative vote, at any annual or special meeting of the
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stockholders called for the purpose of filling such directorship, of the
holders of a majority of the outstanding shares of each class of capital
stock then entitled to vote. Each director so chosen shall hold office for
the remainder of the full term of the class of directors in which the
vacancy occurred and until such director's successor shall have been duly
elected and qualified.
ISA Shareholders
Under English law, shareholders may demand that a general meeting is held
and that a specific resolution is considered. The demand must be made by
members of the company holding at the date of the deposit of the requisition
not less than 10 per cent. of the paid-up capital of the company as at that
date carries the right of voting at general meetings of the company.
The shareholders must deposit the demand at the company's registered office
and if the directors do not convene such a meeting within 21 days of the
demand being served, then the shareholders can themselves convene the
meeting. In addition, in the case of ISA, the Articles of Association state
that if a resolution to appoint a director is to be voted on, then not less
than six nor more than fourteen clear days before the day appointed for the
meeting, notice must be given to the company that such a resolution is going
to be proposed and that notice must contain the name and address of the
person proposed to be appointed a director and must also be signed by them.
Under English law and the Articles of Association, shareholders may by
ordinary resolution, at a meeting at which any director retires, appoint a
person to be a director:
(a) to fill a vacancy; or
(b) to become an additional director, subject to any maximum provided in the
company's articles of association.
The board of directors has the power to appoint a director to serve until
the next annual general meeting of the company, whereupon the director
concerned is required to retire, but will be eligible for re-election.
(g) Removal of directors
(i) Daisytek Stockholders
Delaware law provides that a director may be removed with or without
cause by the holders of a majority in voting power of the shares
entitled to vote at an election of directors, except that:
(a) members of a classified board of directors may be removed only for
cause, unless the certificate of incorporation provides otherwise;
and
(b) directors may not be removed in certain situations in the case of
a corporation having cumulative voting.
The bylaws of Daisytek provide that any classified director may be
removed only for cause upon the affirmative vote of the holders of a
majority of the outstanding shares of each class of Daisytek capital
stock then entitled to vote in person or by proxy at an election of
such classified directors, provided that notice of the intention to act
upon such matter shall have been given in the notice calling such
meeting.
Daisytek stockholders may not cumulate votes for the election of
directors.
(ii) ISA Shareholders
Under the Act, shareholders may remove a director without cause by
ordinary resolution, irrespective of any provisions of the company's
articles of association or service contract the director has with the
company, provided that:
(a) 28 days' notice of the meeting to consider the resolution is given
to all those entitled to attend (including the director concerned);
and
(b) the director concerned is given the opportunity to respond to the
resolution by the company circulating a copy of his written
representations to every shareholder to attend the meeting and by
being allowed to speak at the meeting itself.
Under the Articles of Association of ISA the office of a Director shall
be vacated if:
(a) he resigns his office by notice in writing; or
156
(b) he becomes bankrupt or makes any arrangement or composition with
his creditors generally; or
(c) an order is made by any court on the ground of mental disorder
for his detention or for the appointment of a guardian or
receiver or other person to exercise powers with respect to his
property or affairs; or
(d) he is absent from meetings of the Directors for six successive
months without leave unless prevented by illness, unavoidable
accident or other cause which may seem to the Directors to be
sufficient, and his alternate director (if any) shall not during
such period have attended in his stead, and the Directors
resolve that his office be vacated; or
(e) he ceases to be a Director by virtue of any provision of the
Act; or
(f) he becomes prohibited by law from being a Director; or
(g) he is requested in writing by all his co-directors to resign.
(h) Liability of directors and officers
(i) Daisytek Stockholders
Delaware law permits a corporation's certificate of incorporation to
include a provision eliminating or limiting the personal liability
of a director to the corporation and its stockholders for damages
arising from a breach of fiduciary duty as a director. However, no
provision can limit the liability of a director for:
(a) any breach of his/her duty of loyalty to the corporation or its
stockholders;
(b) acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
(c) intentional or negligent payment of unlawful dividends or stock
purchases or redemptions; or
(d) any transaction from which he/she derives an improper personal
benefit.
The Daisytek certificate of incorporation provides that a director
of Daisytek shall not be personally liable to Daisytek or its
stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability which would otherwise exist under
applicable law (i) for any beach of the director's duty of loyalty
to Daisytek or its stockholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the DGCL (unlawful
payment of dividend or unlawful stock purchase or redemption); or
(iv) for any transaction from which the director derived any
improper personal benefit.
If the DGCL is amended after approval by the stockholders of this
provision in the certificate of incorporation to authorise corporate
action further eliminating or limited the personal liability of
directors, then the liability of a director of the corporation shall
be eliminated or limited to the fullest extent permitted by the
DGCL, as so amended. The certificate also provides that any repeal
or modification of this provision in the certificate of
incorporation shall not adversely affect any right or protection of
a director of the corporation existing at the time of such repeal or
modification.
(ii) ISA Shareholders
English law does not permit a company to exempt any director,
officer of the company or any person (whether an officer or not)
employed by the company as an auditor, from any liability arising
from negligence, default, breach of duty or breach of trust against
the company.
(i) Indemnification of Directors and Officers
(i) Daisytek Stockholders
Delaware law provides that a corporation may indemnify any
officer or director who is made a party to any suit or
proceeding on account of being a director, officer or employee
of the corporation against expenses, including attorney's fees,
judgements, fines and amounts paid in settlement reasonably
incurred by him/her in connection with the action, through,
among other
157
things, a majority vote of a quorum consisting of directors who
were not parties to the suit or proceeding if the officer or
director:
(a) acted in good faith and in a manner he/she reasonably
believed to be in the best interests of the corporation; and
(b) in a criminal proceeding, had no reasonable cause to believe
his/ her conduct was unlawful.
The certificate of incorporation of Daisytek contains specific
authority for indemnification by the corporation of current and
former directors, officers, employees or agents of the
corporation.
Daisytek maintains policies of insurance under which Daisytek
and its directors and officers are insured subject to specified
exclusions and deductibles and maximum amounts against loss
arising from any claim which may be made against Daisytek or any
director or officer of Daisytek by reason of any breach of duty,
neglect, error, misstatement, omission or act done or alleged to
have been done while acting in their respective capabilities.
(ii) ISA Shareholders
English law does not permit a company to indemnify a director or
officer of the company, or any person (whether an officer or
not) employed by the company as an auditor, against any
liability arising from negligence, default, breach of duty or
breach of trust against the company, except that indemnification
is allowed for liabilities incurred in proceedings in which:
(a) judgment is entered in favour of the director or officer, or
the director or officer is acquitted; or
(b) the director or officer is held liable, but the court finds
that he/she acted honestly and reasonably and that relief
should be granted.
The Act enables companies to purchase and maintain insurance for
directors, officers and auditors against liabilities arising
from negligence, default, breach of duty or breach of trust
against the company.
ISA's Articles of Association provide that every Director or
other officer and auditor of ISA shall be indemnified out of the
assets of ISA against any liability which he may incur as a
result of his office, to the extent permitted by the Act.
See also "Liability of directors and officers".
(j) Shareholder Suits
(i) Daisytek Stockholders
Under the DGCL, a stockholder may initiate a derivative
action to enforce a right of a corporation if the
corporation fails to enforce the right itself. The
plaintiff must have been a stockholder at the time of the
transaction of which the plaintiff complains or the
plaintiff's shares thereafter must have devolved on the
plaintiff by operation of law.
(ii) ISA Shareholders
The Act permits a shareholder whose name is on the register
of shareholders of the company to apply for a court order:
(a) when the company's affairs are being or have been
conducted in a manner unfairly prejudicial to the
interests of all or a group of shareholders, including
the shareholder making the claim; or
(b) when any act or omission of the company is or would be
so prejudicial.
A court has wide discretion in granting relief, and may
authorise civil proceedings to be brought in the name
of the company by a shareholder on terms that the court
directs. Except in these limited circumstances, English
law does not generally permit class action lawsuits by
shareholders on behalf of the company, or on behalf of
other shareholders.
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APPENDIX VII
DEFINITIONS
The following definitions apply throughout this document, unless the context
requires otherwise:
"ACT" means the Companies Act 1985 (as amended)
"AIM" means the Alternative Investment Market of
the London Stock Exchange
"AIM RULES" means the AIM rules of the London Stock
Exchange
"ARTICLES OF ASSOCIATION" means the articles of association of ISA
"AUSTRALIA" means the Commonwealth of Australia, its
territories and its possessions
"BAIRD" OR "ROBERT W. BAIRD" means Robert W. Baird Limited, a company
regulated in the United Kingdom by the
Financial Services Authority
"BOARD OF ISA", "DIRECTORS" OR means the directors of ISA whose names are
"ISA DIRECTORS" set out in paragraph 2 of Appendix V of this
Offer Document
"BUNDESKARTELLAMT" means the Federal Cartel Office of Germany
"CANADA" means Canada, its territories and possessions
"CASH OFFER" means the cash offer of 7.5 pence per ISA
Ordinary Share made by Baird, on behalf of
Daisytek UK to acquire the ISA Ordinary
Shares on the terms and subject to the
conditions set out in this Offer Document
and, where the context admits, any subsequent
revision, variation, extension or renewal of
it
"CITY CODE" means The City Code on Takeovers and Mergers
of the United Kingdom
"CLOSING PRICE" means on any given day, the closing price of
Daisytek Common Stock on NASDAQ
"COMBINED CODE" means the principles of good governance and
code of best practice derived by the
Committee on Corporate Governance from the
Committee's Final Report and from the Cadbury
and Greenbury Reports
"CREST" means the centralised settlement system for
securities traded on the London Stock
Exchange
"CRESTCo" means CRESTCo Limited
"DAISYTEK" means Daisytek International Corporation, a
company incorporated in Delaware
"DAISYTEK COMMON STOCK" means the $0.01 par value common stock of
Daisytek
"DAISYTEK DIRECTORS" OR paragraph means the directors of Daisytek
"BOARD OF DAISYTEK" whose names are set out in 2 of Appendix V
of this Offer Document
"DAISYTEK GROUP" means Daisytek and its direct and indirect
subsidiaries (including Daisytek UK)
"DAISYTEK PREFERRED STOCK" means the $1.00 par value preferred stock of
Daisytek
"DAISYTEK UK" means Daisytek UK Limited, a wholly-owned
subsidiary of Daisytek
"ENLARGED GROUP" OR means the Daisytek Group following the
"ENLARGED DAISYTEK UK acquisition of ISA pursuant to the Offer
GROUP"
"EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations
promulgated under it
159
"FORM OF ACCEPTANCE" means the form of acceptance relating to the
Offer
"INITIAL CLOSING DATE" means the latest time and date at which the
Offer, as so extended by Daisytek, will
expire or, if earlier, the time at which the
conditions of the Offer set out in Parts A
to C of Appendix I of this Offer Document
are satisfied or, to the extent permitted,
waived
"INITIAL OFFER PERIOD" means the period commencing on the date of
this Offer Document and expiring at 3.00 p.m.
(London time) on 13 June 2002, being the 21st
day after the posting of this Offer Document,
unless Daisytek UK, in its discretion and
subject to the Rules of the Code, shall have
extended the Offer, in which case the term
"Initial Closing Date" shall mean the latest
time and date at which the Offer, as so
extended by Daisytek UK will expire or, if
earlier, the time at which the conditions of
the Offer set out in Parts A to C of Appendix
I of this Offer Document are satisfied or, to
the extent permitted, waived
"ISA" means ISA International plc
"ISA CLOSING PRICE" means the middle market closing price for an
ISA Ordinary Share as derived from the AIM
section of the London Stock Exchange Daily
Official List
"ISA GROUP" means ISA and its Subsidiary Undertakings
"ISA ORDINARY SHARES" means ordinary shares of 5 pence each in the
capital of ISA
"ISA PREFERENCE SHARES" means the 8,000,000 variable rate convertible
cumulative redeemable preference shares of 10
pence each in the capital of ISA which mature
on 3 September 2006, all of which are
registered in the name of Daisytek UK
"ISA SHARE OPTION SCHEMES" means, together, the ISA International plc
No. 4 Share Option Scheme, the ISA
International plc 1999 Company Share Option
Scheme, the ISA International plc Unapproved
Share Option Scheme, the ISA International
Savings Related Share Option Scheme, the ISA
International plc Overseas Savings Related
Share Option Scheme, together with any other
option schemes or arrangements of ISA
"ISA SHAREHOLDERS" means the holders of ISA Ordinary Shares
"ISA SHARES TO WHICH THE OFFER means the existing unconditionally allotted
RELATES" or issued and fully paid ISA Ordinary Shares,
any further ISA Ordinary Shares which are
unconditionally allotted or issued while the
Offer remains open for acceptance (or prior
to such earlier date, not being earlier than
the Initial Closing Date, as Daisytek UK may,
subject to the approval of the Panel, decide)
except that it shall not include, for the
avoidance of doubt, any ISA Preference Shares
"JAPAN" means Japan, its territories and possessions
"KAYE" means Kaye Office Supplies Limited, a 47
per cent. associate of ISA
"KAYE SHAREHOLDERS AGREEMENT" means the agreement dated 3 September 1999
between 3i Group plc, Bay Industrial Holdings
Limited, ISA, certain managers of Kaye (as
defined therein) and Kaye
"KAYE SHARES" means the 3,387,791 issued ordinary shares of
L.1 each in the capital of Kaye registered
in the name of ISA which, at the date of this
Offer Document, comprise 47 per cent. of the
issued share capital of Kaye
"KINGFIELD HEATH" means Kingfield Heath Limited, a wholly-owned
subsidiary of Kaye
"LIBOR" means the London Inter-Bank Offered Rate
"LOAN FACILITY" means the loan facility entered into between
Daisytek UK and ISA, as described in
paragraph 5(1)(c) of Appendix V of this Offer
Document
160
"LONDON STOCK EXCHANGE" means the London Stock Exchange plc
"NASDAQ" means the computerised quotation system
sponsored by the National Association of
Securities Dealers
"NEW DAISYTEK RESTRICTED means the new shares of Daisytek Common Stock
COMMON STOCK" to be issued pursuant to the Restricted
Share Offer, and which are subject to certain
restrictions described in paragraphs 3 and 4
of Part 2 of this Offer Document
"OFFER" means the Cash Offer and the Restricted Share
Offer
"OFFER DOCUMENT" means this document means, in relation to the
Offer, the period commencing on 16 April 2002
and ending on whichever of the following
times shall be the latest: "Offer Period" (i)
3.00 p.m. (UK time) on 13 June 2002; (ii) the
time at which the Offer lapses; and (iii) the
time at which the Offer becomes unconditional
"OVERSEAS SHAREHOLDERS" means the holders of ISA Ordinary Shares
resident in, or nationals or citizens of,
jurisdictions outside the United Kingdom and
the United States or who are nominees of, or
custodians, trustees or guardians for,
citizens or nationals of other countries
"PANEL" means the UK Panel on Takeovers and Mergers
"PREFERENCE DIVIDEND" means the variable rate quarterly dividend
payable on the ISA Preference Shares
"REGISTRATION STATEMENT" means the Registration Statement on Form S-3
(or other applicable form) under the
Securities Act which Daisytek has undertaken
to use its reasonable commercial endeavours
to file with the SEC
"RESTRICTED COMMON STOCK means the L.:$ exchange rate, being 1:1.46,
EXCHANGE RATE" at close of business on 22 May 2002
"RESTRICTED SHARE OFFER" means the offer of 0.914 shares of New
Daisytek Restricted Common Stock for every
100 ISA Ordinary Shares as an alternative to
the Cash Offer made by Baird, on behalf of
Daisytek UK, on the terms and subject to the
conditions set out in this Offer Document
and, where the context admits, any subsequent
revision, variation, extension or renewal of
it
"SEC" means the United States Securities and
Exchange Commission
"SECURITIES ACT" means the United States Securities Act of
1933, as amended, and the rules and
regulations promulgated under it
"SIGNIFICANT INTEREST" means, in relation to a company, a direct or
indirect interest in 10 per cent. or more of
the equity share capital of that company (as
defined in the Act)
"SUBSCRIPTION AND SHAREHOLDERS means the agreement between Daisytek, ISA,
AGREEMENT" David Heap and Chisa dated 9 August 2001
"SUBSIDIARY UNDERTAKING" OR shall have the meanings given by the Act,
"ASSOCIATED UNDERTAKING" other than paragraph 20(1)(b) of Schedule 4A
to that Act which shall be excluded for this
purpose
"TREATY" means the US-UK double tax convention
relating to income and capital gains
"UK" OR "UNITED KINGDOM" means the United Kingdom of Great Britain
and Northern Ireland
"UK GAAP" means generally accepted accounting
principles as applied in the UK
"UNITED STATES", "US" or "USA" means the United States of America, its
territories and possessions, any state of the
United States of America and the District of
Columbia
"US GAAP" means generally accepted accounting
principles as applied in the US
161
"WARRANT" means the deed of warrant issued to Daisytek
UK by ISA under which it may subscribe for up
to 15,384,615 ISA Ordinary Shares for an
aggregate subscription price of L.2,000,000
"WIDER DAISYTEK UK means Daisytek, Daisytek UK and their
GROUP" Subsidiary Undertakings, Associated
Undertakings and any other undertaking in
which Daisytek, Daisytek UK and/or such
undertakings (aggregating their interests)
have a Significant Interest
"WIDER ISA GROUP" means ISA and its Subsidiary Undertakings,
Associated Undertakings and any other
undertaking in which ISA and/or such
undertakings (aggregating their interests)
have a Significant Interest
"$" OR "US$" means United States dollars
"L." means United Kingdom pounds sterling
162