ORIGINAL

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TEXA S

SHERMAN DIVISIO N

In re DAISYTEK INTERNATIONALLITIGATION

This Document Relates To :

ALL ACTIONS .

§ Master Docket No. 4:03-CV-212

§ CLASS ACTION

§

CONSOLIDATED COMPLAINT FOR VIOLATIONOF THE FEDERAL SECURITIES LAWS

TABLE OF CONTENTS

Page

SUMMARY OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

DAISYTEK'S MASSIVE EXPANSION, CHANGE IN BUSINESS STRATEGY ANDINFORMATION SYSTEMS UPGRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

THE TRUTH ABOUT DAISYTEK'S STATE OF AFFAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

DAISYTEK RECORDED AT LEAST $30 MILLION IN FICTITIOUS VENDOR REBATESAND PROMOTIONAL ALLOWANCES AND IMPROPERLY CLASSIFIED SUCHDISCOUNTS AS REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

DAISYTEK'S IMPROPER METHODS OF "CLOSING THE GAP" BETWEEN ACTUALAND FORECASTED REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3

DAISYTEK'S EXCESSIVELY LIBERAL SALES POLICIES AND "SALES" TOCUSTOMERS THAT COULD NOT PAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

DAISYTEK'S UNCOLLECTIBLE ACCOUNTS RECEIVABLES AND FAILURE T OACCOUNT FOR THE LARGE NUMBER OF CUSTOMER RETURNS . . . . . . . . . . . . . . . . . . . . . .20

DAISYTEK INTENTIONALLY DAMAGED INVENTORY IT WANTED TO RETURN TOVENDORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

DAISYTEK'S FAILURE TO PROVIDE INVENTORY SYSTEMS DATA MANAGEMENT 27

FALSE AND MISLEADING STATEMENTS MADE BY DEFENDANTS DURING THECLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

DAISYTEK REVEALS ITS TRUE FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

DAISYTEK'S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD . . . . . . . . . . . . . . .63

DAISYTEK'S IMPROPER REVENUE RECOGNITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

DAISYTEK'S IMPROPER ACCOUNTING FOR VENDOR REBATES AN DPROMOTIONAL ALLOWANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

DAISYTEK'S IMPROPER VALUATION OF RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72

DAISYTEK'S IMPROPER ACCOUNTING FOR INVENTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

DAISYTEK'S IMPROPER ACCOUNTING FOR RETURNS TO VENDORS . . . . . . . . . . . . . . . . . . . . . . . . .76

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Page

DAISYTEK'S IMPROPER ACCOUNTING FOR RETURNS FROM CUSTOMERS . . . . . . . . . . . . . . 7 7

OTHER INDICIA OF FALSE FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

DAISYTEK'S GAAP VIOLATIONS WERE MATERIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

DAISYTEK FAILED TO MAKE REQUIRED DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9

DAISYTEK LACKED ADEQUATE INTERNAL CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80

DEFENDANTS' FALSE CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

DEFENDANTS' SCIENTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

THE EXECUTIVE COMPENSATION AND BONUS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

STATUTORY SAFE HARBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9

CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

FIRST CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1

SECOND CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3

_11_

SUMMARY OF THE ACTION

1 . This is a securities class action on behalf of all persons who purchased the publicly

traded securities of Daisytek International Corporation ("Daisytek" or the "Company") between

November 9, 2001 and April 28, 2003 (the "Class Period") . The defendants are four top officers and

directors of the Company who directed the fraud herein (James R . Powell, Ralph Mitchell, John

(Jack) D. Kearney and Peter Wharf) . Plaintiffs allege violations of the federal securities laws arising

out of defendants' issuance of false and misleading statements about the Company's historical

financial statements, business, operating performance and prospects .

2. Daisytek was a global distributor of computer and office supplies and professional

tape products . Daisytek sold its computer and office supplies and services in the United States,

Canada, Australia, Mexico and South America. In early 2001, Daisytek began an aggressive

expansion program that allowed the Company to report double-digit revenue growth . Specifically,

the expansion program consisted o£ (i) changing the Company's customer base from solely

wholesale suppliers to wholesale and retail customers; (ii) acquiring additional distributors and

wholesalers worldwide ; (iii) making drastic changes to the Company's information and systems

technology; and (iv) decentralizing the Company's single distribution center into five regional

facilities . Defendants financed Daisytek's expansion and change in business strategy by increasing

its credit facilities and debt by tens of millions of dollars .

3 . To maintain the false appearance that the expansion and change in business strateg y

was successful and going to increase Daisytek's stock price, defendants flooded the market

throughout the Class Period with false statements that reported strong revenue growth and earnings .

Defendants' statements that the Company's expansion program was succeeding and that Daisytek

was achieving strong revenue growth were outright lies . In fact, Daisytek was a true house of cards,

beset with operational problems impacting every aspect of the Company . Defendants' efforts t o

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simultaneously expand the Company's customer base, revamp its information technology systems

and expand the distribution system were a disaster . First and foremost, Daisytek's business strategy

expansion failed because the Company could not achieve profitability on products sold to new

customers such as Office Depot and Staples . Unfortunately for Daisytek, it expanded into the hyper-

competitive business of supplying products to gigantic companies which insisted on discount

pricing. In turn, Daisytek had to purchase these same products from huge suppliers such as Hewlett-

Packard which would only allow Daisytek to receive discounts by purchasing in sufficient volume .

The problem, however, was that Daisytek did not have the ability to purchase and turn around and

sell in sufficient quantity to obtain discounts which would allow it to be profitable .

4. Second, compounding the continuous pressure on Daisytek's margins were the

enormous operational problems plaguing the Company . Daisytek's inventory, ordering and shipping

information systems were woefully inadequate to operate the business . The Company's systems

which ran on J .D. Edwards software were so antiquated that Daisytek attempted to upgrade these

systems at the same time the Company's customer base and distribution facilities were being

expanded. The attempted upgrade failed and in the process the Company lost track of inventory,

orders to suppliers, orders from customers, returns to suppliers, returns from customers, and a host of

issues related to promotions and discounts from suppliers .

5 . Third, the Company's operational performance was further impacted by its inabilit y

to track inventory, orders and returns . As a result, Daisytek experienced runaway costs associated

with the expansion of its distribution centers. By expanding its distribution facilities to five

locations from a single center, the Company incurred massive costs to build the new facilities . With

the non-functioning information systems, however, the multiple locations exacerbated problems

associated with the Company's inability to manage its inventory . In short, simultaneously

expanding distribution facilities and upgrading information systems was impossible .

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6 . Instead of revealing the operational problems plaguing the Company, defendants

caused Daisytek to issue financial results indicating that the Company's expansion program was on

track, the Company was successfully transitioning its business model and that the Company was

achieving strong revenue growth . Defendants' statements to the market during the Class Period

were false when made . Daisytek was only able to report strong revenue growth throughout the Class

Period by improper revenue recognition and other illegal accounting practices, all of which served to

conceal from investors the true state of Daisytek's operations . Defendants' accounting shenanigans

allowed Daisytek to report materially and artificially inflated sales, income, assets and shareholder

equity.

7 . Daisytek's illegal accounting practices took various forms, including :

• recording at least $30 million in fictitious vendor rebates and promotionalallowances and improperly labeling them as revenue instead of as a reduction

of sales costs ;

• recording millions more in fictitious revenue to "close gaps" at the end of

quarters by engaging in improper sales practices, including shipping productearly, shipping excess amounts, failing to ship product at all and storingproduct in trailers to record sales ;

• recording revenues on sales to customers that Daisytek knew were alreadydelinquent or poor credit risks ;

• failing to record adequate reserves for uncollectible accounts receivable ;

• failing to record adequate reserves for excess, obsolete, damaged and non-returnable inventory ;

• recording unjustified credits for purported returns to vendors ;

• failing to properly account for returns from Daisytek customers ;

• using a nonfunctioning inventory management system that became evenworse with the transition to a new system ; and

• failing to make appropriate disclosures required by GAAP and SEC rules .

Absent the improper accounting practices, Daisytek would have reported materially lower revenue

and negative EPS or losses in these periods .

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8. Despite knowing the truth about Daisytek's improper business and accountin g

practices, defendants continued to flood the market with false, positive statements . Defendants'

statements caused stock to trade at artificially inflated prices during the Class Period, as high as

$18 .41 per share. Capitalizing on defendants' false statements and artificial inflation, defendant

Director Peter Wharf sold 92,000 shares of Daisytek common stock for more than $1 .18 million in

unlawful insider trading proceeds . Defendants were also motivated to increase the stock price an d

keep it inflated because their personal compensation, including bonuses, was tied to the Company's

performance and acquisitions .

9. Defendants continued to keep the house of cards afloat despite being confronted

several times by employees regarding the accounting shenanigans . First, in February 2002, a Senio r

Vice President of Operations and a North American Controller compiled a book that contained th e

accounting irregularities and presented it to senior management, including the defendants . In March

2002, a former Director of the Peripherals Division and Corporate Development objected about the

Company's problematic business practices, improper accounting and revenue recognition t o

Daisytek's Board. As a result of his objections, the Board allegedly demanded repayment of $ 2

million in bonuses that Daisytek had paid in spring 2002 to eleven executives for the Company' s

reported financial performance for the prior fiscal year . And finally in March 2003, an employe e

from the accounting department and a Vice President of Sales also prepared and presented a detaile d

book setting forth the defendants' accounting problems . Despite these employees' descriptions of

accounting shenanigans and improper business practices being presented to the Board of Directors,

including the audit committee thereof, the Company did nothing to stop the practices .

10 . Thus, the crippling effects of the Company's increased debt, deteriorating margins ,

lack of financial growth and fast-approaching loan covenant deadlines which the Company violated ,

soon became too overwhelming . On April 28, 2003, the Company finally revealed the truth about it s

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dismal financial state and disclosed it would record "significant" write-downs of customer and

vendor receivables, inventory and large restructuring charges . On this news, the Company's stock

dropped to $0.53 . Daisytek subsequently announced the resignation of its CEO and its CFO and,

soon thereafter, instead of restating its financials declared bankruptcy . Daisytek's public investors,

in turn, lost millions .

JURISDICTION AND VENUE

11 . The claims asserted arise under §§10(b) and 20(a) of the Securities Exchange Act of

1934 ("Exchange Act"), 15 U .S .C. §§78j(b) and 78t, and Rule lOb-5 . Jurisdiction exists pursuant to

§27 of the Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C. § 1331 .

THE PARTIES

12. Lead Plaintiffs Hawaii Electricians Annuity Fund, James Donahue and Alaska Hotel

& Restaurant Employees Pension Trust Fund purchased shares of Daisytek stock and were damaged

thereby.

13 . Daisytek is headquartered in Allen, Texas. Daisytek filed for Chapter 11 bankruptcy

reorganization on May 7, 2003 and June 3, 2003, and is not named as a defendant herein .

14. Defendant James R . Powell ("Powell") was, until his resignation on May 5, 2003 ,

President, CEO and a director of Daisytek . Powell had held several senior management positions in

his 13 years with the Company . Powell was named President and Chief Executive Officer of the

Company during February 2000, after most recently serving as Senior Vice President . Powell was

primarily responsible for the Company's largest division, United States computer supplies, for more

than five years . Before that, he was Daisytek's Vice President of Sales and served in various other

management positions in the Company . Powell was a Director of Daisytek since 1996 . During the

Class Period, Powell misappropriated more than $800,000 from Daisytek by defaulting on an

employee loan to him .

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15 . Defendant Ralph Mitchell ("Mitchell") was, until May 5, 2003, CFO and Executive

Vice President of Daisytek. Mitchell served as Executive Vice President of Finance and Chief

Financial Officer of the Company since March 2000 .

16. Defendant John (Jack) D. Kearney, Sr., ("Kearney"), was Executive Vice President-

Corporate Development of the Company , a position he held since February 2000. From March 1999

to February 2000, Kearney was Vice President - Corporate Development of the Company . Kearney

served as acting CFO during the Class Period while Mitchell was on medical leave . Kearney was a

Director of Daisytek since July 2000 .

17. Defendant Peter Wharf ("Wharf') has served as a Director of the Company sinc e

September 2000 and as Executive Vice President and President of International Operations since

June 2002 . Wharf previously served as Executive Vice President of Worldwide Supplies since May

2000, Vice President of International Operations since 1997 and as Director of International

Operations of the Company from 1992 to 1997 . During the Class Period, Wharf sold 90,200 shares

of his Daisytek stock, at inflated levels, for proceeds exceeding $1 .18 million while in possession of

adverse, non-public information in mid-July 2002 .

18. Defendants identified in ¶¶14-17 are referred to herein as the "defendants ."

DAISYTEK'S MASSIVE EXPANSION, CHANGE IN BUSINESS STRATEGY ANDINFORMATION SYSTEMS UPGRADE

19. Daisytek, a global distributor of computer and office supplies and professional tape

products, began a program of aggressive expansion in early 2001 that would supposedly lead to

sustained double-digit revenue and earnings growth. Specifically, defendants embarked upon an

ambitious program to : (i) acquire additional distributors and wholesalers worldwide ; (ii) change its

information systems technology ; and (iii) transform from a centralized distribution center to five new

regional hub facilities .

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20. Daisytek, thus, began to enter into business opportunities that supposedly would

provide higher returns on investments :

• during the quarter ended June 30, 2001, Daisytek acquired certain assets andliabilities of Digital Storage, LLC ("Digital Storage"), a value-added distributor of

computer media, accessories and supplies;

• during the quarter ended September 30, 2001, Daisytek acquired certain assets andliabilities of office products wholesaler General Stationery Supplies in Australia ;

• during the quarter ended September 30, 2001, Daisytek expanded its computer andoffice supplies product line to include computer peripheral and connectivityproducts, announcing agreements to distribute products from Logitech International

and iBIZ Technology Corp . ;

• during September 2001, Daisytek invested approximately $11 .6 million in ISAInternational plc ("ISA"), a publicly-held European computer consumables

distributor based in the United Kingdom ;

+ during the quarter ended December 31, 2001, Daisytek announced a strategic alliance

with eCommerce Industries Inc . (ECI2) to provide technology tools to help resellers

and the acquisition of exclusive rights to distribute OpenSupply, a software that

monitors toner and ink usage. and

• during the quarter ended June 30, 2002, Daisytek acquired ISA .

21 . In 3 Q02,1 Daisytek also began to build a centralized distribution and business support

platform. Defendants began a plan to cause :

(1) information technology enhancements to ensure growth in the business will be

technologically supported; (2) distribution improvements and consolidation of

subsidiary computer and office supplies warehouses into five new regional hub

facilities in order to leverage distribution costs ; and (3) centralization of certain back-office resources into a shared services organization to reduce costs and improve

efficiencies .

Form 10-Q, filed Feb . 14, 2002, at 13 .

22 . Defendants financed Daisytek's above-mentioned expansion and change in business

strategy by incurring additional debt . The additional debt, in turn, included covenants that demande d

I Daisytek's fiscal year begins April 1 and ends March 31, so the third quarter of fiscal 2002

ended December 31, 2001 .

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that the Company raise additional capital . While Daisytek's Form I0-Qs and 10-K for I Q03, 2Q0 3

and 3Q03, touched upon this situation, they left the full, crippling effects of the added debt and lack

of financial growth undisclosed . For example, the Form IO-Q for I Q03, ended June 30, 2002 ,

described :

During April 2002, Daisytek signed a $200 million senior secured debt facility

expiring on April 24, 2005, which was amended and increased to $250 millionduring June 2002 . This credit facility replaced the existing $150 million creditfacility expiring on December 19, 2003 . . . . The credit facility contains variouscovenants including, among other things, the maintenance of certain financial ratios

including the achievement of a minimum fixed charge ratio, a minimum level oftangible net worth, and restrictions on certain activities, including loans andpayments to related parties, payments of dividends, capital expenditures,

acquisitions, investments and asset sales .

Form I0-Q filed Aug. 14, 2002, at 13 . 2

23 . Faced with this increased debt :

During November 2002, [the Company] amended certain terms of its domesticcredit facility and received a waiver ofcompliance for its fixed charge ratio andtangible net worth covenants for the quarter ended September 30, 2002. . . . A new

covenant was added which requires the Company to use its best efforts to raiseadditional capital having net proceeds of not less than $20 million by March 31,

2003 and to raise such additional capital, in any event, on or before September 30,

2003 . Provided, however, in certain circumstances such as if the average availability

under the facility for any trailing 30-day period first calculated on February 14, 2003is less than $15 million, then $20 million (net) of additional capital must be raised

within 90 days of such event .

Upon the first calculation on February 14, 2003, our trailing 30-day average

availability under this facility is less than $15 million . Therefore, in addition to the

requirement that we will use our best efforts to raise the additional capital byMarch 31, 2003, we will be required, in any event, to raise such capital within 90days of February 14, 2003 (by May 15, 2003) . We anticipate being able to raise the

additional capital by the required deadline.

In addition, we are currently pursuing operational improvements that are expected

to generate a higher level of cash flow, including improvements in working capital,

such as elimination of redundant costs carried in connection with the office productslaunch, and a focus on profitability, including product mix and a review of all

Unless otherwise noted, all emphasis is added and citations are omitted .

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customer relationships . Near-term growth will be controlled as we gradually

eliminate unprofitability or non-strategic activities and focus on the channels,products and customers that are most accretive to our business .

Form 10-Q, filed Feb . 14, 2003, at 21 .

24. Daisytek also increased its borrowing internationally :

During March 2001, we entered into a revolving credit facility with a Canadian bankwith maximum credit availability of 40 .0 million Canadian dollars, or approximately

$25 .4 million, expiring during March 2004 .

In November 2002, Daisytek Australia Pty . Ltd, signed a 35 million Australian dollar

(approximately $19.6 million) revolving credit facility, expiring on November 18,

2005.

ISA also has revolving credit facilities with various European banks off 14 .6 million

British Pounds, or approximately $23 .6 million, which are payable upon demand,

and a term loan with a bank in Norway for £0 .4 million British Pounds, or

approximately $0 .6 million .

During February 2003, ISA signed a 33 .5 million British pounds (approximately

$53.9 million) secured debt facility with an initial period expiring during February

2006. This facility replaced existing facilities of approximately 22 .8 million British

pounds (approximately $36 .7 million) which were payable on demand .

During July 2002, our Mexican subsidiary entered into a secured revolving line of

credit facility with a Mexican bank with maximum credit availability of 90 .0 million

Mexican pesos, or approximately $8 .6 million, expiring during July 2005 .

Id. at 22 .

25 . To give the appearance that their growth strategies were successful and to continue t o

receive increased borrowing, defendants flooded the market with false, positive statements regarding

revenue and earnings growth . As stated in more detail herein, defendants were only able to achiev e

revenue growth by illegally "cooking the books . "

THE TRUTH ABOUT DAISYTEK'S STATE OF AFFAIR S

26 . During their tenure at Daisytek, each of the defendants knew their public statement s

about the Company were false and misleading due to the following contemporaneously known facts ,

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as told by confidential witnesses with first-hand knowledge of the events described.. These witnesses

are comprised of former Daisytek employees and employees of former Daisytek subsidiaries (like

the Tape Company and Arlington Industries), each of whom worked at the respective companies

when the events occurred . Each of these witnesses provided facts from numerous departmental

vantage points with the respective companies . As described in more detail below, these witnesses

tell how defendants actually knew or were deliberately reckless in disregarding that the Company's

financial condition was materially impaired .

DAISYTEK RECORDED AT LEAST $30 MILLION IN FICTITIOUS VENDOR

REBATES AND PROMOTIONAL ALLOWANCES AND IMPROPERLY CLASSIFIEDSUCH DISCOUNTS AS REVENU E

27. Over a fiveyear period, including the Class Period, a former Daisytek marketing

director was present at regularly scheduled meetings attended by defendant Powell and during

which the illegal accounting practices regarding the recording of vendor rebates were discussed.

Daisytek President Michael Scannell and Senior Vice President of Marketing Higgs led these

meetings and drove these practices . Further, this practice was confirmed by a former assistant

controller who described that as a result of recognizing revenue on the vendor rebates and

promotional allowances prematurely, by October 2002, Daisytek had accumulated in excess of

$30 million in uncollectible vendor receivables that were never written off . According to this same

witness, Daisytek knew these monies were uncollectible because the vendors were explicitly telling

Daisytek that they were not going to pay the amount that Daisytek claimed as vendor receivables .

28. In addition, not only did this practice lead Daisytek to accumulate a large sum of

inappropriately recognized vendor rebate revenues and uncollectible vendor rebate receivables, but

according to both a former assistant controller for the Tape Company and Arlington Industries, and a

former assistant controller for Daisytek, Daisytek and Arlington Industries were double-counting for

the same vendor rebates . For example, Arlington Industries bought its Hewlett-Packard product s

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from Daisytek . However , both Arlington and Daisytek each repo rted in their respective financial

results the same $2 million in vendor rebate receivables , but only one of these entities - Arlington or

Daisytek - could rightly claim and collect the rebates . This problem was on the Arlington and

Daisytek books in February 2002, and instead of being written off, remained unresolved through

2003 .

29 . Moreover , under Generally Accepted Account Principles ("GAAP"), a distribution

company like Daisytek can only recognize vendor rebates as a cost reduction (not revenue) when the

distributor actually sells-through the product to its customers . Daisytek, however, consistently

bought unneeded quantities of inventory from its vendors just to improperly record the rebates as

revenue, leading it to accumulate excess and unsellable inventory . According to a former assistant

controller, throughout a quarter, purchases from vendors were made according to genuine forecasted

need of these products in each period . But then, at the end of a quarter, Daisytek would typically

place large orders with the vendors in order to ensure that the total amount of product procured

during the quarter met the threshold to receive the maximum vendor rebate, even though these

purchases were for products that Daisytek did not actually need and could not actually sell . As a

result of these unnecessary purchases of inventory, according to a former Daisytek assistant

controller, the distribution centers were filled with huge quantities of excess inventory by mid-2002 .

This was corroborated by a former project manager who also was aware that for some items

Daisytek had so much inventory (as much as a 1,000 day supply) that there was no way it could sell

it . Furthermore, Daisytek would then recognize the vendor rebates in the period in which the

purchases had been made, and not - as was required under GAAP - when the products were sold-

through to Daisytek's customers .

30. Normally, according to a former Daisytek strategic marketing manager, vendors

provided volume purchase rebates and promotional allowances such as market development funds t o

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Daisytek so that the Company could promote their products . Daisytek would create special, limited -

time, price lists for vendors that were promoting their products and would send those price lists out

to customers via direct mail, email or fax . Vendors typically left it to Daisytek's discretion on how

to spend the market funds . According to this same witness, Daisytek had to provide proof of

performance (i . e ., that the funds had been spent on actual promotions of the vendor's product) to th e

vendor, such as a sample of the price list, but they did not have to break down the specific costs of

the promotion for the vendor . The Senior Vice President of Marketing, Craig Higgs, would assig n

the particular vendor promotion. There was an attitude within the marketing department of Daisyte k

that marketing funds were funny money . In fact, according to a former director of marketing an d

operations in the office products division, Daisytek used vendor rebates and market development

funds like heroin .

31 . A former project manager revealed that on numerous occasions Daisytek would bil l

vendors for marketing and promotional services and book the payments received as revenue before

Daisytek performed those services . One example of this inappropriate booking of revenue from

vendor promotions was the production of the "Big Book" catalog . Big Book was a catalog that was

to be distributed to end-users that contained retail pricing and descriptions for thousands of vendor

products . Vendors would pay Daisytek to have their products included in the catalog . Daisytek,

however, would bill the vendors and recognize the advertising revenue from the Big Book

immediately, rather than waiting until after sales from the catalog were actually generated . In

fact, the Big Book, originally scheduled to be released in March 2002, was not released until January

2003 . Another example is that, by October 2002, Daisytek had booked at least $500,000 in revenue s

for promotions that had not been approved by vendors . According to a former project manager wh o

handled collections of vendor receivables, Daisytek had a folder of correspondence from vendors ,

including Hewlett Packard, Sony, Canon, Fuji and others, in which the vendors disputed owin g

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amounts to Daisytek that had been recorded as vendor receivables, because Daisytek had not

received approval or authorization from the vendors .

32 . Another marketing campaign from which Daisytek inappropriately derived revenue

was the "HP (Hewlett-Packard) 1-9/10-50." HP 1-9/10-50 was a promotion for Hewlett-Packard

products (primarily ink/toner and specialty paper) that ran on a quarterly basis and focused on

companies that had 1-9 employees and companies that had 10-50 employees . The promotion

consisted primarily of fliers that were faxed to the targeted customers . Again, Daisytek was

supposed to actually create the promotional materials and distribute them before billing the

customer. However, in early January 2003, a former project manager learned that former Director of

Marketing, Michael Morris, had instructed this former project manager's subordinates to alter the

date on a promotional flier to make it appear as if this promotional activity had actually already

taken place in December 2002, when in fact the promotion had yet to be performed . The farmer

Director of Marketing then submitted a bill for $225,000 to Hewlett-Packard and Daisytek booked

the revenue associated with this bill in December 2002, even though the campaign had, in fact, not

been completed at that time .

33 . In fact, according to a former Daisytek director of marketing and operations in th e

office products division, Daisytek often improperly booked these rebates as revenue when it bought

a particular product instead of waiting to do so when Daisytek sold the product . More important,

defendants knew or were reckless in disregard of this practice because the Director of Marketing

would report to Powell, and the remaining Board of Directors at regular meetings where this practice

was openly discussed .

DAISYTEK'S IMPROPER METHODS OF "CLOSING THE GAP"BETWEEN ACTUAL AND FORECASTED REVENU E

34. During the Class Period, sales personnel were instructed by defendants to be creative

in finding ways to close the gap in revenue at the end of each quarter .

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35 . According to both a former Daisytek assistant controller and a former project

manager, to achieve Wall Street expectations at quarter end, the Company would enter into large

end-of-quarter deals that would be booked - only to be cancelled within the first few days of the next

quarter. The same project manager recalled many times in the final days of a quarter that overall

sales were far short of the quarterly goal and there were no other prospective or potential deals to

close the gap . In spite of these circumstances, certain mystery orders from customers appeared so

Daisytek could magically make the numbers . This same project manager recalled that these orders

were very unusual because they always occurred at the very end of the quarter, were always $1 -

$2 orders, often to customers in the United Kingdom. Stranger still, the shipping instructions would

show as "next day delivery" to the U.K-- although it absolutely made no sense to pay the expense of

next day delivery to the U .K. for orders of such magnitude .

36 . According to a former Daisytek director of credit and collections, because of these

revenue pull-ins, the first month of the quarter would typically be light because the early-quarter

sales had actually been realized in the last month of the prior quarter . This final month was

invariably a high stress and high stakes time at the Company . When there was at least a $5 million

gap in meeting the quarterly revenue goals, personnel were instructed to be creative in finding ways

to close the gap. This instruction would cause $5-$6 million of questionable revenue to be recorded

in the final week of a typical quarter . This extraordinary revenue included pulling in revenue from

an ensuing quarter by offering a deep discount to a customer to close a deal . Such discounted end-

of-quarter deals resulted in miniscule or non-existent margins .

37 . According to a former Daisytek project manager, this witness would run a showcase

query to pull information out of the J .D. Edwards system to see how sales of products in the catalogs

were doing . During these queries, crazy revenue would pop up . In 2002 this witness, and a former

Daisytek assistant controller, recalled seeing very large shipments of $1 million - $2 million go out

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at quarter 's end followed by returns and credits given to the same customer 's account . When the

project manager raised concerns about these issues, the practice temporarily stopped . However ,

these activities resumed after defendant Powell brought in President Scannell in June 2002 .

Additionally, this assistant controller noted that Daisytek recorded more than $1 million in revenu e

on the basis of customer letters that were not even purchase orders .

38 . Another problematic practice involved the activities of two Daisytek employees who

also ran an export business that did business with Daisytek while these two employees worked at th e

Company . Patty Formis and Ginger Calvert - both defendant Powell's close associates - owned a

business that would place orders for Daisytek product . Formis and Clavert's export business would

order as much as $1 million from Daisytek only to have the order subsequently cancelled/returned .

39. According to a former credit collections supervisor, there were plenty of occasion s

when a customer wanted delivery of a product in the next quarter, but Daisytek would invoice th e

customer in the current quarter to improperly record the sale, isolate the inventory in a caged area i n

the warehouse and ultimately ship it out on the original date specified by the customer . This practice

affected when a customer would pay Daisytek because some customers would start counting their

net terms from when they received their products, as opposed to the date of the invoice . For

instance, Office Depot, Office Max and Meijer stores would begin counting their net terms from

when they received product even though Daisytek recorded the sale on the date shown on th e

invoice .

40 . Another way Daisytek created extraordinary revenue to close revenue gaps at the end

of a quarter was to ship before customers ' specified order dates and allow product to sit in trailers

at the customers' receiving areas . The customer would not consider such shipments as having been

delivered by Daisytek until later . In fact, when the former director of credit, would try to collect o n

these shipments, customers would indicate that payment was not due because the products had no t

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been received by the customer until the specified order date . In fact, this former Daisytek credi t

collections supervisor described how Daisytek sales representatives directed monthly shipments o f

product to customers such as Office Max and Office Depot which would result in these shipment s

never going to the customer, but would be returned back to Daisytek eight to ten days from when

they shipped, only to be sent back to the same customer again and returned again . This recurring

pattern of shipments, returns, followed by still more shipments and returns, went on every month fo r

over two years .

41 . According to this same former Daisytek credit collections supervisor, Daisytek' s

improper shipping practices led to high return rates from large retail customers like Staples . Daisytek

essentially had to accept whatever terms these customers demanded . In fact, according to a former

director of credit and collection, Daisytek's new relationships with food-drug customers like

convenience stores, pharmacies, and supermarkets had much higher rates of return than Daisytek

was used to, up to 30% .

42. Daisytek was even more creative in finding ways to close the revenue gap . For

example, according to a project manager, in December 2002, Daisytek booked $650,000 in revenu e

for a Las Vegas tradeshow EXPO that wouldn't even take place for two more quarters (Apri12003) .

In fact, the event never occurred .

43 . Yet another method Daisytek used to create revenue at the end of each quarter was b y

selling and shipping to poor credit-risk customers . Because of these known risky sales practices, a

former Director of Credit was forced to re-evaluate these sales so that an adequate reserve for

potentially uncollectible accounts receivables could be set aside for the quarter . In fact, credit

managers had to evaluate every receivable overdue by 60 days . The credit managers, including a

former credit collections supervisor, had to assign a percentage of the likelihood that each of thes e

accounts would or would not be collected, and were directly involved in calculating how much bad

-16-

debt reserve should be established for a given period for all the accounts that they worked. The

managers' evaluations of receivables would be consolidated and compared to the prior quarter's

reserves . The former Director of Credit then submitted a Quarterly Reserve Analysis to VP of

Finance Tom Graham in which the former Director would recommend the amount he believed

should be prudently reserved against the Company's overall receivables .

44. According to former credit managers, the director would always re-figure the ba d

debt reserve estimates submitted because the amount being proposed - even though it was what was

actually needed to absorb the amount of customer deductions and other write-offs to the receivables

that would have to be made - would be unacceptably high to Daisytek senior management like Tom

Graham and others . However, even these reduced estimates for the bad debt reserve would be

further reduced. As a result, there simply was not enough of a bad debt reserve in place to absorb

the write-offs that had to be made because of customer deductions . However, Daisytck managemen t

consistently disregarded the proposals for establishing an adequate bad debt reserve, and in fact,

Treasurer Mark Cori ay (who reported to defendant Mitchell) indicated during such meetings on this

topic that proposed bad debt reserves were too high. Moreover, a former assistant controller would

tell Mitchell every month during the Class Period that the inventory reserves were too low, but

Mitchell consistently refused to set these reserves at the recommended levels.

DAISYTEK'S EXCESSIVELY LIBERAL SALES POLICIES AND "SALES" TOCUSTOMERS THAT COULD NOT PAY

45 . According to a former account executive for the Tape Company, while it was a

Daisytek subsidiary during the Class Period, the Tape Company granted very liberal sales and

payment terms to customers . Tape Company account executives had tremendous discretion to make

deals with customers . For example, according to this witness, executives were permitted to accept

purchase orders from new customers even if that new customer had not been evaluated for

creditworthiness .

-17-

46, The Tape Company account executives were able to call most shots on customer

deals . This frequently caused friction with The Tape Company/Daisytek credit and collections

departments . According to this same executive, the credit and collections department was

responsible for evaluating all customers (both new and established) for creditworthiness, and for

resolving all payment issues prior to the release of an order . However, in reality, this did not always

happen. The witness remembered several occasions in which account executives could get an order

released even though the customer was on credit hold . It was not all that difficult to get an order

pushed through for a customer even if the order exceeded the customer's established credit limit .

47. According to a former Daisytek credit analyst who worked in the Arlington Industries

division, this division would fall short anywhere from 5%-20% of the forecasted goal . However,

based on attendance of meetings with account receivables personnel from all of the Company's

divisions, this division was doing better than any of the others .

48. Additionally, this credit analyst in the Arlington division confirmed that at the end of

the quarters there would always be a large number of deals being made . As confirmed by other

witnesses in the credit and collections departments, to close deals before the quarter ended, Daisytek

personnel would extend large discounts. Orders from customers who were on credit-hold for failure

to pay past-due amounts would be released for shipment anyway . This credit analyst was also aware

that Daisytek sales personnel engaged in so-called side letter agreements in which they extended

terms to customers, with the approval of management, that were not reflected in the invoices

associated with the transaction and which constituted extended payment terms or non-invoiced

discounts .

49. In fact, according to a former credit collections supervisor, Daisytek sales personnel

utilized side-letter agreements all the time with customers . Daisytek sales personnel verbally

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granted terms that differed from the terms in the formal documentation (i.e., purchase order and

invoice) associated with the transaction .

50. According to a former credit and collections analyst that worked with the Tap e

Company accounts, normal payment terms were net 30 days, although there were times when thi s

analyst would be instructed by her managers to allow a customer extra time in which to pay. The

Tape Company's goal for each collector was to bring in approximately $200,000 - $300,000 a wee k

in past-due accounts . This same witness knew there were numerous occasions when a customer was

on credit-hold for failure to pay on a past-due account, but the Director of Credit and Collection s

directed the release of these orders for shipment anyway . According to the analyst, it seemed that

the Company's sales department ran the credit department.

51 . For example, the analyst recalled a customer, Media ToolBox, that wanted t o

establish credit terms with The Tape Company . This credit analyst working on the account ha d

given Media ToolBox only $5,000 - $15,000 in credit, but the sales representative for this account ,

had gotten a $30,000 order from the customer . The sales representative then went to a team member

of Director of Accounting, Eric Logan, who directed this witness to release the $30,000 order fo r

shipment even though this exceeded the credit limit that had been established by the credit analyst .

This was the customer's first order and it shipped in October 2002 . However, the account went 45-

days past due and when the analyst tried to collect on the account, the customer informed the analyst

that it would only pay The Tape Company/Daisytek after it (Media ToolBox) sold the product,

which meant that this was a contingent sale . Orders to Media ToolBox continued to be released

even-though the customer was well over its credit limit and consistently late in paying its debts to

The Tape Company/Daisytek, making it a significant credit risk .

52. Similarly, a former Daisytek inbound customer/sales representative confirme d

shipping orders, even when they were on credit hold, as indicated by "no sale" for an order .

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According to this customer service representative this meant the customer was on credit hold .

Regardless, orders were taken from these customers . The representative knew this because some of

these customers would call when they did not receive their order and this customer representative

would review their information .

53. Daisytek's Controller, Richard Tolle, reported to defendant CFO Mitchell . An

inventory accountant who had daily interactions with Tolle during which inventory and accounting

issues, including those mentioned above, would be discussed also attended bi-monthly meetings

regarding the Company's financial performance and business challenges where defendant

Mitchell was present. At these meetings senior managers would make presentations, including

Tolle, who discussed inventory and accounting issues .

DAISYTEK'S UNCOLLECTIBLE ACCOUNTS RECEIVABLES AND FAILURETO ACCOUNT FOR THE LARGE NUMBER OF CUSTOMER RETURN S

54. Nearly half of Daisytek's customers were delinquent at some point in the 2002-2003

timeframe, according to a former Daisytek accounts analyst. Several hundred accounts were

seriously delinquent, meaning between 90-120 days past due .

55 . Starting in at least January 2003, there were panicked efforts to collect on past due

customer receivables, according to a former Daisytek collections analyst in the Allen, Texas

headquarters . This collections analyst was responsible for about 1000 Daisytek customer accounts

and worked customer accounts where the customer had returned substantial amounts of merchandise ,

some of which had been shipped to the customer months before . This situation was reflective of

the gross mismanagement of Daisytek's credit and collections practices . Daisytek had very poor

credit policies in place, did not rigorously enforce the policies that were in place, and were nearly

completely ineffective in collecting on accounts that had gone bad . This analyst opined that

Daisytek' performance with credit and collections was an unmitigated disaster .

-20-

56. Ultimately, the amount of uncollectible receivables became insurmountable .

According to a former credit collections supervisor, in July 2002 , Daisytek began entertaining th e

idea of retaining a third-party collection agency to assist in collecting on the Company's past-du e

accounts . In December 2002, a third-party collection agency was retained for this purpose .

Altogether, the National Retail/Convenience accounts assigned $3 million in old receivables to th e

third-party collection agency to collect, but these accounts were not removed from Daisytek 's active

accounts receivable. Altogether, according to this former credit collections supervisor, the third-

party collection agency only collected about $180,000 of the $3 million in accounts they had bee n

assigned. Most of the $3 million was uncollectible because the customers had taken legitimat e

deductions and therefore were under no obligation to pay and instead Daisytek should have written

off these uncollected accounts long before .

57. According to a former Daisytek Trading Company representative/price broker,

customers were told of Daisytek's return policies at the time of the order, but the sales departmen t

routinely circumvented those return policies . Sales representatives would verbally offer customer s

special agreements regarding credit terms and product returns to keep customers happy because th e

belief was that eventually, the customers would buy more than they returned . This belief began to

fail when Daisytek expanded its customer base to include convenience groups, like pharmacies ,

retail stores, and supermarkets, who would return more than they purchased. In fact, a former

Daisytek credit analyst in the Allen headquarters confirmed many instances in which customer s

would not pay for certain merchandise or pay Daisytek restocking fees for returned merchandis e

because of side deals with sales executives regarding payment terms .

58 . Additionally, according to a former credit collections supervisor, Daisytek sale s

personnel would also grant discounts that were not included in the invoices . These were typicall y

discounts of 1% - 2% based on the volume of product purchased by the customers . The sales

-21 -

personnel would typically receive approval for extending the discount prior to the order being

invoiced, but according to the credit collections supervisor witness, the invoice sent out did not

reflect the discount and the customer was, instead, billed (and the transaction recorded) on the full

price. The customer would then pay the discounted amount and Daisytek Credit/Collections

personnel were supposed to apply a so-called "trailing credit" to take care of the unpaid amount .

The trailing credit account was supposed to be an accrual account that would cover the write-offs

necessary for these discounts, but Daisytek did not accrue enough to cover the discounts and

therefore these uncollectible discounted amounts remained as active receivables ; in fact, Daisytek

did not begin to accrue into the trailing credit account until 2003 .

59. In fact, in February 2002, a former Daisytek Senior Vice President of Operations and

a former Daisytek North American Controller compiled a book that documented a wide variety of

the accounting issues and irregularities detailed in this Consolidated Complaint that needed to be

rectified and submitted their concerns to Daisytek's senior management, including defendants

Powell and Mitchell .

60. Large Daisytek customers would reduce their overall balances by claiming very large

program allowances , according to a former credit and collections analyst who handled credit and

collections issues for Daisytek's accounts with Office Max and Office Depot . Program allowances

were rebates or discounts based on the overall amount of product that these customers ordered in a

given period of time. For instance, if a customer bought $1 million in a given period, the terms

between the customer and Daisytek might allow the customer to receive a 2% program allowance so

that the customer would receive a $20,000 credit to their account .

61. According to this credit and collections analyst, the amount of money being claimed

by these customers as program allowances far exceeded the amounts recorded by Daisytek . For

example, both Office Max and Office Depot consistently claimed significantly large program

-22-

allowances. In fact, according to this witness, Office Max claimed $250,000 in one single claim

alone, which was one of many program allowances claimed by Office Max during a particular

month. The amounts claimed for program allowances were so excessive that at the end of I Q03

Daisytek actually owed $400,000 to Office Depot . This meant that for about a 30-day period, Office

Depot simply sent in no payments because it had this credit on its account. Only after a flow of new

orders ensued was this credit in the Office Depot account reduced to where Office Depot began

owing Daisytek money for Daisytek products ordered and received . However, the program

allowances were not properly accounted for by Daisytek .

62. These program allowances, according to this analyst, were not recorded properly on

Daisytek's books in Daisytek's computer accounting system . This analyst would have to access the

Office Depot and Office Max websites to get more detailed information about the program

allowances Daisytek owed. This analyst emphasized that the chargebacks and program allowance

deductions were never included in Daisytek's system . Instead, they were entered into an Excel

spreadsheet to keep track of the overall status of these two customer accounts . These spreadsheet

reports were given to the Senior Credit Manager because this would have been the only way that he,

or anyone else, would have known the actual status of the accounts for Office Depot and Office Max

-- the system would not have shown an accurate representation of the account status .

63. Daisytek was especially vulnerable to deductions that large customers would claim

from invoices sent by Daisytek ("chargebacks") . Customers would claim a deduction in what they

owed Daisytek for any cost they incurred in having to stock or handle Daisytek products . Customers

would also claim a slotting allowance for the cost of placing the products on the shelves or the end of

aisles in its stores . According to a former Daisytek credit collections supervisor and a former

Daisytek credit analyst, the majority of customer chargebacks were legitimate, and Daisytek would

never be able to collect these from their customers . According to the same former Daisytek credi t

-23-

analyst, chargehacks were a significant cost to Daisytek, typically 20% of the total amount

invoiced to large customers like Office Depot and Office Max . According to the former credit

collections supervisor, Daisytek had not been prepared for the kind of deductions that these

customers took and which Daisytek had to accept . In fact, according to this witness, Daisytek's

large customers took so many deductions that they were referred to by Daisytek credit and

collections personnel as mass murderers instead of mass merchandisers .

64 . Sometimes, customer chargebacks sat on Daisytek's books for more than a year .

Even after Daisytek (unsuccessfully) turned over $3 million inuncollectible accounts receivable to a

collection agency, Daisytek refused to w rite off the receivables , a standard business practice required

by GAAP . According to a former credit collections supe rvisor, only about $180,000 (6%) was

ultimately collected by the agency , because most of the $3 million was not even owed to Daisytek

due to legitimate customer chargebacks . Daisytek often did not account for such chargebacks, even

after the customer informed Daisytek about the chargebacks .

65 . These problems resulted in Daisytek 's failure to adequately reserve for bad deb t

during the Class Period. According to a former credit collections supervisor, the Company

consistently failed to establish an adequate bad debt reserve to account for write-offs of receivables

that would have to be made as part of these customer deductions . As a result, these uncollectible

receivables would ride on Daisytek's accounts receivables as active receivables, even though they

should have been written off . By October 2001, the amount of bad receivables on the books, as a

result of deductions claimed by the customers as well as returns being made by customers, had

grown to critical proportions . Customers could return Daisytek product for any reason . For

instance, if Daisytek's customers' received returns of Daisytek products, then the Daisytek customer

would return this product to Daisytek and Daisytek had to accept the return ; in some cases, the

vendors would destroy the product because Daisytek did not have a return system properly in

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placefor Daisytek to always receive and process the return . Daisytek ultimately utilized a third-

party reclamation service, but the customers took deductions for these destroyed products from what

they owed to Daisytek. Because Daisytek had insufficiently reserved for bad debt, these

uncollectible accounts grew enormous, and were unaccounted for .

66 . The situation with these uncollectible accounts had grown to such proportions that a

meeting was held in October 2001 which was attended by approximately 30 individuals from the

credit, inventory, warehousing and claims departments, to discuss ways to resolve the backlog

monster, (this had become the informal term for these bad receivables) . According to a former

collections supervisor, a main topic of this meeting regarded monies that were missing in a certain

account that was supposed to be in place to absorb at least some of these uncollectible receivables .

67 . Monies received from vendors for these purposes were maintained in a Genera l

Ledger account referred to as the "Convenience Check Book Balance" account . As a customer

engaged in a promotional activity and claimed a deduction against its Daisytek invoice for the

amount incurred in the promotional activity, Daisytek credit personnel would apply the amount that

had been deducted by the customer against the amount in the Convenience Check Book Balance

account . This way, the deducted amount would not stay on Daisytek's books as an active (and

uncollectible) receivable . However, over a period of several quarters, the amount in the

Convenience Check Book Balance account that should have been available to help absorb the

deductions being claimed by Daisytek's customers for promotional activities simply disappeared

from the Convenience Check Book Balance account, as the Company never recorded a sufficient

amount to cover legitimate customer deductions . The consequence of this was that there was

insufficient money in either the Convenience Check Book Balance or the bad debt reserve to absorb

the write-offs in bad receivables that were riding on the books as active (albeit uncollectible)

receivables .

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68. In early 2003, this same credit collections supervisor personally reported to company

management that Daisytek would have to write-off $2. 6 million of uncollectible accounts receivable,

even though these monies should have been written off long ago and could have been written off if

adequate bad debt reserves had been maintained in the first place .

69 . As well, in March 2002, a former Director of the Peripherals Division and Corporate

Development objected about the Company's problematic business practices, improper accounting

and revenue recognition to Daisytek's Board . As a result of his objections, the Board allegedly

demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002 to eleven

executives for the Company's reported financial performance for the prior fiscal year .

DAISYTEK INTENTIONALLY DAMAGED INVENTORY IT WANTED TO RETURNTO VENDOR S

70. Daisytek's problems with excess and outdated inventory became so severe in early

2003 that some merchandise was intentionally damaged so that the Company could file damaged

goods claims with a number of vendors, according to a former Daisytek buyer from the Allen

headquarters . The inventory problems were so bad that this buyer, instead of being responsible for

negotiating purchases from various vendors, was assigned an inventory management project for

developing a strategy for Daisytek to dispose of excess and obsolete inventory .

71 . Despite the Company's efforts to eliminate its excess and obsolete merchandis e

through conventional means, the explosion of inventory in early 2003 required more unconventional

efforts . This same buyer recalled a number of vendors, including NCR Corporation and Sanford

Corporation, simply refusing to work with the Company to resolve the situation, and would not

accept returns of merchandise just because the merchandise was obsolete or in excess of demand . As

a result, sometime in late January 2003, warehouse personnel were instructed to damage and/or

destroy certain inventory items so that it could be returned to vendors as damaged goods . The

directive came from an Allen operations manager .

-26-

72 . Generally, Daisytek's efforts to return goods for credit were not successful because

most of Daisytek's vendors would not accept it back if it was simply outdated or in excess of

demand. This buyer also related that the way Daisytek would get the unwanted product off its books

was to damage it . As an example, the witness recalled that a whole pallet of printer cartridges was

intentionally dropped from a forklift . The boxes of cartridges were damaged, and Daisytek filed a

claim stating that the merchandise was not properly packed in the first place . The witness offered

another example of what Daisytek did to damage/destroy certain merchandise . On one occasion,

several pallets of audio and video products were stored in apart of the Allen warehouse that was not

climate controlled. This buyer explained that certain media and data tape products are temperature

sensitive, and need to be maintained in a controlled environment . The buyer further commented that

these storage requirements are widely known among warehouse personnel . Nevertheless, several

pallets of these types of products were stored in an inappropriate place until the products were

damaged beyond use . This buyer confirmed that credit memos were prepared at the time the goods

were returned to the vendor, despite the fact that Daisytek knew the vendor was unlikely to grant

credit for inventory damaged in this manner .

DAISYTEK'S FAILURE TO PROVIDE INVENTORY SYSTEMS DATAMANAGEMENT

73 . To perpetuate its ongoing overstatement of accounts receivable and inventor y

balances, Daisytek intentionally maintained a defective data management system for accounts

receivable, inventory, shipments and returns . According to a former senior programmer/analyst and

project leader who worked for Daisytek from 1998 through the end of the Class Period, the

Company initially used a J .D. Edwards software program to manage its inventory and accounting .

This J .D. Edwards program was inefficient because inventory amounts were not updated up to the

minute and quantities were not accurate until after the nightly processing, i .e ., were a day behind .

-27-

74. In the fall of 2002, the Company began to transition to a new accounting and

management system called IRMS . This Senior Programmer recalled that the IRMS system had

trouble reading and interpreting information from the J .D. Edwards program. A former Daisytek

Shipping Supervisor reiterated the significant communication problems between the two systems .

75 . Units of measure were a major problem with the system transition. The two program s

were out-of-synch in terms of identifying and counting products . For example, if a customer ordered

50 pens, J.D. Edwards counted 50 individual pens, whereas IRMS might count 50 boxes containing

50 pens each. This miscommunication between the two systems resulted in over-shipping of

products . As known by Daisytek management, the over shipping led to improper revenue

recognition on unordered product that would be returned to Daisytek . The problem was widespread

and it was not resolved during the witness' employment . Also, the J .D. Edwards system utilized

product descriptions to provide shipping box dimensions for products . The communication

difficulties between software programs caused miscalculations of shipping box sizes . As a result,

shipping personnel stopped relying on the software to determine box sizes and had to manually box

shipments instead . This unit of measure problem was confirmed by several sources, including

former buyers, inventory accountants, and credit and collections analysts .

76. A former credit and collections analyst confirmed the problems with the migration t o

the IRMS system. This analyst confirmed that Daisytek would however invoice these customers at

the price associated with the over-shipment . This charge would cause these customers to claim

chargebacks, or return the products . This problem with the IRMS system is why many of the

chargebacks claimed by Office Max and Office Depot were valid . On those situations, Daisytek had

to accept either chargebacks or return of the goods . For instance, both Office Max and Office Depot

informed Daisytek that they would destroy over-shipped items if Daisytek would not accept a return .

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77. A former Daisytek inventory accountant and a former Daisytek shipping supervisor

confirmed the migration problems caused by the switch in systems . Fitzgerald and Tolle, in fact,

expressed to the inventory accountant that the migration process had caused Daisytek to lose its

ability to monitor and control the flow of inventory among the Company's various distribution

centers and to and from customers . This shipping supervisor described the migration - and in

particular, the decision to use the both systems simultaneously around December 2002 - as a real

mess .

78 . This shipping supervisor also recalled that the problems caused by the migration and

simultaneous use of both systems snowballed very quickly after the go live date in December 2002

and that the Company did not have any contingency plan in place to correct the communications and

synchronization difficulties . The data migration efforts resulted in significant mistakes in customer

orders . In many instances, customers would receive far more product than they ordered, and then

returned it to the Memphis center . Hundreds upon hundreds of orders did not meet .the required

deadlines . Some customer orders were also shorted . Essentially, the Company lost control on both

sides of the equation . Further, these inventory problems were openly discussed in managerial

meetings in December 2002 and January 2003 , attended by this shipping supervisor. This

shipping supervisor recalled seeing written correspondence sent by his supervisor to supervisors in

the Allen headquarters regarding the performance failures of the IRMS system .

79. A former Daisytek account executive confirmed that the Company had a very serious

problem with inventory control . Based on discussions with sales managers and other sale s

department personnel, these problems existed since at least 2001 . From this account executive's

perspective, the Company's inventory problems prevented the Company from meeting many

customer orders in late 2002 and 2003 . Simply put, Daisytek did not know exactly what they had in

stock, and made promises to clients that they could not keep . This account executive recalle d

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incorrect orders and a lot of angry customers that ultimately went elsewhere to purchase the products

they needed. The problem was related to a breakdown in the computer systems that tracked

inventory by SKU and quantity .

80. The poor inventory control problems also caused problems with the orders Daisyte k

placed with its vendors . For example, Daisytek did not order goods from a number of suppliers

during the critical selling season because their inventory records showed ample supplies in stock

when the opposite was true . This created a frustrating problem for account executives because they

would accept an order from a customer and put the purchase order through processing, only to learn

later that the Company did not have the goods in stock .

81 . According to a former credit collections supervisor, the IRMS system had a flaw tha t

resulted in Daisytek being unable in many situations to timely fulfill customer orders . If one

warehouse did not have everything that comprised a customer order, the IRMS system would

transfer the complete order to another . But if that facility also lacked everything necessary to fulfill

the order, then the IRMS system did nothing and the order would simply go unfulfilled - a situation

that caused mayhem .

FALSE AND MISLEADING STATEMENTS MADEBY DEFENDANTS DURING THE CLASS PERIOD

82 . Despite knowing the above critical problems with Daisytek's accounting, business,

finances and operations, defendants nonetheless disseminated materially false and misleading

statements to the investing public as detailed below .

83 . On November 9, 2001, Daisytek issued a press release entitled, "Daisytek Announces

Second Quarter Earnings ; Completes IT Separation from PFSweb Overcomes Business Disruptions ;

Outlook Remains Strong." The press release stated in part :

Daisytek International Corporation today announced that second quarter

income from continuing operations was $3 .2 million and diluted earnings per share

from continuing operations were $0 .19 . . . .

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"For our next fiscal year, we remain committed to our consolidated revenue

growth targets of 10% to 15%, which would result in revenue of between $1 .3 billion

and $1 .4 billion . Assuming an EBIT of at leas t

• 3.3%, and weighted-average shares outstanding of approximatel y

• 17.5 million, this results in earnings per share for next fiscal year of between $1 .30

and $1 .40," Mitchell [said] .

84. Upon the release of Daisytek's news regarding its 2Q01 earnings, Daisytek's stoc k

price surged over 10% from $13 .95 per share on November 8, 2001 to as high as $15 .41 per share on

November 9, 2001 .

85. On December 20, 2001, Daisytek issued a press release entitled , "Daisytek Complete s

$17.7 Million Private Placement of Common Stock." The press release stated in pa rt :

Daisytek International, a $1 .2 billion wholesale distributor of computer andoffice supplies and provider of marketing and demand-generation services, hascompleted a private placement of approximately 1 .6 million shares of its common

stock to a group of institutional investors at a purchase price of $11 .20 per share for

total gross proceeds of approximately $17 .7 million . Daisytek intends to use thefunds to pursue strategic acquisitions and investment opportunities, to expand itswarehousing network, to reduce indebtedness under the company's revolving credit

loans, and for general working capital .

86. The statements in I M83, 85 were false and misleading when made . At the time thes e

statements were made, defendants actually knew or were deliberately reckless in disregarding that

the Company's financial condition was materially impaired because they knew Daisytek : improperly

recorded vendor rebates and promotional allowances as revenue (causing at least $30 million in

uncollectible vendor receivables to be accumulated by October 2002), ¶¶27-33 ; created revenue by

pulling in sales from the ensuing quarters, ¶1J35-37 ; shipped unwanted product to customers which

would eventually be returned or destroyed, ¶139-41 ; had loose sales policies along with its

subsidiary, The Tape Company, that led to product being shipped to poor credit-customers which, in

turn, increased the number of uncollectible accounts, ¶1143-59 ; destroyed unwanted inventory to be

able to return it to vendors as damaged goods, ¶1170-72 ; had an inefficient inventory data

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management system that would ship to customers more goods than the customer wanted and not

correctly show the correct number of supplies in stock, ¶¶73-81 ; and was experiencing unaccounted

for program allowances claimed by customers as credit, ¶¶60-69 .

87. Thus, Daisytek's financial results were materially false and misleading because they

overstated revenue and income, assets, accounts receivable and inventory and understated expenses

and reserves . As a result of aforementioned adverse, material, non-public facts, defendants had no

reasonable basis and, in fact, knew or were deliberately reckless in disregarding that Daisytek

misrepresented its true financial position and that the Company did not have exceptional

opportunities for growth and earnings, and the Company could not achieve the predicted earnings

per share and revenue growth of 10%-I5% in FY03 .

88 . At the time these statements were made, defendants knew or recklessly disregarded

that the Company's financial condition was materially impaired because of their senior positions and

attendance at various meetings, and information they received from managers, including :

(i) regularly attended meetings where Powell was present and problematic practices regarding the

recording of vendor rebates were discussed openly, led by Daisytek President Michael Scannell and

Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would report to

Powell, and the remaining Board of Directors, at regular meetings where the improper practice of

recognizing revenue on vendor rebates was openly discussed ; (iii) that the Director of Internal Audit

would report employees' concerns regarding the problematic business and accounting practices

directly to Daisytek's Board; (iv) that Daisytek management consistently disregarded the proposals

for establishing an adequate bad debt reserve, and in fact, Treasurer Mark Corjay (who reported to

defendant Mitchell) indicated during meetings on this topic that proposed bad debt reserves were too

high; (v) that a former assistant controller would tell Mitchell every month during the Class Period

that the inventory reserves were too low in spite of the excess and unnecessary inventory, but

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Mitchell consistently refused to set these reserves to the recommended levels ; and (vi) that

Daisytek's Controller, Richard Tolle, discussed inventory and accounting issues at bi-monthl y

meetings regarding the Company's financial performance and business challenges where defendant

Mitchell was present .

89 . On February 12, 2002, Daisytek issued a press release entitled, "Daisytek Earning s

Up Over 30%; Revenue Growth of 23% ; Reports Adjusted Earnings per Share of $0 .29 and Begins

Regionalization/Shared Services Initiative ." The press release stated in part :

Daisytek International Corporation today announced third quarter net incomefrom continuing operations of $5 .0 million and diluted earnings per share of $0 .29,

excluding special charges . Net income, as adjusted, represents a 33% increase over

the prior year adjusted net income of $3.8 million and diluted earnings per share, asadjusted, represents a 16% increase over $0.25 for last year's quarter. Revenues forthe quarter increased 23% to $309.3 million compared to last year's quarterly

revenues of $251 .0 million .

Ralph Mitchell, Executive Vice President and CFO said, "[Daisytek]expect[s] total corporate revenue growth for the current fiscal year ending March 31,

2002 to be over 15%, in the range of $1 .18 billion to $1 .2 billion, despite the effects

of Sept . 11 and the challenges in Argentina . We see U.S . revenue growth for the full

year of 10% to 15% . International revenue growth continues at a rate to achieve the

target of 15% to 20% . With the recent issues in Argentina, the effects of Sept . 11

and dilution from our recent share placement, EPS from continuing operations,excluding restructuring and nonrecurring charges, is targeted to be $1.03 to $1 .06for the current fiscal year . . . .

"For our next fiscal year, we remain committed to our consolidated revenue

growth targets of about 15%, which would result in revenue of between $1 .35 billion

and $1 .4 billion . Our EBIT during fiscal 2003 will experience both the costs andsome benefits of our restructuring plans and should be in the 3 .2%-3.5% range

through the year. We expect this EBIT percentage to climb more than 3 .5% by the

time we exit fiscal year 2004 and all our restructuring initiatives are completed,"

[Mitchell continued] .

90 . Daisytek's stock price increased after the Company's February 12, 200 2

announcement increasing from $13 .69 per share on February 11, 2002 to as high as $13 .94 per share

on February 13, 2002 .

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(a) The statements in ¶89 were false and misleading when made . At the time

these statements were made, defendants actually knew or were deliberately reckless in disregarding

that the Company's financial condition was materially impaired because they knew Daisytek :

improperly recorded vendor rebates and promotional allowances as revenue (causing at least $30

million in uncollectible vendor receivables to be accumulated by October 2002), ¶¶27-33 ; created

revenue by pulling in sales from the ensuing quarters, ¶¶35-37 ; shipped unwanted product to

customers which would eventually be returned or destroyed, ¶139-41 ; had loose sales policies along

with its subsidiary, The Tape Company, that led to product being shipped to poor credit-customers

which, in turn, increased the number of uncollectible accounts, ¶¶43-59 ; destroyed unwanted

inventory to be able to return it to vendors as damaged goods, ¶170-72; had an inefficient inventory

data management system that would ship to customers more goods than the customer wanted and not

correctly show the correct number of supplies in stock, ¶¶73-81 ; and was experiencing unaccounted

for program allowances claimed by customers as credit, ¶¶60-69 .

(b) Thus, Daisytek's financial results were materially false and misleadin g

because they overstated revenue and income, assets, accounts receivable and inventory and

understated expenses and reserves . As a result of aforementioned adverse, material, non-public

facts, defendants had no reasonable basis and, in fact, knew or were deliberately reckless in

disregarding that Daisytek misrepresented its true financial position and that the Company did not

have exceptional opportunities for growth and earnings, and the Company could not achieve the

predicted earnings per share and revenue growth of 10%-15% in FY03 .

(c) At the time these statements were made, defendants knew or recklessly

disregarded that the Company's financial condition was materially impaired because of their senior

positions and attendance at various meetings, and information they received from managers,

including: (i) regularly attended meetings where Powell was present and problematic practice s

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regarding the recording of vendor rebates were discussed openly, led by Daisytek President Michael

Scannell and Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would

repo rt to Powell, and the remaining Board of Directors , at regular meetings where the improper

practice of recognizing revenue on vendor rebates was openly discussed ; ( iii) that Daisytek

management consistently disregarded the proposals for establishing an adequate bad debt reserve,

and in fact, Treasurer Mark Corj ay (who reported to defendant Mitchell ) indicated during meetings

on this topic that proposed bad debt reserves were too high ; ( iv) that a former assistant controller

would tell Mitchell every month du ring the Class Period that the inventory reserves were too low in

spite of the excess and unnecessary inventory , but Mitchell consistently refused to set these reserves

to the recommended levels ; (v) that Daisytek 's Controller , Richard Tolle, discussed inventory and

accounting issues at bi-monthly meetings regarding the Company's financial performance and

business challenges where defendant Mitchell was present ; (vi) that in February 2002, a former

Daisytek Senior Vice President of Operations and a former Daisytek North American Controller

compiled a book that documented a wide variety of the accounting issues and irregularities detailed

in this Complaint that needed to be rectified and submi tted their concerns to Daisytek 's senior

management , including defendants Powell and Mitchell; and (vii) that the Director of Internal Audit

would repo rt employees ' concerns regarding the problematic business and accounting practices

directly to Daisytek 's Board.

91 . On April 25, 2002, Daisytek issued a press release entitled , "Daisytek International

Signs Increased Credit Facility ." The press release stated in part :

"Our new credit arrangement will enable Daisytek to continue building on

our already successful growth strategies" said Ralph Mitchell, Daisytek's chief

financial officer. "Our strategies include expanding into higher growth international

markets ; driving sales through the consumer-convenient channel - which includes

grocery, drug, online and other resellers ; increasing product offerings to include a

full line of office supplies ; and developing new client services in customer care and

demand generation through our fee-based VirtualDemand division . "

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92. Daisytek's ability to negotiate an increased credit facility were dependant upon th e

Company's false financial statements . Absent Daisytek's improper financial reporting , the bank s

would not have agreed to increase Daisytek's credit facility . Thus, as defendants knew, Daisytek

improperly delayed its inevitable bankruptcy .

93 . On May 7, 2002, Daisytek announced its earn ings for the fourth quarter of 2001 with

a press release entitled, "Daisytek Q4 Earnings Up Over 20% ." The press release stated in part :

Daisytek International Corporation today announced fourth quarter net

income from continuing operations of $5 .2 million and diluted earnings per share of

$0.27, excluding special charges . Net income, as adjusted, represents a 23% increase

over the prior year adjusted net income of $4 .2 million. Current quarter diluted

earnings per share of $0 .27 (on 19.2 million shares) compares to prior year diluted

earnings per share of $0.28 (on 15 .1 million shares) . Revenues for the quarter

increased 23% to $324 .0 million compared to last year's quarterly revenues of

$264.1 million. For the fiscal year ended March 31, 2002, net income from

continuing operations was $17 .8 million (excluding special charges), a 13% increase

over $15 .8 million for the prior year, and revenues were $1 .2 billion, an 18%

increase over $1 .0 billion in the prior year . Diluted earnings per share for the fiscal

year ended March 31, 2002 were $1 .03 compared to $0 .98 for the prior year.

After accounting for special charges, fourth quarter net income from

continuing operations was $3 .9 million, a 29% increase over the same quarter last

year of $3 .0 million. Diluted earnings per share from continuing operations were

$0 .20 in both quarters, using share counts above .

Daisytek considers its adjusted presentation of earnings, which excludesnonrecurring charges and discontinued operations, to be the most relevant benchmark

of the company's operating performance . The information in this release relates to

Daisytek's adjusted financial data, unless otherwise noted.

"Daisytek has again delivered earnings and revenue to meet expectations

despite the uncertain global economic climate . In addition, we have announced an

intention to offer to acquire full control of ISA International plc in Europe. We

continue to move forward with operational plans in the areas of information

technology improvements, distribution efficiencies and cost-saving back-officeconsolidations, which all support our strategic growth initiatives and will furtherlower costs in the supply chain," said Jim Powell, president and CEO of Daisytek .

Achievements for this past full fiscal year include :

Consolidated revenue growth of 18% .

Overall U .S. revenue growth of 23% .

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International revenue growth of 21%, in local currencies .

Earnings growth of 13%, before nonrecurring charges and discontinued operations .

In the fourth quarter, revenue growth for the U .S. division was 34%compared to the prior year's quarter, including the acquisition of Digital Storage .

Excluding the Digital Storage acquisition, domestic revenue growth for the quarterwas 13%. Daisytek's initiative to drive sales through the consumer-convenientchannel -- which includes grocery, drug, online and other resellers - continues to

produce excellent results, with fourth quarter revenues up approximately 58% overthe prior year. In addition, the company's plan to expand its existing offering ofoffice products is on track for a full launch in early fall .

International revenues grew approximately 13% in U .S . dollars (15% in local

currencies) .

At The Tape Company, operating pro fit contribution increased signi ficantlyover the prior-year qua rter despite a revenue decrease of 13%. "There continues to beprogress from cost savings plans and marketing initiatives ," said Powell .

Overall gross margins were approximately 10 .3%, consistent with the thirdquarter of the year . This quarter's SG&A was 7 .1 % of total revenue compared to

7.2% for the preceding quarter . Resulting EBIT (excluding certain charges) for thefourth quarter, as a percentage of net revenues, was an improved 3 .2%, exceedingDaisytek's target of achieving 3 .0% by the end of the fiscal year, and up from 3 .1 %

in the third quarter and from 3 .1 % a year ago .

The company is progressing its previously announced restructuring plans,including IT enhancements to support Daisytek's growing businesses , UnitedStates distribution improvements through consolidation of subsidiary computerand office supplies warehouses into five new regionalfacilities (plus the Memphis

facility), and centralization of certain U.S. back-office resources into a sharedservices organization . The first two regional distribution sites were announced with

opening plans for late summer near Bakersfield, Calif., and fall near Albany, N .Y. Inaddition, certain administrative functions were consolidated into the Texas

headquarters during the quarter .

"This restructuring plan will support our goal to be THE low-cost nationalprovider in our industry . We expect great results from the project, including gains inmarket share and further improvements in our operating margins," Powell said . Thecompany, in the March 31, 2002 quarter, recorded after-tax restructuring charges of

$1 .3 million, including $1 .0 million related to warehouse and distribution initiatives

and $0 .3 million related to back-office improvements . "We expect the projects wil l

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take about 12 to 15 months to complete, with a further $6 million to $8 million ofsuch charges, before taxes," said Powell . "We are targeting improvements inprofitability of approximately $5 million in fiscal year 2004 and $7 million in fiscal

year 2005 due to these restructuring moves. We are also building a very leveragable

fixed cost structure, catering to future growth needs . "

The company is providing updated guidance to the market to help facilitate a

better understanding of Daisytek's short-term outlook . . . .

Ralph Mitchell, executive vice president and CFO, said, "Before accounting

for the consolidation of ISA, we expect total corporate revenue growth for the fiscal

year ending March 31, 2003, to be 10% - 15%, in the range of $1 .3 billion to $1 .4

billion. We see U .S . revenue growth for the full year achieving the target of 10% to

15%. We continue to target international revenue growth at a rate to achieve the goalof 15% to 20%, although currency issues, mainly in Argentina, will challenge this .

Due to our control over ISA, even if the offer is not successful, we will commenceconsolidating ISA's results in Q1 of our fiscal 2003 year, which will substantially

impact revenue and earnings in that quarter and beyond. ISA's announced revenue

for calendar FY01 was (pound)361 million (approximately $510 million) . We expect

this to grow at the market rate of 10% to 15%, at least . Given this, Daisytek's

combined revenue for Fiscal 2003 is projected to be $1 .8 to $1 .9 billion . "

Mitchell continued, "However, we do expect earnings dilution from the

consolidation and funding of ISA (and its 47% investment in Kingfield Heath),especially in the first two quarters of our FY03, due to the seasonality of theEuropean businesses and the ongoing operational improvement initiatives in ISA's

continental operations . We are targeting breakeven with funding costs in our third

and fourth quarters or possibly a small accretion, after funding costs, during these

quarters . By next fiscal year, ending March 2004, we expect ISA to be significantly

net accretive, rather than dilutive, for the full fiscal year. Once the offer period for

the acquisition of ISA is complete, which we expect to occur in the next two to three

months, we will be able to provide more specific guidance on earnings targets . "

"In addition, we believe that performance in Argentina will cause a small

decline in first-quarter earnings, overall debt costs have risen and there will becertain redundant operating costs in the U.S. for each quarter of our distribution

center reorganization and shared-services restructuring . These redundant operating

costs are in addition to the separately identifiable, nonrecurring charges," Mitchell

concluded .

"FY02 was a year of significant change for Daisytek and FY03 will be no

different. While being very committed to deliver on our short-term performance

goals, we believe this next year will establish us as the world's leading distributor of

computer supplies, office products and accessories . In North America we intend to

establish the most cost-effective national supplies distribution model in the industry .

Internationally, should our offer for ISA be successful, we will add a major Europeanpresence which we believe has significant upside potential . Ultimately, we hope that

our focus on supply-chain efficiencies and fanatic cost management, coupled wit h

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our strategies for the long term, will create significant shareholder value," said

Powell .

94 . On May 24, 2002, announced its intention to make a cash offer for all of the ordinary

share capital of ISA International and that it mailed a recommended offer to ISA shareholders . Also ,

Daisytek, had already received irrevocable commitments to accept the offer in respect of 56 .5% of

ISA ordinary shares .

95. On June 6, 2002, based on information from defendants, Dow Jones News Servic e

reported "Daisytek Reorganizes Leadership Structure ." The article stated, in part :

[Daisytek Corp .] named Mike Scannell president of all U .S. business and units, and

Peter Wharf president of international operations, excluding Europe .

Scannell, 40 years old, will be responsible for Daisytek's domestic corebusiness of computer supplies and office product sales, as well as its fee-basedmarketing and demand-generation services unit, VirtualDemand .

Wharf, 43, has been a Daisytek executive since 1992 and is a company

director .

Before accounting for the consolidation of ISA, Daisytek expects revenuegrowth of10% to 15%, leading to revenue of $1.3 billion to $1.4 billionfor fiscal

2003. This puts revenue growth targets in the U.S. at 10% to 15%, and

internationally at 15 % to 20% .

Assuming the acquisition closes, Daisytek still expects that ISA's fiscal yearrevenue of about $510 million will grow at the market rate of 10% to 15% . Given

this, Daisytek's combined revenue for fiscal2003 is projected at $1.8 billion to $1.9

billion .

In the latestfourth quarter ended March 31, U.S. division revenue grew

34%, while international revenue increased 13% . Daisytek's units in Australia,Canada and Mexico, which represent nearly 90% of the company's international

business, delivered strong results, each experiencing growth higher than their relative

market growth .

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96. Daisytek's stock price continued to trade at artificially inflated levels after th e

Company reaffirmed its ability to reach revenue growth targets and reported that its acquisition o f

ISA would significantly add to its earnings .

97 . On June 14, 2002, Daisytek issued a press release entitled "Daisytek Announced

Control 85.3% of ISA ordinary shares ; First Closing of Deal for European Computer Supplies

Distributor set for June 27 ." The press release also stated in part that :

ISA, with annual revenues of 361 million pounds sterling (approximately

$510 million) for calendar year 2001, is based in Bradford, England, and operates inthe United Kingdom, Ireland, Germany, France, Italy, Norway and Sweden . ISA

indirectly owns 47% of Kingfield Heath Limited, a privately owned U .K. wholesaler

of office products, which itself generates additional revenues of 200 million pounds

sterling (approximately $290 million) . As a result of this transaction Daisytek

expects revenue for the current year to be between $1.8 billion and $1 .9 billion .

98 . On June 24, 2002, Daisytek issued a press release entitled, "Daisytek Call to Confirm

Consensus Estimates for FY `03 and `04 ; ISA Acquisition Projected to Boost Revenue and

Earnings ." The press release stated in part :

In a conference call scheduled for this Tuesday, management at Daisytek

International Corporation will confirm that the imminent takeover of ISAInternational plc will provide a significant boost to revenues and be accretive to

earnings in Q3 of this fiscal year . Daisytek confirmed today that consensusestimatesfor the company are generally in line with expectations for FY `03 and

`04 .

"Because of challenging conditions for many investors, we felt it important toconfirm that the purpose of tomorrow's call is to deliver positive news about thefinancial benefits Daisytek expects to see with our takeover of ISA, a company with

a long track record and our platform to enter the growing European computer and

office supplies market . We will also provide an update on the exciting progress that

is being made throughout the Daisytek International business," said Jim Powell,

president and CEO .

99 . On June 24, 2002, Daisytek issued a press release entitled , "Daisytek Closes U .S .

Bank Syndication ; Facility Now $250 Million ." The press release stated in part :

Daisytek International Corporation has closed the syndication of its $200million senior secured revolving credit facility with Bank of America, N .A., as lead

manager. Recent market syndication of this facility was oversubscribed, and

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Daisytek management has decided to increase the size of this facility to $250 million .

All other terms and conditions will remain the same .

"We are obviously very pleased with the timely and favorable response to our

syndication of this facility . This represents a big vote of confidence in the

management and growth strategies of the company . We look forward to a good

working relationship with all our lenders in the future," said Ralph Mitchell,

executive vice president and chief financial officer.

100. On June 24, 2002, Daisytek issued a press release entitled , "Daisytek Predicts

Significant Earnings Contribution from ISA ." The press release provided initial guidance on futur e

earnings following the successful takeover of ISA International , plc and stated in part :

"We are confirming revenue estimates for this year ending March 31, 2003 .

Daisytek's targeted consolidated revenue is in the range of $1 .8 billion to $1.9

billion, a growth of at least 50% from last year," said Jim Powell, president and

CEO of Daisytek International .

"Based upon our expectations for ISA's continued recovery, we are

targeting significant earnings growth to Daisytek for several years. We expect

accretionfrom .ISA to commence in our thirdfiscal quarter ending Dec. 31, 2002,

and continue thereafter, including all four quarters ofFY04. As a result, our earlyguidance for earnings in FY04 is $1.40 to $1.50 per diluted share . "

"Revenue growth should remain strong, with organic growth rates

projected to be in the range of 10% to 15% annually . We will target ISA's

operating profits to continue to improve to levels consistent with Daisytek's own .

Last quarter, Daisytek's operating margins were 3 .2% of revenue, with plans for its

existing businesses to go to 3 .5% in the next 12 months . We expect ISA to achieve

this same level of improvement over the next three years, and as a result we

anticipate consolidated earnings to rise 30% next year and 20% to 25% in the

following two years, outstripping top-line growth rates," continued Powell .

101 . On this news, Daisytek's stock price surged over 14%, from $14 .02 per share on June

21, 2002 to as high as $16 .05 per share on June 27, 2002 .

102. In Daisytek's 2002 Form 10-K, filed June 28, 2002, defendants falsely stated in a

section entitled "Critical Accounting Policies" :

The following critical accounting policies are utilized by management in the

preparation of the consolidated financial statements .

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Revenue Recognition . We recognize product revenue upon shipment ofproduct to customers and provide for estimated returns and allowances . We permitour customers to return defective products (many of which we then return to themanufacturer) and incorrect shipments for credit against other purchases . We offerterms to our customers that we believe are standard for our industries .

Inventories . Inventories (merchandise held for resale, all of which arefinished goods) are stated at the lower of weighted average cost or market . We

estimate an inventory reserve for excess quantities and obsolete items based onspecific identification and historical write-offs . Actual losses could differ from our

estimates .

Allowance for Doubtful Accounts . We maintain allowances for doubtful

accounts for estimated losses resulting from the inability of our customers to makerequired payments . Our allowance for doubtful accounts is based on a review ofspecifically identified accounts in addition to an overall aging analysis . We make

judgments on the collectibility of our accounts receivable based on historicalexperience and current trends . Actual losses could differ from our estimates .

Customer Promotional Programs . We offer sales incentives to our customerssuch as volume rebates, sales growth incentives and other promotional and discount

programs . We recognize sales incentives to our customers as a reduction in revenueon the date the revenue is recorded or the sales incentive is offered . For our time-based or volume-based programs, we allocate the incentive to each underlyingrevenue transaction based on an estimate of customer participation .

Vendor Promotional Programs . Our vendors often offer sales incentives suchas rebates, cooperative advertising and marketing development funds . We recognize

vendor rebates as a reduction to our cost of revenues at the time inventory ispurchased . Volume-based programs are accrued based on our inventory purchase

volume estimates . We record cooperative advertising and marketing development

funds as an offset to our marketing expense .

103 . In Daisytek's 2002 Form 10-K, defendants also falsely described, among other things :

(a) Their supposed "Dedication to Profitability" :

You might say our dedication to increasing profitability is an obsession .

Every manager at Daisytek - every day- is a financial manager . Each one uses thelatest financial management tools to gauge our cost and sales performance . Through

calculated and strategic expansion, corporate acquisitions and the introduction ofnew products, this consistent monitoring and focus on revenues and earnings growth

has paid off.

In addition, days sales outstanding, inventory turns and margins all improved

in FY 2002 . Despite a challenging quarter following Sept . 11, Daisytek revenues andprofits finished the year with an impressive performance, with $1 .2 billion in sales,

an increase of 18 percent over FY 2001 . Our net income, before nonrecurring

charges and discontinued operations, increased by 13 percent . Corresponding diluted

-42-

earnings per share were equally impressive in light of the recession, with $0 .98 per

share in FY 2001 to $1 .03 per share in 2002 .

Daisytek 2002 Form 10-K at 18 .

(b) That "We are Technologically Advanced" :

With the advent of e-commerce, online catalogs and electronic tracking, productordering and distribution have become more streamlined than ever before.

Daisytek stays at the forefront of the latest technology, passing those innovations on

to customers whenever possible . To that end, we have invested millions of dollars toobtain the most technologically advanced information management systems

available. All in the name of lower costs . Better service . Faster delivery. And

greater market share . . . .

Id. at 21 .

(c) In his "Letter to Shareholders ," Jim Powell falsely wrote in part :

We have focused on our goals, set two years ago, of expanding our product line to

include office products ; pioneering emerging customer channels, such as drug and

grocery stores; leveraging our core competencies in customer care and demand

generation ; opening new international markets ; and pursuing acquisitions to support

our operating and financial strategies .

FY 2002 results show that we planned and executed well . We achieved significantresults, even in the face of the devastating attacks on the United States and theeconomic downturn . We are proud that we reached so many impo rtant milestones .

GROWTH

• Consolidated revenue rose 18% .

U.S . revenue was up 23% .

• International revenue grew 21 %, in local currencies .

Earnings increased 13%, before nonrecurring charges and discontinued

operations .

Id. at 27 .

(d) Finally, defendants falsely stated their adherence to a "Revenue Recognition "

policy :

The Company recognizes product revenue upon shipment of product to customersand provides for estimated returns and allowances. The company permits its

customers to return defective products (many of which are then returned by the

-43-

Company to the manufacturer) and incorrect shipments for credit against other

purchases . The Company offers terms to its customers that it believes are standard

for its industries . PFSweb service fee revenues were recognized at the time the

service was provided to the client .

Id. at 43 .

104. On the release of its 2002 Form 10-K, Daisytek's stock price surged to as high as

$16 .96 per share on June 28, 2002 .

(a) The statements in ¶¶91, 93, 95, 97, 98, 100, 102, 103 were false an d

misleading when made . At the time these statements were made, defendants actually knew or were

deliberately reckless in disregarding that the Company's financial condition was materially impaired

because they knew Daisytek : improperly recorded vendor rebates and promotional allowances as

revenue (causing at least $30 million in uncollectible vendor receivables to be accumulated by

October 2002), ¶¶27-33 ; created revenue by pulling in sales from the ensuing quarters, ¶¶35-37 ;

shipped unwanted product to customers which would eventually be returned or destroyed, ¶¶39-41 ;

had loose sales policies along with its subsidiary, The Tape Company, that led to product being

shipped to poor credit-customers which, in turn, increased the number of uncollectible accounts,

¶¶43-59; destroyed unwanted inventory to be able to return it to vendors as damaged goods, ¶¶70-

72; had an inefficient inventory data management system that would ship to customers more goods

than the customer wanted and not correctly show the correct number of supplies in stock, ¶¶73-81 ;

and was experiencing unaccounted for program allowances claimed by customers as credit, ¶160-69 .

(b) Thus, Daisytek's financial results were materially false and misleadin g

because they overstated revenue and income, assets, accounts receivable and inventory and

understated expenses and reserves . As a result of aforementioned adverse, material, non-public

facts, defendants had no reasonable basis and, in fact, knew or were deliberately reckless in

disregarding that Daisytek misrepresented its true financial position and that the Company did no t

-44-

have exceptional opportunities for growth and earnings, and the Company could not achieve the

predicted earnings per share growth of 30% and revenue growth of l0%-15% in FY03 .

(c) At the time these statements were made, defendants knew or recklessly

disregarded that the Company's financial condition was materially impaired because of their senior

positions and attendance at various meetings, and information they received from managers ,

including: (i) regularly attended meetings where Powell was present and problematic practices

regarding the recording of vendor rebates were discussed openly, led by Daisytek President Michael

Scannell and Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would

report to Powell, and the remaining Board of Directors, at regular meetings where the improper

practice of recognizing revenue on vendor rebates was openly discussed ; (iii) that Daisytek

management consistently disregarded the proposals for establishing an adequate bad debt reserve,

and in fact, Treasurer Mark Corjay (who reported to defendant Mitchell) indicated during meetings

on this topic that proposed bad debt reserves were too high ; (iv) that a former assistant controller

would tell Mitchell every month during the Class Period that the inventory reserves were too low in

spite of the excess and unnecessary inventory, but Mitchell consistently refused to set these reserves

to the recommended levels ; (v) that Daisytek's Controller, Richard Tolle, discussed inventory an d

accounting issues at bi-monthly meetings regarding the Company's financial performance and

business challenges where defendant Mitchell was present; (vi) that in February 2002, a former

Daisytek Senior Vice President of Operations and a former Daisytek North American Controller

compiled a book that documented a wide variety of the accounting issues and irregularities detailed

in this Complaint that needed to be rectified and submitted their concerns to Daisytek's senior

management, including defendants Powell and Mitchell ; (vii) that in March 2002, a former Director

of the Peripherals Division and Corporate Development objected about the Company's problematic

business practices and accounting improprieties to the Board and, as a result of his objections, th e

-45-

Board allegedly demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002

to eleven executives for the Company's reported financial performance for the prior fiscal year ; and

(viii) that the Director of Internal Audit would report employees' concerns regarding the problematic

business and accounting practices directly to Daisytek's Board .

(d) A former assistant controller and a former director of the peripherals divisio n

and corporate development stated that it was a known fact within Daisytek's senior management that

the ISA acquisition in 2002 would not be accretive but instead would be definitely dilutive to

Daisytek's earnings, based on internal documents indicating profitability within a two-year

timeframe. Further, according to a former assistant controller, the defendants were motivated to

acquire ISA due the bonuses that they were to (and did) receive for the acquisition .

105. During July 2002, while the stock traded at inflated levels, Wharf sold 90,200 shares

for over $1 .18 million in illegal insider sales profits .

106. On July 22, 2002, in connection with Daisytek's acquisition of ISA, the Company

amended its Form 8-K filed May 7, 2002 by issuing pro forma financial statements. These pro

forma financial statements repeated Daisytek's false March 2002 financial statements .

107. On August 7, 2002, Daisytek issued a press release entitled, "Daisytek Earnings Beat

Expectations, Revenue Grows 47% U .S., Australia, Canada, Mexico, U .K. Deliver Solid

Performance ." The press release stated in part :

Daisytek International Corporation today announced first quarter net income

from continuing operations of $3 .6 million and diluted earnings per share of $0 .19,

excluding special charges . Revenues for the quarter increased 47% to $402.5

million compared to last year 's quarterly revenues of $273.0 million, primarily due

to consolidation of ISA International plc for two months . Revenue growth,

excluding ISA, was 17% . As previously announced, the inclusion of ISA

International had a short-term dilutive impact on net income, which as adjusted,represents an 18% decrease over the prior year adjusted net income of $4 .5 million .

Corresponding first quarter diluted earnings per share of $0 .19 (on 19 .4 million

shares) compares to prior year diluted earnings per share of $0 .28 (on 16.0 million

shares) .

-46-

"Daisytek has delivered impressive revenue growth throughout all of our

divisions. Organic growth was within our stated range of 10-15%. Earnings

exceeded our expectations , and are poised for further growth through some

exciting initiatives worldwide," said Jim Powell, president and CEO .

Achievements for the first quarter include :

---- Consolidated revenue growth of 47% .

- Overall U. S. revenue growth of 25% .

In the first quarter, revenue growth for the U .S. division was 25% compared

to the prior year's quarter . Daisytek' s initiative to drive sales through the consumer-

convenient channel - which includes grocery, drug, online and other resellers -

continues to produce excellent results, with first quarter revenues upapproximately 50% over the prior year,producing an annualized run rate in excessof $100 million for this channel .

Net debt (total debt less cash) increased to approximately $203 million during

the quarter. This increase was mainly attributable to ISA's acquisition cost, ISAassumed debt and increases in working capital, deriving from revenue growth during

the quarter and stocking at the two new regional distribution centers . Daisies

announced that it had closed a new three-year $250 million syndicated senior secured

debt facility led by Bank of America, N .A. in the United States . In addition to this

U.S . facility, the company has a further $100 million of asset-based credit facilities

with a variety of international lender . These combined facilities are sufficient to

meet Daisytek's current growth projections .

Ralph Mitchell, executive vice president and CFO, said, "Daisytek's

combined revenuefor Fiscal 2003 is projected to be $1.8 billion to $1.9 billion . We

expected earnings dilution from the consolidation and funding of ISA (and its 47%investment in Kingfield Heath) in the first two quarters of our FY03, due to theseasonality of the European businesses and the ongoing operational improvement

initiatives in ISA's continental operations . We are targeting breakeven with funding

costs in our third and fourth quarters or possibly a small accretion, after fundingcosts, for ISA during these quarters . Our EPS guidance for this year remains as $1 .05

to $1 .10 per diluted share . By next fiscal year, ending March 2004, we expect ISA to

be significantly net accretivefor the full fiscal year. Our EPSguidance for FY04 is

$1.40 to $1.50per diluted share with revenue growth of at least 10-15% ."

-47-

108 . On August 8, 2002, based on information from defendants, in report entitled ,

"Daisytek First Quarter on Track ; Robust Revenue Growth, ISA Dilutive ," Bruce Simpson of Blair,

William & Co., stated in part :

Revenue growth was solid in almost all areas of the firm, showing an impressive15% organic growth . . . .

Although considerable execution risk remains, Daisytek is on track to meet itsaggressive growth targets; we believe the December quarter will be particularlyimportant in demonstrating this .

Revenue growth in this quarter was at the top end ofmanagement 's target of 10%-15% organic growth , and the company met several operational milestones such asleasing and stocking the first of the new regional distribution centers and signing up

new clients in its consumer/convenience channel . . . . Total revenue growth, inclusiveof the ISA acquisition , was 47% . . . .

We believe that theISA integration is on track, although contributing about $0.08dilution in the quarter , as anticipated. Revenue growth of 20% year-over-yearpredates much of the Daisytek effort, but bodes well for returning ISA toprofitability later in this fiscal year.

109 . On August 8, 2002, based on information from defendants, David J . Manthey of

Robert W. Baird & Company (a firm who Daisytek paid to recommend the ISA acquisition to IS A

shareholders, see Exhibit 99 .2 to Form 8-K dated May 7, 2002) stated, in part, that Daisytek' s

"[s]ales in most areas of the business (excluding The Tape Company and Argentina ) are tracking in

line with expectations. If not for the cost issues and charges, Daisytek would most likely b e

performing well. "

110. On August 19, 2002, Daisytek issued a press release entitled, "Daisytek Completes

Acquisition of ISA International ; European Computer Supplies Distributor Fully Owned by U . S .

Operator ." The press release stated in part :

Daisytekprojects combined revenue for FY2003 will be $1.8 billion to $1.9billion. EPS guidance for the year is $1.05 to $1 .10 per diluted share. By thefiscal year ending March 2004, Daisytek expects ISA to be net accretivefor the full

-48-

fiscal year. EPS guidance for FY04 is $1 .40 to $1.50 per diluted share with

revenue growth of at least 10% to 15% .

111 . On August 29, 2002, Daisytek issued a press release entitled , "Daisytek Management

Reviews FY2002 Highlights of Annual Meeting ; Leadership Team Discusses European Expansio n

with Shareholders ." The press release stated in part :

Daisytek officers presented FY2002 highlights, emphasizing both the positive

financials delivered and the significant strides made in delivering the infrastructureplans outlined for the year. Financial highlights include consolidated revenues up

18%, U.S. revenue up 23%, international revenue growth of 21% (in localcurrencies), and increased earnings, before special charges, of 13 % .

Daisytek estimates combined revenue for FY2003 at $1.8 billion to $1.9billion. EPS guidance for the year is $1.05 to $1. 1 0 per diluted share. By thefiscal year ending March 2004 Daisytek expects '(SA to be net accretive for the full

fiscal year. EPS guidance for FY2004 is $1.40 to $1. 50 per diluted share withrevenue growth of at least 10% to 15% .

112. (a) The statements in ¶106-111 were false and misleading when made . At the tim e

these statements were made, defendants actually knew or were deliberately reckless in disregardin g

that the Company' s financial condition was materially impaired because they knew Daisytek :

improperly recorded vendor rebates and promotional allowances as revenue (causing at least $3 0

million in uncollectible vendor receivables to be accumulated by October 2002 ), ¶¶27-33 ; created

revenue by pulling in sales from the ensuing quarters, ¶¶35-37; shipped unwanted product to

customers which would eventually be returned or destroyed, ¶139-41 ; had loose sales policies along

with its subsidiary, The Tape Company, that led to product being shipped to poor credit-customer s

which, in turn, increased the number of uncollectible accounts, ¶¶43-59 ; destroyed unwante d

inventory to be able to retu rn it to vendors as damaged goods, ¶¶70-72 ; had an ineffi cient inventory

data management system that would ship to customers more goods than the customer wanted and no t

correctly show the correct number of supplies in stock, ¶¶73-81 ; and was experiencing unaccounted

for program allowances claimed by customers as credit, ¶¶60-69 .

-49-

(b) Thus, Daisytek's financial results were materially false and misleading because

they overstated revenue and income, assets, accounts receivable and inventory and understated

expenses and reserves . As a result of aforementioned adverse, material, non-public facts, defendants

had no reasonable basis and, in fact, knew or were deliberately reckless in disregarding that Daisytek

misrepresented its true financial position and that the Company did not have exceptional

opportunities for growth and earnings, and the Company could not achieve the predicted earnings

per share growth of $0 .30-$0 .45 and revenue growth of 10%-15% in FY03 .

(c) At the time these statements were made, defendants knew or recklessly

disregarded that the Company's financial condition was materially impaired because of their senior

positions and attendance at various meetings, and information they received from managers ,

including: (i) regularly attended meetings where Powell was present and problematic practices

regarding the recording of vendor rebates were discussed openly, led by Daisytek President Michael

Scannell and Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would

report to Powell, and the remaining Board of Directors, at regular meetings where the improper

practice of recognizing revenue on vendor rebates was openly discussed ; (iii) that Daisytek

management consistently disregarded the proposals for establishing an adequate bad debt reserve,

and in fact, Treasurer Mark Corjay (who reported to defendant Mitchell) indicated during meetings

on this topic that proposed bad debt reserves were too high ; (iv) that a former assistant controller

would tell Mitchell every month during the Class Period that the inventory reserves were too low in

spite of the excess and unnecessary inventory, but Mitchell consistently refused to set these reserves

to the recommended levels ; (v) that Daisytek's Controller, Richard Tolle, discussed inventory and

accounting issues at bi-monthly meetings regarding the Company's financial performance and

business challenges where defendant Mitchell was present; (vi) that in February 2002, a former

Daisytek Senior Vice President of Operations and a former Daisytek North American Controlle r

-50-

compiled a book that documented a wide variety of the accounting issues and irregularities detailed

in this Complaint that needed to be rectified and submitted their concerns to Daisytek's senio r

management , including defendants Powell and Mitchell ; (vii) a former Director of the Peripheral s

Division and Corporate Development objected about the Company's problematic business practices

and accounting improprieties to the Board and, as a result of his objections, the Board allegedly

demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002 to eleven

executives for the Company's reported financial performance for the prior fiscal year ; and (viii) that

the Director of Internal Audit would report employees' concerns regarding the problematic busines s

and accounting practices directly to Daisytek's Board .

(d) A former assistant controller and a former director of the peripherals division an d

corporate development stated that it was a known fact within Daisytek's senior management that th e

ISA acquisition in 2002 would not be accretive but instead would be definitely dilutive to Daisytek' s

earnings, based on internal documents indicating profitability within a two-year timeframe . Further,

according to a former assistant controller, the defendants were motivated to acquire ISA due the

bonuses that they were to (and did) receive for the acquisition .

113. On October 11, 2002, based on information from defendants, David J . Manthey of

Robert W. Baird & Company stated, in part, "Daisytek should fall within prior guidance due to

recurring revenue streams and recent positive news from key supplier, Lexmark . . . . New initiative s

have been running better than expected, driving higher growth rates in recent quarters ."

114. On October 24, 2002, Daisytek issued a press release entitled, "Daisytek Expects to

Take Goodwill Charge Related to Tape Company and Argentina Businesses ." The press release

stated in part :

[P]erformance of the Tape Company and Argentina businesses plus incremental costs

related the company's U . S . office products rollout are expected to adversely impact

the second quarter results, and the company will not meet analyst earnings estimatesfor the quarter.

-51-

Jim Powell, president and CEO, said, "Although The Tape Company is stillvery profitable and we continue to implement new sales, marketing, and cost-savingsinitiatives, industry unit price degradation is expected at a higher rate than anysavings or gains we can hope to make . Results for the second quarter confirm thatnegative industry trends such as price degradation and volume declines continue to

trouble this business ."

"As our new warehouse network continues to expand, it is our plan to

collapse some of the existing Tape Company distribution centers into our newregional network," Powell said. "We have already folded much of The TapeCompany's back-office administrative functions into Daisytek. While themanagement team has done a greatjob of running the business as cost-effectivelyas possible and developing new initiatives to drive growth and profitability, theindustry issues outweigh their current efforts . "

"Daisytek 's office products initiative is on schedule for a fourth fiscal

quarter rollout. Our new 900-page Business Products 2003 catalog, containing full

lines of both computer supplies and office products, is ready for distribution inJanuary, and it's impressive," Powell said .

"Unfortunately, costs related to our U .S. expansion into office products,

including the production of our new catalog ; higher-than-expected costs in the build-

out of our new warehouses ; certain delays in converting from more expensive airdelivery to lower-cost ground; and interest costs on investment in incrementalinventory, have negatively impacted our second quarter performance," Powell said .

Daisytek has confirmed that it expects revenue to be $1 .8 billion to $1.9 billion, aspreviously stated, for this fiscal year . The company also confirmed that it ismaintaining its earnings estimatesfor next fiscal year of $1 .40 to $1.50 per share,citing office products expansion, growth of its drug and grocery sales channel, aswell as international expansion - specifically ISA - as major contributors .

"Although we are disappointed that our near-term performance will be belowexpectations, again for reasons related primarily to The Tape Company, LatinAmerica, Argentina and office products rollout costs, it is important to note that the

bulk of our business is performing as expected . We remain committed to our long-

term goals and are confident that our strategies will result in continued earningsgrowth," Powell said .

-52-

115, On October 24, 2002, investors were given their first inkling that there migh t

potentially be revenue and growth problems at Daisytek, but defendants continued to conceal from

investors the serious nature and extent of the problems surrounding Daisytek's revenues and

operations, which were known to them internally, but not to the investing public . In fact, this partial

disclosure continued to conceal material information which artificially inflated the stock price .

116 . On November 7, 2002, Daisytek issued a press release entitled , "Daisytek 2nd

Quarter Revenue Strong ; Earnings Impacted by Charges ." The press release stated in part :

Daisytek International Corporation today announced results for its secondfiscal quarter. Revenues for the quarter increased 62% to $452 .9 million comparedto last year's quarterly revenues of $278 .8 million. Excluding revenues for ISA

International plc, which the company began consolidating in May 2002, revenuegrowth was 13%. U . S . computer and office supplies revenue increased 19% over theprior year quarter . International revenues increased 16% over the prior year quarter,

excluding Argentina . Including Argentina, growth in international revenues was 8% .

Although top-line results were in line with company expectations,

performance of the Tape Company and Argentina businesses plus incremental costsrelated to the company's U .S . office products rollout and distribution centerreorganization adversely impacted second quarter results . In addition, the company

recorded goodwill impairment charges of $13 .8 million related to the Tape andArgentina businesses and incremental balance sheet reserves and adjustments of

$14.8 million (after tax), resulting in a second quarter net loss of $27 .3 million, or$1 .49 per share. Prior year second quarter net income from continuing operationswas $3 .2 million, or $0 .19 per diluted share .

117. This partial disclosure continued to conceal material information which artificially

inflated the stock price . Defendants continued to conceal from investors the serious nature an d

extent of the problems surrounding Daisytek's revenues and operations, which were known to the m

internally, but not to the investing public .

(a) The statements in ¶¶l 13, 114, 116 were false and misleading when made . At

the time these statements were made , defendants actually knew or were deliberately reckless in

disregarding that the Company's financial condition was materially impaired because they kne w

Daisytek : improperly recorded vendor rebates and promotional allowances as revenue (causing a t

-53-

least $30 million in uncollectible vendor receivables to be accumulated by October 2002), ¶¶27-33 ;

created revenue by pulling in sales from the ensuing quarters, ¶¶3 5-37 ; shipped unwanted product t o

customers which would eventually be returned or destroyed, ¶¶39-41 ; had loose sales policies along

with its subsidiary, The Tape Company, that led to product being shipped to poor credit-customer s

which, in turn, increased the number of uncollectible accounts, ¶¶43-59; destroyed unwante d

inventory to be able to return it to vendors as damaged goods, ¶¶70-72 ; had an inefficient inventor y

data management system that would ship to customers more goods than the customer wanted and no t

correctly show the correct number of supplies in stock, ¶¶73-81 ; and was experiencing unaccounted

for program allowances claimed by customers as credit, ¶¶60-69 .

(b) Thus, Daisytek's financial results were materially false and misleadin g

because they overstated revenue and income, assets, accounts receivable and inventory an d

understated expenses and reserves . As a result of aforementioned adverse, material, non-publi c

facts, defendants had no reasonable basis and, in fact, knew or were deliberately reckless i n

disregarding that Daisytek misrepresented its true financial position and that the Company did no t

have exceptional opportunities for growth and earnings, and the Company could not achieve the

predicted earnings per share and revenue growth of l0%-15% in FY03 .

(c) At the time these statements were made, defendants knew or recklessly

disregarded that the Company's financial condition was materially impaired because of their senio r

positions and attendance at various meetings, and information they received from managers ,

including: (i) regularly attended meetings where Powell was present and problematic practice s

regarding the recording of vendor rebates were discussed openly, led by Daisytek President Michae l

Scannell and Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would

report to Powell, and the remaining Board of Directors, at regular meetings where the imprope r

practice of recognizing revenue on vendor rebates was openly discussed; (iii) that Daisytek

-54-

management consistently disregarded the proposals for establishing an adequate bad debt reserve,

and in fact, Treasurer Mark Corjay (who reported to defendant Mitchell) indicated during meetings

on this topic that proposed bad debt reserves were too high ; (iv) that a former assistant controller

would tell Mitchell every month during the Class Period that the inventory reserves were too low in

spite of the excess and unnecessary inventory, but Mitchell consistently refused to set these reserves

to the recommended levels ; (v) that Daisytek's Controller, Richard Tolle, discussed inventory and

accounting issues at bi-monthly meetings regarding the Company's financial performance and

business challenges where defendant Mitchell was present; (vi) that in February 2002, a former

Daisytek Senior Vice President of Operations and a former Daisytek North American Controller

compiled a book that documented a wide variety of the accounting issues and irregularities detailed

in this Complaint that needed to be rectified and submitted their concerns to Daisytek's senior

management, including defendants Powell and Mitchell ; (vii) that in March 2002, a former Director

of the Peripherals Division and Corporate Development objected about the Company's problematic

business practices and accounting improprieties to the Board and, as a result of his objections, the

Board allegedly demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002

to eleven executives for the Company's reported financial performance for the prior fiscal year ; and

(viii) that the Director of Internal Audit would report employees' concerns regarding the problematic

business and accounting practices directly to Daisytek's Board .

(d) A former assistant controller and a former director of the peripherals divisio n

and corporate development stated that it was a known fact within Daisytek's senior management that

the ISA acquisition in 2002 would not be accretive but instead would be definitely dilutive to

Daisytek's earnings, based on internal documents indicating profitability within a two-year

timeframe. Further, according to a former assistant controller, the defendants were motivated to

acquire ISA due the bonuses that they were to (and did) receive for the acquisition .

-55-

118 . On November 14, 2002, Daisytek announced the waiver of compliance of the credit

agreement covenants in a press release entitled, "Daisytek Amends $250 Million Credit Facility ;

Bank Waives Covenants for Second Quarter As Expected ." A new covenant was added which

required defendants to use their best efforts to raise additional capital having net proceeds of not less

than $20 million by March 31, 2003, and to raise such additional capital, in any event, on or before

September 30, 2003 . Also, if the average availability under the facility for any trailing 30-day period

first calculated on February 14, 2003 was less than $15 million, then $20 million (net) of additional

capital was required to be raised within 90 days of that date .

119. Daisytek's ability to negotiate around its loan covenant violations were dependant

upon the Company's false financial statements . Absent Daisytek's improper financial reporting, the

bank would not have agreed to waive Daisytek's loan covenants . Thus, as defendants knew,

Daisytek improperly delayed its inevitable bankruptcy .

120. On February 12, 2003, Daisytek issued a press release entitled, "Daisytek Reports

Third-Quarter Fiscal Year 2003 Results ; Operational Milestones Complete ; ISA Continues

Improvements." The press release stated in part :

Daisytek International Corporation today announced third-quarter fiscal year

2003 diluted earnings per share of $0 .14, excluding nonrecurring charges of

approximately $0.09 per share related to its previously announced restructuring plan .

Prior-year third-quarter diluted earnings per share were $0 .29, excluding

nonrecurring charges of approximately $0 .11 related to the restructuring plan . Most

of the restructuring costs related to the reconfiguration ofthe company's superhub

in Memphis, Tenn. and the completion of new facilities in Albany , N. Y. and

Bakersfield, Calif. The company stated that these activities are substantially

completed and, as a result, future operating results should be simplified .

Revenuesfor the quarter increased 55% to $478.6 million , compared with

last year's quarterly revenues of $309.3 million. Third-quarter fiscal year 2003

results include ISA International plc, Daisytek's new European affiliate . The

company began consolidating ISA in May 2002 . Combined quarter-over-quarter

revenue growth for Daisytek and ISA was 7% .

-56-

121 . This partial disclosure continued to conceal material information which artificially

inflated the stock price . Defendants continued to conceal from investors the serious nature and

extent of the problems surrounding Daisytek's revenues and operations, which were known to the m

internally, but not to the investing public .

122 . According to the February 12, 2003 press release, upon the first calculation on

February 14, 2003 of the average availability under the Company's credit facility, the 30-day

average availability under the facility was less than $15 million . Therefore, in addition to th e

requirement that Daisytek would use its best efforts to raise the additional capital by March 31 ,

2003, the Company was required to raise such capital within 90 days of February 14, 2003 (by Ma y

15, 2003) .

123 . Thus, it was even more important to the Company that it reported favorable financial s

to raise the necessary funds .

124 . On February 27, 2003, Daisytek issued a press release entitled, "Daisytek Provide s

Earnings Guidance; FY 2004 EPS Estimated $0 .70 to $0.75." The press release stated in part :

Jim Powell, Daisytek's president and CEO, reiterated the company'snear-term focus announced Feb. 12 . "Daisytek will control its growth in the nearterm as we eliminate lower-margin or nonstrategic activities and focus on the

channels, products and customers that are most accretive to our business. Overtime, the slower growth will be offset by increased top-line results relating to ourtwo growth initiatives - expanding the office products business and improvingresults at ISA, our European operation . The narrower focus will enable us topursue working capital andprofitability improvements worldwide ," he said .

The company estimates fourth-quarter fiscal year 2003 revenue of $465

million to $475 million with diluted earnings per share of $0 .06 to $0.07, excludingany impact from the company's adoption of Emerging Issues Task Force Issue No .

02-16. Reported third-quarter fiscal year 2003 diluted earnings per share were $0 .05,

after restructuring charges of $0 .09 . Fiscal year 2004 revenues are targeted to be$1 .9 billion to $2.0 billion with diluted earnings per share of $0.70 to $0.75 .

Daisytek has targeted working capital improvements of $20-$25 million,with an additional $10-$15 million of cash expected to be freed up from the sale or

-57-

closure of certain nonstrategic or lower-margin businesses . "Last quarter, our U.S .

team delivered solid improvements in accounts receivable metrics, with a days sales

outstanding of 38 .5 days . We plan to use our U .S . team's best practices in our other

businesses to improve worldwide days sales outstanding," said Powell . "Another toppriority is to generate significant working capital improvements through betterinventory management ."

125. This partial disclosure continued to conceal material information which artificially

inflated the stock price. Defendants continued to conceal from investors the serious nature and

extent of the problems surrounding Daisytek's revenues and operations, which were known to them

internally, but not to the investing public .

(a) The statements in ¶¶120, 124 were false and misleading when made . At the

time these statements were made , defendants actually knew or were deliberately reckless in

disregarding that the Company ' s financial condition was materially impaired because they knew

Daisytek: improperly recorded vendor rebates and promotional allowances as revenue (causing at

least $30 million in uncollectible vendor receivables to be accumulated by October 2002 ), ¶¶27-33 ;

created revenue by pulling in sales from the ensuing quarters, ¶¶3 5-37 ; shipped unwanted product to

customers which would eventually be returned or destroyed, ¶T394 1 ; had loose sales policies along

with its subsidiary , The Tape Company , that led to product being shipped to poor credit - customers

which, in turn, increased the number of uncollectible accounts , ¶¶43-59; destroyed unwanted

inventory to be able to return it to vendors as damaged goods, ¶¶70-72; had an inefficient inventory

data management system that would ship to customers more goods than the customer wanted and not

correctly show the correct number of supplies in stock, ¶¶73-81 ; and was experiencing unaccounted

for program allowances claimed by customers as credit , ¶¶60-69 .

(b) Thus, Daisytek 's financial results were materially false and misleading

because they overstated revenue and income, assets , accounts receivable and inventory and

understated expenses and reserves . As a result of aforementioned adverse , material, non-public

facts, defendants had no reasonable basis and , in fact , knew or were deliberately reckless in

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disregarding that Daisytek misrepresented its true financial positions and that the Company did not

have exceptional opportunities for growth and earnings, and the Company could not achieve the

predicted earnings per share growth and revenue growth of l0%-15% in FY04 .

(c) At the time these statements were made, defendants knew or recklessly

disregarded that the Company's financial condition was materially impaired because of their senior

positions and attendance at various meetings, and information they received from managers,

including: (i) regularly attended meetings where Powell was present and problematic practices

regarding the recording of vendor rebates were discussed openly, led by Daisytek President Michael

Scannell and Senior Vice President of Marketing Higgs ; (ii) that the Director of Marketing would

report to Powell, and the remaining Board of Directors, at regular meetings where the improper

practice of recognizing revenue on vendor rebates was openly discussed ; (iii) that Daisytek

management consistently disregarded the proposals for establishing an adequate bad debt reserve,

and in fact, Treasurer Mark Corjay (who reported to defendant Mitchell) indicated during meetings

on this topic that proposed bad debt reserves were too high ; (iv) that a former assistant controller

would tell Mitchell every month during the Class Period that the inventory reserves were too low in

spite of the excess and unnecessary inventory, but Mitchell consistently refused to set these reserve s

to the recommended levels ; (v) that Daisytek's Controller, Richard Tolle, discussed inventory and

accounting issues at bi-monthly meetings regarding the Company's financial performance and

business challenges where defendant Mitchell was present ; (vi) that in February 2002, a former

Daisytek Senior Vice President of Operations and a former Daisytek North American Controller

compiled a book that documented a wide variety of the accounting issues and irregularities detailed

in this Complaint that needed to be rectified and submitted their concerns to Daisytek's senior

management, including defendants Powell and Mitchell ; (vii) that in March 2002, a former Director

of the Peripherals Division and Corporate Development objected about the Company's problematic

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business practices and accounting improprieties to the Board and, as a result of his objections, the

Board allegedly demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002

to eleven executives for the Company's reported financial performance for the prior fiscal year ; and

(viii) that the Director of Internal Audit would report employees' concerns regarding the problematic

business and accounting practices directly to Daisytek's Board .

(d) A former Director of the Peripherals Division and Corporate Development

objected about the Company's problematic business practices and accounting improprieties to th e

Board and, as a result of his objections, the Board allegedly demanded repayment of $2 million i n

bonuses that Daisytek had paid in spring 2002 to eleven executives for the Company's reporte d

financial performance for the prior fiscal year .

126 . After the announcements detailed in ¶11120, 124 Daisytek's stock price continued to

trade at artificially inflated levels .

DAISYTEK REVEALS ITS TRUE FINANCIAL CONDITIO N

127. Then, on April 28, 2003, Daisytek issued a press release entitled, "Daisytek Expects

Significant Loss in Fourth Quarter 2003 ; Company Evaluating Financing Options and

Reorganization Alternatives ." The press release stated in part :

Daisytek International Corp . today provided an update on its operations,

financial condition and fourth quarter results . Additional lending restrictions from

Daisytek's U.S. lending syndicate have significantly tightened the borrowingcapacity of the company, which has had a substantial negative impact on fourth

quarter operations and created serious liquidity constraints forDaisytek's largest U .S .

subsidiary, Daisytek, Incorporated .

Daisytek announced the following business developments :

- Daisytek's independent Audit Committee has completed an investigationand report relating principally to the company's accounting treatment of vendor

monies prior to its adoption of a recently issued accounting pronouncement . The

company has concluded that no restatement of its previously issued financialstatements is required and has voluntarily provided the results of this investigation to

the Securities and Exchange Commission (SEC) .

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Daisytek Pursues Other Financial Alternative s

The company has signed and funded a term sheet proposal for a $185 millionagreement with a well-known global financing institution and due diligence

procedures are already underway . The proposed facility would include a $150million U.S. senior secured revolving credit facility and a $35 million Canadiansenior secured revolving credit facility, established through the company's whollyowned subsidiary Daisytek, Incorporated . Proceeds from the new facility would be

used to repay the company's current lenders and to fund working capital . Theproposed credit facility would have a three-year term and availability would besubject to certain borrowing base and other limitations .

Daisytek is also negotiating with a number of parties interested in purchasingportions of the company's assets .

The company will require alternative financing to continue to meet itsobligations. If the company cannot obtain alternativefinancing in the nearfuture,

one or more of the company's primary U.S. subsidiaries may file a voluntarypetition to reorganize under Chapter 11 of the U.S Bankruptcy Code . If thecompany were to elect this course of action, management anticipates that its foreignsubsidiaries in Europe, Australia, Mexico and Canada would not be included in any

bankruptcy filing in the United States .

The company noted there can be no assurance that this potential lenderultimately will commit to or sign the term sheet or credit facility as proposed, or at

all, or that the other alternatives being pursued will be consummated . Further, there

can be no assurance that alternativefinancingcould be obtainedprior to any filingby one or more of the company's primary U.S. subsidiaries of a voluntarypetitionto reorganize under Chapter 11 of the U.S. Bankruptcy Code .

Daisytek has engaged reorganization consultants to assist the company in itsdiscussions with alternative financing sources and with the company's vendors .

Daisytek also continues to aggressively pursue profitability improvement planspreviously announced. Cost-saving plans to date are expected to increase cash flow

by more than $16 million per year.

Company Seeks Forbearances From U .S. Lending Syndicate

Daisytek has sought to negotiate a forbearance agreement with U . S . lenderssubsequent to the receipt of a default notice relating to the fixed-charge coverage

ratio and letters for subsequent defaults . The company previously announced it hadnot maintained the minimum fixed-charge coverage ratio required by the credit

facility agreement and subsequently received a letter of default from its lenders onthis and other covenant violations . To date, the syndicate has not accepted the

company's proposals . The banking syndicate also has imposed additional borrowing

base limitations and reserves . Subject to these restrictions and limitations, thesyndicate is continuing to advance funds to the primary U .S . subsidiaries . As a resultof the credit restrictions imposed on the U .S. facility, the company has repaid

approximately $56 million in debt between Dec . 31, 2002 and Apr. 25, 2003 .

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The company also is seeking accommodations from its U .S. vendors,

although vendors have not taken any action against Daisytek .

Fourth-quarter results impacted by U .S. financing restrictions and balance

sheet adjustments .

Due to the tightened borrowing capacity of the company's U .S. credit facility,

inventory purchases were severely restricted during the fourth quarter, which

significantly reduced fill rates and sales . Further, the lack of sufficient funding

prohibited Daisytek from taking advantage of vendor programs such as rebates,cooperative advertising and marketing development funds, which often require

minimum levels of purchasing. As a result of the shortfall in the principal U.S .

subsidiary's earnings, the company expects to report a consolidated operating loss for

the quarter.

In addition to the loss generated from the impact of significantly restricted

liquidity, the company expects to make balance sheet adjustments that will widen

the fourth quarter lossfrom operations, including significant increases in reserves

for customer and vendor accounts receivable and inventory , and to incur

greater-than -expectedrestructuring charges, primarily related to the completion of

the Memphis reconfiguration .

"Results of operations for our fourth quarter of fiscal year 2003 and to-date

first fiscal quarter of 2004 have been negatively affected by serious liquidityconstraints resulting from the restrictions imposed by the lending syndicate," said

Jack Kearney, Daisytek's acting chief financial officer . "Because we are reviewing

all of our strategic initiatives and customer and vendor relationships, our team needsto reassess the balance sheet and make adjustments with respect to the realizablevalue of receivables, inventory, deferred costs and other assets . We expect these

balance sheet adjustments to be material ."

Audit Committee Completes Investigation Into Accounting Treatment of Vendor

Monies

Daisytek's independent Audit Committee has completed an investigation and

report relating primarily to the company's accounting treatment of vendor moniesprior to its adoption of the recently issued Emerging Issues Task Force (EITF) Issue

No. 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration

Received from a Vendor. The Audit Committee initiated its investigation in

response to concerns raised by two employees . In connection with its inquiry,

Daisytek's Audit Committee retained separate legal counsel, which retained its own

accounting advisors .

As previously announced, Daisytek adopted EITF Issue No . 02-16 effective

January 1, 2003 . EITF Issue No . 02-16 standardizes the accounting treatment and

classification of monies received from vendors and generally requires that such cas h

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consideration be treated as a reduction of the cost of inventory acquired from the

vendor.

The company has concluded that no restatement of its previously issued

financial statements is required. The Audit Committee has provided the results of itsinvestigation to the company's Board of Directors and to the SEC . Powell expressedhis strong support for the independent inquiry .

128. However, Daisytek's financial statements were materially misstated throughout th e

class period and a restatement was required under GAAP and SEC rules . As defendants knew, by

declaring bankruptcy instead of filing its fiscal 2003 financial statements, Daisytek was able to avoi d

the inevitability of restating its class period financial statements .

129. On this news, Daisytek's stock dropped to $0 .53 on volume of 10 .6 million shares, a

97% decline from the Class Period high of $16 .96.

130. Later, on May 5, 2003, the Company announced the resignation of both its CEO an d

its CFO :

The Board of Directors of Daisytek International Corporation has acceptedthe resignations of two Daisytek senior executives . James R. Powell stepped downas President and Chief Executive Officer, a position he had held since early 2000 .

Powell ceded his position on the Board of Directors as well . Ralph Mitchell,Executive Vice President and Chief Financial Officer, resigned for personal reasons .

131 . Finally on May 7, and June 3, 2003, Daisytek announced its filing of a voluntary

petition for reorganization under Chapter 11 of the bankruptcy code . Tellingly, defendants' June 3 ,

2003 press release made clear that "It is unlikely that the shareholders of Daisytek Internationa l

Corp. will realize any value from the company's Chapter I 1 case . "

DAISYTEK'S FALSE FINANCIALREPORTING DURING THE CLASS PERIOD

132. To inflate Daisytek's stock price, defendants falsely reported its results for at least six

consecutive quarters through the use of improper income and expense recognition, as well a s

improper asset valuation, thereby materially overstating its net income and EPS during that period .

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133 . Daisytek reported the following amounts during the Class Period:

2Q02 3Q02 4Q02 1Q03 2Q03 3Q039/30/01 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02

Net revenues $278 .8M $309.3M $324.OM $402.5M $452.9M $478.6M

Net income (loss) $2.1M $3 .1M $3 .5M $2 .2M ($27.3M) $0.9M

Net income (loss) per share $ .19 $ .18 $ .20 $ .12 ($1 .49) $ .05

134. These results were included in the quarterly Forms 10-Q and the annual Form 10-K

filed with the SEC . But the results, and the representations about them by defendants, were false and

misleading when made because Daisytek's financial statements for at least the last three quarters in

fiscal 2002 and the first three quarters in fiscal 2003 were not fair presentations of its results and

were presented in violation of GAAP and SEC rules .

135 . GAAP are principles recognized by the accounting profession as the conventions,

rules and guidelines necessary to define accepted accounting practice at a pa rt icular time. SEC

Regulation S-X (17 C .F .R. §210.4-01 (a)(1)) states that financial statements filed with the SEC which

are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite

footnote or other disclosure . Regulation S-X requires that interim financial statements must also

comply with GAAP, with the exception that interim financial statements need not include

disclosures which would be duplicative of disclosures accompanying annual financial statements . 17

C.F .R. §210 . 10-01(a) .

136. Defendants caused Daisytek to falsify its reported financial results through it s

improper accounting for revenues, vendor rebates and promotional allowances, accounts receivable,

inventory, the cost of its merchandise and product returns (both to and from Daisytek), resulting in

materially and artificially inflated sales, income, assets and shareholder equity . Absent the

Company's improper accounting, Daisytek would have reported materially lower EPS or losses in

these periods . Daisytek's improper financial reporting enabled defendants to conceal the fact that

Daisytek was headed towards bankruptcy .

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137. Daisytek ' s false accounting took various forms, including recording revenues on sales

to customers where payment was not assured , recording premature and fictitious vendor rebates and

promotional allowances , failing to record adequate reserves for receivables , overstating its inventory

by failing to properly measure the value of excess, obsolete , damaged and non-returnable inventory,

recording unjustified credits for purported retu rns to vendors and failing to properly account for

returns from Daisytek customers . Defendants also caused Daisytek to improperly record vendor

rebates and promotional allowances as revenue rather than as a reduction of sales costs , and failed to

make appropriate disclosures required by GAAP and SEC rules .

138 . On November 7, 2002, Daisytek belatedly announced it was required to take a

significant charge of at least $17 .2 million in 2Q03 (the quarter ended September 20, 2002) for

previously unrecorded reserves . However, this charge was untimely and woefully inadequate, even

though investors were misled into believing that the charges then recorded were sufficient . On

February 27, 2003, Daisytek announced that millions more in accounting charges were required to

properly account for vendor rebates and promotional allowances . Daisytek declared bankruptcy

before disclosing the actual amount of necessary charges .

DAISYTEK'S IMPROPER REVENUE RECOGNITION

139 . FASB Statement of Concepts No. 5 ("CON 5") sets forth fundamental GAAP

requirements for revenue recognition: revenue must be both earned and realizable (or collectible) .

See CON 5, ¶¶83-84 . SEC Staff Accounting Bulletin No . 101 provides that revenue is not earned

and realizable until each of four conditions are met : (i) persuasive evidence of an arrangement exists ;

(ii) delivery has occurred ; (iii) the seller's price to the buyer is fixed and determinable ; and

(iv) collectibility is reasonably assured . Thus, when payment is not reasonably assured, revenue

recognition is prohibited . Throughout the Class Period, defendants and Daisytek improperly

recognized revenue on product shipments to customers where the revenue was not realizable ,

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because the customers were not creditworthy, or were already delinquent to Daisytek from prio r

purchases, or both . Daisytek also improperly recognized revenue when it shipped product in exces s

of its customers' orders or needs . Daisytek also violated revenue recognition rules because it did no t

record adequate reserves for sales returns .

140. Daisytek improperly recognized revenue when it shipped product to customers who ,

for numerous reasons, were not creditworthy . For example: (i) Daisytek shipped product to

customers who had already been put on credit hold by Daisytek's own credit department for failur e

to pay past-due amounts ; (ii) Daisytek shipped product in amounts that exceeded established credi t

limits set by Daisytek; (iii) Daisytek shipped product to "poor credit risk" customers ; and

(iv) Daisytek shipped product when the credit department had not yet evaluated the customer fo r

creditworthiness . By recording revenue on such shipments , Daisytek violated GAAP and overstated

revenue and earnings because collectibility was not reasonably assured and the revenue was no t

realizable according to GAAP .

141 . Statement of Financial Accounting Standards No. 48 (".FASB 48"), Revenue

Recognition When Right of Return Exists, prohibits the recognition of revenue on sales to customer s

that can return products unless six specific conditions are all met . Daisytek was required to follow

FASB 48 because it applies to all transactions "in which a product may be returned, whether as a

matter of contract or as a matter of existing practice . . . ." FASB 48, ¶3 . FASB 48, ¶6 states in

pertinent part :

If an enterprise sells its product but gives the buyer the right to return the product,revenue from the sales transaction shall be recognized at time of sale only if all of the

following conditions are met:

a. The seller's price to the buyer is substantially fixed or determinable at thedate of sale .

b . The buyer has paid the seller, or the buyer is obligated to pay the seller andthe obligation is not contingent on resale of the product .

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f. The amount of future returns can be reasonably estimated (paragraph 8) .

Sales revenue and cost of sales that are not recognized at time of sale because theforegoing conditions are not met shall be recognized either when the return period

has substantially expired or if those conditions are subsequently met, whicheveroccurs first .

FASB 48, ¶6 .

142. Condition 6(a) of FASB 48 was not met because Daisytek shipped premature or

excess quantities of product to its customers that would sit in trailers and therefore not be considered

due by the customer. These shipments often would result in large quantities of damaged goods and

subsequent disputes over the amounts owed by the customers . Daisytek knew at the time of

shipment that, due to both the extended payment duration and extended return/exchange periods it

provided its customers, material amounts of product would ultimately be returned or exchanged for

different products before Daisytek received payment. Daisytek had an extremely high rate of return,

including 30% for some customer types . Because Daisytek had high rates of returns and exchanges,

Daisytek's price to buyers was not substantially fixed or determinable at the time of shipment .

143 . Condition 6(b) of FASB 48 was not met because Daisytek made explicit agreement s

with their customers that they would not be required to pay for product until it was resold, which is a

contingent sale by definition. Also, Daisytek often had "side letter agreements" or other

arrangements which provided extended payment terms to its customers and, therefore, payments

would not be made unless or until the product was resold . As Daisytek knew, customers would

frequently return unsold products, which also made payment contingent on resale .

144. Condition 6(f) of FASB 48 was not met because Daisytek could not make a

reasonable estimate of future returns, as set forth below . FASB 48, ¶8 states in part :

The ability to make a reasonable estimate of the amount of future returns depends onmany factors and circumstances that will vary from one case to the next . However,

the following factors may impair the ability to make a reasonable estimate :

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b . Relatively long periods in which a particular product may be returned

c. Absence of historical experience with similar types of sales of similarproducts, or inability to apply such experience because of changing circumstances,for example, changes in the selling enterprise's marketing policies or relationships

with its customers

145 . Daisytek's ability to estimate returns was significantly impaired because Daisyte k

shipped excess quantities to its customers and provided excessively long return periods . Customers

could return product to Daisytek for any reason. Daisytek's ability to estimate returns was also

significantly impaired because Daisytek changed its marketing policies when it began using catalogs

sent to customers to encourage catalog sales and began new customer relationships with convenience

stores, pharmacies, and supermarkets - distribution channels with which Daisytek had little, if any,

historical experience, with much higher return rates than Daisytek was used to . Thus, Daisytek

could not reasonably estimate returns . To the extent Daisytek had any ability to estimate returns,

Daisytek intentionally recorded insufficient return reserves . Daisytek thereby violated FASB

No. 48, ¶7, which states :

If sales revenue is recognized because the conditions of paragraph 6 are met, anycosts or losses that may be expected in connection with any returns shall be accrued

in accordance with FASB Statement No . 5, Accounting for Contingencies . Sales

revenue and cost of sales reported in the income statement shall be reduced to reflect

estimated returns .

146. Failure to meet any of the conditions set forth in FASB 48, ¶6(a), 6(b) or 6(f)

precluded Daisytek from recognizing revenue at the time of shipment . Daisytek failed to meet all

three, yet chose to recognize the revenue anyway . In doing so, it violated Statement of Accounting

Standards No. 5 ("FASB 5") concerning revenue collectibility and other contingencies . Daisytek

was required by GAAP to record concurrently with all of its revenues any related contingent

liabilities, including reserves for bad debts, returns, product warranties and product defects (FASB

48, ¶7; CON 5, ¶¶8, 10, 22-24 ; and FASB Statement of Concepts No . 6 ("CON 6"), Elements of

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Financial Statements, ¶139, 145-146) . Despite knowing that a substantial portion of product s

shipped would ultimately be returned or otherwise not paid for, Daisytek failed to record th e

required reserves in accordance with GAAP .

147. Daisytek even booked revenue that was fictitious outright. For example , at the end of

reporting periods, Daisytek's sales staff, with defendants' knowledge, would direct shipments to b e

made and revenues and receivables to be booked . In the beginning of the next period, the shipment

would be returned and the sale reversed, only to recur again at the end of the next reporting period .

Some of these shipments were made to Office Max and Office Depot - two of Daisytek' s larges t

customers - but the shipments would never reach the purported customer . Instead, the products

would sit in trucks for 8-10 days before returning to Daisytek . Other times, Daisytek would ship "far

more product" than the customer ordered. Other sales transactions had uninvoiced discounts --

Daisytek recorded these sales at full price even though salespeople agreed to sales discounts .

Daisytek also improperly recorded revenues in current periods when the customer specified future

delivery dates even when Daisytek had not shipped any product .

148 . As a result ofDaisytek' s improper revenue recognition , Daisytek overstated revenue

by many tens of millions of dollars during the Class Period .

149. In fact, in February 2002, a former Daisytek Senior Vice President of Operations an d

a former Daisytek North American Controller compiled a book that documented a wide variety o f

the accounting issues and irregularities detailed in this Consolidated Complaint that needed to b e

rectified and submitted their concerns to Daisytek's senior management, including defendant s

Powell and Mitchell.

150. In March 2002, a former Director of the Peripherals Division and Corporat e

Development objected about the Company's problematic business practices, improper accountin g

and revenue recognition to Daisytek's Board . As a result of his objections, the Board allegedl y

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demanded repayment of $2 million in bonuses that Daisytek had paid in spring 2002 to eleven

executives for the Company's reported financial performance for the prior fiscal year .

DAISYTEK'S IMPROPER ACCOUNTING FOR VENDOR REBATES ANDPROMOTIONAL ALLOWANCES

151 . Many of Daisytek's vendors offered volume-based purchase discounts in the form o f

rebates for making a certain amount of purchases in a particular period . According to one witness,

Daisytek used these programs like heroin to meet Daisytek's publicly disseminated sales and earning

targets . Daisytek would purchase a significant amount of inventory from vendors, even when the

inventory was not needed by Daisytek, at the very end of quarters to improperly book these

discounts as revenue . There are two problems with this from an accounting perspective : (i) these

discounts were being recorded prematurely, because the rebate should be recorded when the

inventory was sold, not purchased ; and (ii) these discounts were not revenues to Daisytek, but, in

substance, a reduction to Daisytek's inventory cost, which should be recorded as such until the

inventory is resold . Another problem with this strategy is that these purchases often saddled

Daisytek with excess amounts of unsellable inventory for which Daisytek failed to record adequate

inventory reserves .

152. A fundamental GAAP concept is the "matching principle," which says that relate d

expenses and revenues should be recorded in the same accounting period . CON 6, ¶144-146 . This

is basic to all accrual accounting . Thus, to properly match revenues and costs, rebates can not be

properly recorded until the products are sold to a customer in a complete and final sales transaction,

because a purchase discount is tied to those inventory units for accounting purposes . Accounting

Research Bulletin No. 43 ("ARB 43"), Chapter 4, ¶¶4-5 . Immediately recording rebates from end-

of-quarter purchases as revenue, as was done by Daisytek, overstates revenues and earnings because

the product was not sold by Daisytek, thus the discount was not "earned ;" nor was the income

"matched" to the subsequent sale of the discounted inventory . CON 5, ¶¶83-84. This is even mor e

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egregious given Daisytek's high return rates - even if the end-of-quarter purchases were shipped out,

Daisytek knew they were not complete and final sales because of the high product return rates .

Daisytek improperly recorded vendor rebates as revenue even when Daisytek knew it would

ultimately return the related inventory to the vendor unsold, and forfeit any rebate .

153 . Daisytek also improperly recorded fictitious receivables by recording vendor rebates

twice - once in Daisytek's accounting records and once in Arlington Industries accounting records .

As a result of improperly and prematurely recording vendor rebates and promotional allowances, b y

October 2002 , Daisytek had accumulated about $30 million in uncollectible vendor accounts

receivable, mostly from Hewlett Packard , Daisytek ' s largest supplier . Daisytekknew these amounts

were uncollectible because the vendors explicitly told Daisytek that they would not pay them .

Daisytek failed to write off the at least $18 million in uncollectible accounts , even though defendants

knew such a write off was required by GAAP for the reasons discussed above .

154. In addition to recording premature and fictitious vendor rebates, Daisytek also

improperly classified the rebates as revenue, instead of a reduction to cost of revenues . Revenue is

predicated on sales to customers , not rebates (refunds ) from vendors . Funds exchanged between

Daisytek and its vendors relate exclusively to purchases made by Daisytek , not sales . Therefore ,

these are clearly purchase discounts, not payment for anything sold by Daisytek to the vendor . It is

disingenuous for Daisytek to even consider recording purchase discounts as revenue . As an

everyday example, when a consumer buys a kitchen appliance with a rebate, they would consider the

rebate in calculating the cost of the appliance, and not consider reporting it to the IRS as income .

The accounting treatment is the same for the vendor paying the rebate : according to the Emerging

Issues Task Force 01-9 ("EITF 01-9"), Accounting for Consideration Given by a Vendor to a

Customer (Including a Reseller of the Vendor's Products), ¶9, a rebate of the type given to Daisytek

must be accounted for by the vendor (the seller) as a reduction of the vendor's revenue . For the

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same reason, the rebate must be recorded by Daisytek (the buyer) as a reduction of Daisytek's cost

of revenue. If companies could get away with booking purchase discounts/rebates as revenue,

businesses would structure all their supplier contracts with inflated sales prices and commensurate

rebates. Their net costs would not change, but they would now be able record revenue in the amount

of the rebate . The reason this is not done is because it is not permitted by GAAP . As Daisytek

knew, this was an egregious abuse of the accounting rules .

155 . Daisytek also received promotional allowances and manufacturer's developmen t

funds ("MDF") from its vendors . These payments, credits and allowances were also prematurely

and improperly accounting for by Daisytek as revenue . Like vendor rebates, these amounts

represent cost recoveries by Daisytek and, upon sale, should be recorded as expense reductions (fo r

cost of revenues, advertising or administrative costs) depending on the nature of the payment, credit

or allowance. EITF 01-9; EITF 02-16; CON 6, ¶¶78-80 .

156 . Ultimately, Daisytek realized it would have to correct its improper accounting fo r

vendor rebates, promotional allowances and MDF, but tried to attribute this to a "new" accounting

rule, EITF 02-16 . However, Daisytek's accounting for these vendor credits was fraudulent and i n

violation of GAAP and SEC rules throughout the class period for the reasons stated above . As a

result of Daisytek's improper accounting for vendor rebates, Daisytek overstated income an d

inventory by tens of millions of dollars during the class period .

DAISYTEK'S IMPROPER VALUATION OF RECEIVABLE S

157. When Daisytek recorded revenue, they concurrently recorded accounts receivable .

GAAP requires that accounts receivable must be recorded at "net realizable value," the amoun t

expected to be received in cash or cash equivalents . CON 5, ¶67(d) ; ARB 43, Chapter 3A, ¶9 ;

FASB 5 . This is done by recording reserves for bad debts (uncollectible accounts) : "[l]osses from

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uncollectible receivables shall be accrued when both conditions' in paragraph 8 are met . . . . If the

conditions are met, accrual shall be made even though the particular receivables that are

uncollectible may not be identifiable ." FASB 5, 122. According to a former Daisytek Director of

Credit, defendant Mitchell was responsible for the final determination of the reserve for uncollectibl e

accounts .

158 . Daisytek's aggressive shipping patterns and improper revenue recognition resulted i n

enormous amounts of uncollectible receivables on Daisytek's books, however , Daisytek failed to

sufficiently record reserves for bad debts, as required by GAAP and SEC rules . For example, many

of Daisytek ' s customers were already delinquent to Daisytek when product was shipped to them, or

were not creditwo rthy, or were over the credit limits set by Daisytek 's credit department. Also,

customers could return product to Daisytek "for any reason ." Daisytek 's sales department routinely

made exceptions to Daisytek 's already liberal return policies . When Daisytek did not have a system

in place to receive and process a particular return, customers would routinely destroy Daisytek

product and take credits off the amount owed Daisytek . Daisytek received millions of dollars in

returns but did not credit the customers ' accounts or record required receivable reserves , although

even if Daisytek did not want to accept the retu rn, it knew that it had no ability to compel payment

for product returned to them . Daisytek would not record credits or recognize the returns in their

accounting records, even though they obviously could not collect from a customer that had retu rned

product and refused to pay . Some customers were permitted to withhold payment if the product was

unsold . Daisytek also knew that customers would refuse to pay for product shipped to them i n

The two conditions are that a loss will occur in the future and that the amount of the loss canbe reasonably estimated . FASB 5, Accounting for Contingencies , ¶8 . If the amount of the losscannot be estimated , revenues should not be recognized until cash is received . FASB 5, ¶23 ; CON5, J84 .

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excess of order volumes . One credit manager said that the unreserved allowance for uncollectible

accounts due to customer deductions and returns had grown to "critical proportions," and by October

2001, had reached some $1 .6-$2 million for one customer category (national accounts) alone . The

under reserved bad debt reserve continued to grow throughout the class period, throughout th e

company .

159. Daisytek was also charged significant amounts by its customers for standard industr y

levies such as "slotting fees" for shelf space, program allowances for sponsoring events and eve n

stocking fees for just handling Daisytek product (collectively, "chargebacks") . The majority of

customer chargebacks were legitimate, and Daisytek would never be able to collect these from their

customers . Chargebacks were a significant cost to Daisytek, typically 20% of the total amoun t

invoiced to some of Daisytek' s largest customers , like Office Depot and Office Max . Although

Daisytek's customer would apply these chargebacks as a reduction of amounts owed to Daisytek, th e

Company would not make commensurate adjustments for the legitimate charges in its records, eve n

though Daisytek knew about these charges and knew that it would not collect such charges from it s

customers or from any source .

160. Sometimes, customer chargebacks sat on Daisytek's books for more than a year .

Even after Daisytek (unsuccessfully) turned over $3 million in uncollectible accounts receivable to a

collection agency, Daisytek refused to write off the receivables, a standard business practice in thes e

circumstances and one that is required by GAAP . Only about $180,000 (6%) was ultimately

collected by the agency, because most of the $3 million was not even owed to Daisytek due t o

legitimate customer chargebacks . Daisytek should have recorded bed debt reserves to account fo r

such chargebacks concurrently with recording the associated receivable, but Daisytek did not boo k

such reserves, even when the customer informed Daisytek about the chargebacks . As a result ,

Daisytek's accounts receivable were further inflated .

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161 . As a result of the practices described above, Daisytek failed to record adequat e

reserves for : (i) customers who were not credit worthy and could not or would not pay Daisytek ;

(ii) customers who were invoiced for product far beyond the amounts they ordered; (iii) customer

"chargebacks" to Daisytek for slotting fees, handling fees and promotional allowances ; (iv) previous

customer returns to Daisytek; (v) future customer returns to Daisytek ; and (vi) uncollectible vendor

rebates and promotional allowances, many of which were fictitious to begin with .

162. As a result of Daisytek's failure to record adequate reserves for uncollectibl e

accounts, Daisytek overstated assets and income by tens of millions of dollars during the clas s

period .

DAISYTEK'S IMPROPER ACCOUNTING FOR INVENTORY

163 . Businesses are required to record inventory losses whenever the value of the

inventory is less than its cost, regardless of the cause of the loss in value . Accounting for inventory

under GAAP is set forth in ARB 43, Chapter 4, ¶8, which states :

[t]hus, in accounting for inventories, a loss should be recognized whenever the utilityof goods is impaired by damage, deterioration, obsolescence, changes in price levels,or other causes . . . recognized and accounted for in the current period.

164. By the beginning of the Class Period, Daisytek had accumulated massive amounts of

old, excess , damaged, overpriced or otherwise unsellable inventory . In violation of GAAP and SEC

rules, Daisytek refused to record adequate amounts of inventory reserves to account for these know n

losses .

165. Daisytek incurred inventory losses for numerous reasons . For example, Daisytek' s

customers often returned damaged and unsellable inventory to Daisytek . At the end of quarters ,

Daisytek regularly made extraordinary purchases in excess of their actual inventory needs in order to

4 Inventory can not be recorded for more than "net realizable value," the amount expected tobe received in cash or cash equivalents . ARB 43, Chapter 4, Statement 6; CON 5, ¶67(d) .

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improperly record rebates as revenue . This practice led to the build up of large quantities of excess,

unsellable inventory . Daisytek also shipped excessive amounts of product to its customers that were

never ordered and ultimately returned. Daisytek's problems with excess and outdated inventory

became so severe in early 2003 that Daisytek intentionally damaged merchandise so that Daisytek

could file damaged goods claims with vendors - a tactic that was mostly futile . These claims were

often rejected, and some vendors ultimately refused to accept any returns from Daisytek .

166. Daisytek would record credits for inventory it returned to vendors even thoug h

Daisytek often knew the vendors would not accept the returns because the product was too old,

damaged, in quantities in excess of the vendors' reasonable return allowances, or because Daisytek

failed to comply with the vendors' conditions of return (for example, when Daisytek lacked proper

approval, provided incomplete or erroneous paperwork, or could not prove where and when the

purchase was made) . Daisytek intentionally failed to account for inventory losses in the period that

the losses became known .

167. As a result of Daisytek's failure to record adequate reserves for inventory losses,

Daisytek overstated assets and income by tens of millions of dollars during the Class Period .

DAISYTEK'S IMPROPER ACCOUNTING FOR RETURNS TO VENDOR S

168. GAAP, as described in CON 5, ¶83, states that revenues and gains should not b e

recognized until they are both earned and realizable (collectible) . Throughout the Class Period,

Daisytek engaged in a scheme to inflate income by applying illegitimate credits to vendor invoices

for damaged or excess inventory improperly returned by Daisytek . Daisytek would record credits

for these returns, even though it knew the vendors would not provide credit for goods damaged by

Daisytek . Daisytek sent invalid returns to scores of vendors, many of whom were furious with

Daisytek for shipping unapproved returns or returning damaged goods .

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169. Daisytek would improperly record credits for such returns even though Daisytek

knew the returns had been or would be rejected by the vendors and were not income to Daisytek

because it had neither earned the income nor would it ultimately be able to realize (collect) it .

Therefore , it was a violation of GAAP for Daisytek to record the credits . In this manner, Daisytek

further in flated its assets and earn ings by millions of dollars .

DAISYTEK ' S IMPROPER ACCOUNTING FOR RETURNS FROM CUSTOMERS

170. GAAP, as described in CON 1, ¶40, requires that management account for "the

effects of transactions, events, and circumstances that change resources and claims to those

resources ." Throughout the Class Period, Daisytek not only failed to record expected future retu rn s

from customers , as required by FASB 5 and FASB 48, but also failed to record past returns from

customers, even though it had actually received the returned products and no estimate was even

needed. Often, the merchandise returned was not sellable and in these circumstances , Daisytek not

only failed to write off the receivable, they failed to record inventory losses as well . In this manner,

Daisytek further inflated its assets and earnings by millions of dollars .

OTHER INDICIA OF FALSE FINANCIAL STATEMENT S

171 . When Daisytek and its operating subsidiaries declared bankruptcy in May and June

2003, its first set of bankruptcy schedules repo rted just $44 million in trade receivables and only $48

million in inventory (excluding ISA and Daisytek Australia, which were not pa rt of the U.S .

bankruptcy filings ) . However, Daisytek 's most recent GAAP financial statements, dated

December 31, 2002, said that Daisytek had $260 million in working capital . This significant amount

of working capital was mostly due to Daisytek 's high trade receivables ($255 million) and inventory

($ 190 million) . Incredibly , Daisytek and its subsidiaries fi led bankruptcy less than 6 months later .

Much of the capital simply vanished because it never really existed , and because the fraudulent

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financial statements defendants caused to be prepared hid the true financial condition of Daisytek

until its bankruptcy filings .

172. In the same December 31, 2002 financial statements, Daisytek claimed that it had

more than $177 million in shareholders' equity . This amount was also grossly overstated due to

Daisytek's improper revenue recognition and massively overstated accounts receivable and

inventory balances . In fact, Daisytek's initial bankruptcy schedules showed that total combined

equity was less than $2 million . After taking into account the equity of ISA and Daisytek Australia,

which were not part of the U. S . bankruptcy filings, this shows that some $150 million of equity

disappeared in less than six months before the bankruptcy . Again, Daisytek's true financial

condition, revealed by its bankruptcy filings, was hidden by defendants during the Class Period .

DAISYTEK'S GAAP VIOLATIONS WERE MATERIA L

173 . Daisytek's financial misstatements alleged herein were material . As an initial matter,

Daisytek's financial misstatement were clearly material solely from a numerical (quantitative)

standpoint, because Daisytek's earnings, assets and equity were so inflated - by many tens of

millions of dollars - that it masked Daisytek's imminent bankruptcy from investors .

174. However, definitions of materiality are not limited to numbers and amounts . SEC

Staff Accounting Bulletin No. 99 ("SAB 99"), Materiality, summarizes GAAP definitions o f

materiality . Among other items, SAB 99 says: "A matter is `material' if there is a substantial

likelihood that a reasonable person would consider it important ." It also stresses that materiality

requires qualitative, as well as quantitative, considerations. For example, if a known misstatement

would cause a significant market reaction, that reaction should be taken into account in determining

the materiality of the misstatement. SAB 99 further states :

Among the considerations that may well render material a quantitatively smallmisstatement of a financial statement item are -

x * x

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• whether the misstatement masks a change in earnings or other trend s

• whether the misstatement hides a failure to meet analysts' consensus expectations forthe enterprise

• whether the misstatement changes a loss into income or vice versa

• whether the misstatement concerns a segment or other portion of the registrant'sbusiness that has been identified as playing a significant role in the registrant's

operations or profitability

• whether the misstatement affects the registrant's compliance with loan covenants orother contractual requirements .

SAB 99 also says that an intentional misstatement of even immaterial items may be illegal and

constitute fraudulent financial reporting.

175 . Daisytek's misstatements satisfy each of these criteria and thus were material fro m

both a quantitative and qualitative perspective .

DAISYTEK FAILED TO MAKE REQUIRED DISCLOSURES

176 . The SEC requires that, as to annual and interim financial statements filed with the

SEC, registrants include a management's discussion and analysis section which provides information

with respect to the results of operations and "also shall provide such other information that the

registrant believes to be necessary to an understanding of its financial condition , changes in financial

condition and results of operations ." See Regulation S-K, 17 C .F.R. §229.303 . Regulation S-K

states that, as to annual results, the management ' s discussion and analysis section shall :

(i) Describe any unusual or infrequent events or transactions or any

significant economic changes that materially affected the amount of reported incomefrom continuing operations, and in each case, indicate the extent to which incomewas so affected. In addition, describe any other significant components of revenues

or expenses that, in the registrant's judgment, should be described in order tounderstand the registrant's results of operations .

(ii) Describe any known trends or uncertainties that have had or that theregistrant reasonably expects will have a material favorable or unfavorable impact on

net sales or revenues or income from continuing operations . If the registrant knowsof events that will cause material change in the relationship between costs an d

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revenues (such as known future increases in costs of labor or materials or priceincreases or inventory adjustments), the change in the relationship shall be disclosed .

17 C.F .R. §229.303(a)(3) .

177 . Before February 2003, Daisytek failed to disclose to the market that it faced a

liquidity crisis of epic proportions that was likely to force it into bankruptcy . Daisytek also failed to

fully disclose problems with its lenders and that its access to capital, which was necessary t o

continue its business, was threatened due to this crisis . Daisytek failed to timely disclose that there

were serious performance issues in The Tape Company and Daisytek Argentina which would require

significant accounting charges. Daisytek failed to disclose that based on the allegations of tw o

employees, its audit committee was investigating claims of improper accounting for vendor rebate s

and other accounting issues ; and that its auditor, Ernst &Young had met with the audit committe e

twice (November 12, 2002 and April 10, 2003) to discuss reportable accounting issues .

178 . Daisytek also violated AICPA Statement of Position No . 94-6 ("SOP 94-6") ,

Disclosure of Certain Significant Risks and Unce rtainties . Daisytek, as a publicly reporting entity,

was required under GAAP to disclose risks and unce rtainties relating to its accounts receivable and

its inventory . Daisytek failed, inter alia, to make required disclosures about the following matters :

the possibilities that previously unrecorded reserves were required in the near term for (i)

uncollectible accounts receivable , (ii) excess, damaged or otherwise unsellable inventory, and (iii )

sales returns (SOP 94-6, ¶'112-19) .

DAISYTEK LACKED ADEQUATE INTERNAL CONTROL S

179 . Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reportin g

company must :

"(a) make and keep books, records and accounts which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of theissuer ; and (b) devise and maintain a system of internal accounting controls sufficientto provide reasonable assurances that . . . transactions are recorded as necessary . . . topermit the preparation of financial statements in conformity with [GAAPI . "

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15 U.S.C . §78m. These provisions require an issuer to employ and supervise reliable personnel, to

maintain reasonable assurances that transactions are executed as authorized, to properly record

transactions on an issuer's books and, at reasonable intervals, to compare accounting records with

physical assets . SEC v. World-Wide Coin Investments, 567 F . Supp. 724, 746 (N .D. Ga. 1983) .

180. Defendants caused Daisytek to violate § 13(b)(2)(A) of the Exchange Act by failing to

maintain accurate records concerning its revenues, costs, net income, accounts receivable and

inventory . Defendants knew or were reckless in not knowing of Daisytek's failure to recor d

revenues and expenses in the appropriate accounting periods and failure to record adequate reserves

for (i) uncollectible accounts receivable ; and (ii) excess, obsolete and damaged inventory .

Daisytek's inaccurate and false records were not isolated or unique instances because they were

improperly maintained for multiple reporting periods, from at least 2Q02 (ended September 30,

2001) through the end of the Class Period. Accordingly, Daisytek violated § 13(b)(2)(A) of the

Exchange Act.

181 . In addition, defendants caused Daisytek to violate § 13(b)(2)(B) of the Exchange Ac t

by failing to implement procedures reasonably designed to prevent accounting irregularities .

Daisytek failed to ensure that proper review and checks were in place to ensure that it was recording

and properly repo rting revenue, expenses , accounts receivable, inventory, rebates, promotional

allowances , returns to vendors and returns from customers . In fact, despite knowing the true dismal

state of the Company's lack of adequate controls, defendants regularly issued quarterly and annual

financial statements throughout the Class Period without ever disclosing the deficiencies in

Daisytek 's internal accounting controls and falsely asse rted that its financial statements complied

with GAAP .

182. Financial reporting includes not only financial statements, but also other means of

communicating information that relates directly or indirectly to the information in the financia l

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statements . See FASB Statement of Concepts No. 1 ("CON 1"), ¶7 . For this reason, in addition t o

Daisytek's failure to make the required disclosures in its financial statements and in its SEC filings ,

Daisytek also shirked its duty to make such disclosures in its conference calls, its press releases an d

its Annual Reports .

183 . Due to these accounting improprieties, the Company presented its financial result s

and statements in a m anner that violated GAAP, including the following fundamental accountin g

principles :

(a) The principle that interim financial reporting should be based upon the sam e

accounting principles and practices used to prepare annual financial statements (APB No . 28, ¶10) ;

(b) The principle that financial reporting should provide information that is usefu l

to present and potential investors and creditors and other users in making rational investment, credit

and similar decisions (FASB Statement of Concepts No. 1, ¶34) ;

(c) The principle that financial reporting should provide information about th e

economic resources of an enterprise, the claims to those resources, and the effects of transactions ,

events and circumstances that change resources and claims to those resources (FASB Statement o f

Concepts No. 1, ¶40) ;

(d) The principle that financial reporting should provide information about ho w

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it . And to the extent that management offers

securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB Statement of Concept s

No. 1,'50) ;

(e) The principle that financial reporting should provide information about a n

enterprise's financial performance during a period . Investors and creditors often use information

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about the past to help in assessing the prospects of an enterprise . Thus, although investment and

credit decisions reflect investors' expectations about future enterprise performance, thos e

expectations are commonly based, at least partly, on evaluations of past enterprise performanc e

(FASB Statement of Concepts No. 1, ¶42) ;

(f) The principle that financial reporting should be reliable in that it represents

what it purports to represent . That information should be reliable as well as relevant is a notion tha t

is central to accounting (FASB Statement of Concepts No . 2, ¶J58-59) ;

(g) The principle of completeness, which means that nothing is left out of the

information that may be necessary to insure that it validly represents underlying events an d

conditions (FASB Statement of Concepts No . 2,'79) ; and

(h) The principle that conservatism be used as a prudent reaction to unce rtainty t o

try to ensure that uncertainties and risks inherent in business situations are adequately considered .

The best way to avoid injury to investors is to try to ensure that what is reported represents what it

purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97) .

184 . Moreover, defendants' undisclosed, adverse, material information during the Clas s

Period is the type of information that, because of SEC regulations, national stock-exchang e

regulations, and customary business practice, investors and securities analysts expect to be disclose d

and by corporate officials and their legal and financial advisors know to be the type of informatio n

that must be disclosed .

DEFENDANTS' FALSE CERTIFICATION S

185 . On November 14, 2002, Powell signed and filed with the SEC the following

cert ification under Section 906 of the Sarbanes -Oxley Act of 2002 :

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Certification Pursuant To Section 1350 Of Chapter 63Of Title 1 8 Of The United States Code

I, James R. Powell, President and Chief Execu tive Officer of DaisytekInternational Corporation , certify that to the best of my knowledge; (i) the Form 10-Q for the quarterly pe riod ended September 30, 2002, (the "Form 10-Q") fullycomplies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 and ( ii) the information contained in the Form 10-Q fairly presents, in allmaterial respects , the financial condition and results of operations of DaisytekInternational Corporation .

Date: November 14, 2002 DAISYTEK INTERNATIONAL CORPORATION

By: Is/ James R. Powel l

James R. Powel l

President and Chief Executive Office r

Powell signed substantially similar certifications on August 14, 2002 in connection with th e

Company's false Form 10-Q for the quarter ended June 30, 2002 and February 14, 2003 i n

connection with the Company's false Form 10-Q for the quarter ended December 31, 2002 . At the

time Powell signed these certifications, he knew they were false for the reasons set forth in ¶¶86-88 ,

90, 104, 112, 117 and 125 .

186. On November 14, 2002, Mitchell signed and filed with the SEC the followin g

certification under Section 906 of the Sarbanes -Oxley Act of 2002 :

Certification Pursuant to Section 1350 of Chapter 63of Title 18 of the United States Code

I, Ralph Mitchell, Chief Financial Officer of Daisytek International Corporation,

certify that to the best of my knowledge ; (i) the Form I 0-Q for the quarterly period

ended September 30, 2002, (the "Form 10-Q") fully complies with the requirementsof Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the

information contained in the Form 10-Q fairly presents, in all material respects, thefinancial condition and results of operations of Daisytek International Corporation .

Date : November 14, 2002 DAISYTEK INTERNATIONAL CORPORATIO N

By: 1s/ Ralph Mitchel l

Ralph Mitchel lChief Financial Officer

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Mitchell signed a substantially similar Certification on August 14, 2002 in connection with the

Company's false Form 10-Q for the quarter ended June 30, 2002 . Kearney signed a substantially

similar certification dated February 14, 2003 in connection with the Company's false Form 10-Q for

the quarter ended December 31, 2002 . At the time Mitchell and Kearney signed these Certifications,

they knew they were false for the reasons set forth in ¶¶86-88, 90, 104, 112, 117 and 125 .

187. On November 14, 2002, both Powell and Mitchell also certified the following untrue

facts in connection with Daisytek's Form 10-Q for the quarter ended September 30, 2002 .

Based on my knowledge, this quarterly report does not contain any untrue statementof a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not

misleading with respect to the period covered by this quarterly report ;

Based on my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the

periods presented in this quarterly report .

188 . On February 14, 2003, Powell and Kearney, with defendants' knowledge, signed the

same untrue Certifications in connection with Daisytek's Form 10-Q for the quarter ended

December 31, 2002 .

DEFENDANTS' SCIENTER

189. A key factor in the Daisytek "story" was its ability to expand rapidly while

sequentially reporting strong revenue and earnings growth . Defendants closely monitored every

material aspect of Daisytek' s business and were aware and knew, from the outset of the Class

Period, that Daisytek's revenue recognition was improper, accounts receivable and inventory were

hopelessly overstated and inventory systems were inefficient and inaccurate, ultimately plunging

Daisytek into a liquidity crisis . What is more, according to a former assistant controller, defendants

knew the bottom-line earnings they wanted to report and worked backward to get there .

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Nevertheless, at every opportunity during the Class Period, defendants flooded the market with fals e

positive statements about Daisytek's business and their own ability to successfully manag e

Daisytek's operations, thereby increasing profitability and productivity .

190. Because of their positions, defendants knew the adverse non-public information abou t

Daisytek's business, as well as its finances and present and future business prospects via access t o

internal corporate documents (including the Company's operating plans, budgets and forecasts, an d

reports of actual operations compared thereto), conversations and connections with other corporate

officers and employees, attendance at management and Board of Directors' meetings or committee s

thereof, and via reports and other information provided to them in connection therewith . In addition,

employees' concerns regarding problematic business and accounting practices described herein

would be directed to the Daisytek Director of Internal Audit who would then report those concerns

directly to the Daisytek Board of Directors .

191 . Further, at all relevant times, defendants approved and directed the dissemination of

Daisytek's SEC filings, annual reports, press releases, reports to shareholders and other statements

concerning Daisytek which contained materially false and misleading information . By doing so ,

defendants promoted the sale of Daisytek common stock by artificially inflating and maintaining th e

price of these securities through the dissemination of said reports and statements .

192. Each defendant is liable for making false statements or for failing to disclose advers e

material facts while selling Daisytek securities or for participating in a fraudulent scheme whic h

operated as a fraud or deceit on purchasers and acquirers of Daisytek common stock . They are also

liable for the false statements pled at ¶¶83, 85, 89, 91, 93, 97, 98, 99, 100, 102, 103, 106, 107, 110,

114, 116, 120 and 124, as those statements were each "group-published" information for which

defendants were collectively responsible as officers and directors of the Company, as well as for the

false statements pled at ¶¶95, 108, 109 and 113, as those statements were made by defendants to

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securities analysts for the purpose of artificially inflating Daisytek's stock price during the Clas s

Period .

193. Each of the defendants is liable for making false and misleading statements an d

omitting material adverse information that inflated the price of Daisytek . Defendants' wrongful

course of business (i) artificially inflated the prices of Daisytek's securities during the Class Period ;

(ii) deceived the investing public, including Lead Plaintiffs and other Class members, into acquiring

Daisytek's securities at artificially inflated prices ; (iii) permitted insiders were able to b e

compensated generously under Daisytek's compensation plan ; (iv) permitted defendant Wharf to sell

$1 .18 million worth of his Daisytek stock ; (v) permitted Daisytek to sign a new $200 million debt

facility in April 2002 ; (vi) permitted Daisytek to obtain waivers for violations of their debt covenants

in November 2002 ; and (vii) permitted Daisytek to benefit economically from the wrongful cours e

of conduct.

THE EXECUTIVE COMPENSATION AND BONUS PLA N

194. Defendants knew that if the true state of the Company was disclosed, the Compan y

would be unable to continue to expand its business, Daisytek's stock price would collapse, and thei r

generous compensation and bonuses tied to the Company's performance would be wiped out . As

explained in Daisytek's definitive proxy statement, defendants were compensated as follows :

The Committee believes that the total compensation of the Company's senior

executive officers should be primarily based on the subjective determination of theCommittee as to the Company's overallfinancial performance and the individualcontribution to such performance . The Committee further believes that a portion of

total compensation should consist of variable, performance- based componentssuch as stock option awards and bonuses, which it can increase or decrease toreflect its assessment of changes in corporate and individualperformance . These

incentive compensation programs are intended to reinforce management'scommitment to enhance profitability and stockholder value .

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In order to more closely link executive compensation to the Company's performance,the Committee has approved a fiscal year 2003 compensation program for Mr.

Powell and other senior executive officers pursuant to which total cashcompensation comprises a 60% fixed component and 40% variable component.The 40% variable component includes (i) 25% paid quarterly if the Companyachieves certain earnings per share goals ; (ii) 50% paid annually if the Company

exceeds certain earnings per share goals; and (iii) 25% paid annually uponachievement of determinedpersonal objectives .

Daisytek's Definitive Proxy at 7-8, filed August 29, 2002 .

195 . As a result of these incentives, defendants were motivated to keep Daisytek's stock

artificially inflated and were compensated accordingly (and illegitimately) as follows :

Name Year Salary with Other BonusCompensation5

James R. Powell 2002 $353,476 $320,5002001 $253,589 $360,7232000 $194,874 $51,01 4

John D. Kearney 2002 $205,264 $113,0002001 $180,264 $126,3412000 $179,825 $100,000

Ralph Mitchell 2002 $208,831 $108 ,0002001 $172,237 $126,3412000 $5,355 --

Peter D. Wharf 2002 $207,768 $113,0002001 $112,768 $126,3412000 $161,268 $6,377

As well, according to a former assistant controller, the defendants were motivated to complete th e

ISA acquisition, despite knowing that it would not be immediately accretive to Daisytek, due to th e

bonuses that they were to (and did) receive from Daisytek for the acquisition .

5 "Other compensation" includes compensation with respect to life insurance premiums paidby the Company for the benefit of the named executive officer and Company matching contributionsto a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code .

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196. In addition, Powell used Daisytek as his personal piggybank by misappropriating

more than $800,000 during the class period . Powell "borrowed" $800,000 from Daisytek and then

failed to pay back the "borrowed" moiiey . In Daisytek's February 14, 2003 Form 10-Q, the

Company wrote :

James R. Powell, the Company's President and Chief Executive Officer, had

outstanding loans totaling $0 .8 million at December 31, 2002 . Of this amount, $0 .2

million, plus interest, is past due and in default . The Board of Directors and Audit

Committee has demanded payment from Mr . Powell and believes that it will receive

payment . In the event the payment is not received, the Board of Directors will pursue

appropriate action .

197. Powell defaulted on the loan, although on April 2, 2003, shortly before his

resignation, he claimed in a Form 4 that he cancelled 638,074 stock options "in satisfaction of

amounts due under an employee loan ." This was an outright fraud - the stock options were

worthless at this time because the option exercise prices ranged from $5 .71 to $8 .05 while the stock

price was below $2.00 .

STATUTORY SAFE HARBOR

198 . The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the false statements pleaded in this complaint, because none

of the statements pleaded herein were identified as "forward-looking statements" when made . Nor

did meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the statements accompany those statements . To the extent that the

statutory safe harbor does apply to any statements, at the time each of those statements were made

the speaker actually knew the forward-looking statement was false and/or the statement was

authorized and/or approved by an executive officer of the Company, who actually knew that those

statements were false when made .

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CLASS ACTION ALLEGATIONS

199. Plaintiffs b rings this action as a class action under federal Rule of Civil Procedure 23 ,

on behalf of all persons who purchased or otherwise obligated themselves to purchase the publicly

traded securities of Daisytek between November 9, 2001 and April 28, 2003 .

200. The members of the Class are so numerous that joinder of all members i s

impracticable . The disposition of their claims in a class action will provide substantial benefits to

the parties and the Court . Daisytek had more than 18 .6 million shares of stock outstanding, owne d

by hundreds if not thousands of persons .

201 . There is a well-defined community of interest in the questions of law and fac t

involved in this case. The questions of law and fact common to the members of the Class whic h

predominate over questions which may affect individual Class members include the following :

(a) Whether § § 10(b) and 20(a) of the Exchange Act were violated by defendants ;

(b) Whether defendants misrepresented material facts ;

(c) Whether defendants' statements omitted material facts necessary to make th e

statements, in light of the circumstances under which they were made, not misleading ;

(d) Whether defendants knew or should have known that their statements wer e

false and misleading ;

(e) Whether the prices of Daisytek securities were artificially inflated during th e

Class Period ; and

(f) The extent of damage sustained by Class members and the appropriate

measure of damages .

202. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Clas s

sustained damages from defendants' wrongful conduct .

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203. Plaintiffs will adequately protect the interests of the Class . Plaintiffs have retained

counsel who are experienced in class action securities litigation . Plaintiffs have no interests which

conflict with those of the Class .

204 . A class action is superior to other available methods for the fair and efficien t

adjudication of this controversy .

205. The prosecution of separate actions by individual Class members would create a ris k

of inconsistent and varying adjudications .

FIRST CAUSE OF ACTION

For Violation of §10(b) of the Exchange Act andRule 10b-5 Against Defendant s

206. Plaintiffs incorporate ¶¶1-205 by reference .

207. Each of the defendants knew the material, adverse, non-public information abou t

Daisytek's financial results and then-existing business conditions, which was not disclosed, an d

participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and

other public representations of and about Daisytek .

208. During the Class Period, defendants disseminated or approved the false statement s

specified above, which they knew were misleading in that they contained misrepresentations and

failed to disclose material facts necessary in order to make the statements, in light of th e

circumstances under which they were made, not misleading .

209. Defendants violated § 10(b) of the Exchange Act and Rule IOb-5 in that they :

(a) Employed devices, schemes, and artifices to defraud ;

(b) Made untrue statements of material facts or omitted to state material fact s

necessary in order to make statements made, in light of the circumstances under which they were

made, not misleading ; or

-91 -

(c) Engaged in acts, practices, and a course of business that operated as a fraud or

deceit upon plaintiffs and others similarly situated in connection with their purchases of Daisyte k

securities during the Class Period .

210. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for Daisytek securities . Plaintiffs and the Class

would not have purchased Daisytek securities at the prices they paid, or at all, if they had been awar e

that the market prices had been artificially and falsely inflated by defendants' misleading statements .

SECOND CAUSE OF ACTIO N

For Violation of §20(a) of the Exchange Act

Against Defendants

211 . Plaintiffs incorporate ¶¶1-210 by reference .

212. Defendants acted as controlling persons of Daisytek within the meaning of §20(a) of

the Exchange Act. By reason of their positions as directors and/or officers of Daisytek they had th e

power and authority to cause Daisytek to engage in the wrongful conduct complained of herein .

213 . By reason of such wrongful conduct, defendants are liable pursuant to §20(a) of th e

Exchange Act. As a direct and proximate result of these defendants ' wrongful conduct, plaintiffs

and the other members of the Class suffered damages in connection with their purchases of Daisyte k

securities during the Class Period .

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray forjudgment as follows :

A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of

the Federal Rules of Civil Procedure on behalf of the Class defined herein ;

B . Awarding plaintiffs and members of the Class compensatory damages ;

C . Awarding plaintiffs and members of the Class pre judgment and post judgmen t

interest, as well as reasonable attorneys' fees, expert witness fees, and other costs ;

-92-

D . Awarding extraordinary, equitable or injunctive relief as permitted by law or equity ;

and

E. Awarding such other relief as this Court may deem just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury .

DATED : February 6, 2004 PROVOST & UMPHREY LAW FIRM, LLPJOE KENDALLState Bar No . 11260700

WILLIE C. BRISCOE

State Bar No . 24001788

~JlJOE KENDALL

3232 McKinney Avenue, Suite 700

Dallas, TX 7520 4

Telephone: 214/744-3000

214/744-3015 (fax)

Liaison Counsel

MILBERG WEISS BERSHADHYNES & LERACH LLP

WILLIAM S . LERACHHENRY ROSENSHAUN KHOJAYANDAVID A . THORPE401 B Street, Suite 1700San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax )

Lead Counsel for Plaintiffs

S :1PleadingsSD\Daisyteklcpt 00006421 .doc

-93-

DECLARATION OF SERVICE BY MAI L

I, the undersigned, declare :

1 . That declarant is and was, at all times herein mentioned, a ciii2en of the United State s

and a resident of the County of San. Diego , over the age of 18 years, and not a party to or interest .

the within action ; that declara is business address is 401 B Street, Suite 1700, San Diego, Californi a

92101-

1 That on February 6, 2004, declarant served the CONSOLIDATED COMPL AINT

FOR VIOLATION OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereo f

its rx United States mailbox at Say. Diego, California in a sealed envelope with postage thereon full y

prepaid and addressed to the parties listed on the attached Service List .

3. That there is 4 regular communication by mail between the place of mailing and the

places so addressed .

I declare under penalty of perjury that the foregoing is true and correct . Executed this 6th

day of February, 2004, at San Diego, California.

MICHELE M. HENRY

DAISYTEK (E .D. Tex.) (LEAD)

Service List - 2/6/2004 (03-0178)Page 1 of I

Counsel For Defendant(s)

Michael J . Bile sAkin, Gump, Strauss , Hauer & Feld, L.L.P.300 W . Sixth Street, Suite 210 0Austin, TX 78701

512/499-6200512/499-6290(Fax)

Counsel For Plaintiff(s)

Henry RosenShaun KhojayanDavid A. ThorpeMilberg Weiss Bershad Hynes & Lerach LLP401 B Street , Suite 1700San Diego , CA 92101-4297

619/231-10586191231-7423(Fax)

Scott L. DavisDouglas D . HaloftisKimberly R. Phillips

Gardere Wynne Sewell LL P1601 Elm Street , 3000 Thanksgiving TowerDallas , TX 7520 1

214/999-3000214/999-4667(Fax)

Joe KendallWilliam A. ReeceWillie C . BriscoeProvost Umphrey Law Firm, LLP3232 McKinney Avenue , Suite 700Dallas , TX 75204

214/744-3000214/744-3015(Fax)

I

HAW.AJ

1 . P1

2. Pl.

at the direction

action or any c

3 . Ply

class, includin,

4. Pl,

transaction(s)

action :

Sec

ELECTRICIANS ANNUITY FUND ("Plaintiff') declares:

ntiff has reviewed a complaint and authorized its filing.

ntiff did not acquire the security that is the subject of this action

of plaintiffs counsel or in order to participate in this private

her litigation under the federal securities laws.

intiff is willing to serve as a representative party on behalf of the

providing testimony at deposition and trial, if necessary .

intiff has been advised that it has made the following

uring the Class Period in the securities that are the subject ofthi s

Transaction Dale Price Per Share

See attached Schedule A.

5 . DL the three years prior to the date of this Certificate, Plaintiff

has not sought o serve or served as a representative party for a class in an action

filed under the federal securities laws except as detailed below :

Cummings V. . C Laboratories, et at., No. C-02-2298-SC (N .D. Cal.)

Cooper v. Edi on Schools, Inc., et al., No. 02-CV-3 828 (S .D.N.Y.)

In re Fleming ompanies Sec. Litig., No. 5 :02-CV-178(TJW) (E.D. Tex.)

In re Veritas S flware Corp. Sec. Litig., No. C-03-0283-MMC (N.D. Cal .)

-6. Th Plaintiff will not accept any payment for serving as a

representative party on behalf of the class beyond the Plaintiff s pro rata share

of any recovery, except such reasonable costs and- expenses (including los t

DAzsrrsK

g E

wages) directs relating to the representation of the class as ordered or approved

by the court .

I declare under penalty of perjury that the foregoing is true and correct.

Executed this /I- day of , 2003.

HAWAII ELECTRICIANS ANNUITYFUND

By: . ,..~..._GE D A. Y7 Trustee

SCHEDULE A

SECURITIES TRANSACTIONS

Acquisiti

Date

11121,121117

Type/Amount o fSecurities Acquired Price

7300 $13.2014200 $12.25900 $15.08

Sales

Date Type/Amount ofSold Securities Sol d

3171200 4550317/200 37003171200 12700

31101200 6600

Price

$1 .17$1 .23$1 .24$1 .25

*Opening positionlof 5150 shares .

r Daisytek Sigrup

Certification and authorization of Named Plaintiff Pursuant to FederalSecurities Laws

The individual or institution listed below (the "Plaintiff') authorizes and, upon execution ofthe accompanying re ` er agreement by Milberg Weiss, retains Milberg Weiss Bersl adHynes & Lerach L ("MiIberg Weiss") to file an action under the federal securities laws torecover damages an to seek other relief against Daisytek International Corporation("Daisytek"). Milber Weiss will prosecute the action on a contingent fee basis and willadvance all costs an expenses . The Daisytek International Corporation RetentionAgreement provided to the Plaintiff is incorporated by reference, upon execution by MilbergWeiss.

First name:

Last name : Do ueAddress : 2071 Pacific Coast Hwy. #4City: MalibuState, Zip : CA, 0265Email : pink ffoyd@lycos .comPhone: 310- 56-3692

Plaintiff certifies

1. Plaintiffhas reviewed the complaint and authorized its filing.

2. Plaintiffdid not ac wire the security that is the subject of this action at the direction ofplaintiffs counsel or order to participate in this private action or any other litigation underthe-federal securities ws .

3. Plaintiff is willing o serve, as a representative party on behalf of a class, includingproviding testimony t deposition and trial, if necessary.

4. Plaintiff represents and warrants that helshe/it is fully authorized to enter into and executethis certif cation .

5 . Plaintiff will not a ept any payment for serving as a representative party on behalf of aclass beyond the Pl 'tiffs pro rata share of any recovery, except such reasonable costs andexpenses (including I st wages) directly relating to the represention of the class as ordered orapproved by the cour .

6. Plaintiff has madeio transaction( s) during the Class Period in the debt or equity securities .that are the subject o this action except those set forth below :

Acquisitions: Acquired Number of Shares Acquired Acquisition Price per Share

Page 1 of2

30000.00 1.9210000.00 2.15

Daisytek Signup Page 2 of 2

03 5103 10000.00 2.2503125/03 10000.00 2.1 3

Sales:, D to Sold Number of Shares Sold Selling Price per Share

04 29/03 40000 .00 0.6304 9/03 5000.00 0.6604 9/03 5000.002 0.640429/03 10000.00 0.65

7. During the t ree y -ars prior to the date of this Certification, Plaintiff has not sought toserve or served as a preseniative party for a class in an action filed under the federa lsecurities laws except if detailed below :

! declare under penal of perjury, under the laws of the United yesStates, that the info cation entered Is accurate :

By clicking on the bu on below, I Intend to sign and execute yesthis agreement:

Clicked to Participat

Signed pursuant to 0

in the Daisytek Action

lifornia. Civil Code Section 1633, 1, et seq. - Uniform Electronic Transactions Ac t

1k44-.11 -.1-A- ., .. .__ i. . a_ .. ..: cr11 MAAV

FUND ('

1 .

2.

at the dii

action or

3 .

class, incli

4.

Period in I

PURSU

CERTIFICATIONERAL

NAMEDrIE LAWS

►SKA HOTEL & RESTAURANT EMPLOYEES PENSION TRUST

laintiff') declares :

Plaintiff has reviewed a complaint and authorized its filing.

Plaintiff did not acquire the security that is the subject ofthis action

otion of plaintiffs counsel or in order to participate in this private

my other litigation under the federal securities laws.

Plaintiffis willing to serve as a representative party on behalf of theding providing testimony at deposition and trial, if necessary .Plaintiff has made the follow ing transaction(s) during the Class

ie securities that are the subject of this action :

Transac ,t n P09 Price Per Share

See attached Schedule A .

5 .

has not sc

filed und(

During the three years prior to the date of this Certificate, Plaintiff

;ht to serve or served as a representative party for a class in an action

the federal securities laws except as detailed below:

DAISYTBIG

6. The Plaintiff will not accept any payment for serving as a

ue party on behalf ofthe class beyond the Plaintiffs pro rata share o f

any recov xy, except such reasonable costs and expenses (including lost wages)

directly re sting to the representation of the class as ordered or approved by the

court.

I de glare under penalty of pedury that the foregoing is true and correct.M k&day of 2003.Executed 's ? '

ALASKA HOTEL & RESTAURANTEMPLOYEES PENSION TRUST FUND

By:

Its: 44i/m 1l_ A1 sA0es

r I DAPS T K

SCHEDULE A

SECURITIES TRANSACTIONS

Acquisitions

Date Type/Amount ofAcaulred Securities Acquired rice

4/11/2002 5300 $15.608/6/2002 200 $13.80

10/2512002 900 $10.2512130/2002 200 $7.253125/2003 800 $2.35