SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (date of earliest event reported):
May 7, 2002
Daisytek International Corporation
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-25400 75-2421746
-------- ------------ -------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
1025 Central Expressway South, Suite 200
Allen, Texas 75013
(Address of Principal Executive Offices, including zip code)
(972) 881-4700
(Registrant's Telephone Number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
This Amendment to the Current Report on Form 8-K dated May 7, 2002 and filed on
May 22, 2002 by Daisytek International Corporation ("Daisytek") is submitted to
provide historical financial statements related to the acquisition of ISA
International plc ("ISA") and pro forma financial information giving effect to
the acquisition of ISA by Daisytek UK Limited, a wholly-owned subsidiary of
Daisytek.
On May 23, 2002, Daisytek mailed a recommended offer to shareholders of ISA, a
pan-European distributor of computer supplies, which owns 47% of Kaye Office
Supplies Limited, a subsidiary of which is Kingfield Heath Ltd., a U.K.-based
wholesaler of office products. Daisytek has received acceptances from ISA
shareholders totaling more than 90% of ISA ordinary shares and all conditions to
the offer have either been satisfied or waived. The cash offer for ISA ordinary
shares remained open until July 10, 2002 and Daisytek then exercised its rights
under U.K. law to pursue compulsory acquisition of the remainder of ISA ordinary
shares. The alternative offer to receive Daisytek common shares instead of cash
expired at the close of trading in the U.K. on June 27, 2002. On June 14, 2002,
Daisytek appointed three members to the board of ISA.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of business acquired
The following historical financial statements are filed
herewith:
<Table>
<Caption>
Page
----
Financial statements of ISA International plc as of F-1
and for the year ended December 31, 2001, in
accordance with UK Generally Accepted Accounting Principles
("GAAP"), with a reconciliation to US GAAP, audited by Ernst
& Young LLP in accordance with US Generally Accepted
Auditing Standards ("GAAS").
Financial statements of ISA International plc as of F-31
and for the two years ended December 31, 2000 in
accordance with UK GAAP, audited in accordance with UK
GAAS, including an unaudited reconciliation to US GAAP for
the year ended December 31, 2000.
The financial statements of ISA International plc for the
year ended December 31, 2000, including the unaudited
reconciliation to US GAAP, do not meet the technical
requirements of Form 8-K and Regulation S-X. The
Commission has granted Daisytek a 60-day extension from
July 22, 2002 to file an amendment to this Form 8-K/A to
include financial statements of ISA International plc for
the year ended December 31, 2000, including an audited
reconciliation to US GAAP, that do so comply.
</Table>
<Table>
Unaudited financial statements of ISA International F-83
plc as of and for the three months ended March 31, 2002,
including an unaudited reconciliation to US GAAP.
Financial statements of Kaye Office Supplies Limited F-92
as of and for the year ended December 31, 2001 in
accordance with UK GAAP audited by Arthur Andersen in
accordance with UK GAAS.
Unaudited financial statements of Kaye Office F-124
Supplies Limited for the three months ended March 31,
2002.
</Table>
(b) Pro forma financial information
Pro forma financial information required pursuant to
Article 11 of Regulation S-X as of March 31, 2002 and
for Daisytek's fiscal year ended March 31, 2002 are
filed herewith beginning on page P-1.
(c) Exhibits
23.1 Consent of Ernst & Young LLP.
The consents of Arthur Andersen to the inclusion of
its auditors' reports on the financial statements of
ISA International plc as of and for the two years
ended December 31, 2000 and the financial statements
of Kaye Office Supplies Limited for the year ended
December 31, 2001 are omitted pursuant to rules
promulgated by the United States Securities and
Exchange Commission. The Company has not been able to
obtain, after reasonable efforts, the written consent
to the reissuance of the Arthur Andersen audit
opinions for these previously issued reports.
Accordingly, investors in the Company will not have
legal recourse against Arthur Andersen and,
therefore, an investor's right of recovery, including
under Section 11(a)(4) of the Securities Act of 1933,
as amended, with respect to any Securities Act
registration statements of the Company, may be
limited as a result of the lack of consent to the
reissuance of Arthur Andersen's audit opinions.
99.1 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 (incorporated by reference from
Current Report on Form 8-K dated May 24, 2002 (File
No. 000-25400)).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ RALPH MITCHELL
--------------------------------------
Ralph Mitchell
Chief Financial Officer,
Executive Vice President - Finance
Dated: July 22, 2002
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma financial information of Daisytek International
Corporation (together with its subsidiaries, "Daisytek" or the "Company") gives
effect to the acquisition of ISA International plc ("ISA"), a pan-European
distributor of computer supplies, which indirectly owns 47% of Kingfield Heath
Ltd., a U.K.-based wholesaler of office products. The unaudited pro forma
balance sheet data at March 31, 2002 presents adjustments for the ISA
acquisition as if the transaction was completed on March 31, 2002. The unaudited
pro forma statement of operations data for the fiscal year ended March 31, 2002
present adjustments for the ISA acquisition as if the transaction had been
completed on April 1, 2001. Amounts included for ISA are based on U.S. GAAP.
British pounds balances are translated at the average exchange rates for the
related period of operations and for balance sheet amounts at the exchange rate
at March 31, 2002.
The purchase method of accounting has been used in the preparation of the
unaudited pro forma financial information. Therefore, the estimated aggregate
purchase price is allocated to assets acquired and liabilities assumed based on
their estimated fair values. For purposes of the unaudited pro forma financial
information, the purchase prices of the assets acquired have been allocated
based on preliminary estimates of fair value which are still being finalized.
The information presented herein may differ from the final purchase price
allocation; however, such allocations are not expected to differ materially from
the preliminary amounts.
The unaudited pro forma financial information should be read in conjunction with
the historical consolidated financial statements and the related notes thereto
of Daisytek which have previously been reported. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
acquisition of ISA had been consummated at the dates indicated, nor is it
indicative of the future operating results or financial position.
P-1
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT MARCH 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
PURCHASE
COMPANY ISA ACCOUNTING COMPANY
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 4,147 $ 6,083 $ -- $ 10,230
Accounts receivable, prepaid expenses and
other current assets ................................ 189,180 82,248 -- 271,428
Inventories, net ..................................... 115,377 32,498 -- 147,875
--------- --------- --------- ---------
Total current assets .......................... 308,704 120,829 -- 429,533
--------- --------- --------- ---------
Property and equipment, net ............................ 20,806 8,411 -- 29,217
Other assets ........................................... 30,010 1,252 (28,082)(a) 3,180
Goodwill, net .......................................... 54,870 36,993 (36,993)(b) 89,968
35,098 (c)
--------- --------- --------- ---------
Total assets .................................. $ 414,390 $ 167,485 $ (29,977) $ 551,898
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................... $ 7,069 $ 54,437 $ -- $ 61,506
Trade accounts payable, accrued expenses
and other current liabilities ....................... 98,293 74,147 (1,956)(d) 170,484
--------- --------- --------- ---------
Total current liabilities ..................... 105,362 128,584 (1,956) 231,990
Long-term debt, less current portion ................... 111,343 5,974 8,392 (e) 119,911
(5,798)(f)
Other liabilities ...................................... 1,665 144 -- 1,809
Commitments and contingencies
Redeemable preferred stock ............................. -- 10,043 (10,043)(g) --
Shareholders' equity:
Preferred stock ...................................... -- -- -- --
Common stock ......................................... 197 5,444 (5,444)(h) 198
1 (i)
Additional paid-in capital ........................... 117,946 26,182 (26,182)(h) 120,113
2,167 (i)
Retained earnings .................................... 103,268 (8,886) 8,886 (h) 103,268
Accumulated other comprehensive loss ................. (13,699) -- -- (13,699)
Treasury stock at cost ............................... (11,692) -- -- (11,692)
--------- --------- --------- ---------
Total shareholders' equity .................... 196,020 22,740 (20,572) 198,188
--------- --------- --------- ---------
Total liabilities and shareholders' equity ............. $ 414,390 $ 167,485 $ (29,977) $ 551,898
========= ========= ========= =========
</Table>
See accompanying notes to Unaudited Pro Forma Financial Information.
P-2
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
COMPANY ISA PRO FORMA COMPANY
HISTORICAL HISTORICAL(j) ADJUSTMENTS PRO FORMA
----------- ------------- ----------- -----------
Net revenues .......................................... $ 1,185,030 $ 521,111 $ (5,639)(k) $ 1,700,502
Cost of revenues ...................................... 1,059,539 444,403 (5,453)(k) 1,498,489
----------- ----------- ----------- -----------
Gross profit .................................. 125,491 76,708 (186) 202,013
Selling, general and administrative expenses .......... 90,710 76,402 (1,619)(l) 165,493
Restructuring and nonrecurring costs .................. 8,556 2,584 -- 11,140
----------- ----------- ----------- -----------
Income from operations ........................ 26,225 (2,278) 1,433 25,380
Interest expense, net ................................. 7,221 4,129 520 (m) 11,870
----------- ----------- ----------- -----------
Income from continuing operations before
income taxes ................................. 19,004 (6,407) 913 13,510
Provision for income taxes ............................ 7,066 435 320 (n) 7,821
----------- ----------- ----------- -----------
Income from continuing operations before
equity in net loss of affiliate .............. 11,938 (6,842) 593 5,689
Equity in net loss of affiliate ....................... -- (7,004) 1,173 (l) (5,831)
----------- ----------- ----------- -----------
Income from continuing operations ............. $ 11,938 $ (13,846) $ 1,766 $ (142)
=========== =========== =========== ===========
Net income per common share:
Basic .......................................... $ 0.75 $ (0.01)
Diluted ........................................ $ 0.69 $ (0.01)
Weighted average common and common share
equivalents outstanding:
Basic .......................................... 15,963 136 16,099
Diluted ........................................ 17,396 136 17,532
</Table>
See accompanying notes to Unaudited Pro Forma Financial Information.
P-3
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. PURCHASE PRICE
On May 23, 2002, the Company mailed a recommended offer to shareholders of ISA
which included a cash offer of 7.5 pence (approximately $0.11) in cash for each
ordinary share, with a share alternative of .914 shares of unregistered Daisytek
common stock for each share 100 shares of ISA common stock. Acceptances from
shareholders owning approximately 14.9 million ISA ordinary shares have selected
the alternative offer to receive unregistered Daisytek common shares instead of
cash, representing share consideration of 136,292 Daisytek common shares. For
purposes of the unaudited pro forma condensed combined financial statements, it
is assumed that the remainder of ISA shareholders will elect the cash offer. The
fair market value of common stock is calculated by using $15.91 per share which
is based on the market price of Daisytek common stock on March 31, 2002. The
estimated aggregate purchase price is summarized below (in thousands):
<Table>
Estimated cash purchase price......................................... $ 4,692
Estimated fair value of Daisytek common stock (136,292 shares at
$15.91 per share).................................................. 2,168
Prior investment in ISA............................................... 28,082
Estimated transaction costs........................................... 3,700
-------------
Estimated aggregate purchase price.................................... $ 38,642
=============
</Table>
NOTE 2. ALLOCATION OF PURCHASE PRICE
<Table>
(in thousands)
Cash............................................................... $ 6,083
Accounts receivable, prepaid expenses and other current assets..... 82,248
Inventories........................................................ 32,498
Property and equipment............................................. 8,411
Other assets....................................................... 1,252
Goodwill........................................................... 35,098
Current portion of long-term debt.................................. (54,437)
Trade accounts payable, accrued expenses and other current
liabilities...................................................... (72,191)
Long-term debt, less current portion............................... (176)
Other liabilities.................................................. (144)
-------------
Aggregate purchase price.............................................. $ 38,642
=============
</Table>
NOTE 3. PRO FORMA ADJUSTMENTS
The following are descriptions for the pro forma purchase accounting and other
merger-related adjustments, labeled (a) through (n), which have been reflected
in the accompanying Unaudited Pro Forma Combined Condensed Balance Sheet and the
Unaudited Pro Forma Combined Condensed Statement of Operations:
(a) Represents Daisytek's prior investment in ISA. Daisytek's
investment in ISA, including applicable acquisition costs, is
included in historical other assets in the Unaudited Pro Forma
Combined Condensed Balance Sheet at March 31, 2002 and has
been included in the determination of the total aggregate
purchase price of ISA detailed in Note 1. During September
2001, Daisytek invested 8.0 million British pounds, or
approximately $11.4 million, in preference shares of ISA
convertible into 50% plus one share of ISA at Daisytek's
option at any time over a period of five years. In addition to
the preference share investment, as of March 31, 2002, the
Company has advanced funds to ISA of approximately 11.7
million British pounds, or approximately $16.7 million,
including 3.1 million British pounds, or approximately $4.4
million, for pro-rata participation in a shareholder rights
issue by Kingfield Heath, and approximately 8.6 million
British pounds, or approximately $12.3 million, for working
capital purposes.
P-4
(b) Adjustment to eliminate the existing goodwill on ISA's
historical balance sheet.
(c) Adjustment to record goodwill allocated to ISA in the purchase
accounting allocation detailed in Note 2.
(d) Adjustment to eliminate trade accounts payable to Daisytek of
approximately $2.0 million reflected in ISA's historical
balance sheet.
(e) Reflects additional bank borrowings of approximately $8.4
million required to finance the cash portion of the purchase
price and estimated transaction costs of the ISA acquisition
(see Note 1).
(f) Adjustment to eliminate long-term debt payable to Daisytek of
approximately $5.8 million reflected in ISA's historical
balance sheet.
(g) Adjustment to eliminate the redeemable preferred stock of
approximately $10.0 million on ISA's historical balance sheet,
which represents the investment made by Daisytek in redeemable
preferred stock of ISA in September 2001.
(h) Reflects the elimination of historical ISA equity amounts.
(i) Reflects the issuance of 136,292 shares of Daisytek common
stock, par value $0.01, with an estimated fair value of $15.91
per share (see Note 1).
(j) Represents historical ISA results of operations for ISA's
fiscal year ended December 31, 2001 after adjustments to
reconcile U.K. GAAP to U.S. GAAP and conversion from British
pounds to U.S. dollars at the average exchange rate for the
period.
(k) Reflects the elimination of transactions between the Company
and ISA. During fiscal year 2002, the Company recorded sales
to ISA of approximately $5.0 million and purchases from ISA of
approximately $0.6 million. The intercompany transactions
included gross profit of approximately $0.2 million.
(l) 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. Adjustment eliminates goodwill amortization as included
in ISA's historical results of operations.
(m) Reflects the adjustment to record interest expense on cash
acquisition costs of approximately $8.4 million, including
estimated additional bank borrowings related to estimated
legal, accounting and other professional fees incurred by
Daisytek.
(n) Reflects the tax effects of the pro forma adjustments.
P-5
ISA INTERNATIONAL PLC
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors of ISA International PLC
We have audited the accompanying consolidated balance sheet of ISA International
PLC as of 31st December, 2001, and the related consolidated profit and loss
account, statement of total recognised gains and losses and statement of cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with United Kingdom auditing standards and
United States generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ISA
International PLC as of 31st December, 2001 and the consolidated results of its
operations and its consolidated cash flows for the year then ended in conformity
with accounting principles generally accepted in the United Kingdom which differ
in certain respects from those followed in the United States (see Note 30 of
Notes to the Financial Statements).
ERNST & YOUNG LLP
Leeds, England
18 July, 2002
F-1
ISA International plc
Consolidated Profit and Loss Account
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
<Table>
<Caption>
2001
NOTES L.000
TURNOVER 2, 3 361,554
-----------------
COST OF SALES (308,333)
-----------------
GROSS PROFIT 53,221
-----------------
OPERATING EXPENSES
Distribution costs - normal 5 (30,527)
- exceptional 4 (1,013)
-----------------
(31,540)
-----------------
Administrative expenses - normal 5 (21,301)
- exceptional 4 (709)
-----------------
(22,010)
-----------------
OPERATING LOSS 5 (329)
Share of associates' normal operating profit 6 1,001
Share of associates' exceptional operating items 6 (2,636)
Amortisation of goodwill arising on associates 14 (814)
Loss on disposal of associate 16b (71)
-----------------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION (2,849)
Interest receivable 7 128
Interest payable and similar charges 6, 8 (4,069)
-----------------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (6,790)
Tax on loss on ordinary activities 11 (631)
-----------------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION FOR THE FINANCIAL YEAR (7,421)
Dividends - Non-equity 12 (208)
-----------------
TRANSFER FROM RESERVES 24 (7,629)
-----------------
LOSSES PER ORDINARY SHARE 13
Basic (13.0)p
Before exceptional items 6 (6.1)p
Diluted (13.0)p
-----------------
</Table>
A summary of the significant adjustments to loss for the financial year that
would be required if United States generally accepted accounting principles were
to be applied instead of those generally accepted in the United Kingdom is set
forth in Note 30 of Notes to the Financial Statements.
The accompanying notes form an integral part of these Financial Statements
F-2
ISA INTERNATIONAL PLC
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
at 31st December, 2001
<Table>
<Caption>
2001
NOTES L.000
FIXED ASSETS
Intangible assets - goodwill 14 13,965
Tangible assets 15 5,777
Investments 16 2,297
------------------
22,039
------------------
CURRENT ASSETS
Stocks 17 22,320
Debtors 18 56,116
Cash at bank and in hand 4,178
------------------
82,614
CREDITORS DUE WITHIN ONE YEAR 19 (88,521)
------------------
NET CURRENT LIABILITIES (5,907)
------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 16,132
CREDITORS DUE AFTER MORE THAN ONE YEAR 20 (4,202)
------------------
NET ASSETS 11,930
------------------
CAPITAL AND RESERVES
Called up share capital 23 3,739
Share premium account 24 7,154
Merger reserve 24 5,069
Profit and loss account 24 (4,032)
------------------
11,930
------------------
Equity shareholders' funds 5,017
Non-equity shareholders' funds 6,913
------------------
TOTAL SHAREHOLDERS' FUNDS 11,930
------------------
</Table>
A summary of the significant adjustments to equity shareholders' funds that
would be required if United States generally accepted accounting principles were
to be applied instead of those generally accepted in the United Kingdom is set
forth in Note 30 of Notes to the Financial Statements.
The accompanying notes form an integral part of these Financial Statements
F-3
ISA International plc
Consolidated Cash Flow Statement
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
<Table>
<Caption>
2001
NOTES L.000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES 27a (9,159)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 27c (3,147)
TAXATION 27c (915)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT 27c (1,812)
ACQUISITIONS AND DISPOSALS 27c (3,285)
EQUITY DIVIDENDS PAID --
------------------
CASH OUTFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING
(18,318)
FINANCING 27c 10,537
------------------
DECREASE IN CASH IN THE YEAR (7,781)
------------------
</Table>
The significant differences between the cash flow statement presented above and
that required under United States generally accepted accounting principles are
set forth in Note 30 of Notes to the Financial Statements.
Consolidated Statement of Total
Recognised Gains and Losses
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
<Table>
<Caption>
2001
L.000
Loss for the financial year (7,421)
Translation differences on foreign currency net investments (92)
------------------
Total gains and losses recognised since the last annual report (7,513)
------------------
</Table>
The accompanying notes form an integral part of these Financial Statements
F-4
ISA INTERNATIONAL PLC
Notes to the Financial Statements
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
1 ACCOUNTING POLICIES
The principal accounting policies are summarised below. They have all
been applied consistently throughout the year.
a) BASIS OF PREPARATION
The Financial Statements are prepared under the historical
cost convention and in accordance with applicable United
Kingdom accounting standards.
The Financial Statements have been prepared on a going concern
basis which the Directors believe to be appropriate for the
reasons summarised below.
On 27 June, 2002 the acquisition by Daisytek of the entire
share capital of the Company, was completed.
The directors have prepared cash flow forecasts for the period
up to 31st December 2003, which show that the Group requires
further funding in order to be able to continue as a going
concern. Daisytek has agreed to provide the necessary
financial support to enable the Group to meet its liabilities
as they fall due.
In addition, Daisytek has confirmed that it will not require
payment of preference dividends until such time as funds are
available and that its entitlement to a Special Dividend (as
defined in the Company's Articles of Association) has been
waived.
b) 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 31st December, 2001.
The results of subsidiary undertakings acquired or disposed of
during the year are included from, or to, the date that
control passes to, or from, the Group.
c) GOODWILL
Goodwill arising on acquisitions, 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.
Goodwill that arose from acquisitions prior to 31st 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 re-instated in the balance sheet.
On the subsequent disposal or termination of a business
acquired since 1st January, 1998 the profit or loss on
disposal or termination is calculated after charging the
unamortised amount of any related goodwill.
F-5
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
1 ACCOUNTING POLICIES (CONTINUED)
d) TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost less 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:
<Table>
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
</Table>
e) 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 periodic rate of
charge on the capital outstanding. Rentals in respect of all
operating leases are charged to the profit and loss accounts
on a straight line basis over the term of the lease.
f) INVESTMENTS
Fixed asset investments are shown at cost less provision for
permanent diminution in value where appropriate.
g) 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 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.
h) 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. 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.
i) 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 an asset or
liability is expected to crystallise.
j) FOREIGN CURRENCIES AND RELATED DERIVATIVE FINANCIAL
INSTRUMENTS
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.
F-6
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
1 ACCOUNTING POLICIES (CONTINUED)
k) 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. 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.
2 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 consumable
products for the office.
<Table>
<Caption>
TURNOVER BY DESTINATION 2001
L.000
United Kingdom & Ireland 132,398
Continental Europe 176,066
Scandinavia 44,416
Other areas 8,674
------------
361,554
------------
</Table>
3 SEGMENTAL REPORTING
<Table>
<Caption>
UNITED KINGDOM CONTINENTAL
& IRELAND EUROPE SCANDINAVIA TOTAL
2001 2001 2001 2001
L.000 L.000 L.000 L.000
TURNOVER BY ORIGIN
Total sales 144,353 180,318 46,682 371,353
Inter-segment sales (2,872) (4,661) (2,266) (9,799)
----------- ----------- ----------- -----------
Sales to third parties 141,481 175,657 44,416 361,554
----------- ----------- ----------- -----------
LOSS BEFORE TAXATION
Segment operating
profit/(loss) before 5,589 (4,165) 1,072 2,496
exceptional items
Exceptional items (1,101) (301) -- (1,402)
----------- ----------- ----------- -----------
4,488 (4,466) 1,072 1,094
----------- ----------- -----------
Unallocated central costs : operating (1,103)
loss (320)
exceptional items
----------
Operating loss (329)
Share of associates' loss after exceptional items and goodwill (2,520)
amortisation
Net interest (3,941)
----------
GROUP LOSS BEFORE TAXATION (6,790)
----------
NET ASSETS
Segmental net assets 10,007 18,794 3,910 32,711
----------- ----------- ----------- ----------
Investments and goodwill 16,262
Unallocated liabilities (37,043)
----------
Total net assets 11,930
----------
Unallocated liabilities represent net borrowings and taxation, which are
not applicable to the operations of any individual segment.
</Table>
F-7
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
4 EXCEPTIONAL ITEMS
<Table>
<Caption>
2001
L.000
DISTRIBUTION COSTS
Relocation of distribution centre 939
Contract termination costs 74
---------------
1,013
---------------
ADMINISTRATIVE EXPENSES
Board and senior management settlements 592
Property and location rationalisation 117
---------------
709
---------------
Total before share of associates 1,722
Share of associates (Note 16a) 2,636
---------------
4,358
---------------
</Table>
5 OPERATING LOSS
<Table>
Operating loss is stated after charging:
Depreciation - on owned assets 1,670
- on hire purchase assets 388
Loss on disposal of fixed assets 1
Auditors' remuneration - audit 172
- other services 535
Operating lease rentals - land and buildings 2,225
- plant and machinery 1,535
</Table>
The auditors' remuneration figure given above for other services
provided in the year, 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 23 for further details), and preparation of other
necessary financial information and reports.
F-8
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
6 SHARE OF RESULTS OF ASSOCIATED UNDERTAKINGS
<Table>
<Caption>
2001
L.000
Operating profit (excluding exceptional items) 1,001
Net interest payable (1,076)
Exceptional items (Note 16) (2,636)
--------------
Loss before tax (2,711)
Tax (145)
--------------
Loss after tax (2,856)
--------------
</Table>
Further details are given in Note 16.
7 INTEREST RECEIVABLE
<Table>
Bank interest 58
Other interest 70
--------------
128
--------------
</Table>
8 INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
Bank loans and overdrafts 2,778
Hire purchase charges 26
Other interest 189
--------------
Total before share of associated undertakings 2,993
Share of associated undertakings 1,076
--------------
4,069
--------------
</Table>
9 DIRECTORS' REMUNERATION
<Table>
Executive Directors salary and fees 407
Performance related bonus 20
Fees for Non-Executive Directors 25
Compensation for loss of office 100
Other benefits 21
--------------
573
Contributions to money purchase pension schemes 18
--------------
591
--------------
</Table>
F-9
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
EXECUTIVE DIRECTORS' REMUNERATION
<Table>
<Caption>
B ROBINSON MJ MURPHY DA HEAP * TOTAL
L.000 L.000 L.000 L.000
Salary and fees 187 120 100 407
Benefits 10 11 -- 21
Bonus -- 20 -- 20
Pension -- 18 -- 18
Compensation for loss of office -- -- 100 100
----------- ----------- ----------- -----------
TOTAL 197 169 200 566
----------- ----------- ----------- -----------
</Table>
* resigned 31st December, 2001
<Table>
<Caption>
NON-EXECUTIVE DIRECTORS' REMUNERATION
2001
L.000
BV Triebel (resigned 26th June, 2001) 8
H Fristedt 17
-----------
25
-----------
</Table>
SHARE OPTIONS
In order to link an element of remuneration with long-term share
performance, the company operates discretionary share option schemes
for the Executive Directors and other senior management. Following
shareholder approval on 3rd September, 2001, the rules of the share
option schemes were amended to reflect the changed circumstances of the
Group. Options over 3,739,000 ordinary shares outstanding at that time
were surrendered and re-issued, of which 1,750,000 were to Directors.
Exercise of these options is subject to the satisfaction of performance
criteria. Options over a further 11,306,307 ordinary shares, (including
6,342,307 to Directors) exercisable subject to the same performance
criteria were granted during the year. Of these, options over 7,518,807
ordinary shares (including 4,042,307 to Directors) are subject to a
further condition that the Preference Shares must have been converted
to ordinary shares. Details of outstanding options are set out in Note
23 to the Financial Statements.
PENSIONS
The Group continues to operate a defined contribution pension scheme
for senior employees in the UK.
SERVICE CONTRACTS
The Executive Directors have service contracts terminable on twelve
months' notice. In the case of Mr B Robinson, this notice may not be
served before 31st December, 2002.
F-10
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
NON-EXECUTIVE DIRECTORS
Independent Non-Executive Directors are appointed for an initial period
of three years, following which their appointment is reviewed annually.
Details of the amounts paid to Non-Executive Directors are set out on
the previous page. There are no pension arrangements for the
Non-Executive Directors, nor do they participate in any share option
scheme.
DIRECTORS' INTERESTS
According to the register maintained under the Companies Act 1985 the
interests (all of which were beneficial), of the Directors in office at
31st December, 2001 (and their immediate families) in the issued share
capital of the Company were as shown in the table below.
<Table>
<Caption>
21ST MAY, 2002 31ST DECEMBER, 2001 1ST JANUARY, 2001
ORDINARY SHARES OF 5p ORDINARY SHARES OF 5p ORDINARY SHARES OF 5p
EACH EACH EACH
B Robinson -- -- --
MJ Murphy 120,000 120,000 120,000
H Fristedt 90,000 90,000 90,000
</Table>
DIRECTORS' SHARE OPTIONS
Options held by the Directors to subscribe for the Company's ordinary
shares are shown in Note 24 to the Financial Statements.
10 PARTICULARS OF EMPLOYEES
<Table>
<Caption>
2001
NUMBER
The average monthly number of persons employed by the Group during the
year was:
Sales 642
Administration 301
Distribution 217
--------------
1,160
--------------
<Caption>
L.000
Staff costs, including Executive Directors' remuneration, during the year
amounted to:
Wages and salaries 23,071
Social security costs 4,441
Pension costs 270
--------------
27,782
--------------
</Table>
F-11
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
11 TAX ON LOSS ON ORDINARY ACTIVITIES
<Table>
<Caption>
2001
L.000
UK Corporation tax at 30% 1,115
Double taxation relief (893)
Transfer (from)/to deferred tax (52)
Overseas taxation 505
Share of associates' tax 145
Adjustment relating to prior years - UK Corporation tax (189)
-----------
631
-----------
</Table>
The tax charge for the year has been reduced by tax relief in respect
of exceptional items amounting to L.394,000
12 DIVIDENDS
<Table>
NON-EQUITY - PREFERENCE SHARES
Declared (see Note 24) 208
-------------
</Table>
F-12
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
13 LOSSES 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 and on 58.8
million ordinary shares, being the weighted average number of shares in
issue during the year.
The calculation of loss before exceptional items per ordinary share is
based on a loss of L.3,594,000 arrived at as follows:
<Table>
<Caption>
2001
L.000
Loss after taxation and non-equity dividends (7,629)
Exceptional items (Note 4) 4,358
Tax effect of exceptional items (Note 11) (394)
Loss on disposal of associate 71
-----------
Loss before exceptional items (3,594)
-----------
</Table>
The calculation of diluted loss per ordinary share is also based on
58.8 million ordinary shares, as the outstanding warrant and share
options have no dilutive effect.
14 GOODWILL
<Table>
<Caption>
L.000
COST
At 1st January, 2001 15,989
Additions 292
Disposals (565)
-----------
AT 31ST DECEMBER, 2001 15,716
-----------
AMORTISATION
At 1st January, 2001 996
Charge for the year 814
Disposals (59)
-----------
AT 31ST DECEMBER, 2001 1,751
-----------
NET BOOK VALUE AT 31ST DECEMBER, 2001 13,965
-----------
</Table>
F-13
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
14 GOODWILL (CONTINUED)
All of the goodwill arose on the acquisition of the associated
undertakings, and therefore the amortisation is shown in the Profit and
Loss Account after the operating loss in accordance with Financial
Reporting Standard 9.
An impairment review has been performed 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%. This review demonstrated that no provision is
required in relation to this investment.
15 TANGIBLE FIXED ASSETS
<Table>
<Caption>
FIXTURES
FREEHOLD LEASEHOLD PLANT AND AND
BUILDINGS IMPROVEMENTS MACHINERY FITTINGS TOTAL
L.000 L.000 L.000 L.000 L.000
COST
At 1st January, 2001 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 31ST DECEMBER, 2001 328 781 6,776 5,617 13,502
----------- ----------- ----------- ----------- -----------
DEPRECIATION
At 1st January, 2001 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 31ST DECEMBER, 2001 140 261 4,495 2,829 7,725
----------- ----------- ----------- ----------- -----------
NET BOOK VALUE AT 31ST DECEMBER
2001 188 520 2,281 2,788 5,777
----------- ----------- ----------- ----------- -----------
</Table>
The net book value of tangible fixed assets includes L.350,000 in
respect of assets held under hire purchase or finance lease contracts.
F-14
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
16 INVESTMENTS
<Table>
<Caption>
L.000
INVESTMENT IN ASSOCIATED UNDERTAKINGS
At 1st January, 2001 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 31ST DECEMBER, 2001 2,297
-----------
</Table>
a) KAYE OFFICE SUPPLIES LIMITED ("KAYE")
Kaye is a private company registered in England. The Group
acquired a holding of 46.85% of the issued ordinary L.1 shares
on 30th September, 1999. This percentage shareholding was
increased to 47% earlier in the year 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 12th 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 year
ended 31st December, 2001 and the share attributable to the
Group comprises:
<Table>
<Caption>
GROUP SHARE KAYE
2001 2001
L.000 L.000
Turnover 97,245 206,904
------------- -------------
(Loss) before exceptional items, amortisation (432) (918)
of goodwill and tax
Exceptional items (2,636) (5,609)
Amortisation of goodwill -- (308)
------------- -------------
Loss before tax (3,068) (6,835)
Tax -- --
------------- -------------
Loss after tax (3,068) (6,835)
------------- -------------
</Table>
F-15
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
16 INVESTMENTS (CONTINUED)
a) KAYE OFFICE SUPPLIES LIMITED ("KAYE") (CONTINUED)
The table below summarises the exceptional items incurred by
Kaye, and the share attributable to the Group in 2001:
<Table>
<Caption>
GROUP SHARE KAYE
2001 2001
L.000 L.000
Integration costs following the acquisition of
John Heath (Holdings) Limited
Integration costs 170 361
----------- -----------
Costs of a 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 201 429
refinancing
----------- -----------
2,466 5,248
----------- -----------
Total exceptional items for Kaye 2,636 5,609
----------- -----------
</Table>
Arrow is the new automated distribution centre, located in Lutterworth,
Leicestershire.
The summarised balance sheet of Kaye at 31st December, 2001 and the
share attributable to the Group comprises:
<Table>
<Caption>
GROUP SHARE KAYE
2001 2001
L.000 L.000
Fixed assets 5,679 12,083
Investments 5 10
Goodwill -- 5,455
Current assets 30,999 65,957
------------- -------------
36,683 83,505
Creditors due within one year (33,131) (70,492)
Creditors due after one year and provisions (1,255) (2,669)
------------- -------------
EQUITY SHAREHOLDERS' FUNDS 2,297 10,344
------------- -------------
</Table>
F-16
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
16 INVESTMENTS (CONTINUED)
b) EXY GROUP LIMITED ("EXY")
EXY is a private company registered in England. On 24th
December, 2001, the Group disposed of the whole of the 32%
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% preference shares of L.1 each, redeemable in
equal amounts on 30th April and 31st 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 (see
Notes 15 and 17 for further details), 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.
EXY is the parent undertaking of a group of companies whose
trading activities principally consist of the recycling,
manufacture and distribution of consumable products for the
office.
F-17
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
17 STOCKS
Stocks comprise finished goods and goods held for resale.
18 DEBTORS
<Table>
<Caption>
2001
L.000
GROUP
Trade debtors 50,432
Amounts owed by associated undertakings 6
Other debtors 1,900
Prepayments and accrued income 2,706
Corporation tax recoverable 628
Short term investments (see Note 16b) 444
-----------
56,116
-----------
</Table>
19 CREDITORS DUE WITHIN ONE YEAR
<Table>
Bank loans and overdrafts (see Note 22) 37,066
Obligations under hire purchase and finance lease contracts (see Note 22) 322
Trade creditors 38,549
Corporation tax payable 358
Other taxes and social security 3,094
Other creditors 3,846
Accruals and deferred income 5,078
Dividends payable 208
-----------
88,521
-----------
</Table>
Banks loans and overdrafts amounting to L.15,944,000 are secured by
fixed and floating charges over the assets of the Company and its
subsidiary undertakings in the UK and bear interest at rates linked to
LIBOR. Bank loans and overdrafts amounting to L.20,846,000 are secured
by charges over the assets of certain overseas subsidiary undertakings.
F-18
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
20 CREDITORS DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
2001
L.000
GROUP
Medium terms loans (see Note 22) 3,982
Obligations under hire purchase and finance lease contracts (see Note 22) 121
Other creditors 99
-----------
4,202
-----------
</Table>
21 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Group's treasury policy is outlined in note 1 j)
FINANCIAL ASSETS
The Group has no financial assets other than short-term debtors and
cash at bank.
FINANCIAL LIABILITIES
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>
2001
L.000
Sterling (6,054)
Euro based currencies (30,204)
Other currencies (808)
------------
(37,066)
------------
</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, linked to relevant national
LIBOR or base rate equivalents. All facilities are uncommitted.
F-19
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
21 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
The maturity profile of the Group's financial liabilities as at 31st
December, 2001 was:
<Table>
<Caption>
FINANCE LEASE AND
BANK LOANS AND MEDIUM TERM HIRE PURCHASE
OVERDRAFTS LOANS OBLIGATIONS
2001 2001 2001
L.000 L.000 L.000
In one year or less, or on demand 37,066 -- 322
In more than one year, but less than two years -- 3,982 121
In more than two years, but less than five -- -- --
years
------------- ------------- -------------
37,066 3,982 443
------------- ------------- -------------
</Table>
FAIR VALUES OF FINANCIAL INSTRUMENTS
At 31st December, 2001, 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.
22 PROVISIONS FOR LIABILITIES AND CHARGES
<Table>
<Caption>
L.000
DEFERRED TAXATION
At 1st January, 2001 81
Transfer to profit and loss account (52)
Exchange adjustments (29)
-------------
AT 31ST 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 2001
L.000 L.000
Accelerated capital allowances (273) (273)
Other timing differences 273 273
----------- -----------
-- --
----------- -----------
</Table>
F-20
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
23 CALLED UP SHARE CAPITAL
<Table>
<Caption>
2001
L.000
Authorised:
175,000,000 Ordinary shares of 5p each (2000: 80,000,000) 8,750
80,000,000 variable rate convertible cumulative redeemable preference shares 8,000
2006 of 10p each
-------------
16,750
-------------
Allotted, called up and fully paid:
58,778,398 Ordinary shares of 5p each (2000: 58,778,398) 2,939
8,000,000 variable rate convertible cumulative redeemable preference shares
2006 of 10p each 800
-------------
3,739
-------------
</Table>
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 3rd 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 6th May, 2002. Daisytek have waived these
rights under the terms of an event of default, subsequent to the agreed
offer for the group being accepted.
WARRANT
A warrant was issued to Daisytek UK Limited on the 3rd 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.
F-21
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
23 CALLED UP SHARE CAPITAL (CONTINUED)
Under the terms of the Approved and Unapproved Share Option Schemes of
ISA INTERNATIONAL plc, options to subscribe for ordinary shares were
outstanding at 31st December, 2001 as follows:
<Table>
<Caption>
EXERCISABLE BETWEEN EXERCISE PRICE NO. OF SHARES
------------------- -------------- -------------
1st January, 2002 and 15th March, 2002 * 97 p 39,725
1st January, 2002 and 7th September, 2004 * 150 p 20,000
1st January, 2002 and 29th June, 2010 26 3/4 p 30,000
24th March, 2002 and 23rd March, 2009 36 p 56,625
1st April, 2002 and 29th June, 2010 26 3/4 p 892,000
1st April, 2003 and 29th June, 2010 26 3/4 p 25,000
1st April, 2003 and 14th October, 2011 13 p 3,078,000
9th November, 2003 and 8th November, 2010 23 3/4 p 536,500
9th November, 2003 and 14th October, 2011 13 p 661,000
15th October, 2004 and 14th October, 2011 13 p 3,787,500
15th October, 2004 and 14th October, 2011 + 13 p 7,518,807
</Table>
Other than those marked *, the above options are subject to performance
criteria, which had not been satisfied at 31st 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.
Included in the above are options held by Directors as follows:
<Table>
<Caption>
AT 1ST AT 31ST EXERCISE
DIRECTOR JAN, 2001 GRANTED SURRENDERED DEC, 2001 PRICE EXERCISABLE BETWEEN
-------- --------- --------- ----------- ---------- --------- ----------------------------------
B Robinson 500,000 -- (500,000) -- 26 3/4 p Surrendered
500,000 -- (500,000) -- 26 3/4 p Surrendered
-- 1,000,000 -- 1,000,000 13 p 1st Apr, 2003 and 14th Oct, 2011
-- 1,200,000 -- 1,200,000 13 p 15th Oct, 2004 and 14th Oct, 2011
-- 2,200,000 -- 2,200,000 13 p 15th Oct, 2004 and 14th Oct, 2011+
MJ Murphy 500,000 -- (500,000) -- 26 3/4 p Surrendered
250,000 -- (250,000) -- 23 3/4 p Surrendered
-- 500,000 -- 500,000 13 p 1st Apr, 2003 and 14th Oct, 2011
-- 250,000 -- 250,000 13 p 9th Nov, 2003 and 14th Oct, 2011
-- 1,100,000 -- 1,100,000 13 p 15th Oct, 2004 and 14th Oct, 2011
-- 1,842,307 -- 1,842,307 13 p 15th Oct, 2004 and 14th Oct, 2011+
</Table>
F-22
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
23 CALLED UP SHARE CAPITAL (CONTINUED)
Under the terms of the Savings Related Share Option Scheme of ISA
INTERNATIONAL plc, options to subscribe for ordinary shares were
outstanding at 31st December, 2001 as follows:
<Table>
<Caption>
EXERCISABLE BETWEEN EXERCISE PRICE NO. OF SHARES
---------------------------------------------------- ------------------ --------------------------------------
1st August, 2002 and 31st January, 2003 35 p 555,334
1st July, 2003 and 31st December, 2003 25 1/2 p 489,447
</Table>
The market price of the shares at 31st December, 2001 was 6 1/4 p and
the range during 2001 was 5 3/4 p to 20 1/4 p.
24 RESERVES
<Table>
<Caption>
PROFIT AND
SHARE PREMIUM MERGER OTHER LOSS
ACCOUNT RESERVE RESERVES ACCOUNT
L.000 L.000 L.000 L.000
At 1st January, 2001 1,041 5,069 -- 3,689
Premium on shares issued 6,113 -- -- --
Loss for the year -- -- -- (7,629)
Exchange adjustments -- -- -- (92)
----------- ----------- ----------- -----------
AT 31ST DECEMBER, 2001 7,154 5,069 -- (4,032)
----------- ----------- ----------- -----------
</Table>
The premium arising 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 31st December, 2001 was
L.23,202,000.
F-23
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
25 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<Table>
<Caption>
2001
L.000
Loss after taxation for the year (7,421)
Dividends - Non-equity (208)
--------------
(7,629)
Other recognised net gains and losses relating to the year (92)
New share capital subscribed (net of costs) 6,913
--------------
Net deduction from shareholders' funds (808)
Opening shareholders' funds 12,738
--------------
Closing shareholders' funds 11,930
--------------
</Table>
26 FINANCIAL COMMITMENTS
The annual commitment of the Group under non-cancellable operating
leases was as follows:
<Table>
<Caption>
LAND AND BUILDINGS PLANT AND MACHINERY
2001 2001
L.000 L.000
Leases expiring:
Within one year 575 81
Within two to five years 560 1,329
After five years 1,612 --
------------- -------------
2,747 1,410
------------- -------------
</Table>
At 31st December, 2001, the Group had no commitment to future capital
expenditure.
27 CASH FLOW STATEMENT
a) RECONCILIATION OF OPERATING LOSS TO NET CASH (OUTFLOW)/INFLOW FROM
OPERATING ACTIVITIES
<Table>
<Caption>
2001
L.000
Operating loss (329)
Depreciation 2,058
Loss on sale of tangible fixed assets 1
Increase in stocks (3,832)
Increase in debtors (8,929)
Increase in creditors 1,872
-------------
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (9,159)
-------------
</Table>
F-24
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
27 CASH FLOW STATEMENT (CONTINUED)
b) ANALYSIS OF NET CASH OUTFLOW FROM EXCEPTIONAL ITEMS
<Table>
<Caption>
Operating loss (1,722)
Decrease in creditors (48)
----------
NET CASH OUTFLOW FROM EXCEPTIONAL ITEMS (1,770)
----------
</Table>
c) ANALYSIS OF CASH FLOWS NETTED IN THE CASH FLOW STATEMENT
<Table>
<Caption>
2001
L.000
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 125
Interest paid (3,235)
Interest element of hire purchase and finance lease payments (37)
----------
(3,147)
----------
TAXATION
UK Corporation tax paid (224)
Overseas tax paid (691)
----------
(915)
----------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (1,903)
Proceeds of sale of tangible fixed assets 91
----------
(1,812)
----------
ACQUISITIONS AND DISPOSALS
Investment in associate (3,285)
----------
(3,285)
----------
FINANCING
Issue of share capital 6,913
New loans 3,982
Capital element of hire purchase and finance lease payments (358)
----------
10,537
----------
</Table>
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
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>
F-25
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
27 CASH FLOW STATEMENT (CONTINUED)
e) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<Table>
<Caption>
2001
L.000
Decrease in cash in the year (7,781)
Cash outflow from decrease in debt and lease financing 358
New loans (3,982)
-----------
Change in net debt resulting from cash flows (11,405)
Translation difference (74)
-----------
MOVEMENT IN NET DEBT IN THE YEAR (11,479)
Net debt at 1st January, 2001 (25,834)
-----------
NET DEBT AT 31ST DECEMBER, 2001 (37,313)
-----------
</Table>
28 RELATED PARTY TRANSACTIONS
<Table>
<Caption>
During the year the Group purchased goods or services in the ordinary
course of business from the following related parties:
EXY Group Limited and subsidiary undertakings ("EXY") 5,433
Daisytek International Corporation and subsidiary undertakings ("Daisytek") 17
Virtual Village Limited 7
During the year the Group sold goods in the ordinary course of business
to the following related parties:
Daisytek 2,580
Kaye 269
Virtual Village Limited 31
Torres Limited 11
2
</Table>
Kaye and EXY are related parties as they are or have been associated
undertakings during the year (see Note 17 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 10p 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 provided goods for
re-sale.
F-26
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
28 RELATED PARTY TRANSACTIONS (CONTINUED)
<Table>
<Caption>
2001
L.000
The following balances are included in debtors
TRADE DEBTORS:
EXY 449
--------
449
--------
The following balances are included in creditors
TRADE CREDITORS:
EXY 641
Daisytek 15
--------
656
--------
ACCRUALS AND DEFERRED INCOME:
Daisytek 140
--------
MEDIUM TERM LOANS:
Daisytek 3,982
--------
</Table>
29 SUBSEQUENT EVENTS
On 22nd January 2002, the Group disposed of the whole of the share
capital of its Austrian subsidiary, Supplies Team EDV-Zubehor Handel
GmbH ("ST Austria"), for a total cash consideration of Pound Sterling
1,432,000, of which L.698,000 was used to settle intra-group balances.
During the year ST Austria contributed Pound Sterling 7,408,000 to
Group turnover and generated a profit before tax of L.65,000. Its net
assets at 31st December 2001 were L.549,000.
On 27 June 2002 the acquisition by Daisytek UK Limited, a wholly owned
subsidiary of Daisytek International Corporation, of the entire share
capital of ISA International plc was completed.
F-27
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
30 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES
SUMMARY OF DIFFERENCES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("UK
GAAP") which differ in certain respects from United States generally
accepted accounting principles ("US GAAP"). Those differences which
have a significant effect on the Group's net income and shareholders
equity are as follows:
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to 1998 goodwill arising on acquisitions was set off against
reserves. On disposal of such businesses, goodwill previously set off
against reserves is charged to profit or loss on disposal. Since 1998,
goodwill and other intangible fixed assets purchased by way of
acquisition have been capitalised and written off over a period not
exceeding 20 years. Under US GAAP, goodwill and other intangible fixed
assets would be capitalised and amortised over their expected useful
lives, which typically in the case of goodwill should not exceed 40
years. Goodwill on certain acquisitions may have become impaired
between the date of acquisition and the date of the financial
statements. In such cases, under US GAAP, the amount of the impairment
would be deducted from cost. Under US GAAP an amount of Pound
Sterling 2,411,000 would have been written off at 31st December 2000.
ACCOUNTING FOR INVESTMENTS IN ASSOCIATED UNDERTAKINGS
Investments in associated undertakings are accounted for using the
equity method under which the Group's share of their income is included
in the Group's income statement on a line by line basis below operating
profit. Under US GAAP, investments in associated undertakings would be
accounted for using the equity method under which the Group's share of
their after tax income is included in the Group's income statement in
one line.
FORWARD FOREIGN EXCHANGE CONTRACTS
Forward foreign exchange contracts in respect of anticipated future
transactions are treated as hedges and gains and losses on valuing such
contracts at the forward rates at the balance sheet date are not
recognised in income for the year. Under US GAAP, gains and losses at
the balance sheet date would be included in net income.
DIVIDENDS
Dividends are provided for in the financial statements for the period
to which they relate and, in the case of proposed final dividends, on
the basis of proposals by the directors. Under US GAAP, dividends would
be provided for in the financial statements in the period in which they
are declared.
REDEEMABLE PREFERENCE SHARES AND WARRANTS
Redeemable preference shares are recorded in shareholders' equity for
UK GAAP. Under US GAAP these would not be treated as shareholders'
equity. As explained in note 23, a warrant was issued to Daisytek at
the same time as the redeemable preference shares. Under UK GAAP none
of the consideration received has been allocated to the warrant but all
relates to the issue of redeemable preference shares. Under US GAAP, a
value would be attributed to the warrant based upon a calculation as at
the date of issue. This value would be treated as shareholders' equity.
PROVISION FOR RESTRUCTURING COSTS
Provisions for restructuring, including ongoing costs of vacant
properties, is made when each element of the restructuring is
implemented and properties become vacant. Under US GAAP, costs
associated with a restructuring, including ongoing costs of vacant
properties, would be provided at the time that management approves and
commits to the specific restructuring plan.
TAXATION
Deferred taxation is provided using the liability method on timing
differences between the taxable allowances and related accounting
treatments where these are regarded as likely to crystallise in the
foreseeable future. Under US GAAP deferred taxation would be recognised
on all temporary differences. No adjustments have been made for
deferred taxation. The amounts provide under UK GAAP are consistent
with the amounts that would be provided under US GAAP and therefore no
adjustment has been recognised.
F-28
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
30 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES (CONTINUED)
EFFECT OF DIFFERENCES
The effect of the significant adjustments to net income and to
shareholders' equity in 2001, that would be required if US GAAP were to
be applied instead of UK GAAP is summarised as follows:
NET INCOME
<Table>
<Caption>
2001
L.000
Loss for the financial year as reported in the consolidated
profit and loss account (7,421)
Adjustments:
Amortisation of goodwill (1,123)
Unrecognised forward foreign exchange gains/(losses) (58)
Provision for restructuring (1,437)
Deferred taxation on US GAAP adjustments 431
----------
Net loss as adjusted to accord with US GAAP (9,608)
----------
Undiluted earnings per share (16.3) p
Diluted earnings per share (16.3) p
</Table>
COMPREHENSIVE INCOME
<Table>
<Caption>
2001
L.000
Net income as adjusted to accord with US GAAP (9,608)
Other comprehensive income:
Translation differences on foreign currency net investments (92)
----------
Comprehensive income (9,700)
----------
</Table>
SHAREHOLDERS' EQUITY
<Table>
<Caption>
2001
L.000
Shareholders' funds as reported in the consolidated balance sheet 11,930
Adjustments:
Goodwill cost 20,790
amortisation (9,348)
Proposed final dividend 208
Current asset derivatives (58)
Redeemable preference shares (6,898)
Provision for restructuring (1,437)
Deferred taxation on US GAAP adjustments 431
----------
Shareholders' equity as adjusted to accord with US GAAP 15,618
----------
</Table>
F-29
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the year ended 31st December, 2001
30 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES (CONTINUED)
CONSOLIDATED STATEMENT OF CASHFLOWS
The US GAAP cash flow statement reports changes in cash and cash
equivalents, which includes short term highly liquid investments. Under
UK GAAP, cashflows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, investing
activities and financing activities. US GAAP requires only three
categories of cash flow activity to be reported: operating, investing
and financing. Cashflows from taxation and returns on investments and
servicing of finance shown under UK GAAP would be included as operating
activities under US GAAP. The categories of cash flow activity under US
GAAP are summarised as follows:
<Table>
<Caption>
2001
L.000
Cashflows from operating activities (13,221)
Cashflows from investing activities (5,097)
Cashflows from financing activities 18,417
---------
Increase/(decrease) in cash and cash equivalents 99
Exchange adjustments (74)
Cash and cash equivalents at beginning of year 4,153
---------
Cash and cash equivalents at end of year 4,178
---------
</Table>
F-30
ISA INTERNATIONAL PLC
Annual Report and Accounts 2000
F-31
CONTENTS
<Table>
Chief executive's report F-33
Financial review F-40
Directors' report F-46
Group profit and loss account F-56
Group balance sheet F-57
Company balance sheet F-58
Group cash flow statement F-59
Group statement of total recognised gains and losses F-59
Notes to the financial statements F-60
Auditors' report F-82
</Table>
F-32
CHIEF EXECUTIVE'S REPORT
Summary
The challenges the Group faced when I joined the Board in January 2000,
initially as Chief Operating Officer, and subsequently as Chief Executive
Officer, were significant:
o expand and implement throughout Europe the highly profitable business model
that I had been developing in the UK during the second half of 1999
o review the performance of the outsourced logistics contract which had
commenced in October 1999. The outcome of this review, was the decision to
return this half of the Group's sales volume to ISA controlled logistics
o implement a robust e-commerce programme that would surpass competitor
offerings and satisfy customer and vendor needs
2000 was a year of contrasting financial performance for ISA: record profits in
the UK and Ireland were offset by significant losses incurred in Continental
Europe. The European outsourced logistics partner failed to attain customer
service performance or financial controls satisfactory to ISA. The contract was
therefore terminated in September 2000 and logistics was re-established as an
ISA core competence in both Germany and France. The consequential impact of the
European logistics failure was that Group turnover only grew by 3% to L.296.8
million (1999 continuing operations: L.288.0 million) whilst operating losses,
excluding non-recurring costs and before our share of associates, were L.0.6
million (1999 continuing operations: L.2.2 million operating profit). One-off
costs directly attributable to the outsourced European logistics contract
amounted to L.7.2 million (total non-recurring items excluding associates: L.7.7
million).
The Group has returned to an operating profit in the first quarter of 2001.
Turnover increased by 25% against the same quarter in 2000, with the UK and
Ireland increasing their record profit performance, Sweden and Norway producing
good profits and the losses of Germany and France in rapid decline. All
countries are now enabled with both Internet and Electronic Data Interchange
("EDI") processes. Customer e-commerce orders represented 12% of transactions
for the quarter. The Hybrid business model fully developed in the UK during 2000
now provides the platform for Group-wide future success. I genuinely believe
that ISA is now well positioned to exploit its leading position in the changed
environment of the European Electronic Office Supplies ("EOS") market. I have
expanded on the business rationale below.
In order to strengthen the balance sheet (weakened by the losses incurred in
Germany and France), to help ISA grow and to seize commercial opportunities as
and when they arise in the future, the Board carefully considered alternative
investment options. We determined that the correct solution combined equity
capital injection with strategic added value. Following extensive discussions
with a number of interested parties, we were pleased to announce on 30th April,
2001 that Heads of Agreement had been signed with a global trade partner who
proposed to make a cash investment of L.10 million in ISA. This investment will
be in the form of a convertible redeemable instrument, which can, inter alia,
convert over the next five years into ordinary shares of ISA representing 50%
plus one share of the Company's existing share capital, reflecting a conversion
price of circa 16p per ordinary share. The proposal is subject to shareholder
approval and further details will be set out in a circular which is anticipated
to be mailed to shareholders shortly after this report.
F-33
Hybrid Business Model
This distributor definition is relatively new to the US and European EOS market.
It refers to "evolved" distributors that have multi-channel sales capability,
which is highly attractive to the Original Equipment Manufacturers ("OEMs") who
favour a reduced number of specialist distributors with broad geographical
coverage. I believe the Hybrid business model is an increasingly important
attribute of ISA, indeed today, it is one of our most important differential
advantages. In the world of the "low cost provider", this model is fundamental
to re-establishing a strong profit performance throughout the Group.
The European EOS market has developed to the extent that there is now more
overlap between channels. The emergence of e-commerce portals has reinforced
this trend. The ISA Hybrid business model was fully developed in the UK during
2000 to capitalise on these market changes; re-focus on the core competencies of
sales, marketing and logistics; and to maximise ISA's significant presence in
the three principal sales channels:
o Direct - Corporate, Government, Education, Health and SME customers
o Wholesale - Contract Stationers and Computer Supplies Re-sellers
o Retail - Major Supermarket Chains and Computer Supplies Retailers
The business model maximises growth opportunities in both existing and emerging
markets; leverages OEM distribution agreements; balances sales volume with sales
margin - all within a low cost infrastructure. The charts to the left
demonstrate the differential revenue and margin characteristics of the Hybrid
business model. Value added, high quality distribution solutions have an
increasing appeal to customers seeking to reduce transaction costs, particularly
during an economic slow-down. Success with this model in the UK was both
immediate and dramatic. As we roll out the Hybrid model across Group operations,
we will be continually monitoring our "low cost provider" status.
[CHANNEL SALES MIX CHART]
[GROSS PROFIT MIX CHART]
Senior Management
In early 2000 an Operational Board was created which now consists of:
o Country Managing Directors with full Profit & Loss responsibility
o European Functional Directors in Marketing, Logistics, Purchasing, IT and
Finance
o European e-commerce team to drive Internet and EDI programmes
All internal and external appointments were completed by September 2000. Due to
the skills and commitment of the Operational Board members we were able to
overcome many significant problems in 2000. I believe the Group now enjoys the
correct managerial capabilities to support the essential core competencies
required to improve profitability.
F-34
Vendors
The graph to the right illustrates the importance of long-standing partnership
arrangements with all the key OEMs. During 2000, I undertook to improve our
strategic dialogue and maximise the support programmes available on both a local
country and European level. In October we held our first European Vendor
Conference and gained encouraging support for our strategic plans, and in
particular the Hybrid business model. The Board very much appreciated the
participation of OEMs in the European recovery plan. With logistics
re-established as a core competence, the Group was able to develop a number of
initiatives launched in conjunction with OEMs to address global market changes
in customer procurement requirements for EOS. During the third and fourth
quarters, e-commerce programmes were trialled in the UK and Sweden that focused
on the reduction of back-room costs and working capital, whilst improving
product availability through just-in-time supply chain solutions. Illustrating
some of the potential benefits, stock turn increased to 13.5 times for 2000
(1999: 12.7 times) and in the UK the return on working capital employed
increased to 35% (1999: 30%). A Pan European purchasing programme was also
launched in September 2000.
[VENDORS RANKED BY VOLUME GRAPH]
Customers
Excellent customer relationships were also a crucial constituent of the European
recovery plan - we are pleased to report that no major customer losses were
incurred as a result of the service disruption. The UK, Ireland and Sweden
benefited from the launch of "customer friendly" e-commerce ordering tools and
an expanded range of products and services. A number of major new customers were
acquired on the strength of ISA e-commerce solutions. The formation of a Pan
European sales group in the fourth quarter allowed us to initiate a number of
European supply agreements estimated to have an incremental annualised sales
value of L.11 million. New tender invitations are now a regular occurrence and
having established a solid sales, logistics and IT infrastructure throughout
Europe, the opportunity going forward looks encouraging.
F-35
Marketing
Marketing was re-established in 2000 as a Pan European function with particular
emphasis on external, co-ordinated campaigns delivering a clear and consistent
message across all sales channels. This enables us to concentrate our efforts
and resources on maximising sales growth, productivity and new customer
conversion programmes. Considerable work is also being undertaken to evaluate
and capitalise on the potential of our large customer database.
Consistent identity was an important feature in generating market awareness of
Supplies Team, our Direct trading brand. Margins were enhanced by expanding and
promoting our private label product ranges.
Multi-language web sites for Supplies Team and our local Wholesale brands have
been installed, incorporating interactive links to our on-line catalogue and
Internet customer ordering tool. ISA International plc was given a complete
"face lift" and a website built to support targeted communication programmes
designed to increase awareness of ISA's potential and international capability.
During 2001, proactive communication will represent an important aspect of my
role.
E-commerce
The "dot com" crash of recent times has somewhat spoiled the market perception
of the real value of "smart" technology in a high volume distributor such as
ISA. I believe, therefore, it is worth summarising the tangible e-commerce
programmes that have warranted our investment and represent significant future
cost reduction opportunities through re-engineered processes and productivity
improvement.
Web ordering: Launched in June 2000, our multi language Internet site provides a
suite of ordering tools and on-line, real-time,information to those customers
who are happy to utilise the public domain. The InterWorld software we purchased
is a world-leading product, offering excellent customer functionality and user
friendly navigation. It has proven to be a market leading solution with around
1,500 customers enabled and over 500 active by December 2000. Benefits have
already been seen in sales productivity and order accuracy, particularly in our
telesales divisions.
EDI: Bespoke solutions have been provided to both customers and vendors to
support data transfer where the public domain is not appropriate or existing
legacy systems already provide electronic communication capability. As EDI
traffic is high volume it offers a significant potential labour savings for
customer order processing, product purchasing and accounting functions.
F-36
Customer Relationship Management ("CRM"): Late last year we trialled software
that provided our Internet customers with a human help desk via the web. Using
multi-language translation software, we are rolling out CRM programmes with
major customers during 2001. As a result, specialised customer service staff are
able to release valuable selling time back into the telesales and field sales
teams.
UK & Ireland
Record operating profits were achieved in each quarter and for the year as a
whole. Overall operating profits increased by 47% from L.3.0 million in 1999 to
L.4.4 million in 2000. Total turnover grew year on year by 21% to L.111.4
million (1999 continuing operations: L.91.9 million), increasing ISA's market
share.
In line with the Hybrid business model, a strong revenue performance was seen in
all our sales channels from a combination of new customer wins, developments
with existing customers and a broadening of our product portfolio.
Increasingly, customers are seeking value added, high quality distribution and
fulfilment solutions. To enable ISA to meet this requirement, considerable work
has been done to build the necessary infrastructure. The expanded distribution
facility at Bradford began this process. However, in order to fully exploit
future opportunities we are reviewing our logistics capability, with a view to
increasing capacity further in early 2002.
Operations in London were improved to address ISA's market share in the most
lucrative region of the UK. Presence was also enhanced in the Republic of
Ireland (Dublin), Northern Ireland (Belfast) and Scotland (Edinburgh). The
"Celtic" regions now represent 20% of the Direct UK and Irish business volume.
Profits were further improved by e-commerce capturing 9% of customer transaction
volume. This is targeted to increase to 30% by the end of 2001.
I am pleased to report that Investors in People accreditation was achieved in
Northern Ireland and the Republic of Ireland during 2000, with accreditation for
the rest of the UK achieved in March 2001.
Germany
Continuous customer service failure from the outsourced logistics postponed
expansion and development plans for the entire year. The recovery of logistics
commenced at the end of May 2000 with the commissioning of a 15,000 m2
distribution facility at Mulheim, close to Dusseldorf. Customers were
transferred in three phases between May and August restoring total control of
customer service with effect from September. Full year turnover grew by 6% to
L.96.9 million, the overwhelming majority of this growth arising in the fourth
quarter following the recovery of logistics. However, gross margins, sacrificed
to retain customer loyalty, have taken longer to recover. Operating losses,
before non-recurring items, of L.2.5 million (1999: profit of L.0.1 million)
directly reflected the enormity of customer service disruption.
F-37
Executive management was re-structured in line with the UK Hybrid model with
directors appointed for each sales channel, marking and logistics. Germany
worked with the UK to establish a common brand for the Retail channel, improving
our service to the fast emerging European superstore retailers.
Group-wide catalogue-production and web product imaging was established in the
German marketing team. The financial and operational benefits to the Group are
anticipated to be considerable.
France
The disruption to the business caused by the various changes made in 1999
continued to impact in the early part of 2000, exacerbated by the previously
announced transfer of logistics to the outsourced provider. Unfortunately, as
with Germany, the logistics failure led to further customer service disruption.
Within the Group's overall plan to recover logistics as a core competence, the
French warehouse was successfully re-established in September, with the help of
an International team drawn from within the Group. Early signs of success were
demonstrated in the fourth quarter when turnover increased by 11% on the same
quarter in the previous year, reversing some of the declining revenue trend.
However, also as in Germany, margins were sacrificed to retain customer loyalty.
Consequently, operating losses increased to L.1.8 million (1999: L..1.0
million).
A new Managing Director was appointed in June and he established a new
management team, supported by specialist assistance from central Group staff.
Our strategy in France is to rebuild sales volume, margin and thereby
profitability, but this will take a little time.
As part of our recovery strategy, a new office and distribution facility is
planned to be commissioned in December 2001 which will provide the platform for
channel and product expansion. The Paris region is estimated to represent the
majority of the French market spend on EOS. The planned facility is just 30
minutes from the centre of Paris.
Sweden & Norway
The "dot com" mania in early 2000 and the emergence of short lived, but highly
competitive, computer supplies websites led to a challenging year.
Turnover decreased year on year to L.43.8 million (1999:L.46.0 million).
However, at constant exchange rates revenue was broadly unchanged. Despite firm
control over costs, operating profits declined from L.1.3 million in 1999 to
L.0.5 million in 2000 as margins came under pressure.
F-38
In Norway a Managing Director was appointed in August 2000, who restructured the
executive management and began the process of enhancing margins to improve
profitability. Programmes were introduced in Sweden to improve the sales volume,
particularly in the Wholesale channel. The Group e-commerce programmes were
piloted in Sweden where the market acceptance is more in line with the USA.
Considerable success was achieved, by the end of the year over 30% of customer
transactions were being placed via the Internet or EDI solutions.
Scandinavia has started 2001 well, recording good operating profits in the first
quarter. E-business continues to grow with the added benefit of new
"partnership" portal agreements in place with major customers and vendors.
Kingfield Heath
Our 47% associate Kingfield Heath contributed L.0.2 million to profit before
tax, prior to exceptional costs of L.1.0 million. On a like-for-like basis
Kingfield Heath's turnover was broadly unchanged at L.206.4 million in the first
full year since its creation. It enjoyed reasonable early success in executing
its integration plan, but suffered service difficulties late in the year. The
service level has now been recovered and Kingfield Heath is moving forward with
the second phase of its strategic plan.
Outlook
The market growth of EOS in Europe is projected to continue at 15% per annum for
at least the next five years. The relative spend on EOS as a percentage of
general office consumable products continues to grow and is predicted to exceed
50% in 2001. Margins remain under constant pressure, but ISA's Hybrid model
provides a clear market advantage enabling growth in excess of market forecasts
and delivering incremental operating profit.
In the current year, signs from Germany and France are encouraging and are
broadly in line with our expectation of the pace of recovery leading to monthly
profitability. Our chief goal is the return to sustained profits for the Group
as a whole.
ISA has proven through the UK business model that an attractive return on sales
can be attained. Logistics has been re-established as a core competence and, as
Continental Europe returns to profit, the Board believes the Group has the
potential to achieve a 3-4% operating return on sales, in the medium term.
BRUCE ROBINSON
Chief Executive Officer
F-39
FINANCIAL REVIEW
Financial results
Losses for the year before non-recurring items, share of associates and tax were
L.2.6 million (1999 continuing operations: profit of L.0.9 million).
Non-recurring items, excluding our share of associates were L.7.7 million (1999
continuing operations L.4.2 million). The Group's share of the associates,
including non-recurring items and amortisation of goodwill was a loss of L.1.6
million (1999: L.1.0 million).
As a result of the non-recurring items and tax losses in Continental Europe
which cannot be relieved this year, losses per share were 21.4 pence (1999: 7.3
pence). Losses per share prior to non-recurring items were 6.3 pence (1999:
earnings of 4.1 pence).
Margin
Overall gross margin, before non-recurring items, has declined from 17.0% to
16.1% as there has been a change in the mix of volume between distribution
channels, with a disproportionate increase in sales volume in the lower margin
wholesale channel. The severe service difficulties experienced in Continental
Europe also led to some short-term sacrificing of margin in order to retain
customer loyalty.
Non-recurring items
The non-recurring costs incurred during the year were substantial. These costs
are summarised in Note 4. One-off costs directly attributable to the service
failure of the outsourced European logistics contract totalled L.7.2 million as
follows:
Stock losses and customer claims L.2.8 million: During the course of the
contract, delivery problems gave rise to significant levels of complaints,
resulting in an abnormal level of credits being given to customers. In addition,
significant stock shrinkage occurred in the warehouse in Belgium.
F-40
Duplicated costs during logistics transfer L.1.8 million: Whilst logistics was
transferred back under the Group's control and during the three month period of
preparation for the transfer, significant costs were duplicated as charges were
still being incurred under the outsourced service agreement. This duplication of
costs ended when the service agreement was terminated.
Non recoverable debts L.1.2 million: The outsourced logistics partner has been
unable to produce sufficient proof of many deliveries reported to have been made
to customers. Consequently, debtors amounting to L.1.2 million are considered to
be unrecoverable.
Contract termination costs L.1.4 million: The contract for outsourced logistics
had an initial term of five years with stringent early termination penalties.
These were reduced by negotiation to a cost of L.1.4 million including interest
on deferred payment. At 31st December, 2000 L.0.9 million of this settlement
remained unpaid.
During the period of disruption in Continental Europe, a further L.0.5 million
was incurred in senior management restructuring costs. In addition the property
and location rationalisation programme begun in France in 1999 cost a further
L.0.3 million. However, there was a L.0.3 million credit as the debt provision
made in 1999 in the discontinued John Heath business was found to be excessive.
Cash and balance sheet
The impact of the problems with the outsourced logistics in Continental Europe
contributed to an increase in the net debt of the Group by L.3.5m to L.25.8m.
Shareholders' funds have reduced to L.12.7m giving net gearing of 203%.
Net debt during the early part of 2001 has further increased due to a
significant uplift in the level of business combined with seasonal working
capital requirements. Whilst the Board considers that its banking facilities are
adequate to support the Group's predicted cash flow, the Board believes that the
proposed equity injection will improve the Group's balance sheet and increase
the pace of recovery.
F-41
Taxation
Although losses were incurred during 2000, there is a tax charge in the profit
and loss account. This arises as the taxable losses incurred in Continental
Europe cannot be relieved this year, while other parts of the Group produced
taxable profits. As Continental Europe moves back into profit it is anticipated
that the tax losses now being carried forward will reduce the effective tax rate
on future profits.
Treasury policy
The Group's treasury policy aims to ensure that the Group has sufficient
resources, whilst 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 risk. 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
instruments.
F-42
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% 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.
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 part of its net investment
in 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 forward currency contracts.
MIKE MURPHY
Chief Financial Officer
F-43
THE BOARD
DAVID HEAP,
aged 57 years
Chairman
Appointed October 1998
Originally founded ISA in 1970, and following its disposal in 1985 via a
Management Buy-Out, developed Daisytek International Corporation in the USA.
Retired as chairman of Daisytek in 1999. Has considerable experience of the
electronic office supplies market.
BRUCE ROBINSON,
aged 45 years
Chief Executive Officer
Appointed January 2000
Joined the Group in June, 1999 as General Manager, UK & Ireland. Has held
various senior executive roles in the Office Products Industry during the last
16 years, most recently as CEO of Corporate Express (UK), a subsidiary of one of
the world's largest suppliers of office consumables.
MIKE MURPHY,
aged 35 years
Chief Financial Officer
Appointed September 1999
A qualified Chartered Accountant. Was previously Group Finance Director of
Capital Industries PLC, a quoted specialist niche packaging group, for eight
years.
F-44
VOLKER TRIEBEL,
aged 59 years
Non-executive Director
Appointed 1987
A practising German lawyer and English barrister. He is also chairman of the
Supervisory Board of Rosenthal AG, porcelain manufacturers.
HANS FRISTEDT,
aged 59 years
Non-executive Director
Appointed March 1998
President of Calvert Holdings LLC, the parent undertaking of CHISA LLC.
Previously president and Chief Operating Officer of American Trading and
Production Corporation (Atapco). Prior to joining Atapco he held similar roles
in Esselte Business Systems Inc. He has considerable experience of the
stationery and office products market.
PAUL WHITE,
aged 39 years
Company Secretary
Appointed 1997
A qualified Chartered Accountant. Has held the additional position of Group
Financial Controller since 1993, having joined the Group in 1990.
F-45
DIRECTORS' REPORT
The Directors present their Report and the Audited Financial Statements for the
year ended 31st December, 2000.
Principal activity and business review
The principal activity of the Group during the year was the distribution of
consumable products for information processing equipment and office products.
The names of the principal operating companies during year are set out in Note
17.
A review of the Group is contained in the Chief Executive's Report on pages F-33
to F-39 and in the Financial Review on pages F-40 to F-43.
Results
The results for the year are set out in the Group Profit and Loss Account on
page F-56. Following the loss for the financial year, L.12.4m was transferred
from reserves (1999: L.3.9m).
Dividend
The Board does not propose a dividend for the year ended 31st December, 2000.
Special business at the Annual General Meeting
Resolution 3 in the Notice of Annual General Meeting, which will be proposed as
an ordinary resolution, renews the authority given to the Directors at the
Annual General Meeting on 18th May, 2000 to issue shares limited to the lower of
the existing authorised but unissued share capital or 33.3% of the issued share
capital. At the date of this report this amounts to 19,592,799 ordinary shares
of 5p each, being L.979,640 in nominal value. No issue will be made which will
effectively alter control of the Company without the consent of the shareholders
in General Meeting.
Resolution 4, which will be proposed as a special resolution, extends for a
maximum period of 15 months the Directors authority to issue equity securities
for cash without first offering such shares to shareholders in proportion to
their existing holdings. The authority is limited, other than in the case of a
rights issue or pursuant to share schemes, to shares not exceeding 5% of the
issued ordinary share capital of the Company. At the date of this report this
amounts to 2,938,920 ordinary shares of 5p each amounting to L.146,946 in
nominal value.
F-46
Corporate governance
In June 1998, the Hampel Committee on Corporate Governance published the
Combined Code, containing Principles of Good Governance and a Code of Best
Practice. These consolidate the work of the earlier Cadbury and Greenbury
Committees. The following is a statement explaining how the Principles of Good
Governance have been applied and whether the best practice provisions of the
Combined Code have been complied with, specifying which provisions, if any, have
not been complied with, for what period and the reasons for non-compliance.
Principles of good governance
(A) Directors
1. The Board
The Board currently consists of three Executive and two Non-executive Directors
and meets regularly throughout the year. The Non-executive Directors provide the
Company with further commercial and investment experience. The Board monitors
current trading performance, budgets and forecasts and strategic options for
each division of the Group. To enable them to do this, all Directors have full
and timely access to all relevant information, including monthly financial
reports. The appointment of new Directors is considered by a Nominations
Committee comprising the two Non-executive Directors. Procedures are in place to
enable Directors to obtain independent professional advice, where necessary, at
the Company's expense. All Directors also have access to the advice and services
of the Company Secretary.
2. Chairman and Chief Executive
Since 28th September, 2000 the roles of Chairman and Chief Executive have been
clearly segregated and are carried out by separate individuals. Prior to that
date DA Heap combined both roles. The Board is aware of Code Provision A.2.1
which requires the division of responsibilities between these positions.
However, the Non-Executive Directors, under the leadership of Dr BV Triebel had,
in the Board's view, the ability and authority to ensure that the combination of
roles did not work to the disadvantage of the Company and its shareholders.
F-47
3. Board balance
The Board has a balance of Executive and Non-executive Directors, and the
Non-executive Directors continue to represent a strong and independent element.
Dr BV Triebel retires at the Annual General Meeting, but has decided not to seek
re-election. Therefore, as a matter of priority, the Board has instructed the
Nominations Committee to make recommendations for the appointment of further
Non-executive Directors who will bring new skills or relevant experience.
4. Re-election
The Company's Articles of Association provide that one-third of the Directors
retire at each Annual General Meeting. All Directors, in accordance with the
Code, submit themselves for re-election in turn.
(B) Directors' remuneration
The principles applied by the Board are set out in the Report by the
Remuneration Committee on pages F-52 to F-54.
(C) Relations with shareholders
The Annual General Meeting is the Company's principal opportunity to communicate
directly with private shareholders. The Board seeks to make best use of this
opportunity by ensuring that the Chairman of the Board, the Executive Directors
and the chairman of the Audit and Remuneration Committees are available at the
meeting to answer any questions from shareholders.
(D) Internal control and risk management
Under the terms of the Combined Code, the Board is responsible for the Group's
system of internal control and for reviewing its effectiveness. Such a system is
designed to manage rather than eliminate the risk of failure to achieve the
Group's strategic objectives and can only provide reasonable and not absolute
assurance against material misstatement or loss.
Implementation of an on-going process for identifying, evaluating and managing
the Group's significant risks was completed during the current financial year.
These procedures have been in place up to the date of approval of the Annual
Report and Accounts. The processes are regularly reviewed by the Board in
accordance with the guidance, Internal Control Guidance for Directors on the
Combined Code. Prior to this the Company followed the guidance for directors on
internal control and financial reporting issued by the Working Group on
'Internal Control' in December 1994.
F-48
Principal elements of the Group's system of internal controls are:
Control environment
The Board sets the overall policy for the Group which includes a well defined
organisational structure with clear operating procedures, lines of
responsibility and delegated authority. Control procedures exist to identify and
control business risks, safeguard the Group's assets and to ensure that
financial transactions are properly recorded.
Assessment of business risk
Management are responsible for the identification and evaluation of key risks
applicable to their areas of business. These risks are assessed on a continual
basis and action plans are formulated to deal with them. The Board has
constituted a Risk Committee, which meets at least twice each year, to
co-ordinate and formalise this process. Appropriate control procedures are
identified for each key risk and responsibility for control is allocated to
appropriate business managers.
Monitoring process
The control procedures are regularly reviewed by executive management. An
assessment of the internal control environment has been undertaken at each of
the Group's subsidiaries and the results reported to the Risk Committee. The
Risk Committee produces reports to The Board setting out the key risk indicators
and considers possible control issues brought to their attention.
The first annual review of the effectiveness of the Group's system of internal
control was completed in late 2000 and approved by the Board on 27th March,
2001.
It became apparent to the Board during 2000 that the controls over order
despatch and stock in the outsourced logistics operation in Continental Europe
were unsatisfactory. Logistics was therefore returned to Group management in an
orderly fashion, with an appropriate system of effective internal control fully
re-established by September 2000.
F-49
Internal financial control
In addition to the general internal controls discussed above the Directors
acknowledge their responsibility for the Group's system of internal financial
control.
The key features of the internal financial control system that operated
throughout the period covered by the accounts are described below:
Operating controls
The purpose of the key financial and operating controls procedures in place
throughout the Group are: (a) the safeguarding of assets against unauthorised
use or disposition; (b) the maintenance of proper accounting records and
reliable financial information for use within the business or for publication.
Financial reporting and information systems
There is a comprehensive budgeting system with an annual budget and revised
forecasts for the year which are continuously updated and compared to actual
results on a regular basis.
Functional reporting
The Board has identified specific matters and transactions which require full
Board approval. These include matters such as acquisitions and disposals,
capital projects over certain pre-agreed financial limits and the establishment
of banking facilities.
The Board has reviewed the effectiveness of the system of internal control in
operation in the Group. Other than as described above, the Directors consider
that there have been no material weaknesses in internal control that have
resulted in any material losses, contingencies or uncertainties requiring
disclosure in the Financial Statements.
F-50
Board Committees
The Audit Committee, which normally meets twice a year, comprises two
Non-executive Directors, and is chaired by H Fristedt. The Committee reviews the
Company's interim and annual Financial Statements before submission to the Board
for final approval and considers any matters raised by the auditors. The Audit
Committee has specific terms of reference which deal with its authorities and
duties. The Company does not comply with Code Provision D.3.1 which requires the
Audit Committee to consist of at least three Non-executive Directors. The Board
has instructed the Nominations Committee to make recommendations for the
appointment of further Non-executive Directors.
As the auditors of the Company, Arthur Andersen also provide non-audit services
to the Group. The Audit Committee keeps under review the nature and extent of
such services, in order to seek to balance the maintenance of objectivity and
value for money.
The Remuneration Committee comprises two Non-executive Directors, it is chaired
by H Fristedt and meets as required during the year to review and agree the
terms and conditions of employment of the Executive Directors, including levels
of remuneration and other benefits.
Statement of compliance
Other than the exceptions described above, the Company continued to comply and
has complied in all material respects with the provisions of section 1 of the
Combined Code.
Directors' responsibilities
The Directors are required by the Companies Act 1985 to prepared Financial
Statements for each financial year which give a true and fair view of the state
of affairs of the Company and Group as at the end of the financial year and of
the profit or loss for that period. It is also the Directors' responsibility to
maintain adequate accounting records, safeguard the assets of the Company and
Group and to take reasonable steps to prevent and detect fraud and other
irregularities.
The Directors confirm that suitable accounting policies, consistently applied
and supported by reasonable and prudent judgements and estimates, have been used
in the preparation of the Financial Statements and that applicable accounting
standards have been followed.
Going concern
After making enquiries, the Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in operational
existence for the foreseeable future. For this reason, they continue to adopt
the going concern basis in preparing the Financial Statements.
F-51
Directors
The current Directors are as follows:
DA Heap Chairman
B Robinson Chief Executive Officer
Appointed to the Board 26th January, 2000
Appointed Chief Executive 28th September, 2000
MJ Murphy Chief Financial Officer
Dr BV Triebel* Senior Independent Director
H Fristedt*
On 2nd June, 2000 MC Layton* resigned as a Director
* Indicated Non-executive
In accordance with the Articles of Association, Dr BV Triebel retires at the
Annual General Meeting, but has decided not to seek re-election. Dr Triebel has
been a Non-executive Director since 1987 and the Board sincerely thanks him for
his contribution over the last 14 years.
Remuneration report
The Company has, throughout the year, complied with section A "Remuneration
Committees" of the best practice provisions regarding Directors' remuneration
annexed to the Listing Rules, and has applied the best practice provisions set
out in section B annexed to the Listing Rules. The Remuneration Committee
currently comprises H Fristedt (Chairman), and Dr BV Triebel. Its role is to
review the appointment of and service contracts, salaries and other remuneration
of Directors and senior management. The recommendations of the Committee are
presented for ratification by the full Board.
Objective
The Committee aims to ensure that top quality management is recruited, retained
and motivated by offering competitive remuneration packages.
Salaries and benefits
In determining basic salaries, the Committee considers each individual's
ability, performance and level of responsibility, as well as taking professional
advice and market data into account.
In addition to salary, Executive Directors are provided with private health
cover and a company car. Salaries and benefits paid to the Executive Directors
are shown opposite.
F-52
Executive Directors' remuneration
<Table>
<Caption>
Salary
and Total Total
fees Benefits Bonus Pension 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
DA Heap 100 -- -- -- 100 97
B Robinson 122 8 -- -- 130 --
(appointed 26th January, 2000
MJ Murphy 100 10 -- 15 125 38
(appointed 20th September, 1999)
PPJ Vikanis -- -- -- -- -- 17
(resigned 29th November, 1999)
GR Stevens -- -- -- -- -- 204
(resigned 20th September, 1999)
TE Blyth -- -- -- -- -- 119
(resigned 9th March, 1999)
322 18 -- 15 355 475
</Table>
Non-executive Directors' remuneration
<Table>
<Caption>
2000 1999
L.'000 L.'000
BV Triebel 17 17
H Fristedt* -- --
MC Layton (resigned 2nd June, 2000) -- 45
JK Hewson (resigned 30th September, 1999) -- 13
17 75
</Table>
* H Fristedt is a representative of CHISA LLC and only received expenses.
F-53
Share options
In order to link an element of remuneration with long-term share performance,
the Company operates discretionary share option schemes for the Executive
Directors and other senior management. Following shareholder approval on 22nd
June, 2000, the rules of the share option schemes were amended to reflect the
changed circumstances of the Group. Options over 3,885,500 ordinary shares
outstanding at that time were surrendered and re-issued. Exercise of these
options is subject to the satisfaction of performance criteria. Options over a
further 2,207,500 ordinary shares, exercisable subject to the same performance
criteria, were granted during the year, of which 750,000 were to Directors.
Detail of outstanding options are set out in Note 24 to the Financial
Statements.
Pensions
The Group continues to operate a defined contribution pension scheme for senior
employees.
Service contracts
The Executive Directors have service contracts terminable on twelve months
notice. In the case of B Robinson, this notice may not be served before 31st
December, 2002.
Non-executive Directors
Independent Non-executive Directors are appointed for an initial period of three
years, following which their appointment is reviewed annually. Details of the
amounts paid to Non-executive Directors are set out on the previous page. There
are no pension arrangements for the Non-executive Directors, nor do they
participate in any share option scheme.
Directors' interests
According to the register maintained under the Companies Act 1985 the interests
(all of which were beneficial), of the Directors in office at 31st December,
2000 (and their immediate families) in the issued share capital of the Company
were as shown in the table below.
Directors' share options
Options held by the Directors to subscribe for the Company's ordinary shares are
shown in Note 24 to the Financial Statements.
<Table>
<Caption>
Directors' interests
- -----------------------------------------------------------------------------------------------------
18th May, 2001 31st December, 2000 1st January, 2000*
Ordinary shares of 5p each Ordinary shares of 5p each Ordinary shares of 5p each
- -----------------------------------------------------------------------------------------------------
DA Heap 12,278,029 12,278,029 12,118,029
B Robinson -- -- --
MJ Murphy 120,000 120,000 --
BV Triebel 40,000 40,000 40,000
H Fristedt 90,000 90,000 100,000
- -----------------------------------------------------------------------------------------------------
</Table>
*or date of appointment, if later
F-54
Employees
The Group places considerable value on the involvement of its employees and has
continued its practice of keeping them informed of matters affecting them as
employees. A Group-wide intranet, updated daily, is accessible by all staff. In
addition, regular Communication Roadshows are presented for all staff in a
particular location by Bruce Robinson, Chief Executive Officer and local
directors.
It is the Group's policy to give equal consideration to all job applicants and
employees irrespective of sex, race, creed or disability.
Supplier payment policy
The Group's policy is to agree terms and conditions for its business
transactions with suppliers. Payment is generally made on those terms, subject
to the terms and conditions being met by the supplier.
At 31st December, 2000 the average number of days outstanding in respect of the
Group's trade creditors was 47 (1999: 39). The Company itself does not trade and
therefore its trade creditor days were nil.
Substantial holdings
The Directors have been notified that as at 18th May, 2001 the shareholders
shown in the table below were beneficially and non-beneficially interested in
the ordinary shares of the Company.
Save as disclosed in the table, the Directors have not been notified of any
holding of 3% or more.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------
Number of ordinary shares Percentage of issued share capital
- ---------------------------------------------------------------------------------------------------------
CHISA LLC 17,542,553 29.8%
DA Heap 12,278,029 20.9%
The Prudential Assurance Co Ltd 3,533,763 6.0%
JA Heap 3,210,137 5.5%
Hart Ventures Plc 2,940,000 5.0%
- ---------------------------------------------------------------------------------------------------------
</Table>
Auditors
A resolution proposing the re-appointment of Arthur Andersen will be put to the
Annual General Meeting.
This report was approved by the Board on 22nd May, 2001.
Paul White
Secretary
66-70 Vicar Lane
Bradford BD1 5AG
F-55
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST DECEMBER, 2000
<Table>
<Caption>
Continuing Discontinued
operations operations Total
2000 1999 1999 1999
Notes L.'000 L.'000 L.'000 L.'000
TURNOVER 2,3 296,803 288,027 83,573 371,600
COST OF SALES
Normal (248,916) (239,206) (62,215) (301,421)
Exceptional 4 (2,836) (1,532) -- (1,532)
------------ ------------ ------------ ---------
(251,752) (240,738) (62,215) (302,953)
------------ ------------ ------------ ---------
GROSS PROFIT 45,051 47,289 21,358 68,647
------------ ------------ ------------ ---------
OPERATING EXPENSES
Distribution costs (19,814) (18,481) (10,225) (28,706)
Administrative expenses (28,671) (28,123) (7,205) (35,328)
Amortisation of goodwill -- -- (329) (329)
Non-recurring items 4 (4,866) (2,701) (1,267) (3,968)
------------ ------------ ------------ ---------
(53,351) (49,305) (19,026) (68,331)
------------ ------------ ------------ ---------
OPERATING (LOSS)/PROFIT 5 (8,300) (2,016) 2,332 316
Share of associates' operating profit 6 1,458 702 -- 702
Share of associates' non-recurring items 6 (1,032) (1,366) -- (1,366)
Amortisation of goodwill 14 (799) (197) -- (197)
------------ ------------ ------------ ---------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST (8,673) (2,877) 2,332 (545)
Interest receivable 7 115 122 21 143
Interest payable and similar charges 8 (3,343) (1,569) (933) (2,502)
------------ ------------ ------------ ---------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (11,901) (4,324) 1,420 (2,904)
------------ ------------
Tax on loss on ordinary activities 11 (449) (987)
------------ ---------
LOSS FOR THE FINANCIAL YEAR 25 (12,350) (3,891)
------------ ---------
(LOSSES)/EARNINGS PER ORDINARY SHARE 13
Basic (21.4)p (7.3)p
Before non-recurring items (6.3)p 4.1p
Fully diluted (21.0)p (6.6)p
============ =========
The accompanying notes form an integral part of these Financial Statements.
F-56
GROUP BALANCE SHEET
AT 31ST DECEMBER, 2000
<Table>
<Caption>
2000 1999
Notes L.'000 L.'000
FIXED ASSETS
Goodwill 14 14,993 15,437
Tangible assets 15 6,085 4,706
Investments 16 2,609 3,262
------------ ------------
23,687 23,405
------------ ------------
CURRENT ASSETS
Stocks 18 18,488 18,873
Debtors 19 46,268 45,968
Cash at bank and in hand 4,153 1,860
------------ ------------
68,909 66,701
CREDITORS (AMOUNTS FALLING DUE WITHIN ONE YEAR) 20 (79,233) (63,382)
------------ ------------
NET CURRENT (LIABILITIES)/ASSETS (10,324) 3,319
------------ ------------
TOTAL ASSETS LESS CURRENT LIABILITIES 13,363 26,724
CREDITORS (AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR) 21 (544) (618)
PROVISIONS FOR LIABILITIES AND CHARGES 23 (81) (37)
------------ ------------
NET ASSETS 12,738 26,069
============ ============
CAPITAL AND RESERVES
Called up share capital 24 2,939 2,660
Share premium account 25 1,041 1,034
Shares to be issued -- 3,976
Other reserves 25 5,069 1,370
Profit and loss account 25 3,689 17,029
------------ ------------
Equity shareholders' funds 12,738 26,069
============ ============
</Table>
The accompanying notes form an integral part of these Financial Statements.
The Financial Statements were approved by the Board on 22nd May, 2001 and signed
on its behalf by:
B ROBINSON MJ MURPHY
Director Director
F-57
COMPANY BALANCE SHEET
AT 31ST DECEMBER, 2000
<Table>
<Caption>
2000 1999
Notes L.'000 L.'000
FIXED ASSETS
Tangible assets 15 1,474 697
Investments 17 44,591 44,430
------------ ------------
46,065 45,127
------------ ------------
CURRENT ASSETS
Debtors 19 33,567 26,126
CREDITORS (AMOUNTS FALLING DUE WITHIN ONE YEAR) 20 (27,412) (19,278)
------------ ------------
NET CURRENT ASSETS 6,155 6,848
------------ ------------
NET ASSETS 52,220 51,975
============ ============
CAPITAL AND RESERVES
Called up share capital 24 2,939 2,660
Share premium account 25 1,041 1,034
Shares to be issued -- 3,976
Other reserves 25 40,663 36,964
Profit and loss account 25 7,577 7,341
------------ ------------
Equity shareholders' funds 52,220 51,975
============ ============
</Table>
The accompanying notes form an integral part of these Financial Statements.
The Financial Statements were approved by the Board on 22nd May, 2001 and signed
on its behalf by:
B ROBINSON MJ MURPHY
Director Director
F-58
GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31ST DECEMBER, 2000
<Table>
<Caption>
2000 1999
Notes L.'000 L.'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 28 a 2,427 2,172
Returns on investments and servicing of finance 28 c (1,639) (2,645)
Taxation 28 c (55) (1,349)
Capital expenditure and financial investment 28 c (2,983) (529)
Acquisitions and disposals 28 c (161) 16,111
------------ ------------
Cash (outflow)/inflow before management of liquid
resources and financing (2,411) 13,760
Financing 28 c (434) (16,989)
------------ ------------
DECREASE IN CASH IN THE YEAR (2,845) (3,229)
============ ============
</Table>
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31ST DECEMBER, 2000
<Table>
<Caption>
2000 1999
L.'000 L.'000
LOSS FOR THE FINANCIAL YEAR (12,350) (3,891)
Translation differences on foreign currency net investments (808) 120
Unrealised gain on disposal of subsidiary (182) 815
------------ ------------
Total gains and losses recognised since the last annual report (13,340) (2,956)
============ ============
</Table>
The accompanying notes form an integral part of these Financial Statements.
F-59
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31st December, 2000
1 ACCOUNTING POLICIES
The principal accounting policies are summarised below. They have all been
applied consistently throughout the year and preceding year:
a) BASIS OF ACCOUNTING
The financial statements are prepared under the historical cost convention
and in accordance with applicable accounting standards.
b) 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
31st December, 2000.
The results of subsidiary undertakings acquired or disposed of during the
year are included from, or to, the date that control passes from, or to, the
Group.
c) GOODWILL
Goodwill arising on acquisitions representing the excess of the purchase
consideration 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 31st 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.
d) 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
e) 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 periodic 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.
f) INVESTMENTS
Fixed asset investments are stated at cost less provision for permanent
diminution in value where appropriate.
g) 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
F-60
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.
h) 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. 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.
i) 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.
j) FOREIGN CURRENCIES AND RELATED DERIVATIVE FINANCIAL INSTRUMENTS
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.
k) 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.
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.
2 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 consumable products for the office.
F-61
<Table>
<Caption>
2000 1999
L.'000 L.'000
TURNOVER BY DESTINATION
United Kingdom 104,053 161,896
Continental Europe 140,855 158,406
Scandinavia 43,798 46,166
Other areas 8,097 5,132
-------- --------
296,803 371,600
======== ========
</Table>
3 SEGMENTAL REPORTING
<Table>
<Caption>
Continuing Discontinued Total
Operations Operations United Continental
United Kingdom United Kingdom Kingdom Europe
--------------------- -------------------- --------------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
TURNOVER BY ORIGIN
Total sales 113,107 97,262 -- 88,003 113,107 185,265 142,834 153,371
Inter-segment sales (1,686) (5,323) -- (4,430) (1,686) (9,753) (1,250) (3,272)
-------- -------- ------- ------- -------- -------- -------- --------
Sales to third
parties 111,421 91,939 -- 83,573 111,421 175,512 141,584 150,099
======== ======== ======= ======= ======== ======== ======== ========
(LOSS)/PROFIT BEFORE
TAXATION
Segment operating
profit/(loss) before
non-recurring items 4,430 3,026 -- 3,599 4,430 6,625 (4,348) (961)
Non recurring items (45) (277) -- (1,267) (45) (1,544) (7,936) (3,248)
-------- -------- ------- ------- -------- -------- -------- --------
4,385 2,749 -- 2,332 4,385 5,081 (12,204) (4,209)
======== ======== ======= ======= ======== ======== ======== ========
Unallocated central
costs:
Operating loss
Non-recurring items
Operating (loss)/profit
Share of associates loss after non-recurring
items and goodwill amortisation
Net interest
Group loss before
taxation
NET ASSETS
Segmental net assets 8,912 12,255 -- 8,912 12,255 9,167 13,352
======== ======== ======= ======= ======== ======== ======== ========
Investments and
goodwill
Unallocated liabilities
Total net assets
<Caption>
Scandinavia Total
--------------------- --------------------
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
TURNOVER BY ORIGIN
Total sales 45,195 46,121 301,136 384,757
Inter-segment sales (1,397) (132) (4,333) (13,157)
-------- -------- ------- -------
Sales to third
parties 43,798 45,989 296,803 371,600
======== ======== ======= =======
(LOSS)/PROFIT BEFORE
TAXATION
Segment operating
profit/(loss) before
non-recurring items 504 1,303 586 6,967
Non recurring items -- (93) (7,981) (4,885)
-------- -------- ------- -------
504 1,210 (7,395) 2,082
======== ======== ======= =======
Unallocated central
costs:
Operating loss (1,184) 1,151
Non-recurring items 279 615
------- --------
Operating (loss)/profit (8,300) 316
Share of associates loss after non-recurring
items and goodwill amortisation (373) (861)
Net interest (3,228) (2,359)
-------- --------
Group loss before
taxation (11,901) (2,904)
-------- --------
NET ASSETS
Segmental net assets 3,091 3,714 21,170 29,321
======== ======== ======= =======
Investments and
goodwill 17,602 18,699
Unallocated liabilities (26,034) (21,951)
-------- --------
Total net assets 12,738 26,069
======== ========
</Table>
Unallocated liabilities represent net borrowings and taxation which are not
applicable to the operations of any individual segment.
F-62
4 NON-RECURRING ITEMS
<Table>
<Caption>
Continuing Discontinued
operations operations Total
--------------------- ------------ -------
2000 1999 1999 1999
L.'000 L.'000 L.'000 L.'000
COST OF SALES
Stock losses and customer
claims 2,836 1,532 -- 1,532
------ ------ ------ ------
DISTRIBUTION COSTS
Duplicated costs during
logistics transfer 1,745 -- -- --
Contract termination
costs 1,420 -- -- --
------ ------ ------ ------
3,165 -- -- --
------ ------ ------ ------
ADMINISTRATIVE EXPENSES
Board and senior
management settlements 513 1,305 120 1,425
Property and location
rationalisation 270 838 151 989
Non-recoverable debts 1,197 -- -- --
Exceptional bad debts (279) -- 996 996
Accelerated IT deprecation -- 558 -- 558
------ ------ ------ ------
1,701 2,701 1,267 3,968
------ ------ ------ ------
Total before share of
associates 7,702 4,233 1,267 5,500
Share of associates
1,032 1,366 -- 1,366
------ ------ ------ ------
8,734 5,599 1,267 6,866
====== ====== ====== ======
</Table>
Further details of the non-recurring items are given in the Financial Review.
5 OPERATING (LOSS)/PROFIT
<Table>
<Caption>
2000 1999
L.'000 L.'000
Operating (loss)/profit is stated after charging or (crediting):
Depreciation
- --on owned assets 1,453 3,085
- --on hire purchased assets 356 338
Loss (profit) on disposal of fixed assets 39 (51)
Auditors' remuneration
- --audit 169 198
- --other services 44 186
Operating lease rentals
- --land and buildings 1,904 3,265
- --plant and machinery 1,577 551
</Table>
F-63
6 SHARE OF RESULTS OF ASSOCIATED UNDERTAKINGS
<Table>
<Caption>
2000 1999
L.'000 L.'000
Operating profit (excluding non-recurring items) 1,458 702
Net interest payable (1,219) (156)
Non-recurring items (1,032) (1,366)
------- ------
Loss before tax (793) (820)
Tax (Note 11) 334 (40)
------- ------
Loss after tax (459) (860)
======= ======
</Table>
Further details are given in Note 16.
7 INTEREST RECEIVABLE
<Table>
Bank interest 41 20
Other interest 74 123
------- ------
115 143
======= ======
</Table>
8 INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
Bank loans and overdrafts 2,051 2,239
Hire purchase charges 50 69
Other interest 23 38
------ ------
Total before share of associated undertakings 2,124 2,346
Share of associated undertakings 1,219 156
------ ------
3,343 2,502
====== ======
</Table>
F-64
9 DIRECTORS' REMUNERATION
<Table>
<Caption>
2000 1999
L.'000 L.'000
Executive Directors salary and fees 322 270
Fees for Non-executive Directors 17 75
Compensation for loss of office -- 164
Other benefits 18 19
---- ----
357 528
Group contributions to money purchase pension schemes 15 22
---- ----
372 550
==== ====
</Table>
Further details are given in the Directors' Report.
10 PARTICULARS OF EMPLOYEES
<Table>
<Caption>
Number Number
The average monthly number of
persons employed by the Group
during the year was:
Sales 627 702
Administration 316 421
Distribution 152 499
Manufacturing -- 76
------ ------
1,095 1,698
====== ======
</Table>
<Table>
Staff costs, including executive
directors' remuneration, during
the year amounted to:
Wages and salaries 21,445 30,201
Social security costs 4,069 4,935
Pension costs 172 460
------- -------
25,686 35,596
======= =======
</Table>
11 TAX ON LOSS ON ORDINARY ACTIVITIES
<Table>
UK Corporation tax at 30% (1999: 30.25%) 677 1,179
Double taxation relief (207) (484)
Transfer to/(from) deferred tax 52 (31)
Overseas taxation (5) 605
Share of associates tax (334) 40
Adjustment relating to prior years-UK Corporation tax 266 (322)
----- -----
449 987
===== =====
</Table>
The tax charge for the year has been reduced by tax relief in respect of
non-recurring items amounting to L.31,000 (1999: L.792,000).
F-65
12 COMPANY PROFIT FOR THE FINANCIAL YEAR
The profit attributable to the Company which has been dealt with in its own
accounts is 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.
13 (LOSSES)/EARNINGS PER SHARE
The calculation of (losses)/earnings per ordinary share is based on the loss for
the financial year of L.12,350,000 (1999: L.3,891,000) and on 57.8 million
(1999: 53.2 million) ordinary shares, being the weighted average number of
shares in issue during the year.
The calculation of earnings per share before non-recurring items is based on a
loss after taxation of L.3,647,000 (1999: profit L.2,183,000), arrived at as
follows:
The calculation of fully diluted (losses)/earnings per share is based on 58.9
million (1999: 58.9 million) ordinary shares, which reflects the issue of 5.5
million shares under the terms of the acquisition of John Heath (Holdings) Ltd
(see Note 24) and the dilutive effect of outstanding share options.
14 GOODWILL
<Table>
<Caption>
L.'000
COST
-------
At 1st January, 2000 15,634
Reassessment of fair value of assets acquired in prior year 194
Additions 161
-------
At 31st December, 2000 15,989
AMORTISATION
-------
At 1st January, 2000 197
Charge for the year 799
-------
At 31st December, 2000 996
-------
Net book value at 31st December, 2000 14,993
======
NET BOOK VALUE at 31st December, 1999 15,437
======
</Table>
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 31st March, 2000.
All of the goodwill arose on the acquisition of the associated undertakings, and
therefore the amortisation is shown in the Profit and Loss Account after the
operating loss in accordance with Financial Reporting Standard No. 9.
F-66
15 TANGIBLE FIXED ASSETS
<Table>
<Caption>
Plant Fixtures
Freehold Leasehold and and
buildings improvements machinery fittings Total
L.'000 L.'000 L.'000 L.'000 L.'000
Group Cost
At 1st January, 2000 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 31st December, 2000 328 674 8,326 4,441 13,769
DEPRECIATION
At 1st January, 2000 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 31st December, 2000 131 206 4,935 2,412 7,684
NET BOOK VALUE
At 31st December, 2000 197 468 3,391 2,029 6,085
====== ======= ======= ======= =======
NET BOOK VALUE
At 31st December, 1999 206 274 2,678 1,548 4,706
====== ======= ======= ======= =======
</Table>
The net book value of tangible fixed assets includes L.738,000 (1999: L.865,000)
in respect of assets held under hire purchase or finance lease contracts.
<Table>
COMPANY
COST
At 1st January, 2000 103 2,493 60 2,656
Additions -- 1,151 2 1,153
Disposals -- (69) -- (69)
------ ------- ------- -------
AT 31ST DECEMBER, 2000 103 3,575 62 3,740
------ ------- ------- -------
DEPRECIATION
At 1st January, 2000 11 1,919 29 1,959
Charge for the year 10 287 12 309
Disposals -- (2) -- (2)
------ ------- ------- -------
AT 31ST DECEMBER, 2000 21 2,204 41 2,266
------ ------- ------- -------
NET BOOK VALUE AT
31ST DECEMBER, 2000 82 1,371 21 1,474
------ ------- ------- -------
Net book value at
31st December, 1999 92 574 31 697
------ ------- ------- -------
</Table>
F-67
16 INVESTMENTS -- GROUP
<Table>
<Caption>
L.'000
Investment in associated undertakings
At 1st January, 2000 3,262
Reassessment of fair value of assets acquired in prior year (194)
Share of loss after tax for year (459)
------
At 31st December, 2000 2,609
======
</Table>
(a) Kaye Office Supplies Limited ("Kaye")
Kaye is a private company registered in England. The Group acquired a holding of
46.85% of the issued ordinary L.1 shares on 30th September, 1999.
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 year ended 31st December,
2000 and the share attributable to the Group comprises:
<Table>
<Caption>
Group share Kaye
--------------------- ----------------------
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
Turnover 96,708 23,400 206,420 119,036
------- ------- -------- --------
Profit before non-recurring item,
amortisation of goodwill and tax 162 546 345 471
Non-recurring items (1,032) (1,366) (2,203) (3,865)
Amortisation of goodwill -- -- (307) (77)
------- ------- -------- --------
Loss before tax (870) (820) (2,165) (3,471)
Tax 353 (40) 754 (410)
------- ------- -------- --------
Loss after tax (517) (860) (1,411) (3,881)
======= ======= ======== ========
</Table>
The summarised balance sheet of Kaye at 31st December, 2000 and the share
attributable to the Group comprises:
<Table>
<Caption>
Group share Kaye
-------------------- --------------------
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
Fixed assets 3,311 2,007 7,068 4,284
Investments 5 5 10 10
Goodwill -- -- 5,763 6,070
Current assets 36,432 34,444 77,763 73,519
------- ------- ------- -------
39,748 36,456 90,604 83,883
Creditors due within one year (37,472) (32,178) (79,983) (68,682)
Creditors due after one year and
provisions (1,474) (3,147)
------- ------- ------- -------
Equity shareholders' funds 2,276 2,804 10,621 12,054
======= ======= ======= =======
</Table>
F-68
(b) EXY Group Limited ("EXY")
EXY is a private company registered in England. The Group acquired its holding
of 32.0%. of the issued ordinary L.1 shares on 22nd November, 1999.
EXY is the parent undertaking of a group of companies whose trading activities
principally consist of the recycling, manufacture and distribution of consumable
products for the office.
EXY has a financial year end of 31st March.
17 INVESTMENTS -- COMPANY
<Table>
<Caption>
Share in Share in
associated subsidiary
undertakings undertakings Total
L.'000 L.'000 L.'000
At 1st January, 2000 19,093 25,337 44,430
Additions 161 -- 161
------- ------- -------
At 31st December, 2000 19,254 25,337 44,591
======= ======= =======
</Table>
<Table>
<Caption>
Name of principal subsidiary undertaking and
country of incorporation of registration Description of shares held Trading activity
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
Supplies Team Sud GmbH (Germany) Common stock of no par value Trading
Supplies Team EDV-Zubehor Handel GmbH (Austria) Common stock of no par value Trading
ASDV SA (France) Ordinary FFr 320 shares Holding company
GDIS Sarl (France) Ordinary FFr 100 shares Trading
UNISOURCE Sarl (France) Ordinary FFr 100 shares Trading
Supplies Team Sarl (France) Ordinary FFr 500 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
</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 the office.
Each undertaking operates in its country of incorporation or registration.
The Group's shareholding in each of the above subsidiary undertakings represents
100% of the voting rights and nominal value of issued shares.
18 STOCKS
Stocks comprise finished goods and goods held for resale.
F-69
19 DEBTORS
<Table>
<Caption>
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
Group Group Company Company
Trade debtors 42,193 38,862 -- --
Amounts owed by subsidiary undertakings 32,770 24,978
Amounts owed by associated undertakings 512 142 4 4
Other debtors 1,203 2,911 206 316
Prepayments and accrued income 1,761 3,168 -- --
Corporation tax recoverable 599 885 587 828
------- ------- ------- -------
46,268 45,968 33,567 26,126
======= ======= ======= =======
</Table>
20 CREDITORS (amounts falling due within one year)
<Table>
Bank loans and overdrafts (see Note 22) 29,186 23,225 20,173 13,250
Obligations under hire purchase and
finance lease contracts (see Note 22) 358 447 -- --
Trade creditors 37,384 30,039 -- --
Amounts owed to subsidiary
undertakings 4,875 4,761
Amounts owed to associated
undertakings 1,173 631 -- --
Corporation tax payable 719 447 -- --
Other taxes and social security 2,651 2,548 -- --
Other creditors 3,574 2,317 1,817 490
Accruals and deferred income 4,188 3,728 547 777
------- ------- ------- -------
79,233 63,382 27,412 19,278
======= ======= ======= =======
</Table>
Bank loans and overdrafts amounting to 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 rates linked to LIBOR.
Bank loans and overdrafts amounting to 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
31st December, 2000 to L.16,000 (1999: L.1,633,000). The Group's UK based bank
facilities are due for their next annual review on 31st January, 2002.
21 CREDITORS (amounts falling due after more than one year)
<Table>
Obligations under hire purchase and
finance lease contracts (see Note 22) 443 539 -- --
Other creditors 101 79 -- --
------ ------ ----- -----
544 618 -- --
====== ====== ===== =====
</Table>
F-70
22 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Group's treasury policy is outlined elsewhere in this annual report.
FINANCIAL ASSETS
The Group has no financial assets other than short-term debtors and cash at
bank.
FINANCIAL LIABILITIES
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>
2000 1999
L.'000 L.'000
Sterling 1,032 (1,168)
Euro based currencies (29,937) (22,057)
Other currencies (281) --
------- -------
(29,186) (23,225)
======= =======
</Table>
The sterling balance in hand above 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, linked to relevant national LIBOR or base rate
equivalents. All facilities are uncommitted.
The maturity profile of the Group's financial liabilities at 31st December,
2000 was:
<Table>
<Caption>
Finance lease and hire
Bank loans and overdrafts purchase obligations
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
Group Group Group Group
In one year or less, or on demand 29,186 23,225 358 447
In more than one year, but less
than two years -- -- 322 270
In more than two years, but less
than five years -- -- 121 269
------- ------- ----- -----
29,186 23,225 801 986
======= ======= ===== =====
</Table>
FAIR VALUES OF FINANCIAL INSTRUMENTS
Except as disclosed below, at 31st December, 2000, 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.
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 will both
eliminate currency exposure at the time of purchase and reduce 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 27th September, 2001. The
book value at 31st December, 2000 is L.nil, as there was no premium payable in
relation to this option. The theoretical fair value of the option at the year
end 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 the year end.
F-71
23 PROVISIONS FOR LIABILITIES AND CHARGES
<Table>
<Caption>
Group Company
L.'000 L.'000
DEFERRED TAXATION
At 1st January, 2000 37 --
Transfer from profit and loss account 52 --
Exchange adjustments (8) --
----- -----
At 31st December, 2000 81 --
===== =====
</Table>
The potential liability to deferred taxation, together with the amounts for
which provision has been made, is as follows:
<Table>
<Caption>
Potential Provided
2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000
GROUP
Accelerated capital allowances (296) (305) (296) (305)
Other timing differences 377 342 377 342
----- ----- ----- -----
81 37 81 37
===== ===== ===== =====
COMPANY
Accelerated capital allowances (144) (251) -- --
===== ===== ===== =====
</Table>
In addition, the Company has a potential liability to tax on chargeable gains
rolled over amounting to 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.
24 CALLED UP SHARE CAPITAL
<Table>
<Caption>
2000 1999
L.'000 L.'000
Authorised:
80,000,000 ordinary shares of
5p each (1999: 80,000,000) 4,000 4,000
------- -------
Allotted, called up and fully paid:
58,778,398 ordinary shares
of 5p each (1999: 53,206,524) 2,939 2,660
------- -------
</Table>
Under the terms of the Approved and Unapproved Share Option Schemes of ISA
International plc, options to subscribe for ordinary shares were outstanding at
31st December, 2000 as follows:
<Table>
<Caption>
No. of shares Exercise price Exercisable between
39,725 97 p 1st January, 2001 and 15th March, 2002
20,000 150 p 1st January, 2001 and 7th September, 2004
113,000 26 3/4 p 1st April, 2001 and 29th June, 2010
56,625 36 p 24th March, 2002 and 23rd March, 2009
3,722,500 26 3/4 p 1st April, 2002 and 29th June, 2010
675,000 26 3/4 p 1st April, 2003 and 29th June, 2010
1,532,500 23 3/4 p 9th November, 2003 and 8th November, 2010
</Table>
F-72
Of the options above, those first exercisable 1st April, 2001 or later are
subject to performance criteria, which had not been satisfied at 31st
December, 2000.
Included in the above are options held by Directors as follows:
<Table>
<Caption>
At 1st Jan At 31st Dec Exercise
Director 2000 Granted Surrendered 2000 price Exercisable between
B Robinson 500,000 -- (500,000) -- 46 1/2 p Surrendered
-- 500,000 -- 500,000 26 3/4 p 1st April, 2002 and 29th June, 2010
-- 500,000 -- 500,000 26 3/4 p 1st April, 2003 and 29th June, 2010
MJ Murphy 500,000 -- (500,000) -- 41 p Surrendered
-- 500,000 -- 500,000 26 3/4 p 1st April, 2002 and 29th June, 2010
-- 250,000 -- 250,000 23 3/4 p 9th November, 2003 and 8th November, 2010
</Table>
Under the terms of the Savings Related Share Option Schemes of ISA International
plc, options to subscribe for ordinary shares were outstanding at 31st
December, 2000 as follows:
<Table>
<Caption>
No. of shares Exercise price Exercisable between
826,467 35 p 1st August, 2002 and 31st January, 2003
672,702 25 1/2 p 1st July, 2003 and 31st December 2003
</Table>
F-73
The market price of the shares at 31st December, 2000 was 20 1/4 p and the range
during 2000 was 20 1/4 p to 50 1/2 p.
CHANGES IN SHARE CAPITAL
On 9th 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 the year for a
consideration of L.9,000.
25 RESERVES
<Table>
<Caption>
Share Profit and
premium Merger Other loss
account reserve reserves account
L.'000 L.'000 L.'000 L.'000
GROUP
At 1st January, 2000 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 31st December, 2000 1,041 5,069 -- 3,689
======= ======= ======= =======
</Table>
The premium on certain shares issued in the year has been taken to merger
reserve in accordance with Section 131 of the Companies Act 1985.
The cumulative amount of goodwill written off directly to reserves in respect of
subsidiary undertakings at 31st December, 2000 was L.23,202,000 (1999:
L.23,202,000).
<Table>
<Caption>
COMPANY
At 1st January, 2000 1,034 11,905 25,059 7,341
Premium on shares issued 7 3,699 -- --
Profit for the year -- -- -- 236
-------- -------- -------- -------
At 31st December, 2000 1,041 15,604 25,059 7,577
</Table>
F-74
26 RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
<Table>
<Caption>
2000 1999
L.'000 L.'000
Loss for the financial year (12,350) (3,891)
Other recognised net gains and losses relating to the year (990) 935
New share capital subscribed 9 --
-------- --------
Net deduction from shareholders' funds (13,331) (2,956)
Opening shareholders' funds 26,069 29,025
-------- --------
Closing shareholders' funds 12,738 26,069
======== ========
</Table>
27 FINANCIAL COMMITMENTS
The annual commitments of the Group under non-cancellable operating leases was
as follows:
<Table>
<Caption>
Land and buildings Plant and machinery Plant and machinery
2000 1999 2000 1999 2000 1999
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
Group Group Group Group Company Company
GROUP
Leases expiring:
Within one year 211 194 66 183 11 --
Within two to five years 935 1,092 1,062 1,237 53 --
After five years 865 230 -- -- -- --
------ ------ ------ ------ ---- -----
2,011 1,516 1,128 1,420 64 --
====== ====== ====== ====== ==== =====
</Table>
At 31st December, 2000 or 1999, 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 inflow from operating
activities
<Table>
<Caption>
Continuing Discontinued
Operations Operations Total
2000 1999 1999 1999
L.'000 L.'000 L.'000 L.'000
Operating (loss)/profit (8,300) (2,016) 2,323 316
Amortize on of goodwill -- -- 329 329
Depreciation:
Charge for year 1,809 2,718 705 3,423
Loss(profit) on sale of tangible fixed assets 39 (65) 14 (51)
Decrease/(increase) in stocks 385 1,595 5,220 6,815
(Increase)/decrease in debtors (866) (6,600) 1,335 (5,265)
Increase/(decrease) in creditors 9,360 2,265 (5,660) (3,395)
-------- -------- -------- --------
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 2,427 (2,103) 4,275 2,172
-------- -------- -------- --------
</Table>
F-75
(b) Analysis of net cash outflow from non-recurring items
<Table>
<Caption>
Continuing Discontinued
Operations Operations Total
2000 1999 1999 1999
L.'000 L.'000 L.'000 L.'000
Operating loss (7,702) (4,233) (1,267) (5,500)
Depreciation -- 669 -- 669
Decrease in stocks -- 690 -- 690
Decrease in debtors 242 867 996 1,863
Increase in creditors 537 595 -- 595
------- ------- ------- -------
NET CASH OUTFLOW FROM NON-RECURRING ITEMS (6,923) (1,412) (271) (1,683)
======= ======= ======= =======
</Table>
(c) Analysis of cash flows netted in the cash flow statement
<Table>
<Caption>
2000 1999
L.'000 L.'000
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 116 143
Interest paid (1,706) (2,715)
Interest element of hire purchase and finance lease payments (49) (73)
------- --------
(1,639) (2,645)
======= ========
TAXATION
UK Corporation tax received/(paid) 191 (560)
Overseas tax paid (246) (789)
------- --------
(55) (1,349)
======= ========
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (3,209) (2,245)
Proceeds of sale of tangible fixed assets 226 1,716
------- --------
(2,983) (529)
======= ========
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings -- (139)
Sale 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 (161) (648)
------- --------
(161) 16,111
======= ========
FINANCING
Issue of ordinary share capital 9 --
Repayment of amounts borrowed -- (16,500)
Capital element of hire purchase and finance lease payments (443) (489)
------- --------
(434) (16,989)
======= ========
</Table>
F-76
(d) Analysis of net debt
<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>
(e) Reconciliation of net cash flow to movement in net debt
<Table>
<Caption>
2000 1999
L.'000 L.'000
Decrease in cash in the year (2,845) (3,229)
Cash outflow from decrease in debt and lease financing 443 16,989
-------- --------
Change in net debt resulting from cash flows (2,402) 13,760
Loans, hire purchase and finance leases disposed of with subsidiaries -- 10
New hire purchase contracts (261) (36)
Translation difference (820) 347
-------- --------
MOVEMENT IN NET DEBT IN THE YEAR (3,483) 14,081
Net debt at 1st January, 2000 (22,351) (36,432)
-------- --------
NET DEBT AT 31st December, 2000 (25,834) (22,351)
======== ========
</Table>
F-77
29 RELATED PARTY TRANSACTIONS
<Table>
<Caption>
2000 1999
L.'000 L.'000
During the year the Group purchased goods or services in the
ordinary course of business from the following related parties:
EXY Group Limited and subsidiary undertakings 5,500 357
Kaye Office Supplies Limited and subsidiary undertakings 57 50
Torres Limited -- 22
Virtual Village Limited 3 174
</Table>
During the year the Group sold goods in the ordinary course of business to the
following related parties:
<Table>
EXY Group Limited and
subsidiary undertakings 1,453 12
Kaye Office Supplies Limited and
subsidiary undertakings 30 383
Virtual Village Limited 5 3
</Table>
EXY Group Limited and Kaye Office Supplies Limited are related parties as they
are associated undertakings (see Note 16 for further details regarding
associated undertakings).
Virtual Village Limited and Torres Limited are related parties as DA Heap is
a director and significant shareholder in both companies.
Virtual Village Limited provided the Company with information technology
services. Torres Limited provided senior management recruitment services.
The following balances are included in debtors
<Table>
Trade debtors:
Virtual Village Limited 2 6
----- -----
Amounts owed by associates:
EXY Group Limited and
subsidiary undertakings 512 19
Kaye Office Supplies Limited
and subsidiary undertakings -- 123
----- -----
512 142
===== =====
</Table>
The following balances are included in creditors
<Table>
<Caption>
Years ended
------------------
2000 1999
L.'000 L.'000
Trade creditors:
Virtual Village Limited 1 --
----- -----
Amounts owed to associates:
EXY Group Limited and
subsidiary undertakings 1,157 566
Kaye Office Supplies Limited
and subsidiary undertakings 16 65
----- -----
1,173 631
===== =====
</Table>
F-78
30 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES (Unaudited)
SUMMARY OF DIFFERENCES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("UK
GAAP") which differ in certain respects from United States generally
accepted accounting principles ("US GAAP"). Those differences which
have a significant effect on the Group's net income and shareholders
equity are as follows:
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to 1998 goodwill arising on acquisitions was set off against
reserves. On disposal of such businesses, goodwill previously set off
against reserves is charged to profit or loss on disposal. Since 1998,
goodwill and other intangible fixed assets purchased by way of
acquisition have been capitalised and written off over a period not
exceeding 20 years. Under US GAAP, goodwill and other intangible fixed
assets would be capitalised and amortised over their expected useful
lives, which typically in the case of goodwill should not exceed 40
years. Goodwill on certain acquisitions may have become impaired
between the date of acquisition and the date of the financial
statements. In such cases, under US GAAP, the amount of the impairment
would be deducted from cost. Under US GAAP an amount of Pound
Sterling2,411,000 would have been written off at 31st December 2000.
ACCOUNTING FOR INVESTMENTS IN ASSOCIATED UNDERTAKINGS
Investments in associated undertakings are accounted for using the
equity method under which the Group's share of their income is included
in the Group's income statement on a line by line basis below operating
profit. Under US GAAP, investments in associated undertakings would be
accounted for using the equity method under which the Group's share of
their after tax income is included in the Group's income statement in
one line.
FORWARD FOREIGN EXCHANGE CONTRACTS
Forward foreign exchange contracts in respect of anticipated future
transactions are treated as hedges and gains and losses on valuing such
contracts at the forward rates at the balance sheet date are not
recognised in income for the year. Under US GAAP, gains and losses at
the balance sheet date would be included in net income.
DIVIDENDS
Dividends are provided for in the financial statements for the period
to which they relate and, in the case of proposed final dividends, on
the basis of proposals by the directors. Under US GAAP, dividends would
be provided for in the financial statements in the period in which they
are declared.
REDEEMABLE PREFERENCE SHARES AND WARRANTS
Redeemable preference shares are recorded in shareholders' equity for
UK GAAP. Under US GAAP these would not be treated as shareholders'
equity. As explained in note 23, a warrant was issued to Daisytek at
the same time as the redeemable preference shares. Under UK GAAP none
of the consideration received has been allocated to the warrant but all
relates to the issue of redeemable preference shares. Under US GAAP, a
value would be attributed to the warrant based upon a calculation as at
the date of issue. This value would be treated as shareholders' equity.
PROVISION FOR RESTRUCTURING COSTS
Provisions for restructuring, including ongoing costs of vacant
properties, is made when each element of the restructuring is
implemented and properties become vacant. Under US GAAP, costs
associated with a restructuring, including ongoing costs of vacant
properties, would be provided at the time that management approves and
commits to the specific restructuring plan.
TAXATION
Deferred taxation is provided using the liability method on timing
differences between the taxable allowances and related accounting
treatments where these are regarded as likely to crystallise in the
foreseeable future. Under US GAAP deferred taxation would be recognised
on all temporary differences. No adjustments have been made for
deferred taxation. The amounts provide under UK GAAP are consistent
with the amounts that would be provided under US GAAP and therefore no
adjustment has been recognised.
F-79
EFFECT OF DIFFERENCES
The effect of the significant adjustments to net income and to
shareholders' equity in 2000, that would be required if US GAAP were to
be applied instead of UK GAAP is summarised as follows:
NET INCOME
<Table>
<Caption>
2000
L.000
Loss for the financial year as reported in the consolidated
profit and loss account (12,350)
Adjustments:
Amortisation of goodwill (1,123)
Unrecognised forward foreign exchange gains/(losses) 873
Provision for restructuring (170)
Deferred taxation on US GAAP adjustments 51
----------
Net loss as adjusted to accord with US GAAP (12,719)
----------
Undiluted earnings per share (21.6) p
Diluted earnings per share (21.6) p
</Table>
COMPREHENSIVE INCOME
<Table>
<Caption>
2000
L.000
Net income as adjusted to accord with US GAAP
Other comprehensive income: (12,719)
Translation differences on foreign currency net investments (808)
----------
Comprehensive income (13,527)
----------
</Table>
SHAREHOLDERS' EQUITY
<Table>
<Caption>
2000
L.000
Shareholders' funds as reported in the consolidated balance sheet 12,738
Adjustments:
Goodwill cost 20,790
amortisation (8,225)
Proposed final dividend --
Current asset derivatives 848
Provision for restructuring (170)
Deferred taxation on US GAAP adjustments 51
----------
Shareholders' equity as adjusted to accord with US GAAP 26,032
----------
</Table>
F-80
CONSOLIDATED STATEMENT OF CASHFLOWS
The US GAAP cash flow statement reports changes in cash and cash
equivalents, which includes short term highly liquid investments. Under
UK GAAP, cashflows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, investing
activities and financing activities. US GAAP requires only three
categories of cash flow activity to be reported: operating, investing
and financing. Cashflows from taxation and returns on investments and
servicing of finance shown under UK GAAP would be included as operating
activities under US GAAP. The categories of cash flow activity under US
GAAP are summarised as follows:
<Table>
<Caption>
2000
L.000
Cashflows from operating activities 733
Cashflows from investing activities (3,144)
Cashflows from financing activities 5,527
---------
Increase/(decrease) in cash and cash equivalents 3,116
Exchange adjustments (823)
Cash and cash equivalents at beginning of year 1,860
---------
Cash and cash equivalents at end of year 4,153
---------
</Table>
F-81
THIS AUDITORS' REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
AND HAS NOT BEEN REISSUED, NOR HAS ARTHUR ANDERSEN PROVIDED A CONSENT TO THE
INCLUSION OF ITS REPORT HEREIN.
AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF ISA INTERNATIONAL PLC:
We have audited the Financial Statements on pages 26 to 46 which have been
prepared under the historical cost convention and the accounting policies set
out on pages 30 to 31. We have also examined the amounts disclosed relating to
the emoluments and pension benefits of the Directors which form part of the
remuneration report on pages 22 to 24.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Directors are responsible for preparing the Annual Report including, as
described on page 21, preparing the Financial Statements in accordance with
applicable United Kingdom law and accounting standards. Our responsibilities, as
independent auditors are established in the United Kingdom by statute, the
Auditing Practices Board, the Listing Rules of the Financial Services Authority,
and by our profession's ethical guidance.
We report to you our opinion as to whether the Financial Statements give a true
and fair view and are properly prepared in accordance with the Companies Act. We
also report to you if, in our opinion, the Directors' report is not consistent
with the Financial Statements, if the Company has not kept proper accounting
records, if we have not received all the information and explanations we require
for our audit, or if information specified by law or the Listing Rules regarding
Directors' remuneration and transactions with the Company and the Group is not
disclosed.
We review whether the corporate governance statement on page 17 to 21 reflects
the Company's compliance with the seven provisions of the Combined Code
specified for our review by the Financial Services Authority, and we report if
it does not. We are not required to consider whether the Boards's statements on
internal control cover all risks and controls or form an opinion on the
effectiveness of the Company's corporate governance procedures or its risk and
control procedures.
We read the other information contained in the Annual Report, including the
corporate governance statement, and consider whether it is consistent with the
audited Financial Statements. We consider the implications for our report if we
become aware of any apparent misstatements or material inconsistencies with the
Financial Statements.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the Financial Statements. It
also includes as assessment of the significant estimates and judgements made by
the Directors in the preparation of the Financial Statements and of whether the
accounting policies are appropriate to the circumstances of the Company and of
the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the Financial Statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the Financial Statements.
OPINION
In our opinion the Financial Statements give a true and fair view of the state
of affairs of the Company and of the Group at 31st December, 2000 and of the
Group's loss and cash flows for the year then ended and have been properly
prepared in accordance with the Companies Act 1985.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS
1 CITY SQUARE
LEEDS
LS1 2AL
22nd MAY, 2001
F-82
- --------------------------------------------------------------------------------
ISA International plc
Consolidated Profit and Loss Account
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
<Table>
<Caption>
QTR ENDED
31ST MARCH
2002
L.000
Unaudited
TURNOVER 102,972
----------
COST OF SALES (89,257)
----------
----------
GROSS PROFIT 13,715
----------
OPERATING EXPENSES
- normal (14,163)
- exceptional (82)
----------
(14,245)
----------
OPERATING LOSS (530)
Share of associates' normal operating profit (115)
Share of associates' exceptional operating items (501)
Amortisation of goodwill arising on associates (197)
Loss on disposal of subsidiary (3,282)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION (4,625)
Interest receivable
Interest payable and similar charges (1,136)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (5,761)
Tax on loss on ordinary activities 21
----------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (5,740)
Dividends - Non-equity
----------
TRANSFER FROM RESERVES (5,740)
----------
LOSSES PER ORDINARY SHARE
Basic (9.8)p
Diluted (9.8)p
----------
</Table>
A summary of the significant adjustments to profit for the year that would be
required if United States generally accepted accounting principles were to be
applied instead of those generally accepted in the United Kingdom is set forth
in Note 2 of Notes to the Financial Statements.
The accompanying notes form an integral part of these Financial Statements
F-83
ISA INTERNATIONAL PLC
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
at 31st March, 2002
<Table>
<Caption>
31st March
2002
L.000
Unaudited
FIXED ASSETS
Intangible assets - goodwill 13,768
Tangible assets 4,936
Investments 1,403
------------
20,107
------------
CURRENT ASSETS
Stocks 25,603
Debtors 61,621
Cash at bank and in hand 3
------------
87,227
CREDITORS DUE WITHIN ONE YEAR (92,699)
------------
NET CURRENT LIABILITIES (5,472)
------------
TOTAL ASSETS LESS CURRENT LIABILITIES 14,635
CREDITORS DUE AFTER MORE THAN ONE YEAR (4,023)
------------
NET ASSETS 10,612
------------
CAPITAL AND RESERVES
Called up share capital 3,739
Share premium account 7,154
Merger reserve 9,214
Profit and loss account (9,495)
------------
10,612
------------
Equity shareholders' funds 3,699
Non-equity shareholders' funds 6,913
------------
TOTAL SHAREHOLDERS' FUNDS 10,612
------------
</Table>
A summary of the significant adjustments to equity shareholders' funds that
would be required if United States generally accepted accounting principles were
to be applied instead of those generally accepted in the United Kingdom is set
forth in Note 2 of Notes to the Financial Statements.
The accompanying notes form an integral part of these Financial Statements
F-84
ISA International plc
Consolidated Cash Flow Statement
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
<Table>
<Caption>
QTR ENDED
31ST MARCH
2002
L.000
Unaudited
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (10,348)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (927)
TAXATION (295)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (191)
ACQUISITIONS AND DISPOSALS 1,046
EQUITY DIVIDENDS PAID --
------------
CASH OUTFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING (10,715)
FINANCING 3,577
------------
DECREASE IN CASH IN THE YEAR (7,138)
------------
</Table>
The significant differences between the cash flow statement presented above and
that required under United States generally accepted accounting principles are
set forth in Note 2 of Notes to the Financial Statements.
F-85
ISA INTERNATIONAL PLC
Notes to the Financial Statements
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
1 ACCOUNTING POLICIES
The principal accounting policies are summarised below. They have all
been applied consistently throughout the year.
a) BASIS OF PREPARATION
The Financial Statements are prepared under the historical
cost convention and in accordance with applicable United
Kingdom accounting standards.
The Financial Statements have been prepared on a going concern
basis which the Directors believe to be appropriate for the
reasons summarised below.
On 27 June, 2002 the acquisition by Daisytek of the entire
share capital of the Company, was completed.
The directors have prepared cash flow forecasts for the period
up to 31st December 2003, which show that the Group requires
further funding in order to be able to continue as a going
concern. Daisytek has agreed to provide the necessary
financial support to enable the Group to meet its liabilities
as they fall due.
In addition, Daisytek has confirmed that it will not require
payment of preference dividends until such time as funds are
available and that its entitlement to a Special Dividend (as
defined in the Company's Articles of Association) has been
waived.
b) 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 31st March, 2002.
The results of subsidiary undertakings acquired or disposed of
during the year are included from, or to, the date that
control passes to, or from, the Group.
c) GOODWILL
Goodwill arising on acquisitions, 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.
Goodwill that arose from acquisitions prior to 31st 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 re-instated in the balance sheet.
On the subsequent disposal or termination of a business
acquired since 1st January, 1998 the profit or loss on
disposal or termination is calculated after charging the
unamortised amount of any related goodwill.
F-86
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
1 ACCOUNTING POLICIES (CONTINUED)
d) TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost less 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:
<Table>
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
</Table>
e) 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 periodic rate of
charge on the capital outstanding. Rentals in respect of all
operating leases are charged to the profit and loss accounts
on a straight line basis over the term of the lease.
f) INVESTMENTS
Fixed asset investments are shown at cost less provision for
permanent diminution in value where appropriate.
g) 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 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.
h) 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. 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.
i) 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 an asset or
liability is expected to crystallise.
j) FOREIGN CURRENCIES AND RELATED DERIVATIVE FINANCIAL
INSTRUMENTS
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.
F-87
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
1 ACCOUNTING POLICIES (CONTINUED)
k) PENSION COSTS
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. 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.
F-88
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
2 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES
SUMMARY OF DIFFERENCES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("UK
GAAP") which differ in certain respects from United States generally
accepted accounting principles ("US GAAP"). Those differences which
have a significant effect on the Group's net income and shareholders
equity are as follows:
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to 1998 goodwill arising on acquisitions was set off against
reserves. On disposal of such businesses, as occurred in the period,
goodwill previously set off against reserves is charged to profit or
loss on disposal. Since 1998, goodwill and other intangible fixed
assets purchase by way of acquisition have been capitalised and written
off over a period not exceeding 20 years. Under US GAAP, goodwill and
other intangible fixed assets would be capitalised and amortised over
their expected useful lives, which typically in the case of goodwill
should not exceed 40 years. Goodwill on certain acquisitions may have
become impaired between the date of acquisition and the date of the
financial statements. In such cases, under US GAAP, the amount of the
impairment would be deducted from cost.
ACCOUNTING FOR INVESTMENTS IN ASSOCIATED UNDERTAKINGS
Investments in associated undertakings are accounted for using equity
method under which the Group's share of their income is included in the
Group's income statement on a line by line basis below operating
profit. Under US GAAP, investments in associated undertakings would be
accounted for using the equity method under which the Group's share of
their after tax income is included in the Group's income statement in
one line.
FORWARD FOREIGN EXCHANGE CONTRACTS
Forward foreign exchange contracts in respect of anticipated future
transactions are treated as hedges and gains and losses on valuing such
contracts at the forward rates at the balance sheet date are not
recognised in income for the year. Under US GAAP, gains and losses at
the balance sheet date would be included in net income.
DIVIDENDS
Dividends are provided for in the financial statements for the period
to which they relate and, in the case of proposed final dividends, on
the basis of proposals by the directors. Under US GAAP, dividends would
be provided for in the financial statements in the period in which they
are declared.
REDEEMABLE PREFERENCE SHARES
Redeemable preference shares are recorded in shareholders' equity for
UK GAAP. Under US GAAP these would not be treated as shareholders'
equity. As explained in note 23, a warrant was issued to Daisytek at
the same time as the redeemable preference shares. Under UK GAAP none
of the consideration received has been allocated to the warrant but all
relates to the issue of redeemable preference shares. Under US GAAP, a
value would be attributed to the warrant based upon a calculation as at
the date of issue. This value would be treated as shareholders' equity.
PROVISION FOR RESTRUCTURING COSTS
Provisions for restructuring, including ongoing costs of vacant
properties, is made when each element of the restructuring is
implemented and properties become vacant. Under US GAAP, costs
associated with a restructuring, including ongoing costs of vacant
properties, would be provided at the time that management approves and
commits to the specific restructuring plan.
TAXATION
Deferred taxation is provided using the liability method on timing
differences between the taxable allowances and related accounting
treatments where these are regarded as likely to crystallise in the
foreseeable future. Under US GAAP deferred taxation would be recognised
on all temporary differences. No adjustments have been made for
deferred taxation. The amounts provide under UK GAAP are consistent
with the amounts that would be provided under US GAAP and therefore no
adjustment has been recognised.
F-89
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
2 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES (CONTINUED)
EFFECT OF DIFFERENCES
The effect of the significant adjustments to net income for the period
and to shareholders' equity at 31st March, 2002, that would be required
if US GAAP were to be applied instead of UK GAAP is summarised as
follows:
NET INCOME
<Table>
<Caption>
Qtr ended 31st March 2002
L.000
Loss for the financial year as reported in the consolidated
profit and loss account (5,740)
Adjustments:
Amortisation of goodwill (229)
Loss on disposal of subsidiary 3,282
Unrecognised forward foreign exchange gains/(losses) (58)
Provision for restructuring 501
Deferred taxation on US GAAP adjustments (150)
Earnings in equity investment (282)
--------
Net loss as adjusted to accord with US GAAP (2,676)
--------
Undiluted earnings per share (4.6) p
Diluted earnings per share (4.6) p
</Table>
SHAREHOLDERS EQUITY
<Table>
<Caption>
31st March 2002
L.000
Shareholders' funds as reported in the consolidated balance sheet 10,612
Adjustments:
Goodwill cost 19,056
amortisation (8,713)
Proposed final dividend for year ended 31st December 2001 208
Redeemable preference shares and warrants (6,952)
Provision for restructuring (936)
Deferred taxation on US GAAP adjustments 281
Earnings in equity investment (282)
--------
Shareholders' equity as adjusted to accord with US GAAP 13,274
--------
</Table>
F-90
ISA INTERNATIONAL PLC
Notes to the Financial Statements (Continued)
- --------------------------------------------------------------------------------
for the quarter ended 31st March, 2002
2 DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND UNITED STATES (CONTINUED)
CONSOLIDATED STATEMENT OF CASHFLOWS
The US GAAP cash flow statement reports changes in cash and cash
equivalents, which includes short term highly liquid investments. Under
UK GAAP, cashflows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, investing
activities and financing activities. US GAAP requires only three
categories of cash flow activity to be reported: operating, investing
and financing. Cashflows from taxation and returns on investments and
servicing of finance shown under UK GAAP would be included as operating
activities under US GAAP. The categories of cash flow activity under US
GAAP are summarised as follows:
<Table>
<Caption>
Qtr ended 31st March 2002
L.000
Cashflows from operating activities (11,570)
Cashflows from investing activities 855
Cashflows from financing activities 6,579
---------
(Decrease) in cash and cash equivalents (4,136)
Exchange adjustments (39)
Cash and cash equivalents at beginning of period 4,178
---------
Cash and cash equivalents at end of period 3
---------
</Table>
F-91
KAYE OFFICE SUPPLIES LIMITED
and subsidiary undertakings
Annual report and financial statements
for the year ended 31 December 2001
Registered number: 1698984
F-92
Directors, officers and advisors
DIRECTORS
D C Leonard (Chairman) (appointed 20 July 2001)
J K Hewson
I P Williams BSc (Soc. Sci) (Deputy Chairman)
C E Fuller FCA (appointed 7 September 2001)
J D Kearney (appointed 31 October 2001)
M J Murphy (appointed 31 October 2001)
J H K Forster FCA, FCT
A T Hickman BSc (Soc. Sci), FIEBS (resigned 31 December 2001)
J P Prentis BA, ACA (resigned 30 April 2001)
D A Heap (resigned 31 October 2001)
A H A Fristedt (resigned 31 October 2001)
SECRETARY
J H K Forster FCA, FCT
REGISTERED OFFICE
Hart House
Hartley Wintney
Hook
Hampshire
RG27 8PE
AUDITORS
Arthur Andersen
1 City Square
Leeds
LS1 2AL
BANKERS
The Royal Bank of Scotland plc
Sheffield Corporate Office
5 Church Street
Sheffield
S1 1HF
SOLICITORS
Gouldens
10 Old Bailey
London
EC4M 7NG
F-93
Contents
<Table>
<Caption>
PAGE
Chairman's statement F-95
Directors' report F-97
Directors' responsibilities F-99
Independent auditors' report F-100
Consolidated profit and loss account F-102
Consolidated balance sheet F-103
Company balance sheet F-104
Consolidated cash flow statement F-105
Statement of accounting policies F-106
Notes to the financial statements F-109
</Table>
F-94
Chairman's statement
2001 was a year of considerable challenge for the group involving major changes
in management, the restructuring of much of the business operations, a
significant fund raising requirement and the commencement of operations at
'Arrow' our new, highly automated, distribution facility. All of these were
undertaken against a backdrop of difficult trading conditions which saw the
demise of some well known names in our market sector.
Following the merger of Kingfield and John Heath, 2001 was the first full year
of trading from a fully integrated catalogue. Whilst the new catalogue was a
great success with increasing numbers being sold, the group incurred substantial
non-recurring and exceptional costs due to the continuing rationalisation of
depots following the merger, the commissioning of Arrow and further planned
location rationalisations following the start of operations at Arrow.
FINANCIAL RESULTS
Consolidated sales for the year were L.206.9 million, slightly less than in
2000. The decline in traditional, 'core' business was offset by continuing
growth in the Electronic Office Supplies sector, which was particularly strong
in the sales of computer consumables.
Profitability was affected by the highly competitive state of the market, the
location closure programme, an increase in bad debt costs (as insurers have
reduced cover), the commissioning of Arrow and the significant costs of the fund
raising exercise undertaken in October. The profit and loss account shows those
costs separately as integration costs within operating expenses and as costs of
a fundamental restructuring of continuing operations. Before these costs,
amortisation of goodwill and financing costs, the group made a trading profit of
L.1.3 million.
Given the market conditions and trading results, the fund raising exercise in
October was difficult. However, our bankers, The Royal Bank of Scotland plc.,
substantially increased our available facilities and our shareholders subscribed
an additional L.6.5 million in ordinary shares with the three main shareholders
taking up the maximum number of shares available to them. I am pleased to say
that since this exercise the group has performed well inside its forecast
funding requirement.
REVIEW OF OPERATIONS
The core of our customer base has remained loyal throughout the year and we
appreciate their commitment to our business. The start-up of operations at Arrow
incurred the seemingly inevitable systems problems, staff familiarity issues and
general 'learning curve' difficulties. Although there is still plenty to do,
most major problems have been rectified and the facility is now picking and
despatching up to 13,000 lines per night.
DIRECTORS AND STAFF
As I reported last year, Jonathan Prentis resigned as Financial Director in
April and was replaced by Colin Fuller. Later on, Alan Hickman resigned as Chief
Executive in December 2001 terminating over eighteen years' connection with the
business. The Board wishes to express its thanks to Alan for all of his work and
to wish him well in the future. I am currently fulfilling the role of Chief
Executive. With changes at ISA International plc., both David Heap and Hans
Fristedt resigned from the Board, their places being taken by Jack Kearney and
Mike Murphy.
F-95
Chairman's statement (continued)
DIRECTORS AND STAFF (CONTINUED)
Within the operating subsidiary, Kingfield Heath Limited, we have taken the
opportunity to simplify the management structure of the business. As a result, a
number of senior managers and staff have left and we wish them well in the
future. Four executive directors of Kingfield Heath Limited now report directly
to me, these being Alan Barclay, Operations; Graeme Chapman, Marketing and
Publications; Colin Fuller, Finance and Nigel Mitchell, Merchandising. Alan,
Graeme and Nigel all have considerable experience in the industry with either
Kingfield or John Heath.
On behalf of the Board I wish to thank all employees, both at locations and at
the centre, for their considerable efforts during the year. We are now well
placed to take advantage of the present opportunities despite the tough economic
climate.
FUTURE DEVELOPMENT
Having reduced the central overhead structure, we are able to vacate one
property and will shortly vacate the third floor of Kaye House which we will
seek to sub-let. We expect the Arrow facility to be fully running and the
location closure programme to be complete by the middle of 2002.
TRADING PROSPECTS
The first quarter of 2002 has continued to be flat with tough trading
conditions. We are, however, running within our budgets and our cost reduction
programme, which addresses all aspects of the business, will help offset the
lower volumes. Results and published information from our competitors and the
industry in general show the need for margin improvement. We are currently
undertaking a comprehensive review of all our trading terms with the objective
of increasing gross margins.
David Leonard
Chairman
17 April 2002
F-96
Directors' report
For the year ended 31 December 2001
The directors present their annual report on the affairs of the group, together
with the financial statements and auditors' report, for the year ended 31
December 2001.
PRINCIPAL ACTIVITY, BUSINESS REVIEW AND PROPOSED DIVIDENDS
The principal activity of the group continues to be that of a national
wholesaler of office products. Group turnover for the year was L.206,904,000
(2000 - L.207,320,000) and loss before taxation was L.6,835,000 (2000 loss -
L.2,165,000).
Further details of the group's performance during the year and expected future
developments are contained in the chairman's statement.
The directors do not recommend the payment of a dividend (2000 - L.nil).
DIRECTORS AND THEIR INTERESTS
The directors who served during the year were as follows:
D C Leonard (Chairman) (appointed 20 July 2001)
J K Hewson
I P Williams (Deputy Chairman)
C E Fuller (appointed 7 September 2001)
J D Kearney (appointed 31 October 2001)
M J Murphy (appointed 31 October 2001)
J H K Forster
A T Hickman (resigned 31 December 2001)
J P Prentis (resigned 30 April 2001)
D A Heap (resigned 31 October 2001)
A H A Fristedt (resigned 31 October 2001)
Directors' interests in the ordinary share capital of the company are dealt with
in note 8.
CHARITABLE AND POLITICAL CONTRIBUTIONS
The group contributed L.4,000 (2000 - L.4,000) to charities. There were no
political contributions in either year.
DISABLED EMPLOYEES
Applications for employment by disabled persons are always fully considered,
bearing in mind the aptitudes of the applicant concerned. In the event of
members of staff becoming disabled every effort is made to ensure that their
employment with the group continues and that appropriate training is arranged.
It is the policy of the group that the training, career development and
promotion of disabled persons should, as far as possible, be identical with that
of other employees.
F-97
Directors' report (continued)
EMPLOYEE CONSULTATION
The group places considerable value on the involvement of its employees and has
continued its previous practice of keeping them informed on matters affecting
them as employees and on the various factors affecting the performance of the
group.
AUDITORS
The directors will place a resolution before the annual general meeting to
reappoint Arthur Andersen as auditors for the ensuing year.
Hart House By order of the Board,
Hartley Wintney
Hook
Hampshire
RG27 8PE
I P Williams
Deputy Chairman
17 April 2002
F-98
Directors' responsibilities
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and group and of the profit or loss of the group for that period. In
preparing those financial statements, the directors are required to:
o select suitable accounting policies and then apply them consistently;
o make judgements and estimates that are reasonable and prudent;
o state whether applicable accounting standards have been followed, subject to
any material departures disclosed and explained in the financial statements;
and
o prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the group will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and group and enable them to ensure that the financial statements comply
with the Companies Act 1985. They are also responsible for safeguarding the
assets of the company and group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
F-99
THIS INDEPENDENT AUDITORS' REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN AND HAS NOT BEEN REISSUED, NOR HAS ARTHUR ANDERSEN PROVIDED A
CONSENT TO THE INCLUSION OF ITS REPORT HEREIN.
Independent auditors' report
TO THE SHAREHOLDERS OF KAYE OFFICE SUPPLIES LIMITED:
We have audited the financial statements of Kaye Office Supplies Limited for the
year ended 31 December 2001, which comprise the Consolidated Profit and loss
account, the Consolidated and Company balance sheets, the Consolidated Cash flow
statement and the related notes numbered 1 to 25. These financial statements
have been prepared under the accounting policies set out in the Statement of
accounting policies.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors' responsibilities for preparing the annual report and the
financial statements in accordance with applicable law and United Kingdom
Accounting Standards are set out in the Statement of directors'
responsibilities. Our responsibility is to audit the financial statements in
accordance with relevant legal and regulatory requirements and United Kingdom
Auditing Standards.
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report to you if, in our opinion, the Directors' report is not
consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and transactions with the company and other members of
the group is not disclosed.
We read other information contained in the annual report and consider whether it
is consistent with the audited financial statements. This other information
comprises only the Chairman's statement and Directors' report. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do
not extend to any other information.
BASIS OF OPINION
We conducted our audit in accordance with United Kingdom Auditing Standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements
and of whether the accounting policies are appropriate to the circumstances of
the company and of the group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
F-100
Independent auditors' report (continued)
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the company and of the group at 31 December 2001 and of the
group's loss for the year then ended and have been properly prepared in
accordance with the Companies Act 1985.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS
1 City Square
Leeds
LS1 2AL
17 April 2002
F-101
Consolidated profit and loss account
For the year ended 31 December 2001
<Table>
<Caption>
Notes 2001 2000
L.'000 L.'000
TURNOVER 1 206,904 207,320
Cost of sales (160,466) (163,326)
---------- ----------
GROSS PROFIT 46,438 43,994
Other operating expenses 2 (45,736) (43,914)
---------- ----------
Operating profit before amortisation of goodwill and integration costs 3 1,371 3,044
Amortisation of goodwill 3 (308) (307)
Integration costs 3 (361) (2,657)
---------- ----------
OPERATING PROFIT 702 80
Costs of a fundamental restructuring of continuing operations 4 (5,248) -
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE FINANCE CHARGES (4,546) 80
Finance charges (net) 5 (2,289) (2,245)
---------- ----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION 6 (6,835) (2,165)
Tax on loss on ordinary activities 9 - 754
---------- ----------
RETAINED LOSS FOR THE FINANCIAL YEAR 19 (6,835) (1,411)
========== ==========
</Table>
All of the above results arose from continuing operations in both years.
The movement on reserves is shown in note 19.
There are no recognised gains or losses in either year other than the result for
that year.
The accompanying notes are an integral part of this consolidated profit and loss
account.
F-102
Consolidated balance sheet
31 December 2001
<Table>
<Caption>
Notes 2001 2000
L.'000 L.'000
FIXED ASSETS
Goodwill 10 5,455 5,763
Tangible assets 11 12,083 7,068
Investments 12 10 10
---------- ----------
17,548 12,841
---------- ----------
CURRENT ASSETS
Stocks 13 24,613 26,824
Debtors 14 41,338 51,979
Cash at bank and in hand 6 7
---------- ----------
65,957 78,810
CREDITORS: Amounts falling due within one year 15 (70,492) (78,395)
---------- ----------
NET CURRENT (LIABILITIES)/ASSETS (4,535) 415
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 13,013 13,256
CREDITORS: Amounts falling due after more than one year 16 (38) (65)
PROVISIONS FOR LIABILITIES AND CHARGES 17 (2,631) (2,547)
---------- ----------
NET ASSETS 10,344 10,644
========== ==========
CAPITAL AND RESERVES
Called-up share capital 18 7,189 654
Share premium account 19 1,235 1,235
Merger reserve 19 10,193 10,193
Profit and loss account 19 (8,273) (1,438)
---------- ----------
EQUITY SHAREHOLDERS' FUNDS 20 10,344 10,644
========== ==========
</Table>
The accompanying notes are an integral part of this consolidated balance sheet.
F-103
Company balance sheet
31 December 2001
<Table>
<Caption>
Notes 2001 2000
L.'000 L.'000
FIXED ASSETS
Investments 12 13,393 13,393
---------- ----------
CURRENT ASSETS
Debtors 14 5,273 2,961
CREDITORS: Amounts falling due within one year 15 (49) (4,272)
---------- ----------
NET CURRENT ASSETS/(LIABILITIES) 5,224 (1,311)
---------- ----------
NET ASSETS 18,617 12,082
========== ==========
CAPITAL AND RESERVES
Called-up share capital 18 7,189 654
Share premium account 19 1,235 1,235
Merger reserve 19 10,193 10,193
Profit and loss account 19 -- --
---------- ----------
EQUITY SHAREHOLDERS' FUNDS 18,617 12,082
========== ==========
</Table>
The financial statements on pages F-102 to F-123 were approved by the board of
directors on 17 April 2002 and signed on its behalf by:
I P Williams Deputy Chairman
C E Fuller Finance Director
The accompanying notes are an integral part of this balance sheet.
F-104
Consolidated cash flow statement
For the year ended 31 December 2001
<Table>
<Caption>
Notes 2001 2000
L.'000 L.'000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 21a 7,221 (6,917)
---------- ----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (2,281) (2,241)
Interest element of finance lease rental payments (8) (4)
---------- ----------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE (2,289) (2,245)
---------- ----------
TAXATION
UK corporation tax received/(paid) 402 (651)
---------- ----------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (6,714) (4,590)
Sale of tangible fixed assets 35 298
---------- ----------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
(6,679) (4,292)
---------- ----------
CASH OUTFLOW BEFORE FINANCING (1,345) (14,105)
---------- ----------
FINANCING
Issue of ordinary share capital 6,535 -
Capital element of finance lease rental payments (27) -
New finance leases - 25
---------- ----------
NET CASH INFLOW FROM FINANCING 6,508 25
---------- ----------
INCREASE/(DECREASE) IN CASH IN THE YEAR 21b 5,163 (14,080)
========== ==========
</Table>
The accompanying notes are an integral part of this consolidated cash flow
statement.
F-105
Statement of accounting policies
31 December 2001
The principal accounting policies are summarised below. They have all been
applied consistently throughout the year and the preceding year.
BASIS OF ACCOUNTING
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards.
BASIS OF PREPARATION
The group has net current liabilities of L.4,535,000 at 31 December
2001.
The group is undergoing a fundamental reorganisation of its business processes.
The directors have reviewed the financial position of the group and its
projected cash flows and results and consider that the current financing
arrangements are sufficient to allow the group to fulfil its strategies and to
fund the cash flow of the business for the forthcoming year.
Accordingly, the directors believe that on this basis it is appropriate to
prepare the financial statements on a going concern basis.
BASIS OF CONSOLIDATION
The group financial statements consolidate the financial statements of Kaye
Office Supplies Limited and its subsidiary undertakings drawn up to 31 December
each year. The results of subsidiaries acquired or sold are consolidated for the
periods from or to the date on which control passed. Acquisitions are accounted
for under the acquisition method.
No profit and loss account is presented for Kaye Office Supplies Limited as
provided by Section 230 of the Companies Act 1985. The company's result for the
financial year, determined in accordance with the Act, was L.nil
(2000 - L.nil).
INTANGIBLE ASSETS - GOODWILL
Goodwill arising on the acquisition of subsidiary undertakings and businesses,
representing any excess of the fair value of the consideration given over the
fair value of the identifiable assets and liabilities acquired, is capitalised
and written off on a straight line basis over its useful economic life, which is
20 years. Provision is made for any impairment.
Goodwill arising on acquisitions in the year ended 31 December 1997 and earlier
periods was written off to reserves in accordance with the accounting standard
then in force. As permitted by the current accounting standard the goodwill
previously written off to reserves has not been reinstated in the balance sheet.
On disposal or closure of a previously acquired business, the attributable
amount of goodwill previously written off to reserves is included in determining
the profit or loss on disposal.
F-106
Statement of accounting policies (continued)
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost, net of depreciation and any provision
for impairment.
Depreciation is provided on all tangible fixed assets, other than freehold land,
at rates calculated to write off the cost, less estimated residual value, of
each asset on a straight line basis over its expected useful life, as follows:
Freehold buildings 3% of cost per annum
Leasehold improvements over the lease term
Plant and equipment 10% to 33% of cost per annum
Fixtures and fittings 20% of cost per annum
Motor vehicles 25% to 33.33% of cost per annum
Residual value is calculated on prices prevailing at the date of acquisition.
INVESTMENTS
Fixed asset investments are shown at cost less provision for impairment. Current
asset investments are stated at the lower of cost and net realisable value.
STOCKS
Stocks are stated at the lower of cost and net realisable value. Goods for
resale are valued at purchase cost on an average price basis and include costs
incurred in bringing each product to its present location and condition. Net
realisable value is based on estimated normal selling price, less further costs
expected to be incurred to disposal. Provision is made for obsolete, slow-moving
or defective items where appropriate.
TAXATION
Current tax is provided at amounts expected to be paid (or recovered) using the
tax rates and laws that have been enacted or substantially enacted by the
balance sheet date.
Deferred taxation is provided using the liability method on all timing
differences only to the extent that they are expected to reverse in the future
without being replaced, except that the deferred tax effects of timing
differences arising from pensions and other post-retirement benefits are always
recognised in full.
F-107
Statement of accounting policies (continued)
PENSION COSTS
The group operates a defined contribution and a defined benefit pension scheme.
The assets of the defined contribution scheme are held independently of the
group in an independently administered scheme. The amount charged to the profit
and loss account represents the company contributions payable in the year.
John Heath (Holdings) Limited and its subsidiaries operate the defined benefit
scheme. For the defined benefit scheme 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.
Variations from regular cost are charged or credited to the profit and loss
account as a constant percentage of payroll over the estimated remaining working
life of scheme members. Defined benefit schemes are externally funded, with the
assets of the scheme held separately from those of the group in a separate
trustee administered fund. Differences between amounts charged to the profit and
loss account and amounts funded or paid directly to members of unfunded schemes
are shown as either provisions or prepayments in the balance sheet.
TURNOVER
Turnover comprises the value of sales (excluding VAT and similar taxes, trade
discounts and intra-group transactions) of goods and services in the normal
course of business.
LEASES
The group enters into operating leases and finance leases.
Assets held under finance leases and similar contracts which confer rights and
obligations similar to those attached to owned assets, are capitalised as
tangible fixed assets and depreciated over the shorter of the lease terms and
their useful lives. The capital elements of future lease obligations are
recorded as liabilities, while the interest elements are charged to the profit
and loss account over the period of the lease to produce a constant rate of
charge on the balance of capital repayments outstanding.
Rentals under operating leases are charged on a straight line basis over the
lease term, even if the payments are not made on such a basis.
FOREIGN CURRENCY
Transactions in foreign currencies are recorded at the rate of exchange at the
date of the transaction or, if hedged, at the forward contract rate. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet
date are reported at the rates of exchange prevailing at that date or, if
appropriate, at the forward contract rate.
The results of overseas operations are translated at the average rates of
exchange during the period and their balance sheets at the rates ruling at the
balance sheet date. Exchange differences arising on translation of the opening
net assets and on foreign currency borrowings, to the extent that they hedge the
group's investment in such operations, are dealt with through reserves. All
other exchange differences are included in the profit and loss account.
F-108
Notes to the financial statements
31 December 2001
1 SEGMENT INFORMATION
The turnover and pre-tax loss of the group are solely attributable to the
group's principal activity, that of the wholesale of office products, and arose
wholly within the United Kingdom and Ireland.
2 OTHER OPERATING EXPENSES
<Table>
<Caption>
2001 2000
L.'000 L.'000
Distribution costs 24,212 22,479
Administrative expenses 21,524 21,435
---------- ----------
45,736 43,914
========== ==========
</Table>
3 OPERATING PROFIT BEFORE AMORTISATION OF GOODWILL AND INTEGRATION COSTS
Amortisation of goodwill and integration costs are as follows:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Amortisation of goodwill 308 307
========== ==========
Integration costs
Integration costs 361 1,443
Redundancy -- 1,214
---------- ----------
361 2,657
========== ==========
</Table>
Integration costs in both years relate to certain non-recurring costs, incurred
following the acquisition of John Heath (Holdings) Limited. Redundancy costs in
2000 related to redundancies that followed the merger of the two companies.
Operating profit before amortisation of goodwill and integration costs is stated
after charging occupancy costs of the Arrow Distribution Centre of Pound
Sterling1,218,000, incurred during the period before it was fully operational.
F-109
Notes to the financial statements (continued)
4 COSTS OF FUNDAMENTAL RESTRUCTURING OF CONTINUING OPERATIONS
These costs relate to the restructuring of the business operations as follows:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Arrow costs 3,162 --
Redundancy 1,657 --
Professional fees 429 --
---------- ----------
5,248 --
========== ==========
</Table>
Arrow costs relate to certain non-recurring costs incurred during the
establishment and set-up of the new Arrow Distribution Centre.
Redundancy costs relate to the closure of depots as part of the transfer of
business operations to Arrow.
Professional fees relate to the costs of professional services used in obtaining
the necessary finance to fund the restructuring program.
5 FINANCE CHARGES (NET)
<Table>
<Caption>
2001 2000
L.'000 L.'000
Interest receivable and similar income
Interest receivable (24) (11)
Exchange gains (13) -
---------- ----------
(37) (11)
---------- ----------
Interest payable and similar charges
Bank loans and overdrafts 2,326 2,236
Exchange losses - 20
---------- ----------
2,326 2,256
---------- ----------
Finance charges (net)
Interest payable and similar charges 2,326 2,256
Less: Investment income (37) (11)
---------- ----------
2,289 2,245
========== ==========
</Table>
F-110
Notes to the financial statements (continued)
6 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
Loss on ordinary activities before taxation is stated after charging:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Depreciation and amounts written off tangible fixed assets:
- - owned 1,652 1,561
- - assets held under finance leases 18 9
Amortisation of goodwill 308 307
Operating lease rentals
- - plant and machinery 1,408 440
- - other 3,814 1,500
Auditors' remuneration for audit services 109 100
========== ==========
</Table>
Amounts payable to Arthur Andersen by the company and its subsidiary
undertakings in respect of non-audit services were L.66,000 (2000 -
L.63,000).
7 STAFF COSTS
The average monthly number of employees (including executive directors) was as
follows:
<Table>
<Caption>
2001 2000
Number Number
Distribution and warehousing 998 931
Administration 538 580
---------- ----------
1,536 1,511
========== ==========
</Table>
<Table>
<Caption>
2001 2000
L.'000 L.'000
Their aggregate remuneration comprised:
Wages and salaries 24,541 22,675
Social security costs 1,868 1,802
Other pension costs (see note 22d) 898 711
---------- ----------
27,307 25,188
========== ==========
</Table>
F-111
Notes to the financial statements (continued)
8 DIRECTORS' REMUNERATION AND INTERESTS
Remuneration
Remuneration of the directors was as follows:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Emoluments 390 397
Company contributions to money purchase pension schemes 70 42
Compensation for loss of office 137 66
---------- ----------
597 505
========== ==========
</Table>
Pensions
Three directors were members of the money purchase pension scheme (2000 - two).
Highest paid director
The above amounts for remuneration include the following in respect of the
highest paid director:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Emoluments 139 170
Company contributions to money purchase pension schemes 33 27
---------- ----------
172 197
========== ==========
</Table>
Directors' share options
Aggregate emoluments disclosed above do not include any amounts for the value of
options to subscribe for ordinary shares in the company granted to or held by
the directors. Details of the share options granted to directors who held office
at 31 December 2001 are as follows:
<Table>
<Caption>
Exercise 31 December 31 December
Date price 2001 2000
Name of director of grant L. Number Number
J K Hewson 30 September 1999 60.06 3,000 3,000
I P Williams 30 September 1999 20.56 2,500 2,500
30 September 1999 60.06 500 500
A T Hickman 30 September 1999 3.36 1,500 1,500
30 September 1999 20.56 3,500 3,500
30 September 1999 60.06 1,000 1,000
J H K Forster 30 September 1999 3.36 1,500 1,500
</Table>
All options outstanding at 31 December 2001 must be exercised within seven years
of the date of grant.
F-112
Notes to the financial statements (continued)
8 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
The directors who held office at 31 December 2001 had the following interests in
the L.1 ordinary shares of the company:
<Table>
<Caption>
Name of director 2001 2000
Number Number
J K Hewson -- 3,000
I P Williams 83,160 7,560
A T Hickman 8,073 8,073
========== ==========
</Table>
9 TAX ON LOSS ON ORDINARY ACTIVITIES
The tax credit comprises:
<Table>
<Caption>
2001 2000
L.'000 L.'000
UK corporation tax -- 178
Adjustments in respect of prior years:
UK corporation tax -- (552)
Deferred tax -- (380)
---------- ----------
-- (932)
---------- ----------
Tax credit -- (754)
========== ==========
</Table>
There is no unprovided deferred tax at either year end.
10 INTANGIBLE FIXED ASSETS - GOODWILL
<Table>
<Caption>
Group
L.'000
COST
At 1 January 2001 and 31 December 2001 6,147
----------
AMORTISATION
At 1 January 2001 384
Charge for the year 308
----------
At 31 December 2001 692
----------
NET BOOK VALUE
At 31 December 2000 5,763
==========
At 31 December 2001 5,455
==========
</Table>
F-113
Notes to the financial statements (continued)
11 TANGIBLE FIXED ASSETS
<Table>
<Caption>
GROUP
Freehold Leasehold Assets in
land and improve- Plant and Fixtures and Motor course of
buildings ments equipment fittings vehicles construction Total
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
COST
At 1 January 2001 500 2,423 8,952 923 233 1,740 14,771
Additions -- 368 6,827 1,252 7 (1,740) 6,714
Disposals -- -- (39) -- (61) -- (100)
Transfers -- 1,020 -- (1,020) -- -- --
--------- --------- --------- ------------ --------- ------------ ---------
At 31 December 2001
500 3,811 15,740 1,155 179 -- 21,385
--------- --------- --------- ------------ --------- ------------ ---------
DEPRECIATION
At 1 January 2001 6 1,520 5,407 679 91 -- 7,703
Charge for the year
10 194 1,242 188 36 -- 1,670
Disposals -- -- (19) -- (52) -- (71)
Transfers -- 51 -- (51) -- -- --
--------- --------- --------- ------------ --------- ------------ ---------
At 31 December
2001 1,765 6,630 816 75 -- 9,302
--------- --------- --------- ------------ --------- ------------ ---------
NET BOOK VALUE
At 31 December 2000
494 903 3,545 244 142 1,740 7,068
========= ========= ========= ============ ========= ============ =========
At 31 December 2001
484 2,097 9,110 288 104 -- 12,083
========= ========= ========= ============ ========= ============ =========
</Table>
Included in plant and equipment are assets capitalised under finance leases,
with a net book value at 31 December 2001 of L.80,000 (2000 - L.100,000).
Included in freehold land and buildings is freehold land of L.167,000, which is
not depreciated.
COMPANY
The company held no tangible fixed assets in either year.
F-114
Notes to the financial statements (continued)
12 FIXED ASSET INVESTMENTS
<Table>
<Caption>
Group Company
-------------------------- --------------------------
2001 2000 2001 2000
L.'000 L.'000 L.'000 L.'000
Subsidiary undertakings -- -- 13,392 13,392
Other investments 10 10 1 1
---------- ---------- ---------- ----------
10 10 13,393 13,393
========== ========== ========== ==========
</Table>
Subsidiary undertakings
<Table>
<Caption>
L.'000
Cost and net book value
At 1 January 2001 and 31 December 2001 13,392
==========
</Table>
The parent company has investments in the following principal subsidiary
undertakings, registered in England and Wales, which carried on the business of
the wholesale of office supplies and equipment (unless otherwise indicated).
<Table>
<Caption>
Proportion of ordinary
shares held
Kingfield Heath Limited 100%
John Heath (Holdings) Limited (Dormant) 100%
John Heath & Co Limited (Dormant) 100%
John Heath (Ireland) Limited (Dormant and registered in Ireland) 100%
</Table>
Kingfield Heath Limited and John Heath (Holdings) Limited have a number of
dormant wholly owned subsidiary undertakings, all of whom are registered in
England and Wales, Scotland or Ireland.
Additional consideration
Following the acquisition of John Heath (Holdings) Limited on 30 September 1999
additional consideration may be payable to ISA International plc., in the event
of subsequent Share Sale, Asset Sale or Flotation of the company ("Exit"). In
the event of an Exit, formulae operate to transfer to the vendor a proportion of
the exit consideration to ensure that the dilution effect of long standing
options held by employees of Kingfield Heath Limited at option prices below
L.60.06 per share established for new options, is borne by shareholders other
than ISA International plc.
Other investments
Other investments relate to an investment in Interaction, a European Buying
Group.
F-115
Notes to the financial statements (continued)
13 STOCKS
<Table>
<Caption>
Group
--------------------------
2001 2000
L.'000 L.'000
Goods held for resale 24,613 26,824
========== =========
</Table>
There is no material difference between the balance sheet value of stocks and
their replacement cost.
The company held no stocks for resale.
14 DEBTORS
<Table>
<Caption>
Group Company
-------------------------- --------------------------
2001 2000 2001 2000
L.'000 L.'000 L.'000 L.'000
Amounts falling due within one year:
Trade debtors 36,011 46,647 -- --
Amounts owed by group undertakings -- -- 5,234 2,922
UK corporation tax 170 572 16 16
Other debtors 2,164 3,267 23 23
Prepayments and accrued income 2,993 1,493 -- --
---------- ---------- ---------- ----------
41,338 51,979 5,273 2,961
========== ========== ========== ==========
</Table>
15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
Group Company
-------------------------- --------------------------
2001 2000 2001 2000
L.'000 L.'000 L.'000 L.'000
Obligations under finance leases 26 26 -- --
Bank loans and overdrafts 31,913 37,077 -- --
Trade creditors 26,272 31,834 -- --
Amounts owed to group undertakings -- -- -- 4,260
UK corporation tax -- -- -- --
Other taxation and social security 668 677 -- --
Other creditors 4,311 3,408 -- --
Accruals and deferred income 7,302 5,373 49 12
---------- ---------- ---------- ----------
70,492 78,395 49 4,272
========== ========== ========== ==========
</Table>
The bank borrowings of the group are secured by fixed and floating charges over
the group's assets.
F-116
Notes to the financial statements (continued)
16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
Group
--------------------------
2001 2000
L.'000 L.'000
OBLIGATIONS UNDER FINANCE LEASES
Between one and two years 26 26
Between two and five years 12 39
---------- ----------
38 65
========== ==========
</Table>
The company held no assets under finance leases in either year.
17 PROVISIONS FOR LIABILITIES AND CHARGES
<Table>
<Caption>
Dilapidations
GROUP L.'000
At 1 January 2001 2,547
Increase in provision 84
-------------
At 31 December 2001 2,631
=============
</Table>
The provision for dilapidations was made following a review of the group's
leasehold property portfolio.
There is no unprovided deferred tax liability at either year end.
18 CALLED-UP SHARE CAPITAL
<Table>
<Caption>
2001 2000
L.'000 L.'000
Authorised
8,145,175 (2000 - 810,095) ordinary shares of L.1 each 8,145 810
========== ==========
Allotted, called-up and fully paid
7,188,918 (2000 - 653,538) ordinary shares of L.1 each 7,189 654
========== ==========
</Table>
Share capital was increased during the year, as a result of the Rights Issue,
when 6,535,380 shares were issued, at par, for cash.
F-117
Notes to the financial statements (continued)
18 CALLED-UP SHARE CAPITAL (CONTINUED)
For each of the financial years from and including the financial year ending 31
December 2001, the ordinary shares carry an entitlement to a dividend equal to
40% of the profits after taxation for that financial year, as adjusted by adding
back the amount of goodwill amortised in that year and adding back, or as the
case may be, deducting any extraordinary items.
On a return of assets on liquidation or capital reduction or otherwise, the
assets of the company remaining after the payment of its liabilities shall be
distributed amongst the holders of the ordinary shares pari passu in proportion
to the amounts paid up or credited as paid up on the ordinary shares held by
them respectively.
19 RESERVES
<Table>
<Caption>
Share Profit and
premium Merger Loss
account reserve Account Total
GROUP L.'000 L.'000 L.'000 L.'000
Beginning of year 1,235 10,193 (1,438) 9,990
Movement in the year -- -- (6,835) (6,835)
---------- ---------- ---------- ----------
End of year 1,235 10,193 (8,273) 3,155
========== ========== ========== ==========
</Table>
The cumulative amount of goodwill written off against the group's reserves is
L.822,000 (2000 - L.822,000).
<Table>
<Caption>
Share Profit and
premium Merger Loss
account reserve Account Total
COMPANY L.'000 L.'000 L.'000 L.'000
Beginning and end of year 1,235 10,193 - 11,428
========== ========== ========== ==========
</Table>
Of total reserves shown in the balance sheet, the following amounts are regarded
as distributable or otherwise:
<Table>
<Caption>
Group Company
-------------------------- --------------------------
2001 2000 2001 2000
L.'000 L.'000 L.'000 L.'000
Distributable
- - Profit and loss account (8,273) (1,438) -- --
Non-distributable
- - Share premium account 1,235 1,235 1,235 1,235
- - Merger reserve 10,193 10,193 10,193 10,193
---------- ---------- ---------- ----------
Total reserves 3,155 9,990 11,428 11,428
========== ========== ========== ==========
</Table>
F-118
Notes to the financial statements (continued)
20 RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
<Table>
<Caption>
Group
--------------------------
2001 2000
L.'000 L.'000
Loss for the financial year (6,835) (1,411)
New share capital subscribed 6,535 --
---------- ----------
Net reduction in shareholders' funds (300) (1,411)
Opening shareholders' funds 10,644 12,055
---------- ----------
Closing shareholders' funds 10,344 10,644
========== ==========
</Table>
21 CASH FLOW INFORMATION
a) Reconciliation of operating profit to operating cash flows
<Table>
<Caption>
2001 2000
L.'000 L.'000
Operating profit 702 80
Amortisation of goodwill 308 307
Depreciation charges 1,670 1,570
Profit on sale of tangible fixed assets (6) (62)
Decrease/(increase) in stocks 2,211 (3,547)
Decrease/(increase) in debtors 10,239 (1,191)
Decrease in creditors (2,655) (4,074)
Cash impact of fundamental restructuring (5,248) --
---------- ----------
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 7,221 (6,917)
========== ==========
</Table>
b) Analysis and reconciliation of net debt
<Table>
<Caption>
1 January 31 December
2001 Cash flow 2001
L.'000 L.'000 L.'000
Cash in hand, at bank 7 (1) 6
Overdrafts (37,077) 5,164 (31,913)
---------- ---------- ----------
(37,070) 5,163 (31,907)
Finance leases (91) 27 (64)
---------- ---------- ----------
Net debt (37,161) 5,190 (31,971)
========== ========== ==========
</Table>
F-119
Notes to the financial statements (continued)
21 CASH FLOW INFORMATION (CONTINUED)
c) Reconciliation of net debt
<Table>
<Caption>
2001 2000
L.'000 L.'000
Increase/(decrease) in cash in year 5,163 (14,080)
Cash inflow from increase in lease financing -- (25)
Cash outflow from finance lease payments 27 --
---------- ----------
Movement in net debt in year 5,190 (14,105)
Net debt at 1 January 2001 (37,161) (23,056)
---------- ----------
Net debt at 31 December 2001 (31,971) (37,161)
========== ==========
</Table>
22 GUARANTEES AND OTHER FINANCIAL COMMITMENTS
a) Lease commitments
The minimum annual rentals under non-cancellable operating leases are as
follows:
<Table>
<Caption>
2001 2000
Group and company Group and company
-------------------------- --------------------------
Plant and Plant and
Property equipment Property equipment
L.'000 L.'000 L.'000 L.'000
Operating leases which expire:
- - within one year - 83 25 27
- - between two and five years 1,119 280 721 372
- - after five years 2,073 - 2,413 -
---------- ---------- ---------- ----------
3,192 363 3,159 399
========== ========== ========== ==========
</Table>
b) Guarantees
At 31 December 2001, the company has entered into a guarantee in respect of the
bank borrowings of Kingfield Heath Limited and John Heath (Holdings) Limited,
both subsidiary undertakings, which totalled L.31,913,000 (2000 -
L.37,077,000).
c) Capital commitments
Capital commitments are as follows:
<Table>
<Caption>
2001 2000
L.'000 L.'000
Contracted for but not provided for 582 4,481
========== =========
</Table>
F-120
Notes to the financial statements (continued)
22 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED)
d) Pension commitments
The group's principal pension scheme is a defined contribution plan covering 445
employees. In addition, John Heath (Holdings) Limited operates a defined benefit
pension scheme, the John Heath (Holdings) Limited Pension Fund which is funded
by the payment of contributions to a separately administered trust fund.
Contributions to the scheme are determined with the advice of an independent
qualified actuary using the Projected Unit Method. The results of the most
recent actuarial valuation, which was conducted as at 31 March 1999, and the
main assumptions were as follows:
Investment returns 7.3% per annum
Pensionable salary increases 3.75% per annum
Pension increases 2.75% per annum on post GMPs
3% per annum on non-GMPs
Dividend growth 5.0% per annum
The market value of the scheme's assets at the date of the actuarial review was
L.9,458,000. This represents a funding ratio on the new Minimum Funding
Requirements of 94% and an ongoing funding ratio of 93% as at 31 March 1999. The
company has increased its contribution levels by L.10,000 per month for five
years from January 2000 plus additional half yearly contributions of L.150,000
for two years from 1 August 2000. ISA International plc contributes L.108,000 to
the company in respect of each of the additional, half yearly, L.150,000
contributions. The pension costs shown in note 7 have been reduced accordingly.
The pension cost charge for the John Heath (Holdings) scheme for the year was
L.121,000 (2000 - L.372,000). The pension cost charge for the group's defined
contribution plan for the year was L.777,000 (2000 - L.339,000).
In November 2000 the Accounting Standards Board issued FRS 17 'Retirement
Benefits' replacing SSAP 24 'Accounting for Pension Costs'. FRS 17 is fully
effective for periods ending on or after 22 June 2003, though certain
disclosures are required in the transitional period regarding the group's
defined benefit pension scheme, for periods ending on or after 22 June 2001.
These further disclosures as at 31 December 2001 are set out below.
F-121
Notes to the financial statements (continued)
22 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED)
d) Pension commitments (continued)
The principal actuarial assumptions used as at 31 December 2001 for the purposes
of FRS 17 are shown below:
<Table>
<Caption>
%
Rate of increase in salaries N/A
Rate of increase of pensions in payment 2.5
Discount rate 5.8
Inflation assumption 2.5
</Table>
The value of assets and liabilities of the John Heath (Holdings) Limited Pension
Fund at 31 December 2001, along with the weighted average expected rates of
return of the scheme's assets are shown below:
<Table>
<Caption>
Long-term
rate of
return Value
expected (%) L.'000
Equities 7.9 5,507
Gilts 4.9 4,620
Other 4.0 364
------------ --------
Fair value of assets held 10,491
Present value of liabilities (11,685)
--------
Pension scheme deficit (1,194)
========
</Table>
23 SHARE OPTIONS
Options were granted under an employee share option scheme (the Kaye Office
Supplies Limited 1996 Executive Share Options Scheme) to subscribe for ordinary
shares. On 30 September 1999, this scheme was replaced by the Kaye Office
Supplies Limited 1999 Executive Share Options Scheme. The holders of the options
in the old scheme agreed to receive options in the new scheme at the same
exercise price.
No new options were issued or exercised during the year ended 31 December 2001.
F-122
Notes to the financial statements (continued)
23 SHARE OPTIONS (CONTINUED)
Share options outstanding at 31 December 2001 totalled 81,600 (2000: 86,000), as
detailed below:
<Table>
<Caption>
Exercise period Exercise Number of Number of
price per shares under shares under
option option option
L. 2000 Lapsed 2001
September 1999 - September 2006 3.36 12,000 (500) 11,500
September 1999 - September 2006 4.19 1,500 - 1,500
September 1999 - September 2006 4.40 1,500 (500) 1,000
September 1999 - September 2006 4.54 1,500 - 1,500
September 1999 - September 2006 4.61 500 - 500
September 1999 - September 2006 5.07 1,500 - 1,500
September 1999 - September 2006 5.41 900 - 900
September 1999 - September 2006 9.04 1,600 - 1,600
September 1999 - September 2006 20.56 14,500 - 14,500
September 1999 - September 2006 23.01 10,000 - 10,000
September 1999 - September 2006 26.07 6,000 (2,000) 4,000
September 1999 - September 2006 60.06 34,500 (1,400) 33,100
--------- --------- ---------
86,000 (4,400) 81,600
========= ========= =========
</Table>
24 SUBSEQUENT EVENTS
On 16 April 2002, the company made a capital contribution of L.5,000,000 to the
main trading subsidiary, Kingfield Heath Limited. This capital contribution was
in the form of the capitalisation of intercompany debt.
25 RELATED PARTY TRANSACTIONS
Related party transactions with wholly owned group members are not disclosed as
permitted by FRS8, Related Party Disclosures.
ISA International plc., a major shareholder and former owner of John Heath
(Holdings) Limited paid the group L.216,000 (2000 - L.216,000) in the year to
cover some of the costs of the John Heath (Holdings) pension scheme.
F-123
KAYE OFFICE SUPPLIES LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE QUARTER ENDED 31ST MARCH, 2002
(Unaudited)
<Table>
<Caption>
L.'000
TURNOVER 55,615
Cost of sales (43,483)
----------
GROSS PROFIT 12,132
Other operating expenses (12,961)
----------
Operating loss before amortisation of goodwill and exceptional items (829)
Amortisation of goodwill (77)
Exceptional (1,065)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE FINANCE CHARGES (1,971)
Finance charges (net) (608)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (2,579)
Tax on loss on ordinary activities --
----------
LOSS AFTER TAX (2,579)
==========
</Table>
The accompanying notes are an integral part of this consolidated profit and loss
account.
F-124
Kaye Office Supplies Limited
Consolidated Balance Sheet
At 31st March, 2002
(Unaudited)
<Table>
<Caption>
L.'000
FIXED ASSETS
Goodwill 5,379
Tangible assets 11,737
Investments 10
----------
17,126
----------
CURRENT ASSETS
Stocks 24,513
Debtors 44,278
Cash at bank and in hand 5
----------
68,796
CREDITORS: Amounts falling due within one year (75,063)
----------
NET CURRENT (LIABILITIES)/ASSETS (6,267)
----------
TOTAL ASSETS LESS CURRENT LIABILITIES 10,859
CREDITORS: Amounts falling due after more than one year (31)
PROVISIONS FOR LIABILITIES AND CHARGES (2,541)
----------
NET ASSETS 8,287
==========
CAPITAL AND RESERVES
Called-up share capital 7,189
Share premium account 1,235
Merger reserve 10,193
Profit and loss account (10,330)
----------
EQUITY SHAREHOLDERS' FUNDS 8,287
==========
</Table>
The accompanying notes are an integral part of this consolidated balance sheet.
F-125
Kaye Office Supplies Limited
Consolidated Cash Flow Statement
for the quarter ended 31st March, 2002
(Unaudited)
<Table>
<Caption>
L.'000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES (1,746)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (608)
TAXATION 2
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (237)
----------
CASH INFLOW/(OUTFLOW) BEFORE FINANCING (2,589)
----------
FINANCING --
----------
INCREASE/(DECREASE) IN CASH IN THE PERIOD (2,589)
==========
</Table>
The accompanying notes are an integral part of this consolidated cash flow
statement.
F-126
Kaye Office Supplies Limited
Statement of Accounting Policies
for the quarter ended 31st March, 2002
The principal accounting policies are summarised below. They have all been
applied consistently throughout the period.
BASIS OF ACCOUNTING
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards.
BASIS OF PREPARATION
The group has net current liabilities of Pound Sterling 6,267,000 at 31 March
2002.
The group is undergoing a fundamental reorganisation of its business processes.
The directors have reviewed the financial position of the group and its
projected cash flows and results and consider that the current financing
arrangements are sufficient to allow the group to fulfil its strategies and to
fund the cash flow of the business for the forthcoming year.
Accordingly, the directors believe that on this basis it is appropriate to
prepare the financial statements on a going concern basis.
BASIS OF CONSOLIDATION
The group financial statements consolidate the financial statements of Kaye
Office Supplies Limited and its subsidiary undertakings drawn up to 31 March
2002. The results of subsidiaries acquired or sold are consolidated for the
periods from or to the date on which control passed. Acquisitions are accounted
for under the acquisition method.
No profit and loss account is presented for Kaye Office Supplies Limited as
provided by Section 230 of the Companies Act 1985. The company's result for the
financial period, determined in accordance with the Act, was Pound Sterlingnil.
INTANGIBLE ASSETS - GOODWILL
Goodwill arising on the acquisition of subsidiary undertakings and businesses,
representing any excess of the fair value of the consideration given over the
fair value of the identifiable assets and liabilities acquired, is capitalised
and written off on a straight line basis over its useful economic life, which is
20 years. Provision is made for any impairment.
Goodwill arising on acquisitions in the year ended 31 December 1997 and earlier
periods was written off to reserves in accordance with the accounting standard
then in force. As permitted by the current accounting standard the goodwill
previously written off to reserves has not been reinstated in the balance sheet.
On disposal or closure of a previously acquired business, the attributable
amount of goodwill previously written off to reserves is included in determining
the profit or loss on disposal.
F-127
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost, net of depreciation and any provision
for impairment.
Depreciation is provided on all tangible fixed assets, other than freehold land,
at rates calculated to write off the cost, less estimated residual value, of
each asset on a straight line basis over its expected useful life, as follows:
<Table>
Freehold buildings 3% of cost per annum
Leasehold improvements over the lease term
Plant and equipment 10% to 33% of cost per annum
Fixtures and fittings 20% of cost per annum
Motor vehicles 25% to 33.33% of cost per annum
</Table>
Residual value is calculated on prices prevailing at the date of acquisition.
INVESTMENTS
Fixed asset investments are shown at cost less provision for impairment. Current
asset investments are stated at the lower of cost and net realisable value.
STOCKS
Stocks are stated at the lower of cost and net realisable value. Goods for
resale are valued at purchase cost on an average price basis and include costs
incurred in bringing each product to its present location and condition. Net
realisable value is based on estimated normal selling price, less further costs
expected to be incurred to disposal. Provision is made for obsolete, slow-moving
or defective items where appropriate.
TAXATION
Current tax is provided at amounts expected to be paid (or recovered) using the
tax rates and laws that have been enacted or substantially enacted by the
balance sheet date.
Deferred taxation is provided using the liability method on all timing
differences only to the extent that they are expected to reverse in the future
without being replaced, except that the deferred tax effects of timing
differences arising from pensions and other post-retirement benefits are always
recognised in full.
F-128
PENSION COSTS
The group operates a defined contribution and a defined benefit pension scheme.
The assets of the defined contribution scheme are held independently of the
group in an independently administered scheme. The amount charged to the profit
and loss account represents the company contributions payable in the year.
John Heath (Holdings) Limited and its subsidiaries operate the defined benefit
scheme. For the defined benefit scheme 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.
Variations from regular cost are charged or credited to the profit and loss
account as a constant percentage of payroll over the estimated remaining working
life of scheme members. Defined benefit schemes are externally funded, with the
assets of the scheme held separately from those of the group in a separate
trustee administered fund. Differences between amounts charged to the profit and
loss account and amounts funded or paid directly to members of unfunded schemes
are shown as either provisions or prepayments in the balance sheet.
TURNOVER
Turnover comprises the value of sales (excluding VAT and similar taxes, trade
discounts and intra-group transactions) of goods and services in the normal
course of business.
LEASES
The group enters into operating leases and finance leases.
Assets held under finance leases and similar contracts which confer rights and
obligations similar to those attached to owned assets, are capitalised as
tangible fixed assets and depreciated over the shorter of the lease terms and
their useful lives. The capital elements of future lease obligations are
recorded as liabilities, while the interest elements are charged to the profit
and loss account over the period of the lease to produce a constant rate of
charge on the balance of capital repayments outstanding.
Rentals under operating leases are charged on a straight line basis over the
lease term, even if the payments are not made on such a basis.
FOREIGN CURRENCY
Transactions in foreign currencies are recorded at the rate of exchange at the
date of the transaction or, if hedged, at the forward contract rate. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet
date are reported at the rates of exchange prevailing at that date or, if
appropriate, at the forward contract rate.
The results of overseas operations are translated at the average rates of
exchange during the period and their balance sheets at the rates ruling at the
balance sheet date. Exchange differences arising on translation of the opening
net assets and on foreign currency borrowings, to the extent that they hedge the
group's investment in such operations, are dealt with through reserves. All
other exchange differences are included in the profit and loss account.
F-129
Index to Exhibits
<Table>
<Caption>
Exhibit
Number Description
- ------- -----------
23.1 Consent of Ernst & Young LLP.
The consents of Arthur Andersen to the inclusion of its auditors'
reports on the financial statements of ISA International plc as of
and for the two years ended December 31, 2000 and the financial
statements of Kaye Office Supplies Limited for the year ended
December 31, 2001 are omitted pursuant to rules promulgated by the
United States Securities and Exchange Commission. The Company has
not been able to obtain, after reasonable efforts, the written
consent to the reissuance of the Arthur Andersen audit opinions for
these previously issued reports. Accordingly, investors in the
Company will not have legal recourse against Arthur Andersen and,
therefore, an investor's right of recovery, including under Section
11(a)(4) of the Securities Act of 1933, as amended, with respect to
any Securities Act registration statements of the Company, may be
limited as a result of the lack of consent to the reissuance of
Arthur Andersen's audit opinions.
99.1 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 (incorporated by reference
from Current Report on Form 8-K dated May 24, 2002 (File No.
000-25400)).
</Table>