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>