<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PARADIGM CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 04-3408450
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
52 ROLAND STREET
BOSTON, MASSACHUSETTS 02129
(617) 623-3100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JAMES E. CLAYPOOLE
CHIEF EXECUTIVE OFFICER
PARADIGM CONCEPTS, INC.
52 ROLAND STREET
BOSTON, MASSACHUSETTS 02129
(617) 623-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE (2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share, to be
distributed to holders of U.S. Office Products
Company common stock.............................. 100,000,000(1) $.875 $87,532,000 $25,822
</TABLE>
(1) Approximate number of shares of Paradigm Concepts, Inc. common stock
expected to be distributed based upon an assumed distribution ratio of one
share of Paradigm Concepts, Inc. common stock for every one share of U.S.
Office Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of
Paradigm Concepts, Inc. common stock for every one share of U.S. Office
Products Company common stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act based on a book value
of $87,532,000 as of October 25, 1997.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 19, 1998
INFORMATION STATEMENT/PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PARADIGM CONCEPTS, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
PARADIGM CONCEPTS, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of Paradigm Concepts, Inc. ("Paradigm"). Paradigm
is a Delaware corporation formed by U.S. Office Products that will own
substantially all the assets of, and will be responsible for substantially all
the liabilities associated with, U.S. Office Products' Technology Solutions
division. Pursuant to this distribution (the "Technology Distribution"), all of
the issued and outstanding shares of the common stock, $.001 par value per
share, of Paradigm (the "Paradigm Common Stock") will be distributed to holders
of record as of the close of business on , 1998 (the "Record Date")
of the common stock, par value $.001 per share, of U.S. Office Products ("U.S.
Office Products Common Stock"). Each such holder will receive one share of
Paradigm Common Stock for each shares of U.S. Office Products Common
Stock held on the Record Date. Fractional shares will be aggregated into whole
shares of Paradigm Common Stock and sold on the open market by the Distribution
Agent (as defined herein). The proceeds of such sales will be distributed to
holders who otherwise would be entitled to receive fractional shares. See "The
Technology Distribution--General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of Paradigm Common Stock they receive in the
Technology Distribution. There is no current public trading market for the
Paradigm Common Stock. Paradigm intends to seek approval for quotation of the
shares of Paradigm Common Stock on the National Market System of the Nasdaq
Stock Market upon issuance, but there is no assurance that such approval will be
obtained or that an active trading market for Paradigm Common Stock will develop
following the Technology Distribution.
The Technology Distribution is an element of a comprehensive restructuring
plan (the "Strategic Restructuring Plan") approved by the Board of Directors of
U.S. Office Products on January 12, 1998. The principal elements of the
Strategic Restructuring Plan are (1) a self-tender offer by U.S. Office Products
(the "Tender Offer") to purchase 37,037,037 shares of U.S. Office Products
Common Stock at $27.00 per share and the incurrence of debt to pay a portion of
the purchase price in the Tender Offer; (2) after acceptance of shares in the
Tender Offer, the pro rata distribution to U.S. Office Products' stockholders of
shares of four companies that will conduct U.S. Office Products' current print
management, technology solutions, educational supplies and corporate travel
services businesses; and (3) the sale to an affiliate ("CD&R") of Clayton,
Dubilier & Rice, Inc. of equity interests in U.S. Office Products (the "Equity
Investment") following acceptance of shares in the Tender Offer and the Record
Date for the Distributions. In addition to this Information
Statement/Prospectus, U.S. Office Products is distributing a Tender Offer
Statement regarding the Tender Offer and a Proxy Statement regarding stockholder
approval of the issuance of securities in the Equity Investment. See "Additional
Information."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 6.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS FEBRUARY , 1998
<PAGE>
ADDITIONAL INFORMATION
Paradigm has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 (including exhibits, schedules and amendments
thereto, the "Paradigm Form S-1") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), with respect to Paradigm Common Stock. This
Information Statement/Prospectus, while forming a part of the Paradigm Form S-1,
does not contain all of the information set forth in the Paradigm Form S-1.
Reference is hereby made to the Paradigm Form S-1 for further information with
respect to Paradigm and the securities to be distributed to the U.S. Office
Products stockholders in the Technology Distribution. Statements contained
herein concerning the provisions of documents filed as exhibits to the Paradigm
Form S-1 are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.
The Paradigm Form S-1 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates, or on the Internet at http://www.sec.gov.
Following the Technology Distribution, Paradigm will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the SEC that will be available for
inspection and copying at the SEC's public reference facilities referred to
above. Copies of such material can be obtained by mail at prescribed rates by
writing to the Public Reference Branch of the SEC at the address referred to
above.
Additional information regarding the Strategic Restructuring Plan and
Paradigm may be found in reports, proxy statements and other information filed
by U.S. Office Products with the SEC, including U.S. Office Products Tender
Offer Statement on Schedule 13E-4 filed on , 1998 and U.S. Office
Products Proxy Statement filed on , 1998.
Paradigm intends to furnish its stockholders annual reports containing
financial statements audited by its independent auditor. Paradigm does not
intend to furnish its stockholders quarterly reports.
Questions concerning the Technology Distribution should be directed to Mark
D. Director, Chief Administrative Officer, Secretary and General Counsel of U.S.
Office Products, or Donald H. Platt, Senior Vice President, Chief Financial
Officer and Treasurer of U.S. Office Products, at (202) 339-6700. After the
Technology Distribution, holders of Paradigm Common Stock having inquiries
related to their investment in Paradigm should contact James E. Claypoole at
(617) 623-3100.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998 the expiration of the twenty-fifth calendar day
following the Technology Distribution (as defined herein), all dealers effecting
transactions in registered securities, whether or not participating in this
distribution, may be required to deliver an Information Statement/Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY.................................................................................................... 1
RISK FACTORS............................................................................................... 6
THE TECHNOLOGY DISTRIBUTION................................................................................ 14
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, PARADIGM AND THE OTHER SPIN-OFF COMPANIES AFTER THE
DISTRIBUTIONS............................................................................................ 22
DIVIDEND POLICY............................................................................................ 24
CAPITALIZATION............................................................................................. 25
SELECTED FINANCIAL DATA.................................................................................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF PARADIGM........... 28
INDUSTRY OVERVIEW.......................................................................................... 34
BUSINESS................................................................................................... 35
MANAGEMENT OF PARADIGM..................................................................................... 42
RELATED PARTY TRANSACTIONS................................................................................. 47
PRINCIPAL STOCKHOLDERS OF PARADIGM......................................................................... 48
DESCRIPTION OF PARADIGM CAPITAL STOCK...................................................................... 49
EXPERTS.................................................................................................... 50
LEGAL MATTERS.............................................................................................. 50
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD READ THE INFORMATION
STATEMENT/PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT REQUIRES OTHERWISE,
REFERENCES TO (I) U.S. OFFICE PRODUCTS AND THE COMPANY (OR PARADIGM) SHALL
INCLUDE THEIR RESPECTIVE SUBSIDIARIES OR OPERATING COMPANIES AND (II) THE
COMPANY (OR PARADIGM) PRIOR TO THE DISTRIBUTION DATE SHALL REFER TO THE
TECHNOLOGY SOLUTIONS DIVISION OF U.S. OFFICE PRODUCTS.
THE COMPANY
Paradigm is a single-source provider of a broad range of IT business
solutions. Paradigm currently consists of ten companies with a substantial
history of superior client service and profitability, each focusing on a
specific sector of IT solutions. These companies provide personalized service to
their clients on a regional and local basis. Taken together, these companies
offer Paradigm's clients complementary IT solutions to address a broad spectrum
of IT needs.
Paradigm's complementary IT business solutions include: (a) consulting and
engineering services; (b) systems and network integration services; (c) software
development and integration services; (d) IT support and operational services;
and (e) telephony integration services. Senior management of Paradigm will be
responsible for expanding the focused offerings of the sister companies, through
"cross-selling," to each others' clients. This cross-selling initiative is
intended to provide Paradigm's clients with "one-stop" shopping. Paradigm's
clients include Fortune 1000 companies and middle market companies in a wide
range of industries (including communications, health care, financial services,
government, manufacturing, pharmaceuticals, professional services, and
technology).
Paradigm is dedicated to delivering IT services and support for all the
major technology needs of its clients, which include a variety of operating
systems (NT, Unix, VMS, Netware, SunOS, Digital Open VMS, OS/2) on a variety of
hardware platforms (including Intel, Sun, HP, and Digital). In addition,
Paradigm supports the full hardware and software needs of the World Wide Web and
high-end telephony systems.
Paradigm's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. By fostering a long-term relationship
with the customer and providing a superior level of service, Paradigm will seek
to expand its current market presence and reputation, and thereby increase
reported earnings and cash flow. Paradigm has an aggressive growth plan to
increase revenues substantially through organic growth and targeted strategic
acquisitions. Paradigm's organic growth strategies include: (1) capitalizing on
existing cross-selling opportunities; (2) expanding IT consulting and
engineering services; and (3) expanding software development and integration
services. Paradigm's acquisition strategy will be to replicate, in other regions
of the United States, the suite of complementary services currently provided by
its operating companies in the Northeast. Paradigm believes this strategy will
increase its regional cross-selling opportunities. Paradigm will seek to acquire
existing, profitable businesses, rather than start-up operations.
Paradigm is the product of the consolidation by U.S. Office Products,
beginning in 1996, of ten regional IT solutions companies, each with a
significant and successful prior operating history: (1) Aztec International
(based in Connecticut) ("Aztec"); (2) Bay State Computer Group (Massachusetts)
("Bay State"); (3) Compel Corporation (California) ("Compel"); (4) Digital
Network Associates, Inc. (New York) ("Digital Network Associates"); (5) Entra
Computer Corp. (Ohio) ("Entra"); (6) Fortran Corp. (Virginia) ("Fortran"); (7)
Mahon Communications Corporation (Massachusetts) ("Mahon"); (8) Office Equipment
Service, Inc. (Tennessee) ("Office Equipment Service"); (9) Professional
Computer Solutions, Inc. (New Jersey) ("Professional Computer Solutions"); and
(10) Professional Network Services, Inc. (Connecticut) ("Professional Network
Services").
<PAGE>
Paradigm is headquartered in Boston, Massachusetts, and has approximately
1,067 employees, of whom 692 (or approximately 65%) are skilled technical
professionals. Paradigm is a Delaware corporation that was incorporated on
February 12, 1998. The address of Paradigm's principal executive offices is
52 Roland Street, Boston, Massachusetts 02129 (telephone number: 617/623-3100).
BACKGROUND OF THE TECHNOLOGY DISTRIBUTION
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THE DISTRIBUTION.................. Shares of common stock, par value $.001 per share, of
Paradigm (the "Company Common Stock" or "Paradigm Common
Stock") will, subject to certain conditions, be
distributed to the stockholders of record of U.S. Office
Products (the "Technology Distribution" or
"Distribution") on , 1998 (the "Record
Date"). The Technology Distribution is part of a com-
prehensive restructuring plan (the "Strategic
Restructuring Plan") that the U.S. Office Products Board
of Directors adopted on January 12, 1998. The principal
elements of the Strategic Restructuring Plan are:
- Pursuant to a self-tender offer, U.S. Office Products
will purchase 37,037,037 shares of its common stock
$.001 par value ("U.S. Office Products Common Stock"),
or approximately 28% of the outstanding shares of U.S.
Office Products Common Stock, at $27.00 per share (the
"Tender Offer") and will incur additional indebtedness
to finance a substantial portion of the purchase price
for such shares.
- After acceptance of shares in the Tender Offer, U.S.
Office Products will distribute to U.S. Office
Products' shareholders the shares of four separate
companies: Paradigm, Workflow Graphics, Inc., School
Specialty, Inc., and TDOP, Inc. (collectively, the
"Spin-Off Companies"). The distributions of the shares
of the Spin-Off Companies are referred to in this
Information Statement/Prospectus as the
"Distributions." The Spin-Off Companies will hold U.S.
Office Products' current technology solutions, print
management, educational supplies, and corporate travel
services businesses, respectively.
- Following the Record Date, an affiliate ("CD&R") of
Clayton, Dubilier & Rice, Inc., a private investment
firm, will acquire U.S. Office Products Common Stock
and warrants to purchase additional U.S. Office
Products Common Stock for $270.0 million (the "Equity
Investment"). CD&R will not acquire any interests in
the Spin-Off Companies.
U.S. Office Products will retain its North American
Office Products Group (which includes the office supply,
office furniture, and office coffee and beverage
services businesses), Mail Boxes Etc., its New Zealand
and Australian operations, and its 49% interest in
Dudley Stationery Limited (a U.K. contract stationer).
REASONS FOR THE DISTRIBUTIONS..... The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
- adopt strategies and pursue objectives that are
appropriate to its respective industry;
- pursue an independent acquisition program that allows
for a more focused use of resources and, where stock
is used as consideration, provide stock of a public
company that is in the same industry as the businesses
being acquired;
- be recognized by the financial community as a distinct
business that can be evaluated more readily and
compared more easily to industry peers; and
- implement more focused incentive compensation packages
that respond to specific industry and market
conditions and enhance employee retention objectives.
The Distributions are also integral to the objectives of
the Equity Investment which is conditioned on completion
of all of the Distributions. See "The Technology
Distribution--Reasons for the Distributions."
SHARES TO BE DISTRIBUTED.......... Based on the number of shares of U.S. Office Products
Common Stock outstanding on , 1998, less
37,037,037 shares to be repurchased in the Tender Offer,
approximately shares of Paradigm Common Stock
will be distributed to stockholders of U.S. Office
Products in the Technology Distribution. The number of
shares to be distributed could be greater if additional
shares of U.S. Office Products Common Stock are issued
prior to the Record Date pursuant to outstanding con-
vertible debt securities or stock options of U.S. Office
Products.
DISTRIBUTION RATIO................ Each U.S. Office Products stockholder will receive one
share of Paradigm Common Stock for every shares of
U.S. Office Products Common Stock held on the Record
Date.
FRACTIONAL SHARE INTERESTS........ Fractional share interests will be aggregated and sold
by the Distribution Agent and the cash proceeds will be
distributed to those U.S. Office Products stockholders
entitled to a fractional interest. See "The Technology
Distribution--General."
RECORD DATE....................... , 1998.
DISTRIBUTION DATE................. Certificates representing shares of Paradigm Common
Stock will be mailed to U.S. Office Products
stockholders on or about , 1998 (the
"Distribution Date").
DISTRIBUTION AGENT................
TAX CONSEQUENCES.................. U.S. Office Products will receive an opinion of counsel
that for federal income tax purposes the receipt of
Paradigm Common Stock by U.S. Office Products
stockholders should be tax-free to U.S. Office Products
and the U.S. Office Products stockholders. See "The
Technology Distribution--U.S. Federal Income Tax
Consequences of the Technology Distribution."
</TABLE>
3
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<TABLE>
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ARRANGEMENTS AFTER THE Paradigm, U.S. Office Products, and the other Spin-Off
DISTRIBUTIONS................... Companies will enter into an agreement (the
"Distribution Agreement") in connection with the
Technology Distribution pursuant to which, among other
things, (i) equity interests in the U.S. Office Products
subsidiaries that engage in the technology solutions
business will be transferred to Paradigm, (ii)
liabilities will be allocated among Paradigm, U.S.
Office Products, and the other Spin-Off Companies and
(iii) Paradigm, U.S. Office Products, and the other
Spin-Off Companies will indemnify one another for
liabilities assumed under the Distribution Agreement and
certain other liabilities.
Paradigm, U.S. Office Products, and the other Spin-Off
Companies will also enter into an agreement (the "Tax
Allocation Agreement") (i) allocating to each Spin-Off
Company responsibility for its share of U.S. Office
Products' consolidated tax liability for the years that
it was included in U.S. Office Products' consolidated
federal income tax returns, (ii) sharing certain state,
local, and foreign taxes, and (iii) providing for (a)
indemnification by Paradigm for certain taxes if they
are assessed against U.S. Office Products as a result of
the Distributions and (b) joint and several
indemnification by Paradigm and the other Spin-Off
Companies for such taxes resulting from certain acts
taken by Paradigm or any of the other Spin-Off
Companies. The liability to U.S. Office Products for
taxes resulting from such acts will be allocated among
the Spin-Off Companies pursuant to a separate agreement
(the "Tax Indemnification Agreement"). As a consequence,
Paradigm will be primarily liable for taxes resulting
from acts taken by Paradigm and liable (subject to
indemnification by the other Spin-Off Companies) for any
taxes resulting from acts taken by the other Spin-Off
Companies.
Paradigm, U.S. Office Products, and the other Spin-Off
Companies will also enter into an agreement (the
"Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "Arrangements Among U.S.
Office Products, Paradigm and the Other Spin-Off Compa-
nies After the Distributions."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 6, including, among others, risks associated with (i) the
absence of a prior trading market for shares of Paradigm Common Stock, (ii) the
fact that Paradigm has not operated as a stand-alone entity separate from U.S.
Office Products, (iii) the ability of Paradigm to attract and retain qualified
employees, (iv) the potential impact of technological change, (v) conflicts of
interest resulting from the fact that (a) the Distribution Agreement is not the
result of arms'-length negotiation and (b) stock options are being issued to
certain officers and directors of the Spin-Off Companies in connection with the
Distributions, (vi) dependence upon acquisitions for further growth, (vii)
integrating acquisitions and acquisition financing, and (viii) the tax
consequences of the Technology Distribution.
4
<PAGE>
SUMMARY FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SIX MONTHS ENDED
APRIL 26, -------------------------------------
-------------------- PRO
FISCAL YEAR ENDED MARCH 31, PRO FORMA
------------------------------------------ FORMA OCTOBER 26, OCTOBER 25, OCTOBER 26,
1993 1994 1995 1996 1997 1997 (2) 1996 1997 1996 (2)
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $ 46,152 $ 58,979 $ 88,999 $ 114,055 $ 136,278 $ 228,912 $ 66,161 $ 79,605 $ 113,600
Cost of revenues...... 34,121 43,630 65,858 84,113 102,129 169,150 50,571 60,840 84,818
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Gross profit.......... 12,031 15,349 23,141 29,942 34,149 59,762 15,590 18,765 28,782
Selling, general and
administrative
expenses............ 10,139 11,218 14,942 20,510 21,525 40,848 10,011 12,329 19,332
Non-recurring
acquisition costs... 2,274 1,105
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Operating income...... 1,892 4,131 8,199 9,432 10,350 18,914 4,474 6,436 9,450
Interest expense...... 412 297 331 420 324 400 226 50 200
Interest income....... (75) (54) (118) (416) (168) (128) (267)
Other (income)
expense............. (77) (75) (111) (964) (53) (579) (58) 11 (329)
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Income before
provision for income
taxes............... 1,632 3,963 8,097 10,392 10,247 19,093 4,434 6,642 9,579
Provision for income
taxes............... 210 232 401 750 3,524 8,401 502 2,657 4,215
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Net income............ $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,723 $ 10,692 $ 3,932 $ 3,985 $ 5,364
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Pro forma net income
per share........... $ 0.11 $ 0.06
--------- -----------
--------- -----------
Weighted average
shares outstanding
(3)................. 95,963 95,963
<CAPTION>
PRO
FORMA
OCTOBER 25,
1997 (2)
-----------
<S> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $ 128,167
Cost of revenues...... 94,576
-----------
Gross profit.......... 33,591
Selling, general and
administrative
expenses............ 21,450
Non-recurring
acquisition costs...
-----------
Operating income...... 12,141
Interest expense...... 200
Interest income.......
Other (income)
expense............. (226)
-----------
Income before
provision for income
taxes............... 12,167
Provision for income
taxes............... 5,353
-----------
Net income............ $ 6,814
-----------
-----------
Pro forma net income
per share........... $ 0.07
-----------
-----------
Weighted average
shares outstanding
(3)................. 95,963
</TABLE>
<TABLE>
<CAPTION>
OCTOBER
MARCH 31, 25, 1997
--------------------------------- APRIL 30, APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 29,535
Total assets................................... 14,890 16,423 28,106 33,945 37,311 137,901
Long-term debt, less current portion........... 461 461 1,524 799 167 1,527
Long-term payable to U.S. Office Products...... 4,786 7,224
Stockholder's equity........................... 5,382 6,745 11,062 10,497 11,626 87,532
<CAPTION>
PRO FORMA (4)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................ $ 18,157
Total assets................................... 126,523
Long-term debt, less current portion........... 3,694
Long-term payable to U.S. Office Products......
Stockholder's equity........................... 81,211
</TABLE>
- ------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") is included from the dates of their
respective acquisitions. The pro forma financial data reflect acquisitions
completed by Paradigm through February 13, 1998.
(2) Gives effect to the Technology Distribution and the purchase acquisitions
completed by Paradigm since May 1, 1996 as if all such transactions had been
consummated on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) Gives effect to the Technology Distribution as if it had been made on
October 25, 1997. The pro forma balance sheet data are not necessarily
indicative of the financial position that would have been achieved had the
Technology Distribution actually then occurred and should not be construed
as representative of future financial position.
5
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
NO PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Technology Distribution, there has been no public market for
Paradigm Common Stock, and there can be no assurance that an active trading
market will develop or, if one does develop, that it will continue. Until
Paradigm Common Stock is fully distributed and an orderly market develops in
Paradigm Common Stock, the price at which it trades may fluctuate significantly
and may be higher or lower than the price that would be expected for a fully
distributed issue. The price of Paradigm Common Stock will be determined in the
marketplace and may be influenced by many factors, including (i) the depth and
liquidity of the market for Paradigm Common Stock, (ii) developments affecting
Paradigm's business generally, (iii) Paradigm's dividend policy, (iv) investor
perception of Paradigm's business and its industry generally, and (v) general
economic and market conditions.
Although Paradigm intends to apply for Paradigm Common Stock to be quoted on
the Nasdaq Stock Market National Market System (the "Nasdaq Stock Market") upon
issuance, Paradigm cannot ensure that approval for such quotation will be
obtained. If such approval is granted, Paradigm cannot ensure that it will
continue to meet the requirements for quotation of Paradigm Common Stock on the
Nasdaq Stock Market. Regardless of whether Paradigm Common Stock is quoted on
the Nasdaq Stock Market or trades in the over-the-counter market with quotations
being published in the OTC Bulletin Board and the NQB Pink Sheets, Paradigm
cannot ensure that an effective trading market will develop or, if one does
develop, that it will be maintained.
A "when-issued" trading market in Paradigm Common Stock may develop on or
about the effective date of the registration statement of which this Information
Statement/Prospectus is a part. The existence of such a market means that shares
can be traded prior to the time certificates are actually available or issued.
Whether or not there is a "when-issued" market prior to the availability of
certificates, until an orderly market for Paradigm Common Stock develops, the
prices at which shares of such stock will trade may be affected by an imbalance
of supply and demand.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Paradigm is the product of the consolidation by U.S. Office Products of ten
regional IT solutions companies. Paradigm has not heretofore operated as a
single, integrated entity. The operations of Paradigm as a stand-alone,
consolidated entity may place significant demands on Paradigm's management,
operational, and technical resources. Other than its Chief Executive Officer,
James E. Claypoole, and the presidents of its operating companies, Paradigm has
not yet identified officers who will manage Paradigm's operations, although
Paradigm intends to employ a Chief Operating Officer and Chief Financial Officer
prior to the Distribution Date. Prior to the Technology Distribution, certain
administrative functions relating to Paradigm's business (including some legal
and accounting services) were handled by U.S. Office Products. Paradigm's future
performance will depend on its ability to function as a stand-alone entity and
on its ability to finance and manage expanding operations and to adapt its
information systems to changes in its business. Paradigm's expenses may be
higher than when it was a part of U.S. Office Products. Furthermore, the
financial information included herein may not necessarily reflect what the
operating results and financial condition would have been had Paradigm been a
separate, stand-alone entity during the periods presented or be indicative of
the future operating results and financial condition of Paradigm.
ATTRACTION AND RETENTION OF EMPLOYEES
Paradigm's business involves the delivery of professional services and is
labor intensive. Paradigm's success depends in large part on its ability to
attract, develop, motivate, and retain technical professionals.
6
<PAGE>
Approximately 65% of Paradigm's employees are technical professionals. Qualified
technical professionals are in great demand and are likely to remain a limited
resource for the foreseeable future. There can be no assurance that Paradigm
will be able to attract and retain sufficient numbers of technical professionals
in the future. Paradigm has historically experienced turnover rates which it
believes are consistent with industry norms. It is possible that the spin-off of
Paradigm from U.S. Office Products could cause more employees to leave Paradigm.
An increase in turnover rates could have a material adverse effect on Paradigm's
business, including its ability to secure and complete engagements and obtain
new business, which could have a material adverse effect on Paradigm's operating
results and financial condition.
RELIANCE ON KEY PERSONNEL
Paradigm's operations depend on the continued efforts of James E. Claypoole,
its Chief Executive Officer, its operating company presidents, and the senior
management of certain of its operating companies. Furthermore, Paradigm's
operations will likely depend on the senior management of certain of the
companies that it may acquire in the future. If any of these people becomes
unable to continue in his or her present role, or if Paradigm is unable to
attract and retain other skilled professionals, its business could be adversely
affected. Paradigm has employment agreements with its Chief Executive Officer
and its operating company presidents with initial terms ending in 1999-2000.
Thereafter, such agreements are generally terminable without cause on 30 days'
notice by either Paradigm or the employee. In addition, Jonathan J. Ledecky will
serve as a director of Paradigm and is expected to provide services to Paradigm
after the Technology Distribution pursuant to an agreement entered into between
Mr. Ledecky and U.S. Office Products that provides that Paradigm and the other
Spin-Off Companies will succeed to certain rights of, and obligations under,
such agreement following the Distributions (the "Ledecky Services Agreement").
See "Management of Paradigm--Director Compensation and Other Arrangements." Mr.
Ledecky will also serve as a director of each of the other Spin-Off Companies,
and is the director or an officer of two other public companies. Mr. Ledecky may
be unable to devote substantial time to the activities of Paradigm.
RAPID TECHNOLOGICAL CHANGE
As with all IT solutions companies, Paradigm's success will depend in part
on its ability to develop IT solutions that keep pace with continuing changes in
IT, evolving industry standards, and changing client preferences. There can be
no assurance that Paradigm will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed,
Paradigm will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render
Paradigm's services uncompetitive or obsolete. Paradigm's failure to address
these developments could have a material adverse effect on Paradigm's operating
results and financial condition.
PROJECT RISKS
Many of Paradigm's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. Paradigm's failure or inability to meet a client's expectations in
the performance of its services could result in a material adverse change to the
client's operations and therefore could give rise to claims against Paradigm or
damage Paradigm's reputation, adversely affecting its business, operating
results, and financial condition.
INTELLECTUAL PROPERTY RIGHTS
The success of certain operating companies within Paradigm is dependent in
part on certain methodologies these companies use in designing, installing, and
integrating computer software and systems and other proprietary intellectual
property rights. These operating companies rely on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties, enter into confidentiality
7
<PAGE>
agreements with their key employees, and limit distribution of proprietary
information. There can be no assurance that the steps taken by these operating
companies in this regard will be adequate to deter misappropriation of
proprietary information or that these operating companies will be able to detect
unauthorized use and take appropriate steps to enforce their intellectual
property rights.
Although Paradigm believes that its services do not infringe the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, Paradigm is subject
to the risk of claims alleging infringement of third-party intellectual property
rights. Any such claims could require Paradigm to spend significant sums in
litigation, pay damages, develop non-infringing intellectual property, or
acquire licenses to the intellectual property that is the subject of an asserted
infringement claim.
RELIANCE ON GOVERNMENT RELATED PROJECTS
In fiscal years 1996 and 1997, approximately 10.5% and 10.7%, respectively,
of Paradigm's total pro forma revenues were derived from government clients.
Curtailments or substantial reductions in government funded or sponsored
programs could have an adverse impact on, or result in the termination of, the
engagements of certain of the operating companies within Paradigm associated
with these programs, and could have a material adverse effect on these companies
unless they are able to successfully replace the revenues from such business
with additional revenues from new or existing clients.
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
Paradigm is currently a wholly-owned subsidiary of U.S. Office Products. On
or before the Distribution Date, Paradigm, U.S. Office Products, and the other
Spin-Off Companies will enter into the Distribution Agreement, Tax Allocation
Agreement, and Employee Benefits Agreement, and the Spin-Off Companies will
enter into the Tax Indemnification Agreement. See "Arrangements Among U.S.
Office Products, Paradigm, and the Other Spin-Off Companies After the
Distributions." These agreements are expected to provide, among other things,
for U.S. Office Products and Paradigm to indemnify each other from tax and other
liabilities relating to their respective businesses prior to and following the
Technology Distribution.
Certain indemnification obligations of Paradigm and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations to
U.S. Office Products when such a loss occurs, Paradigm may be required to
reimburse U.S. Office Products for all or a portion of the losses that otherwise
would have been allocated to such other Spin-Off Company. In addition, the
agreements will allocate certain liabilities, including general corporate and
securities liabilities of U.S. Office Products not specifically related to the
specific businesses to be conducted by the Spin-Off Companies and
post-Distribution U.S. Office Products among U.S. Office Products and each of
the Spin-Off Companies. Adverse developments involving U.S. Office Products or
the other Spin-Off Companies, or material disputes with U.S. Office Products
following the Technology Distribution, could have a material adverse effect on
Paradigm.
The terms of the agreements that will govern the relationships among
Paradigm, U.S. Office Products and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with management of Paradigm
and the other Spin-Off Companies prior to the Distributions and while Paradigm
and the other Spin-Off Companies are wholly-owned subsidiaries of U.S. Office
Products. The terms of these agreements, including the allocation of general
corporate and securities liabilities among U.S. Office Products, Paradigm, and
the other Spin-Off Companies, may not be the same as they would be if the
agreements were the result of arms'-length negotiations. In addition, the
agreements must contain certain terms specified in U.S. Office Products'
agreement with CD&R relating to the Equity Investment and must otherwise be
reasonably acceptable to CD&R. CD&R will not be a stockholder in any of the
8
<PAGE>
Spin-Off Companies and its interests may be adverse to those of the Spin-Off
Companies. See "Arrangements Among U.S. Office Products, Paradigm, and the Other
Spin-Off Companies After the Distributions." Accordingly, there can be no
assurance that the terms and conditions of the agreements will not be more or
less favorable to Paradigm than those that might have been obtained from
unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors (the "U.S. Office Products Board"), will receive
options for shares of each of the Spin-Off Companies exercisable for up to 7.5%
of the common stock of each Spin-Off Company. See "Management of
Paradigm--Director Compensation and Other Arrangements." As a result, Mr.
Ledecky has interests in the Distributions that differ in certain respects from,
and may conflict with, the interests of other stockholders of U.S. Office
Products and Paradigm.
TAX MATTERS
U.S. Office Products will receive an opinion from Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes the Technology Distribution should qualify as a tax-free spin-off under
Section 355 of the Internal Revenue Code of 1986, as amended, (the "Code"), and
should not be subject to Section 355(e) of the Code. The opinion of counsel will
be based on certain assumptions and the accuracy of factual representations made
by U.S. Office Products and the Spin-Off Companies. A ruling has not been, and
will not be, sought from the Internal Revenue Service (the "IRS") with respect
to the U.S. federal income tax consequences of the Technology Distribution, and
it is possible that the IRS may take the position that the Technology
Distribution does not qualify as a tax-free spin-off. Assuming the Technology
Distribution qualifies under Section 355 of the Code as a tax-free spin-off and
is not subject to Section 355(e), no gain or loss will be recognized by either
U.S. Office Products or the holders of U.S. Office Products Common Stock (except
with respect to cash received in lieu of fractional shares) solely as a result
of the distribution or receipt of Paradigm Common Stock in connection with the
Technology Distribution.
If the Technology Distribution fails to qualify under Section 355 of the
Code as a tax-free spin-off, each holder of U.S. Office Products Common Stock on
the Record Date will be treated as having received a taxable corporate
distribution in an amount equal to the fair market value (on the Distribution
Date) of the Paradigm Common Stock distributed to such holder of U.S. Office
Products Common Stock including fractional shares. Neither U.S. Office Products
nor any of the Spin-Off Companies will be obligated to indemnify U.S. Office
Products stockholders for any such tax. In addition, U.S. Office Products will
be subject to a material corporate-level U.S. federal income tax (discussed in
the following paragraph).
Certain transactions involving U.S. Office Products or Paradigm Common Stock
may jeopardize the tax-free treatment of the Technology Distribution. Section
355(e) of the Code, which was added in 1997, provides generally that if 50% or
more of the capital stock of U.S. Office Products or Paradigm is acquired by one
or more persons acting pursuant to a plan that is deemed to include the
Technology Distribution, U.S. Office Products, but not the holders of U.S.
Office Products Common Stock, will incur a material U.S. federal income tax
liability as a result of the Technology Distribution. For purposes of Section
355(e), any acquisition or issuance of shares of capital stock of U.S. Office
Products or Paradigm pursuant to arrangements existing at the time of the
Technology Distribution will generally be deemed to be part of a plan that
includes the Technology Distribution; any such acquisition or issuance occurring
within two years of the Technology Distribution will be rebuttably presumed to
be part of such a plan. In addition to the 50% limitation of Section 355(e), the
IRS may take the position that any issuance or acquisition of capital stock of
Paradigm that represents more than 20% of the capital stock of Paradigm, in one
or more transactions deemed to be part of a plan that includes the Technology
Distribution, will result in the Technology Distribution failing to qualify as a
tax-free spin-off under Section 355 of the Code. If the Technology Distribution
fails to qualify as a tax-free spin-off, both U.S. Office Products and the U.S.
Office Products stockholders that receive Paradigm Common Stock in the
Technology Distribution would incur a
9
<PAGE>
material U.S. federal income tax liability. It is not clear whether the IRS will
assert this position following the adoption of Section 355(e). As a result of
these limitations, the number of shares of capital stock that Paradigm can issue
following the Technology Distribution may be limited. See "--Limitation on
Equity Offerings and the Use of Paradigm Stock in Acquisitions."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into
the Tax Allocation Agreement with Paradigm and the other Spin-Off Companies,
which will provide that the Spin-Off Companies will jointly and severally
indemnify U.S. Office Products for any losses associated with taxes related to
the Distributions ("Distribution Taxes") if an action or omission (an "Adverse
Tax Act") of any of the Spin-Off Companies materially contributes to a final
determination that any or all of the Distributions are taxable. Paradigm will
also enter into the Tax Indemnification Agreement with the other Spin-Off
Companies under which the Spin-Off Company that is responsible for the Adverse
Tax Act will indemnify the other Spin-Off Companies for any liability to
indemnify U.S. Office Products under the Tax Allocation Agreement. As a
consequence, Paradigm will be primarily liable for any Distribution Taxes
resulting from any Adverse Tax Act by Paradigm and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of the Distribution
Taxes based on the value of each company's common stock after the Distributions.
See "Arrangements Among U.S. Office Products, Paradigm, and the Other Spin-Off
Companies After the Distributions--Tax Allocation Agreement" for a detailed
discussion of the Tax Allocation Agreement.
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
One of Paradigm's strategies is to expand its revenues and the markets it
serves through the acquisition of additional businesses. As with all companies
using an acquisition strategy to expand revenues, there can be no assurance that
suitable candidates can be identified, or, if suitable acquisition candidates
are identified, that such acquisitions can be completed on acceptable terms. The
pace of Paradigm's acquisition program may be adversely affected by these and
other market factors, and may also be affected by the absence of U.S. Office
Products' legal and accounting support for the acquisitions. In addition,
Paradigm intends to use Paradigm Common Stock to pay for certain of its
acquisitions. If the owners of potential acquisition candidates are not willing
to receive shares of Paradigm Common Stock in exchange for their businesses,
Paradigm's acquisition program could be adversely affected. In addition,
Paradigm is subject to limitations on the number of shares it can issue without
jeopardizing the tax-free treatment of the Technology Distribution. Limitations
on Paradigm's ability to issue shares could also adversely affect Paradigm's
acquisition strategy. See "Limitation on Equity Offerings and the Use of
Paradigm Common Stock in Acquisitions" and "Tax Matters."
LIMITATION ON EQUITY OFFERINGS AND THE USE OF PARADIGM COMMON STOCK IN
ACQUISITIONS
As a result of certain U.S. federal income tax limitations under Section 355
of the Code on the number of shares that Paradigm can issue without jeopardizing
the tax-free treatment of the Technology Distribution, the amount of Paradigm
capital stock that is issued in connection with an acquisition by Paradigm or as
part of an issuance of Paradigm capital stock, if such acquisition or issuance
is deemed to be part of a plan that includes the Technology Distribution, when
aggregated with any Paradigm capital stock issuable upon the exercise of options
granted in connection with the Technology Distribution, including the options
that will be issued to Jonathan J. Ledecky pursuant to the Ledecky Services
Agreement, may be limited to 20% of the amount of Paradigm capital stock that
would be issued and outstanding after giving effect to all such issuances.
Depending upon the position that the IRS takes on
10
<PAGE>
these issues in light of certain 1997 tax law changes, a 50% limitation, rather
than a 20% limitation, may apply. There is a rebuttable presumption that
transactions occurring within two years of the Technology Distribution would be
subject to this limitation. See "--Tax Matters" and "The Technology
Distribution-- U.S. Federal Income Tax Consequences of the Technology
Distribution". This limitation could adversely affect the pace of Paradigm's
acquisition program and its ability to issue Paradigm Common Stock for other
purposes, including equity offerings.
RISKS RELATED TO INTEGRATION OF ACQUISITIONS
Integration of acquisitions may involve a number of special risks that could
have a material adverse effect on Paradigm's operations and financial
performance, including adverse short-term effects on its reported operating
results (including restructuring charges associated with the acquisitions and
other expenses associated with a change of control, non-recurring acquisition
costs including accounting and legal fees, investment banking fees, amortization
of acquired intangible assets, recognition of transaction-related obligations,
and various other acquisition-related costs); diversion of management's
attention; difficulties with retention, hiring and training of key personnel;
and risks associated with unanticipated problems or legal liabilities. Although
Paradigm will conduct due diligence and generally require representations,
warranties and indemnifications from the former owners of acquired companies,
there can be no assurance that such owners will have accurately represented the
financial and operating conditions of their companies. If an acquired company's
financial or operating results were misrepresented, the acquisition could have a
material adverse effect on the operating results and financial condition of
Paradigm.
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION
Paradigm currently intends to finance its future acquisitions by using
shares of Paradigm Common Stock, cash, borrowed funds, or a combination thereof.
If Paradigm Common Stock does not maintain a sufficient market value, if the
price of Paradigm Common Stock is highly volatile, or if potential acquisition
candidates are otherwise unwilling to accept Paradigm Common Stock as part of
the consideration for the sale of their businesses, Paradigm may be required to
use more of its cash resources or more borrowed funds in order to initiate and
maintain its acquisition program. If Paradigm does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. Prior to the Technology Distribution,
Paradigm was not responsible for obtaining external sources of funding. Paradigm
is currently engaged in discussions with potential lenders toward obtaining a
$200.0 million credit facility for a term of five years, to be used for working
capital and acquisitions (the "Credit Facility"). There can be no assurance that
Paradigm, as a stand-alone company, will be able to obtain such financing if and
when it is needed or that any such financing will be available on terms it deems
acceptable. If Paradigm does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity offerings. However, the use of equity offerings in connection with the
Technology Distribution will also be subject to certain limitations on the
number of shares that Paradigm can issue without jeopardizing the tax-free
treatment of the Technology Distribution. See "Limitation on Equity Offerings
and the Use of Paradigm Stock in Acquisitions" and "Tax Matters."
Upon completion of the Technology Distribution, Paradigm will have
authorized but unissued and unreserved shares of Paradigm Common Stock, which
(subject to the rules and regulations of Federal and state securities laws,
applicable limits under U.S. Federal income tax laws and rules, and rules of the
Nasdaq Stock Market) Paradigm will be able to issue in order to finance
acquisitions without obtaining stockholder approval for such issuance. Existing
stockholders may suffer dilution if Paradigm uses Paradigm Common Stock as
consideration for future acquisitions. Moreover, the issuance of additional
shares of Paradigm Common Stock may have a negative impact on earnings per share
and may negatively impact the market price of Paradigm Common Stock.
11
<PAGE>
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations accounted for under the pooling-of-interests method. As a result of
Paradigm being a wholly-owned subsidiary of U.S. Office Products prior to the
Technology Distribution, Paradigm will be unable to satisfy this criterion for a
period of two years following the Technology Distribution. Therefore, Paradigm
will be precluded from completing business combinations accounted for under the
pooling-of-interests method for a period of two years and any business
combinations completed by Paradigm during such period will be accounted for
under the purchase method resulting in the recording of goodwill. See "Material
Amount of Goodwill."
MATERIAL AMOUNT OF GOODWILL
Approximately $62.2 million, or 49.2% of Paradigm's pro forma total assets
as of October 25, 1997 represents goodwill. Goodwill represents the excess of
cost over the fair market value of net assets acquired in business combinations
accounted for under the purchase method. Paradigm amortizes goodwill on a
straight line method over a period ranging from 25-40 years with the amount
amortized in a particular period constituting a non-cash expense that reduces
Paradigm's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain future acquisitions,
may not be deductible for tax purposes. In addition, Paradigm will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Paradigm would be required to write down
the carrying value of the goodwill and incur a related charge to its income. A
reduction in net income resulting from the amortization or write down of
goodwill could have a material and adverse impact upon the market price of
Paradigm Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF PARADIGM COMMON
STOCK
Sales of substantial amounts of Paradigm Common Stock in the public market
following the Technology Distribution could have an adverse effect on the market
price of Paradigm Common Stock. Upon completion of the Technology Distribution,
Paradigm will have shares of Paradigm Common Stock outstanding. Additional
shares may be issued either in connection with acquisitions by Paradigm or upon
exercise of outstanding options and options that may be issued in the future.
See "Management of Paradigm--Executive Compensation." Upon completion of the
Technology Distribution, it is anticipated that Paradigm will have outstanding
options to acquire approximately shares of Paradigm Common Stock,
including options held by employees of Paradigm that were converted from options
to acquire U.S. Office Products Common Stock that such employees had previously
held. The exact number of shares that may be issued upon exercise of such
options cannot be determined until the Distribution Date. In addition, options
to acquire shares of Paradigm Common Stock, representing up to 7.5% of the
outstanding Paradigm Common Stock determined as of the Distribution Date will be
issued pursuant to the Ledecky Services Agreement. (See "The Technology
Distribution--Effect on Outstanding U.S. Office Products Options Held by
Paradigm Employees" and "Management of Paradigm--Director Compensation and Other
Arrangements"). If a significant number of additional shares is issued at any
one time that is not subject to restrictions on sale and is sold in the market,
the market price of Paradigm Common Stock could be adversely affected.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of Paradigm's acquisitions have not been
established by independent appraisals, but generally have been determined
through arms'-length negotiations between Paradigm's management and
representatives of such acquired companies. The consideration paid for each such
company has been and will continue to be based primarily on the value of such
company as a going concern
12
<PAGE>
and not on the value of the acquired assets. Valuations of acquired companies
determined solely by appraisals of the acquired assets typically would have been
less than the consideration paid for the companies. No assurance can be given
that the future performance of such companies will be commensurate with the
consideration paid. Paradigm does not expect to value future acquisitions on the
basis of asset appraisals. Therefore, this risk will apply to future
acquisitions as well.
NO DIVIDENDS
Paradigm does not expect to pay cash dividends on Paradigm Common Stock in
the foreseeable future. The decision whether to apply legally available funds to
the payment of dividends on Paradigm Common Stock will be made by the Paradigm
Board of Directors (the "Paradigm Board") from time to time in the exercise of
its business judgement, taking into account, among other things, Paradigm's
results of operations and financial condition, any then existing or proposed
commitments by Paradigm for the use of available funds, and Paradigm's
obligations with respect to the holders of any then outstanding indebtedness or
preferred stock. Paradigm's ability to pay dividends may be restricted from time
to time by financial covenants in its credit agreements. See "Dividend Policy."
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
Several of Paradigm's operating companies are using billing or other
software that is not Year 2000 compliant. Paradigm has not quantified the costs
of addressing its Year 2000 issues, but it believes that the necessary
adaptations of these systems can be completed in the next 18 months, and that
the costs of achieving compliance will not be material. If Paradigm is unable to
make the necessary adaptations on a timely basis, or if the costs are greater
than expected, the consequences of untimely resolution or the costs of complying
could have an adverse impact on Paradigm's business or operations.
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THE TECHNOLOGY DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
the close of business on , 1998 (the "Record Date"), will receive one
share of Paradigm Common Stock for each shares of U.S. Office Products
Common Stock held on the Record Date. The Paradigm Common Stock will be
distributed on behalf of U.S. Office Products by as the
Distribution Agent. No certificates or scrip representing fractional shares of
Paradigm Common Stock will be issued. Fractional share interests will be
aggregated and sold by the Distribution Agent and the cash proceeds will be
distributed to those stockholders entitled to a fractional interest.
Certificates representing shares of Paradigm Common Stock will be distributed on
or about , 1998 (the "Distribution Date").
Paradigm is a newly formed subsidiary of U.S. Office Products that will, as
of the Distribution Date, hold substantially all of the businesses and assets
of, and will be responsible for substantially all of the liabilities associated
with, U.S. Office Products Technology Solutions division. See "Arrangements
Among U.S. Office Products, Paradigm, and the Other Spin-Off Companies After the
Distributions--The Distribution Agreement." Paradigm will include the businesses
of the following wholly-owned subsidiaries of U.S. Office Products: Aztec; Bay
State; Compel; Digital Network Associates; Entra; Fortran; Mahon; Office
Equipment Service; Professional Computer Solutions; and Professional Network
Services. Immediately prior to the Technology Distribution, U.S. Office Products
will hold all the issued and outstanding shares of Paradigm Common Stock. Based
on the number of shares of U.S. Office Products Common Stock outstanding on
, 1998, less 37,037,037 shares to be repurchased in the Tender Offer and
on a Distribution Ratio of one share of Paradigm Common Stock distributed for
every shares of U.S. Office Products Common Stock, approximately
shares of Paradigm Common Stock will be distributed to stockholders of
U.S. Office Products in the Technology Distribution. The number of shares to be
distributed could be greater if additional shares of U.S. Office Products Common
Stock are issued prior to the Technology Distribution pursuant to outstanding
convertible debt securities or stock options of U.S. Office Products.
THE STRATEGIC RESTRUCTURING PLAN
The Technology Distribution is part of the Strategic Restructuring Plan
adopted by U.S. Office Products' Board on January 12, 1998. The principal
elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products will purchase
37,037,037 shares of U.S. Office Products Common Stock, or approximately
28% of the outstanding shares, at $27.00 per share, and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products' stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office Products
stockholder will receive such stockholder's pro rata share of the stock of
each Spin-Off Company.
- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes Etc.,
its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
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REASONS FOR THE DISTRIBUTIONS
The U.S. Office Products Board approved the Strategic Restructuring Plan,
including the Distributions, on January 12, 1998. The U.S. Office Products Board
determined that separation of the businesses of the Spin-Off Companies and the
continuing business of U.S. Office Products as part of the Strategic
Restructuring Plan would have advantages for the Spin-Off Companies and U.S.
Office Products. The Distributions will allow U.S. Office Products and the
Spin-Off Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries and geographic territories. After the
Distributions, U.S. Office Products will be focused on a narrower group of
businesses that involve primarily the distribution of office products and
business services. Each of the Spin-Off Companies will be focused primarily on
its individual business.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the technology solutions business
using U.S. Office Products Common Stock. Sellers were thus required to accept
stock in a business that included office products, corporate travel services,
print management and educational supply businesses. Following the Technology
Distribution, Paradigm will be able to offer stock in its own business, which
will be substantially the same as the businesses Paradigm expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
The Distributions also will allow U.S. Office Products and the Spin-Off
Companies to offer their respective employees more focused incentive
compensation packages. The incentive compensation packages (which are expected
to consist primarily of stock options) will offer the officers and other key
employees of each Spin-Off Company equity interests in a company whose
performance is tied directly to the business for which they work. Paradigm's
ability to issue stock options (as well as other equity) will be subject to
certain limitations in order to avoid triggering certain adverse federal income
tax consequences. See "U.S. Federal Income Tax Consequences of the Technology
Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as the Tender Offer). The U.S. Office Products Board of
Directors recognized that U.S. Office Products was making a transition from an
acquisition-oriented company to a business more focused on growth through
improvement and expansion of existing operations. The U.S. Office Products Board
concluded that the investment by CD&R in U.S. Office Products, and support of
the management of U.S. Office Products by Clayton, Dubilier & Rice, Inc. ("CD&R,
Inc."), would contribute to U.S. Office Products' development. CD&R, Inc. has
substantial experience in providing companies in which its affiliates invest
with financial and managerial advisory services aimed at building value and
improving operational, marketing, and financial performance. CD&R, Inc. is also
experienced in advising and assisting companies in managing high levels of debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products will offer
to repurchase 37,037,037 shares of U.S. Office Products Common Stock at a price
of $27.00 per share. Acceptance of and payment for shares of U.S. Office
Products Common Stock under the Tender Offer will be subject to a number of
conditions. These conditions include: (i) a minimum of 37,037,037 shares of U.S.
Office Products Common Stock being validly tendered and not withdrawn; (ii) U.S.
Office Products having obtained financing sufficient to fund the purchase of
U.S. Office Products Common Stock pursuant to the Tender Offer, and U.S. Office
Products' lenders having consented to the Tender Offer or the debt to them
having been
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refinanced; (iii) all conditions to the completion of the Equity Investment
having been satisfied or waived, except for consummation of the Tender Offer and
the Distributions; and (iv) registration statements relating to the
Distributions having become effective and all other conditions to the completion
of the Distributions having been satisfied.
The aggregate tender price for the shares to be purchased in the Tender
Offer is $1.0 billion. U.S. Office Products expects to finance the aggregate
tender price through a combination of the net proceeds of the Equity Investment,
additional senior secured bank debt, and issuance of subordinated debt
securities. U.S. Office Products anticipates that the foregoing borrowings will
increase its outstanding debt by approximately $800.0 million. In addition,
because elements of the Strategic Restructuring Plan would violate covenants in
U.S. Office Products' existing bank credit facility, that facility will either
have to be modified with the lenders' consent or refinanced. Approximately
$350.5 million was outstanding under the existing bank credit facility as of
February 12, 1998. U.S. Office Products is currently engaged in discussions with
potential lenders and investment banks regarding financing for the Tender Offer
and refinancing of its bank credit facility. U.S. Office Products expects that
it will be able to obtain the necessary financing on acceptable terms. However,
to date, no commitments have been obtained and there can be no assurance that
financing for the Tender Offer will be obtained on acceptable terms.
The Record Date for the Distributions will occur immediately after
acceptance of shares under the Tender Offer. Accordingly, U.S. Office Products
stockholders who tender their shares of U.S. Office Products Common Stock in the
Tender Offer will not receive the Distributions to the extent their U.S. Office
Products shares are accepted in the Tender Offer. Because the Tender Offer is
for only approximately 28% of the issued and outstanding shares of U.S. Office
Products Common Stock, only a portion of the shares tendered by any U.S. Office
Products stockholder is likely to be accepted. U.S. Office Products stockholders
who tender their shares are therefore likely to receive the Distributions with
respect to a portion of their shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible debentures of
U.S. Office Products and of shares of U.S. Office Products Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements; and (c) warrants representing the right to purchase one share of
U.S. Office Products Common Stock for each share of U.S. Office Products Common
Stock purchased by CD&R at the date of the closing under the Investment
Agreement (the "Closing Date") and for each share of U.S. Office Products Common
Stock into which the Special Warrants become exercisable. The Special Warrants
are exercisable from and after the Closing Date until the 12th anniversary
thereof, subject to certain limitations, and the warrants described in clause
(c) above are exercisable from and after the second anniversary of the Closing
Date until such 12th anniversary. The aggregate exercise price of the warrants
described in clause (c) above is $405.0 million. Because the Record Date for the
Distributions will be immediately before the closing of the Equity Investment,
CD&R will not receive any shares of the Spin-Off Companies in the Distributions.
Under the Investment Agreement, the U.S. Office Products Board will consist
of nine directors, including the Chief Executive Officer of U.S. Office
Products, three designees of CD&R, and five persons selected by the current U.S.
Office Products Board. CD&R's obligation to consummate the Equity Investment is
conditioned on two of the designees of the U.S. Office Products Board being
satisfactory to CD&R. Thereafter, for so long as CD&R maintains certain levels
of ownership of U.S. Office Products
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Common Stock, CD&R will have the right to nominate three members of the U.S.
Office Products, and to designate the Chairman of the Board. Certain U.S. Office
Products' Board decisions will be subject to super-majority voting provisions
that, under certain circumstances, may require the concurrence of at least one
director nominated by CD&R. CD&R will be subject to certain restrictions and
limitations with respect to transactions in U.S. Office Products Common Stock.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
receipt of necessary antitrust and other regulatory clearance; (ii) absence of
litigation; (iii) U.S. Office Products stockholder approval of issuance of
shares in the Equity Investment; (iv) consummation of the Distributions in
accordance with Distribution Agreements containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by CD&R; (v)
execution and delivery of the Tax Allocation Agreement containing certain terms
specified in the Investment Agreement and otherwise as reasonably approved by
CD&R; (vi) execution of documents relating to financing for the Tender Offer
satisfactory in form and substance to CD&R; (vii) execution of a consulting
agreement with CD&R Inc. providing for payment of an annual fee of $500,000, and
a registration rights agreement with CD&R; (viii) absence of any development
since October 25, 1997 that would have a material adverse effect on U.S. Office
Products after giving effect to the Distributions; and (ix) U.S. Office
Products' debt immediately following completion of the transactions contemplated
by the Strategic Restructuring Plan shall not exceed $1.4 billion (assuming
conversion of certain convertible debt) and the outstanding debt of the Spin-Off
Companies shall be at least $130.0 million plus expenditures by such entities
for acquisitions after the date of the Investment Agreement. See "Arrangements
Among U.S. Office Products, Paradigm, and the Other Spin-Off Companies after the
Distributions--Distribution Agreement"; and "--Tax Allocation Agreement." If
U.S. Office Products does not proceed with the Distributions, or if the Equity
Investment does not occur for certain other reasons, CD&R can terminate the
Investment Agreement and receive a termination fee of $25.0 million plus
reasonable fees and expenses. If the Equity Investment is completed, CD&R Inc.
will receive a transaction fee of $15.0 million and reimbursement for expenses
it incurs in connection with the transaction. For additional information
concerning the Equity Investment, investors should refer to U.S. Office
Products' proxy statement for its special meeting of stockholders to be held to
consider the issuance of shares in Equity Investment. See "Additional
Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will step down
as Chairman of the Board of U.S. Office Products upon consummation of the
Distributions. In connection with the adoption of the Strategic Restructuring
Plan, U.S. Office Products' Board of Directors concluded that it was important
to the achievement of the objectives of the plan that the Spin-Off Companies
obtain the benefit of Mr. Ledecky's skills and experience. Accordingly, U.S.
Office Products entered into the Ledecky Services Agreement. Pursuant to the
Ledecky Services Agreement, which is contingent on the Distributions occurring,
Mr. Ledecky has agreed to extend his existing non-competition agreement with
U.S. Office Products until the fourth anniversary of the Distribution Date. Each
Spin-Off Company will have the right to enforce the non-competition provision
with respect to its respective business. In consideration of this agreement by
Mr. Ledecky, the Ledecky Services Agreement provides that he will receive
options to purchase up to 7.5% of the outstanding common stock of each Spin-Off
Company as of the Distribution Date. For additional information on the terms of
the options to be granted by Paradigm to Mr. Ledecky, see "Management of
Paradigm--Director Compensation."
Paradigm is also exploring the issuance of Paradigm Common Stock in a public
offering concurrent with or soon after the Technology Distribution, the amount
of which has not been determined. As a result of certain U.S. federal income tax
limitations under Section 355 of the Code on the number of shares that Paradigm
can issue in connection with the Technology Distribution without jeopardizing
the tax-free treatment of the Technology Distribution, the amount of Paradigm
capital stock that will be issued in such a public offering has not been
determined and may be limited by the factors discussed in "Risk Factors--
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Tax Matters," "Limitation on Equity Offerings and the Use of Company Common
Stock in Acquisitions," and "The Technology Distribution--U.S. Federal Income
Tax Consequences of the Technology Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TECHNOLOGY DISTRIBUTION
The following summary describes the material U.S. federal income tax
consequences of the Technology Distribution by U.S. Office Products to holders
of U.S. Office Products Common Stock on the Record Date. The summary is based on
the Code, and regulations, rulings, and judicial decisions as of the date
hereof, all of which may be repealed, revoked, or modified so as to result in
U.S. federal income tax consequences different from those described below. Such
changes could be applied retroactively in a manner that could adversely affect a
holder of U.S. Office Products Common Stock. In addition, the authorities on
which this summary is based are subject to various interpretations. It is
therefore possible that the U.S. federal income tax treatment of the Technology
Distribution and of the holding, and disposition of Paradigm Common Stock may
differ from the treatment described below.
This summary applies only to holders of U.S. Office Products Common Stock
who hold U.S. Office Products Common Stock as a capital asset, and does not deal
with special situations, such as those of dealers in securities or currencies,
financial institutions, insurance companies, persons holding U.S. Office
Products Common Stock as part of a hedging or conversion transaction or a
straddle, persons whose "functional currency" is not the U.S. dollar, and
certain U.S. expatriates.
This summary is for general information only. It does not address all
aspects of U.S. federal income taxation that may be relevant to holders of U.S.
Office Products Common Stock in light of their particular circumstances, nor
does it address any tax consequences arising under the laws of any state, local,
or foreign taxing jurisdiction. Holders of U.S. Office Products Common Stock
should consult their tax advisors about the particular U.S. federal income tax
consequences to them of the Technology Distribution, or the holding and
disposition of Paradigm Common Stock, as well as any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. U.S. Office Products will receive an opinion of Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes the Technology Distribution should qualify as a tax-free spin-off under
Section 355 of the Code and should not be subject to Section 355(e) of the Code.
The opinion of counsel will be based on certain assumptions and the accuracy of
factual representations made by U.S. Office Products and Paradigm. Neither U.S.
Office Products nor Paradigm is aware of any facts or circumstances which would
cause such representations and assumptions to be untrue. However, the opinion of
counsel is not binding on either the IRS or the courts. A ruling has not been,
and will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the Technology Distribution.
Assuming the Technology Distribution qualifies as a tax-free spin-off under
Section 355 of the Code and is not subject to Section 355(e) of the Code:
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of Paradigm Common Stock
in the Technology Distribution. Holders of U.S. Office Products Common Stock
will recognize gain or loss on the receipt of cash in lieu of fractional
shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the Technology Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the Technology Distribution will be
allocated among U.S. Office Products Common Stock and Spin-Off Companies'
common stock (including any fractional shares) received with respect to
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such U.S. Office Products Common Stock in proportion to their relative fair
market values on the Distribution Date. Such allocation must be calculated
separately for each block of U.S. Office Products Common Stock (shares
purchased at the same time and at the same cost) with respect to which the
Spin-Off Companies' common stock is received.
4. The holding period of the Paradigm Common Stock (including any
fractional shares) received in the Technology Distribution will include the
holding period of the U.S. Office Products Common Stock with respect to
which it was distributed.
Treasury regulations governing Section 355 of the Code require that each
holder of U.S. Office Products Common Stock who receives shares of Paradigm
Common Stock pursuant to the Technology Distribution attach a statement to the
U.S. federal income tax return that will be filed by such stockholder for the
taxable year in which the stockholder receives Paradigm Common Stock in the
Technology Distribution. The regulations require that the statement show the
applicability of Section 355 of the Code to the Technology Distribution. U.S.
Office Products will provide each U.S. Office Products stockholder of record on
the Record Date with information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, an opinion of counsel is not binding on the IRS or the courts. It is
therefore possible that the IRS may take the position that the Technology
Distribution does not qualify as a tax-free spin-off.
If the Technology Distribution fails to qualify as a tax-free spin-off under
Section 355 of the Code:
1. U.S. Office Products will recognize gain, if any, equal to the
difference between U.S. Office Products' tax basis in the Paradigm Common
Stock on the Distribution Date and the fair market value of the Paradigm
Common Stock on the Distribution Date.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the Paradigm Common Stock
distributed to such stockholder, including fractional shares. The
distribution would generally be treated as ordinary dividend income to a
U.S. Office Products stockholder to the extent of such U.S. Office Products
stockholder's pro rata share of U.S. Office Products' accumulated and
current earnings and profits. To the extent the amount of the distribution
exceeds such U.S. Office Products stockholder's pro rata share of U.S.
Office Products' accumulated and current earnings and profits, such excess
would be treated first as a basis-reducing, tax-free return of capital to
the extent of the stockholder's tax basis in his or her U.S. Office Products
Common Stock and then as capital gain. For corporate stockholders, the
portion of the taxable distribution that constitutes a dividend would be
eligible for the dividends-received deduction (subject to certain
limitations in the Code) and could be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in a
corporate stockholder's basis in its U.S. Office Products Common Stock to
the extent of such deduction and the recognition of gain to the extent the
deduction exceeds the corporate stockholder's tax basis in its U.S. Office
Products Common Stock.
3. Each U.S. Office Products stockholder's tax basis in Paradigm Common
Stock would equal the fair market value on Distribution Date of Paradigm
Common Stock (including fractional shares) distributed to such stockholder.
4. The holding period of Paradigm Common Stock (including fractional
shares) received in the Technology Distribution would begin with, and
include, the day after the Distribution Date.
Whether or not the Technology Distribution is taxable, cash received by a
holder of U.S. Office Products Common Stock in lieu of a fractional share of
Paradigm Common Stock will be treated as received in exchange for such
fractional share and the stockholder will recognize gain or loss for U.S.
federal income tax purposes measured by the difference between the amount of
cash received and the
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stockholder's tax basis in the fractional share. Such gain or loss will be
capital gain or loss to the stockholder if the U.S. Office Products Common Stock
is held as a capital asset.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Certain transactions involving
U.S. Office Products or Paradigm Common Stock may jeopardize the tax-free
treatment of the Technology Distribution. Section 355(e) of the Code, which was
added in 1997, provides generally that if 50% or more of the capital stock of
U.S. Office Products or Paradigm is acquired by one or more persons acting
pursuant to a plan that is deemed to include the Technology Distribution, U.S.
Office Products, but not the holders of U.S. Office Products Common Stock, will
incur a material U.S. federal income tax liability as a result of the Technology
Distribution. For purposes of Section 355(e), any acquisition or issuance of
shares of capital stock of U.S. Office Products or Paradigm pursuant to
arrangements existing at the time of the Technology Distribution will generally
be deemed to be part of a plan that includes the Technology Distribution; any
such acquisition or issuance occurring within two years of the Technology
Distribution will be rebuttably presumed to be part of such a plan. In addition
to the 50% limitation of Section 355(e), the IRS may take the position that any
issuance or acquisition of capital stock of Paradigm that represents more than
20% of the capital stock of Paradigm, in one or more transactions deemed to be
part of a plan that includes the Technology Distribution, will result in the
Technology Distribution failing to qualify as a tax-free spin-off under Section
355 of the Code. If the Technology Distribution fails to qualify as a tax-free
spin-off, both U.S. Office Products and the U.S. Office Products stockholders
that receive Paradigm Common Stock in the Technology Distribution would incur a
material U.S. federal income tax liability. It is not clear whether the IRS will
assert this position following the adoption of Section 355(e).
Paradigm capital stock issuable upon exercise of options to be granted to
Jonathan J. Ledecky pursuant to the Ledecky Services Agreement (see "Management
of Paradigm--Director Compensation and Other Arrangements"), Paradigm capital
stock issuable upon the exercise of other options granted in connection with the
Technology Distribution, and Paradigm capital stock issued in connection with
acquisitions or public offerings contemplated at the time of the Technology
Distribution would likely be included as stock issuances that are subject to the
50% (or 20%) limitations described above. Moreover, as noted above, for purposes
of the 50% limitation, any issuance of shares of Paradigm capital stock within
two years of the Technology Distribution will be rebuttably presumed to be part
of a plan that includes the Technology Distribution. Accordingly, the number of
shares that may be issued by Paradigm following the Technology Distribution may
be limited.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
Paradigm and the other Spin-Off Companies will jointly and severally indemnify
U.S. Office Products for any Distribution Taxes assessed against U.S. Office
Products if an Adverse Tax Act of any of the Spin-Off Companies materially
contributes to a final determination that any of the Distributions is taxable.
Paradigm will also enter into the Tax Indemnification Agreement with the other
Spin-Off Companies under which the Spin-Off Company that is responsible for the
Adverse Tax Act will indemnify the other Spin-Off Companies for any liability to
U.S. Office Products under the Tax Allocation Agreement. As a consequence,
Paradigm will be primarily liable for any Distribution Taxes resulting from an
Adverse Tax Act by Paradigm. Additionally, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of any Distribution
Taxes, based on the value of each company's common stock after the
Distributions, if it is determined that there has not been an Adverse Tax Act by
either U.S. Office Products or any of the Spin-Off Companies. See "Arrangements
Among U.S. Office Products, Paradigm, and the Other Spin-Off Companies After the
Distributions--Tax Allocation Agreement" for a detailed discussion of the Tax
Allocation Agreement.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK IS FOR GENERAL
INFORMATION ONLY AND DOES NOT PURPORT TO COVER ALL U.S. FEDERAL INCOME TAX
CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER OF U.S. OFFICE PRODUCTS COMMON
STOCK. ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE TECHNOLOGY DISTRIBUTION TO THEM.
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EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY PARADIGM EMPLOYEES
Paradigm expects that all or substantially all vested and unvested options
to acquire U.S. Office Products Common Stock that are held by Paradigm employees
on the Distribution Date will be replaced with options to acquire shares of
Paradigm Common Stock. Paradigm anticipates that the replacement options will be
issued under a stock option plan to be adopted on or prior to the Distribution
Date. The number of shares of Paradigm Common Stock that each optionholder will
receive, and the exercise price of the options will be determined by a formula
designed to provide each optionholder with options having an aggregate value
after the Tender Offer and as of the Distribution Date (equal to the excess or
deficit of then-current trading prices over the exercise price, times the number
of shares subject to options) equivalent to the aggregate value, immediately
prior to the Distribution Date, of the U.S. Office Products options they
replace. It is anticipated that all other terms of the Paradigm stock options
will be the same as the terms of the U.S. Office Products options they replace.
As a result of this, options held by Paradigm employees after the Technology
Distribution would represent a greater percentage interest in U.S. Office
Products than represented by such options before the Distributions. At
, 1998, persons who are expected to become Paradigm employees held
options to purchase, in the aggregate, shares of U.S. Office Products
Common Stock.
RESTRICTIONS ON TRANSFER
Shares of Paradigm Common Stock distributed to U.S. Office Products
stockholders pursuant to the Technology Distribution will be freely transferable
under the Securities Act, except for shares received by any persons who may be
deemed to be "affiliates" of Paradigm as that term is defined in Rule 144
promulgated under the Securities Act. Persons who may be deemed to be affiliates
of Paradigm after the Technology Distribution generally include individuals or
entities that control, are controlled by, or are under common control with,
Paradigm and may include certain officers and directors of Paradigm as well as
principal stockholders of Paradigm. Persons who are affiliates of Paradigm will
be permitted to sell their shares of Paradigm Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemptions
provided for private transactions or Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that legal, financial advisory, investment
banking, financing, accounting, printing, mailing, and other expenses (including
the fees of U.S. Office Products' and the Spin-Off Companies' transfer agents)
of the Strategic Restructuring Plan, including the Distributions, will total
approximately $ . Upon request, U.S. Office Products will pay the
reasonable expenses of brokerage firms, custodians, nominees, and fiduciaries
who are record holders of U.S. Office Products shares for forwarding this
Information Statement/Prospectus to the beneficial owners of such shares. The
foregoing expenses will be allocated among U.S. Office Products and the Spin-Off
Companies pursuant to a formula to be determined. See "Arrangements Among U.S.
Office Products, Paradigm and the Other Spin-Off Companies After the
Distributions--Distribution Agreement."
21
<PAGE>
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, PARADIGM
AND THE OTHER SPIN-OFF COMPANIES AFTER THE DISTRIBUTIONS
Following the Technology Distribution, U.S. Office Products and Paradigm
will operate independently (except for interests U.S. Office Products may retain
pursuant to certain pledge agreements), and neither will have any stock
ownership, beneficial or otherwise, in the other. For the purposes of governing
certain of the ongoing relationships between and among U.S. Office Products,
Paradigm and the other Spin-Off Companies after the Distributions, and to
provide mechanisms for an orderly transition, on or before the Distribution
Date, U.S. Office Products, Paradigm and the other Spin-Off Companies will enter
into the Distribution Agreement, the Tax Allocation Agreement, and the Employee
Benefits Agreement, and the Spin-Off Companies will enter into the Tax
Indemnification Agreement. The terms of the Distribution Agreement, Tax
Allocation Agreement, Tax Indemnification Agreement, and Employee Benefits
Agreement have not yet been finally determined. Those terms will be agreed to
while Paradigm is a wholly-owned subsidiary of U.S. Office Products. In
addition, the Investment Agreement specifies certain terms of these agreements
and provides that they are subject to CD&R's reasonable approval. Therefore,
they will not be the result of arms'-length negotiations between independent
parties.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not been
finally determined, Paradigm currently expects that the terms will include those
described below. There can be no assurance that the terms of the Distribution
Agreement, Tax Allocation Agreement, Tax Indemnification Agreement, and Employee
Benefits Agreement will not be less favorable to the stockholders of Paradigm
than the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement is expected
to provide for the transfer from U.S. Office Products to Paradigm of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are presently engaged in Paradigm's business as well as the
transfer in certain instances of other assets related to the business of
Paradigm. It is also expected to provide that the recovery on any claims under
applicable acquisition agreements that U.S. Office Products may have against the
persons who sold businesses to U.S. Office Products that will become part of
Paradigm in connection with the Technology Distribution (the "Paradigm
Acquisition Indemnity Claims") will be allocated between U.S. Office Products
and the applicable Spin-Off Company under a formula to be determined. In
addition, to the extent that Paradigm Acquisition Indemnity Claims are secured
by the pledge of stock of U.S. Office Products and the Spin-Off Companies that
are owned by persons who sold businesses to U.S. Office Products that will
become part of Paradigm (and no previous claims have been made against such
shares), the pledged shares will be used, subject to final resolution of the
claim, to reimburse U.S. Office Products and the applicable Spin-Off Company for
their respective damages and expenses in accordance with the relative allocation
of recovery rights, which will be determined prior to the Technology
Distribution.
DEBT. The Distribution Agreement is expected to provide that Paradigm will
have, at the time of the Technology Distribution, $5.0 million of debt plus the
amount of any additional debt incurred after the date of the Investment
Agreement by U.S. Office Products or Paradigm in connection with the acquisition
of entities that will become subsidiaries of Paradigm in connection with the
Distributions.
ASSUMPTION OF LIABILITIES. The Distribution Agreement is expected to
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefits matters, which will be
governed by separate agreements) among U.S. Office Products, Paradigm and the
other Spin-Off Companies. Paradigm will be responsible for (i) any liabilities
arising out of or in connection with the businesses conducted by Paradigm and/or
its subsidiaries, (ii) its liabilities under the Distribution Agreement, Tax
Allocation Agreement, Employee Benefits Agreement, Tax Indemnification
22
<PAGE>
Agreement and related agreements, (iii) its liabilities for the debt described
above, (iv) certain securities liabilities, and (v) any liabilities of U.S.
Office Products relating to earn-out or bonus payments owed by U.S. Office
Products in respect of Paradigm or its subsidiaries. In addition, the
Distribution Agreement is expected to provide for sharing of certain liabilities
among some or all of the parties. First, each of U.S. Office Products, Paradigm
and the other Spin-Off Companies will bear a portion, on a basis to be
determined, of (i) any liabilities of U.S. Office Products under the securities
laws arising from events prior to the Distributions (other than claims relating
solely to a specific Spin-Off Company or relating specifically to the continuing
businesses of U.S. Office Products), (ii) U.S. Office Products' general
corporate liabilities (other than debt, except for that specifically allocated
to the Spin-Off Companies) incurred prior to the Distributions (I.E.,
liabilities not related to the conduct of a particular distributed or retained
subsidiary's business), and (iii) transactions costs (including legal,
accounting, investment banking and financial advisory) and other fees incurred
by U.S. Office Products in connection with the Strategic Restructuring Plan.
Second, if U.S. Office Products is entitled to an indemnity from one of the
other Spin-Off Companies and such claim proves to be uncollectible, such
liabilities will be shared on a basis to be determined.
The Distribution Agreement is expected to provide that each party will
indemnify and hold all of the other parties harmless from any and all
liabilities for which the former assumed liability under the Distribution
Agreement. All indemnity payments will be subject to adjustment upward or
downward to take account of tax costs or tax benefits as well as insurance
proceeds. If there are any claims made under U.S. Office Products' existing
insurance policies, the amount of any deductible or retention will be allocated
by U.S. Office Products among the claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement is expected to have other
customary provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
U.S. Office Products estimates that if all of the Distributions fail to
qualify as tax-free spin-offs under Section 355 of the Code or if U.S. Office
Products recognizes taxable gain as a result of the application of Section
355(e) of the Code with respect to all of the Distributions, the aggregate
corporate U.S. federal income tax liability (before interest and penalties) that
would result would be approximately $ (based on an estimate of the value
of the Spin-Off Companies; the actual value of the Spin-Off Companies cannot be
determined until there is public trading of the Spin-Off Companies' common
stock). The Tax Allocation Agreement will provide that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any Distribution
Taxes assessed against U.S. Office Products if an Adverse Tax Act of any of the
Spin-Off Companies materially contributes to a final determination that any or
all of the Distributions are taxable. Paradigm will also enter into the Tax
Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, Paradigm will be primarily liable for
any Distribution Taxes resulting from any Adverse Tax Act by Paradigm and liable
(subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. If there is a final determination that any or all of the
Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
each of U.S.
23
<PAGE>
Office Products and the Spin-Off Companies will be liable for its pro rata
portion of such Distribution Taxes based on the value of each company's common
stock after the Distributions.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with Paradigm and the other Spin-Off
Companies to provide for an orderly transition of benefits coverage between U.S.
Office Products and the Spin-Off Companies. Pursuant to this agreement, the
respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distribution subsidiaries will retain or assume
responsibility for their current and previous employees. The proposed Employee
Benefits Agreement reflects U.S. Office Products' expectation that each of the
Spin-Off Companies will establish 401(k) plans for their respective employees
effective as of, or shortly after, the Distribution Date, and that U.S. Office
Products will transfer 401(k) accounts to those plans as soon as practicable.
The proposed agreement also provides for spinning off of portions of the U.S.
Office Products' cafeteria plan that relate to employees of the Spin-Off
Companies (and their subsidiaries) and having those spun-off plans assume
responsibilities for claims submitted on or after the Distributions.
DIVIDEND POLICY
Paradigm does not anticipate declaring and paying cash dividends on Paradigm
Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of dividends on Paradigm Common Stock
will be made by the Paradigm Board of Directors from time to time in the
exercise of its business judgment, taking into account Paradigm's financial
condition, results of operations, existing and proposed commitments for use of
Paradigm's funds and other relevant factors. Paradigm's ability to pay dividends
may be restricted from time to time by financial covenants in its credit
agreements.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Paradigm at October 25,
1997 (i) on an actual basis and (ii) on a pro forma basis to reflect the
Technology Distribution and the allocation of $5.0 million of debt by U.S.
Office Products. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Position and Results of Operations of
Paradigm," the historical consolidated financial statements and the pro forma
combined financial statements of Paradigm, and the related notes to each
thereof, included elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
OCTOBER 25, 1997
----------------------
ACTUAL PRO FORMA
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt............................................................................ $ 1,306 $ 1,306
--------- -----------
--------- -----------
Long-term debt............................................................................. $ 1,527 $ 3,694
Long-term payable to U.S. Office Products.................................................. 7,224
Stockholder's equity:
Divisional equity...................................................................... 72,069 65,748
Retained earnings...................................................................... 15,463 15,463
--------- -----------
Total stockholder's equity......................................................... 87,532 81,211
--------- -----------
Total capitalization............................................................... $ 96,283 $ 84,905
--------- -----------
--------- -----------
</TABLE>
25
<PAGE>
SELECTED FINANCIAL DATA
The historical Selected Financial Data for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 (except pro forma amounts) have been derived
from Paradigm's consolidated financial statements that have been audited and are
included elsewhere in this Information Statement/Prospectus. The historical
Selected Financial Data for the fiscal years ended March 31, 1993 and 1994 have
been derived from unaudited consolidated financial statements are not included
elsewhere in this Information Statement/Prospectus or incorporated herein by
reference. The Selected Financial Data for the six months ended October 26, 1996
and October 25, 1997 (except pro forma amounts) have been derived from unaudited
consolidated financial statements that appear elsewhere in this Information
Statement/Prospectus. These unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, contain all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the Technology
Distribution and the purchase acquisitions completed by Paradigm between May 1,
1996 and February 13, 1998 as if all such transactions had been consummated on
May 1, 1996. In addition, the pro forma information is based on available
information and certain assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Paradigm" that appear elsewhere in this Information Statement/Prospectus.
26
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
APRIL 26, -------------------------------------
-------------------- PRO
FISCAL YEAR ENDED MARCH 31, PRO FORMA
------------------------------------------ FORMA OCTOBER 26, OCTOBER 25, OCTOBER 26,
1993 1994 1995 1996 1997 1997 (2) 1996 1997 1996 (2)
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $ 46,152 $ 58,979 $ 88,999 $ 114,055 $ 136,278 $ 228,912 $ 66,161 $ 79,605 $ 113,600
Cost of revenues...... 34,121 43,630 65,858 84,113 102,129 169,150 50,571 60,840 84,818
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Gross profit.......... 12,031 15,349 23,141 29,942 34,149 59,762 15,590 18,765 28,782
Selling, general and
administrative
expenses............ 10,139 11,218 14,942 20,510 21,525 40,848 10,011 12,329 19,332
Non-recurring
acquisition costs... 2,274 1,105
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Operating income...... 1,892 4,131 8,199 9,432 10,350 18,914 4,474 6,436 9,450
Interest expense...... 412 297 331 420 324 400 226 50 200
Interest income....... (75) (54) (118) (416) (168) (128) (267)
Other (income)
expense............. (77) (75) (111) (964) (53) (579) (58) 11 (329)
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Income before
provision for income
taxes............... 1,632 3,963 8,097 10,392 10,247 19,093 4,434 6,642 9,579
Provision for income
taxes............... 210 232 401 750 3,524 8,401 502 2,657 4,215
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Net income............ $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,723 $ 10,692 $ 3,932 $ 3,985 $ 5,364
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- ----------- -----------
Pro forma net income
per share........... $ 0.11 $ 0.06
--------- -----------
--------- -----------
Weighted average
shares outstanding
(3)................. 95,963 95,963
<CAPTION>
PRO
FORMA
OCTOBER 25,
1997 (2)
-----------
<S> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $ 128,167
Cost of revenues...... 94,576
-----------
Gross profit.......... 33,591
Selling, general and
administrative
expenses............ 21,450
Non-recurring
acquisition costs...
-----------
Operating income...... 12,141
Interest expense...... 200
Interest income.......
Other (income)
expense............. (226)
-----------
Income before
provision for income
taxes............... 12,167
Provision for income
taxes............... 5,353
-----------
Net income............ $ 6,814
-----------
-----------
Pro forma net income
per share........... $ 0.07
-----------
-----------
Weighted average
shares outstanding
(3)................. 95,963
</TABLE>
<TABLE>
<CAPTION>
OCTOBER
MARCH 31, 25, 1997
--------------------------------- APRIL 30, APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 29,535
Total assets................................... 14,890 16,423 28,106 33,945 37,311 137,901
Long-term debt, less current portion........... 461 461 1,524 799 167 1,527
Long-term payable to U.S. Office Products...... 4,786 7,224
Stockholder's equity........................... 5,382 6,745 11,062 10,497 11,626 87,532
<CAPTION>
PRO FORMA (4)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................ $ 18,157
Total assets................................... 126,523
Long-term debt, less current portion........... 3,694
Long-term payable to U.S. Office Products......
Stockholder's equity........................... 81,211
</TABLE>
- ------------------------
(1) The historical financial information of the Pooled Companies has been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions. The pro forma
financial data reflect acquisitions completed by Paradigm through February
13, 1998.
(2) Gives effect to the Technology Distribution and the purchase acquisitions
completed by Paradigm since May 1, 1996 as if all such transactions had been
consummated on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma balance sheet data are
not necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
(4) Gives effect to the Technology Distribution as if it had been made on
October 25, 1997. The pro forma balance sheet data are not necessarily
indicative of the financial position that would have been achieved had the
Technology Distribution actually then occurred and should not be construed
as representative of future financial position.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF PARADIGM
INTRODUCTION
Paradigm's consolidated financial statements give retroactive effect to the
five business combinations accounted for under the pooling-of-interests method
during the period from October 1996 through April 1997 (the "Pooled Companies")
and include the results of five companies acquired during the six months ended
October 25, 1997 in business combinations accounted for under the purchase
method (the "Purchased Companies") from their respective acquisition dates.
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results for years ending on March 31 and December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from March 31 and December 31 to conform to U.S. Office Products' fiscal year,
which ends on the last Saturday in April. In the following discussion, "fiscal
1995" and "fiscal 1996" refer to the Company's fiscal years ended March 31, 1995
and 1996, respectively.
The following discussion should be read in conjunction with Paradigm's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Information Statement/Prospectus.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended March 31, 1995, 1996 and April 26, 1997 and for the six
months ended October 26, 1996 and October 25, 1997, as well as for the fiscal
year ended April 26, 1997 and for the six months ended October 26, 1996 and
October 25, 1997 on a pro forma basis reflecting the Technology Distribution and
the results of the Purchased Companies as if such transactions had occurred on
May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE SIX MONTHS ENDED
-------------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
MARCH 31, MARCH 31, APRIL 26, APRIL 26, OCTOBER 26, OCTOBER 25, OCTOBER 26,
1995 1996 1997 1997 1996 1997 1996
------------- ------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 74.0 73.7 74.9 73.9 76.4 76.4 74.7
----- ----- ----- ----- ----- ----- -----
Gross profit........... 26.0 26.3 25.1 26.1 23.6 23.6 25.3
Selling, general and
administrative
expenses................. 16.8 18.0 15.8 17.8 15.1 15.5 17.0
Non-recurring acquisition
costs.................... 1.7 1.7
----- ----- ----- ----- ----- ----- -----
Operating income....... 9.2 8.3 7.6 8.3 6.8 8.1 8.3
Interest (income) expense,
net...................... 0.2 0.1 0.2 0.1 (0.2) 0.2
Other income............... (0.1) (0.8) (0.2) (0.3)
----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes............. 9.1 9.1 7.5 8.3 6.7 8.3 8.4
Provision for income
taxes.................... 0.5 0.6 2.6 3.6 0.8 3.3 3.7
----- ----- ----- ----- ----- ----- -----
Net income................. 8.6% 8.5% 4.9% 4.7% 5.9% 5.0% 4.7%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
PRO FORMA
OCTOBER 25,
1997
-------------
<S> <C>
Revenues................... 100.0%
Cost of revenues........... 73.8
-----
Gross profit........... 26.2
Selling, general and
administrative
expenses................. 16.7
Non-recurring acquisition
costs....................
-----
Operating income....... 9.5
Interest (income) expense,
net...................... 0.2
Other income............... (0.2)
-----
Income before provision for
income taxes............. 9.5
Provision for income
taxes.................... 4.2
-----
Net income................. 5.3%
-----
-----
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Pro forma revenues increased 12.8%, from $113.6 million for the six months
ended October 26, 1996 to $128.2 million for the six months ended October 25,
1997. This increase was primarily due to internal growth in the consulting and
engineering services sector, the systems and network integration sector, and the
telephony integration services sector of the business resulting from the
expansion of Paradigm's customer base.
28
<PAGE>
Pro forma gross profit increased 16.7%, from $28.8 million, or 25.3% of pro
forma revenues, for the six months ended October 26, 1996, to $33.6 million, or
26.2% of pro forma revenues for the six months ended October 25, 1997. This
increase in gross profit as a percentage of revenues was primarily due to
increased sales in the consulting and engineering services sector and telephony
integration services sector during the six months ended October 25, 1997.
Pro forma selling, general and administrative expenses increased 11.0%, from
$19.3 million, or 17.0% of pro forma revenues, for the six months ended October
26, 1996, to $21.5 million, or 16.7% of pro forma revenues for the six months
ended October 25, 1997. This decrease in selling, general and administrative
expenses as a percentage of revenues was primarily due to lower operating costs
during the six months ended October 25, 1997.
Provision for income taxes has been estimated using an effective income tax
rate of 44.0%. The high effective tax rate, compared to the federal statutory
rate of 35.0%, was primarily due to nondeductible goodwill amortization.
CONSOLIDATED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Consolidated revenues increased 20.3%, from $66.2 million for the six months
ended October 26, 1996, to $79.6 million for the six months ended October 25,
1997. This increase was primarily due to internal growth in the consulting and
engineering services sector, the systems and network integration sector, and the
telephony integration services sector of the business resulting from the
expansion of Paradigm's customer base.
Gross profit increased 20.4%, from $15.6 million, or 23.6% of revenues, for
the six months ended October 26, 1996 to $18.8 million, or 23.6% of revenues,
for the six months ended October 25, 1997.
Selling, general and administrative expenses increased 23.2%, from $10.0
million, or 15.1% of revenues, for the six months ended October 26, 1996 to
$12.3 million, or 15.5% of revenues, for the six months ended October 25, 1997.
The increase in selling, general and administrative expenses as a percentage of
revenues was primarily due to increases in corporate overhead at one of the
operating companies of Paradigm.
Paradigm incurred non-recurring acquisition costs of $1.1 million for the
six months ended October 26, 1996 in conjunction with two business combinations
accounted for under the pooling-of-interests method. These non-recurring
acquisition costs included accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations. Generally accepted accounting
principles ("GAAP") require Paradigm to expense all acquisition costs (both
those paid by Paradigm and those paid by the sellers of the acquired companies)
related to business combinations accounted for under the pooling-of-interests
method. Paradigm does not anticipate incurring any additional such costs for the
next two years since, as a result of the Technology Distribution, Paradigm is
precluded from completing acquisitions under the pooling-of-interests method for
two years from the Distribution Date.
Interest expense, net of interest income, decreased $315,000, from net
interest expense of $98,000 for the six months ended October 26, 1996, to
$217,000 of net interest income for the six months ended October 25, 1997. The
decrease was due primarily to an increase in cash flows from operations during
the six months ended October 25, 1997.
Provision for income taxes increased from $502,000 for the six months ended
October 26, 1996 to $2.7 million for the six months ended October 25, 1997,
reflecting effective income tax rates of 11.3% and 40.0%, respectively. The low
effective income tax rate for the six months ended October 26, 1996, compared to
the federal statutory rate of 35.0% plus state taxes, is the result of certain
companies included
29
<PAGE>
in the results, which were acquired in business combinations accounted for under
the pooling-of-interests method, not being subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by Paradigm.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Consolidated revenues increased 19.5%, from $114.1 million in fiscal 1996 to
$136.3 million in fiscal 1997. This increase was primarily due to internal
growth in the consulting and engineering services sector, the systems and
network integration sector, and the software development and integration
services sector of the business resulting from the expansion of Paradigm's
customer base.
Gross profit increased 14.1%, from $29.9 million, or 26.3% of revenues, in
fiscal 1996 to $34.1 million, or 25.1% of revenues, in fiscal 1997. The decrease
in gross profit as a percentage of revenues was due primarily to an increase in
technical professional costs during fiscal 1997 as the demand for technical
professionals exceeded the available personnel in the job market.
Selling, general and administrative expenses increased 4.9%, from $20.5
million, or 18.0% of revenues, in fiscal 1996 to $21.5 million, or 15.8% of
revenues, in fiscal 1997. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to operating efficiencies
employed at Paradigm and Paradigm's ability to increase its revenue base without
a corresponding increase in fixed operating costs.
Paradigm incurred non-recurring acquisition costs of $2.3 million in fiscal
1997 in conjunction with five business combinations accounted for under the
pooling-of-interests method.
Interest expense, net of interest income, increased $152,000, from $4,000 in
fiscal 1996 to $156,000 in fiscal 1997. The net increase was due primarily to
the reduction in interest income related to short-term investments at one Pooled
Company. The proceeds from the short-term investments were used to fund other
working capital needs.
Other income decreased $911,000, from $964,000 in fiscal 1996 to other
income of $53,000 in fiscal 1997. In fiscal 1996, other income consisted
primarily of a gain on the sale of a non-core line of business at one of the
Pooled Companies prior to its acquisition by Paradigm.
Provision for income taxes increased from $750,000 in fiscal 1996 to $3.5
million in fiscal 1997, reflecting effective income tax rates of 7.2% and 34.4%,
respectively. The low effective income tax rate for fiscal 1996, compared to the
federal statutory rate of 35.0% plus state taxes, is the result of certain
companies included in the results, which were acquired in business combinations
accounted for under the pooling-of-interests method, not being subject to
federal income taxes on a corporate level as they had elected to be treated as
subchapter S corporations prior to being acquired by Paradigm.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Consolidated revenues increased 28.2%, from $89.0 million in fiscal 1995, to
$114.1 million in fiscal 1996. This increase was primarily due to internal
growth in the consulting and engineering services sector, the systems and
network integration sector, and the software development, and integration
services sector of the business resulting from the expansion of Paradigm's
customer base.
Gross profit increased 29.4%, from $23.1 million, or 26.0% of revenues, in
fiscal 1995 to $29.9 million, or 26.3% of revenues, in fiscal 1996. The increase
in gross profit as a percentage of revenues was due primarily to increased sales
in the consulting and engineering services sector and the telephony integration
services sector of Paradigm's business.
Selling, general and administrative expenses increased 37.3%, from $14.9
million, or 16.8% of revenues, in fiscal 1995 to $20.5 million, or 18.0% of
revenues, in fiscal 1996. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to bonuses that were
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paid to the shareholders of one of the Pooled Companies after the completion of
the sale of a non-core line of business and bonuses paid to the shareholders of
other Pooled Companies for subchapter S corporation tax payments.
Interest expense, net of interest income, decreased $209,000, from $213,000
in fiscal 1995 to $4,000 in fiscal 1996. The net decrease was due primarily to
an increase in interest income at one of the Pooled Companies which invested
excess cash from operations in short-term investments.
Other income increased $853,000, from $111,000 in fiscal 1995, to $964,000
in fiscal 1996. In fiscal 1996, other income consisted primarily of a gain on
the sale of a non-core line of business at one of the Pooled Companies prior to
its acquisition by Paradigm.
Provision for income taxes increased from $401,000 in fiscal 1995 to
$750,000 in fiscal 1996, reflecting effective income tax rates of 5.0% and 7.2%,
respectively. The low effective income tax rates for fiscal 1995 and fiscal
1996, compared to the federal statutory rate of 35.0% plus state taxes, are the
result of certain companies included in the results, which were acquired in
business combinations accounted for under the pooling-of-interests method, not
being subject to federal income taxes on a corporate level as they had elected
to be treated as subchapter S corporations prior to being acquired by Paradigm.
LIQUIDITY AND CAPITAL RESOURCES
At October 25, 1997, Paradigm had cash of $579,000 and working capital of
$29.5 million. Paradigm's capitalization, defined as the sum of long-term debt,
long-term payables to U.S. Office Products and stockholder's equity, at October
25, 1997 was approximately $96.3 million. On a pro forma basis at October 25,
1997, Paradigm had working capital of $18.2 million and capitalization of $84.9
million.
During the six months ended October 25, 1997, net cash provided by operating
activities was $10.9 million. Net cash used in investing activities was
$978,000, which consisted primarily of $838,000 used for additions to property
and equipment. Net cash used in financing activities was $10.4 million,
including $7.1 million that was paid to U.S. Office Products as part of U.S.
Office Products' centralized cash management process, $1.3 million in dividends
paid by one of the Pooled Companies and the repayment of $1.1 million in
short-term debt. After the Technology Distribution such cash paid to U.S. Office
Products would be retained but Paradigm will need to use its own cash resources
for acquisitions and other cash requirements.
During the six months ended October 26, 1996, net cash provided by operating
activities was $3.9 million. Net cash used in investing activities was $2.1
million, which consisted primarily of a tax deposit at one of the Pooled
Companies of $1.3 million and $518,000 used for additions to property and
equipment. Net cash used in financing activities was $2.2 million, which
resulted primarily from $2.2 million in dividends paid by certain Pooled
Companies.
During fiscal 1997, net cash provided by operating activities was $6.3
million. Net cash used in investing activities was $3.9 million, which consisted
primarily of $1.8 million in payments of non-recurring acquisition costs in
conjunction with the acquisitions of certain Pooled Companies and a tax deposit
at one of the Pooled Companies of $1.3 million. Net cash used in financing
activities of $6.8 million resulted from the repayment of $5.5 million in
short-term debt and $4.3 million in dividends paid by certain of the Pooled
Companies. These cash outflows were partially offset by $3.6 million in advances
from U.S. Office Products.
During fiscal 1996, net cash provided by operating activities was $4.3
million. Net cash provided by investing activities was $306,000 consisting of
$1.3 million in proceeds from the sale of a non-core line of business at one of
the Pooled Companies which was partially offset by $552,000 used for additions
to property and equipment and $421,000 paid in deposits. Net cash used in
financing activities was $3.0 million which resulted from $7.4 million in
dividends paid by certain of the Pooled Companies, partially offset by
borrowings of $3.7 million and $1.2 million in short-term and long-term debt,
respectively.
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During fiscal 1995, net cash provided by operating activities was $6.1
million. Net cash used in investing activities was $959,000, which primarily
resulted from $888,000 used in additions to property and equipment. Net cash
used in financing activities was $1.7 million, which primarily consisted of $3.1
million in dividends paid by certain of the Pooled Companies partially offset by
$2.1 million in additional long-term borrowings.
Paradigm's anticipated capital expenditures budget for the next twelve
months is approximately $4.0 million. The largest items include $1.5 million for
Year 2000 compliance, and other amounts for infrastructure improvements
(including computer equipment and service vehicles).
Paradigm expects that the Distribution Agreement with U.S. Office Products
will call for the allocation of $5.0 million of debt by U.S. Office Products
resulting in incremental debt of $6.3 million at October 25, 1997, which will be
reflected in the financial statements as a reduction in stockholder's equity.
Paradigm is currently engaged in discussions with potential lenders toward
obtaining a $200.0 million credit facility for a term of five years, to be used
for working capital and acquisitions (the "Credit Facility"). The Credit
Facility is expected to contain financial and other covenants, including
maintenance of certain financial tests and ratios, limitations on capital
expenditures and restrictions on the incurrence of debt or liens, the sale of
assets, the payment of dividends, transactions with affiliates and other
transactions. Paradigm expects that the Credit Facility will be adequate to fund
working capital and capital expenditure needs. Paradigm expects that a portion
of the Credit Facility will also be available to fund the cash portion of future
acquisitions subject to the maintenance of bank covenants.
Paradigm is also exploring the issuance of Paradigm Common Stock in a public
offering concurrent with or soon after the Technology Distribution, the amount
of which has not been determined. As a result of certain U.S. federal income tax
limitations under Section 355 of the Code on the number of shares that Paradigm
can issue in connection with the Technology Distribution without jeopardizing
the tax-free treatment of the Technology Distribution, the amount of Paradigm
capital stock that will be issued in such a public offering has not been
determined and may be limited by the factors discussed in "Risk Factors-- Tax
Matters," "Limitation on Equity Offerings and the Use of Company Common Stock in
Acquisitions," and "The Technology Distribution--U.S. Federal Income Tax
Consequences of the Technology Distribution."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Paradigm's business is not subject to seasonal influences. As Paradigm
continues to complete acquisitions, Paradigm may become subject to seasonal
influences. Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by Paradigm for the products it sells, the mix of
products sold and general economic conditions. Moreover, the operating margins
of companies acquired by Paradigm may differ substantially from those of
Paradigm, which could contribute further to fluctuation in its quarterly
operating results. Therefore, results for any quarter are not necessarily
indicative of the results that Paradigm may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following table sets forth certain unaudited quarterly financial data
for fiscal 1996 and fiscal 1997 (in thousands). The information has been derived
from unaudited consolidated financial statements that,
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in the opinion of management, reflect adjustments consisting only of normal
recurring accruals necessary for a fair presentation of such quarterly
information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................................................... $ 30,536 $ 27,653 $ 27,173 $ 28,693 $ 114,055
Gross profit..................................................... 9,490 7,462 6,249 6,741 29,942
Operating income (loss).......................................... 5,296 3,036 1,222 (122) 9,432
Net income....................................................... 5,315 2,936 1,103 288 9,642
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................................................... $ 34,263 $ 31,898 $ 35,133 $ 34,984 $ 136,278
Gross profit..................................................... 7,982 7,608 9,655 8,904 34,149
Operating income................................................. 2,695 1,779 3,056 2,820 10,350
Net income....................................................... 2,617 1,315 1,708 1,083 6,723
</TABLE>
INFLATION
Paradigm does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, fiscal 1996 or fiscal 1997.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. Paradigm intends to adopt SFAS No. 128 in the fiscal
year ended April 25, 1998.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Paradigm intends to adopt SFAS
No. 130 in the fiscal year ended April 24, 1999.
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INDUSTRY OVERVIEW
Since the mid-1980's, dramatic changes have occurred in the delivery of IT
services to end users. With the development of the personal computer, computing
power has migrated from centralized mainframes using proprietary software
applications to decentralized, scalable architectures and web-enabled systems
integrating personal computers, client/server networking technology, and
fourth-generation object-oriented programs. Attendant to this major expansion of
distributive data processing are corresponding cultural changes in the corporate
delivery of IT services. No longer is information processed, controlled, and
disseminated by a single central corporate data processing function. The arrival
of distributive data processing has reduced the extent to which IT manufacturers
directly relate to end users. The IT fulfillment process has shifted from
manufacturers to third-party IT providers such as Paradigm.
Businesses have turned increasingly to outside organizations such as
Paradigm for efficient design, development, and implementation of major systems,
in part because the solutions frequently are too sophisticated and complex for
in-house employees to undertake themselves. Additionally, the cost to deliver
these complex business solutions has generally exceeded the internal resources
of businesses. Paradigm believes many Fortune 1000 companies typically spend in
excess of $100 million annually on IT and often have complicated needs that
create demand for outside solutions providers to deliver rapid and coordinated
solutions. The risks of selecting inappropriate or outdated technology and
competitive pressures requiring rapid implementation of new systems also have
contributed to the growth and use of outside IT solutions firms.
The business community increasingly demands multifunctional networks that
can simultaneously support any combination of voice, data, and video services
accessible from wireline and wireless terminal devices. For example,
telecommunications service providers are beginning to offer multifunctional
services, such as Integrated Services Digital Network ("ISDN"), which allows for
the dynamic allocation of bandwidth between any combination of voice, data, and
video, and individual call routing. Paradigm believes that traditionally
distinct telecommunications networks and data networks increasingly will be
built on the same technical platforms.
Data communication solutions have also become standard commodity solutions
where hubs and routers are now available to solve the complex problems of
enterprise-wide information flow. These products were developed by a multitude
of new small IT manufacturers. No longer do a few large computer manufacturers
have a stranglehold on data communication system configuration and deployment.
Today, an optimal IT business solution can be designed and implemented by small,
agile business solution providers who have the professional expertise to bring
together products and services from a multitude of vendors.
More recent technical developments have introduced applications that
capitalize on "cyberspace" and create additional opportunities for business
solution companies to provide:
- programming and consulting services for "web-enabled" applications that
allow them to be accessed by customers, employees, and trading partners
using low-cost Internet/intranet technology;
- consulting and design services for Internet-specific products, such as
firewalls, Internet security systems and network management; and
- integrated voice and data systems that provide networks replacing existing
separate telephone systems and cable plants.
Demand for IT services has grown significantly. According to Dataquest, the
worldwide market for IT services was approximately $158.9 billion in 1996 and
will grow to $347.7 billion by the year 2001 at a compound growth rate of 17%.
The domestic market for IT professional services (consulting, systems
integration, applications development, and outsourcing services) was
approximately $73 billion in 1996 and is estimated to grow to approximately $148
billion by the year 2001. Consulting, development, and
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integration markets are experiencing record growth, with revenue growth for the
top 20 consulting, development, and integration companies averaging 25% between
1995 and 1996, according to Dataquest.
Paradigm believes it is well positioned to capitalize on these developments
by providing focused IT expertise in a cost-effective manner to existing and
potential clients, and by identifying and acquiring complementary businesses in
this industry.
BUSINESS
COMPANY OVERVIEW
Paradigm is a single-source provider of a broad range of IT business
solutions. Paradigm currently consists of ten companies with a substantial
history of superior client service and profitability, each focusing on a
specific sector of IT solutions. These companies provide personalized service to
their clients on a regional and local basis. Taken together, these companies
offer Paradigm's clients complementary IT solutions to address a broad spectrum
of IT needs.
Paradigm's complementary IT business solutions include: (a) consulting and
engineering services; (b) systems and network integration services; (c) software
development and integration services; (d) IT support and operational services;
and (e) telephony integration services. Senior management of Paradigm will be
responsible for expanding the focused offerings of the sister companies, through
"cross-selling," to each others' clients. This cross-selling initiative is
intended to provide Paradigm's clients with "one-stop" shopping. Paradigm's
clients include Fortune 1000 companies and middle market companies in a wide
range of industries (including communications, health care, financial services,
government, manufacturing, pharmaceuticals, professional services and
technology).
Paradigm is dedicated to delivering IT services and support for all the
major technology needs of its clients, which include a variety of operating
systems (NT, Unix, VMS, Netware, SunOS, Digital Open VMS, OS/2) on a variety of
hardware platforms (including Intel, Sun, HP, and Digital). In addition,
Paradigm supports the full hardware and software needs of the World Wide Web and
high-end telephony systems.
Paradigm's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. By fostering a long-term relationship
with the customer and providing a superior level of service, Paradigm will seek
to expand its current market presence and reputation, and thereby increase
reported earnings and cash flow. Paradigm has an aggressive growth plan to
increase revenues substantially through organic growth and targeted strategic
acquisitions. Paradigm's organic growth strategies include: (1) capitalizing on
existing cross-selling opportunities; (2) expanding IT consulting and
engineering services; and (3) expanding software development and integration
services. Paradigm's acquisition strategy will be to replicate, in other regions
of the United States, the suite of complementary services currently provided by
its operating companies in the Northeast. Paradigm believes this strategy will
increase its regional cross-selling opportunities. Paradigm will seek to acquire
existing, profitable businesses, rather than start-up operations.
Paradigm is the product of the consolidation by U.S. Office Products,
beginning in 1996, of ten regional IT solutions companies, each with a
significant prior operating history; (1) Aztec; (2) Bay State; (3) Compel; (4)
Digital Network Associates; (5) Entra; (6) Fortran; (7) Mahon; (8) Office
Equipment Service; (9) Professional Computer Solutions; and (10) Professional
Network Services.
Paradigm is headquartered in Boston, Massachusetts, and has approximately
1,067 employees, of whom 692 (or approximately 65%) are skilled technical
professionals. Paradigm is a Delaware corporation that was incorporated on
February 12, 1998. The address of Paradigm's principal executive offices is 52
Roland Street, Boston, Massachusetts 02129 (telephone number: 617/623-3100).
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STRATEGIC OBJECTIVES
Paradigm's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. By fostering a long-term relationship
with the customer and providing a superior level of service, Paradigm will seek
to expand its current market presence and reputation, and thereby increase
reported earnings and cash flow. Paradigm has an aggressive growth plan to
increase revenues substantially through internal organic growth and targeted
strategic acquisitions.
INTERNAL GROWTH. Paradigm's internal growth strategies include:
(i) CAPITALIZING ON EXISTING CROSS-SELLING OPPORTUNITIES. Paradigm's
operating companies are each regional IT solutions providers that specialize in
a sector of the IT solutions industry. Because each of these companies has
extensive project management experience and client relationships, each has
familiarity with the needs of their particular clients that can be shared with
other operating companies. Similarly, clients value having a "one-stop shopping"
relationship with a technology solutions provider who is familiar with their
technical environment. Accordingly, Paradigm believes that its existing
long-term client relationships provide substantial cross-selling opportunities.
Paradigm also believes the synergies created by further integrating its
operating companies will contribute to its internal growth. Paradigm intends to
foster this growth by, among other things, centralizing the identification and
management of such cross-selling opportunities. Paradigm's senior management
will be responsible for expanding cross-selling across Paradigm's business
sectors.
(ii) EXPANDING IT CONSULTING AND ENGINEERING SERVICES. Paradigm will seek to
expand its strategic planning and design services, including: Business Process
Reengineering (BPR), IT needs analysis, technology infrastructure planning and
design, systems architecture development, decision support planning and
analysis, Year 2000 planning and consulting, and solution design and
development. In conjunction with technology infrastructure and design, Paradigm
has contractual strategic alliances with IBM, Sun Microsystems, Hewlett Packard,
Compaq, Digital, and over fifty other manufacturers of IT equipment. Paradigm is
a high-level solutions provider for Microsoft and Oracle database and
application tools. As a result, Paradigm can recommend the best IT business
solution for its clients without being restricted by narrow product offerings.
(iii) EXPANDING SOFTWARE DEVELOPMENT AND INTEGRATION SERVICES. Paradigm will
seek to expand its custom software design and development, Internet/intranet
software solutions design and development, customization of packaged application
business software, data warehousing design and development, object-oriented
design and development, reselling of leading fourth-generation database tools
and applications, and reselling of document management and imaging software.
GROWTH BY ACQUISITION. Paradigm's acquisition strategy will be to identify
profitable, well-managed companies that (i) provide services complementing the
services already provided by Paradigm, and (ii) facilitate Paradigm's expansion
into new geographic areas. Paradigm's acquisition program will have as its goals
the replication of the suite of service companies that it already has in place
in the Northeast region of the U.S. and the expansion of its cross-selling
opportunities. Paradigm will seek to expand its geographic scope by acquiring
existing, profitable businesses, rather than through start-up operations. Given
the highly fragmented nature of the IT services and solutions industry, Paradigm
believes significant acquisition opportunities exist. Paradigm intends to retain
the distinctive skills of the companies it acquires so as to avoid diluting the
focus and market identify of such acquired companies. Paradigm will be able, as
a stand-alone entity, to focus on continued acquisitions in the IT sector
without the competition for financial resources necessary within U.S. Office
Products as a whole.
In furtherance of its acquisition strategy, Paradigm routinely reviews, and
conducts investigations of, potential acquisitions of technology solutions
businesses. When Paradigm believes a favorable opportunity exists, it enters
into discussions with the owners of such businesses regarding the possibility of
an acquisition by Paradigm. As of the date of this Information
Statement/Prospectus, Paradigm does not have
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any agreements for pending acquisitions. Paradigm is currently engaged in
negotiations for a significant acquisition involving a service provider and
systems integration company located in the Midwest. There can be no assurance
that these or any other negotiations will lead to an acquisition agreement, or,
if an agreement is reached, that any or all of the transactions would be
consummated.
In sum, Paradigm, in executing its strategy, intends to adhere to the
following principles:
- "Listen to clients, understand their needs, and fulfill their highest
expectations
- "Maintain a visionary IT outlook which engenders leading-edge solutions
- "Offer proven solutions that meet clients' needs and goals
- "Deliver what is promised and strive to deliver more
- "Treat clients and colleagues with the same consideration with which we
would like to be treated
- "Remember that a happy and satisfied client is our most important legacy"
BUSINESS SOLUTIONS PROVIDED
Paradigm offers its clients a single source for IT business solutions and
services. Paradigm seeks to foster a relationship with the client that will
allow Paradigm to become its clients' "one-stop shop" for total IT business
solutions. The five sectors of Paradigm's business and the services provided
within each sector are:
(1) CONSULTING AND ENGINEERING SERVICES
Paradigm provides strategic planning and design services, including:
- Business Process Reengineering (BPR)
- IT needs analysis
- Technology infrastructure planning and design
- Systems architecture development
- Decision support planning and analysis
- Year 2000 planning and consulting
- Solution design and development
Paradigm's technical and sales professionals deliver these IT business
solutions through the client's chief information officer or chief financial
officer and involve the client's strategic business plan. In providing these
consulting and intellectual services, Paradigm establishes long-term
relationships with its clients that it believes will offer future opportunities
to expand the level of service and support required to meet clients' needs.
Paradigm provides these services through the following operating companies:
Bay State, Digital Network Associates, Entra, Fortran, Professional Computer
Solutions, and Professional Network Services.
(2) SYSTEMS AND NETWORK INTEGRATION SERVICES
Paradigm designs, develops, and implements systems and network solutions,
including:
- LAN and WAN client/server design and integration
- Internet/intranet infrastructure design and integration
- Voice and data communication infrastructure
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- Communication network solutions involving hubs, routers, and switches
- Capacity planning
- Network performance management
- Connectivity and security services
Paradigm delivers enterprise-wide turnkey IT business solutions by combining
its business knowledge with technical expertise concerning hardware, software,
and support capabilities to achieve the client's goals. These solutions address
client needs for high bandwidth applications, from transaction processing to
Internet commerce.
Paradigm designs, develops, and installs full application-ready, distributed
client/server computing platforms and integrates them into existing IT
infrastructures. Capabilities include project planning, technology integration
and installation that maximizes system performance and delivery of computing
solutions in the most cost-effective way, assuring flexible, open systems
capable of integrating into tomorrow's new technologies.
Paradigm provides these services through its Bay State, Compel , Digital
Network Associates, Entra, Mahon, Office Equipment Service, and Professional
Network Services operating companies.
(3) SOFTWARE DEVELOPMENT AND INTEGRATION SERVICES
Paradigm provides software development and integration services, including:
- Custom client/server software design and development
- Internet/intranet software solutions design and development
- Customization of packaged application business software
- Data warehousing design and development
- Object-oriented design and development
- Reseller of leading fourth-generation database tools and applications
- Reseller of document management and imaging software
Paradigm designs systems that allow groups of various sizes in multiple
locations to collaborate across business lines and functions. It uses data
warehousing tools and technology processes to give clients decision support
information, sales and marketing intelligence systems, and other strategic
knowledge tools. Paradigm's Internet services help clients exploit the full
potential of information processing on both the global Internet and on corporate
intranets. Paradigm is a certified reseller and supporter of products of the
leading software manufacturers, including Microsoft, Oracle, Sybase, and
Borland, incorporating the latest technology and techniques to insure each
project's success. Paradigm emphasizes keeping up with the rapid change of
technology by employing highly-qualified strategists and technologists, forming
alliances with key tool and database vendors, participating in beta programs for
new products, and by participating in and attending major technical conferences.
Paradigm provides these services through its Bay State, Entra, Fortran, and
Professional Computer Solutions operating companies.
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(4) INFORMATION TECHNOLOGY SUPPORT AND OPERATIONAL SERVICES
Paradigm's information technology support and operational services include:
- Outsourcing of IT professional services
- Outsourcing of IT product procurement
- Engineering and network management services
- Facility infrastructure cabling and installation
- Warranty support
- Help desk support
- Hardware and software maintenance and support
Paradigm provides both short- and long-term temporary technical expertise to
address a wide range of network operation and project needs, including LAN and
WAN management, systems management, and system administration.
Paradigm provides these services through its Aztec, Bay State, Compel,
Digital Network Associates, Entra, Fortran, Mahon, Office Equipment Service, and
Professional Computer Solutions operating companies.
(5) TELEPHONY INTEGRATION SERVICES
Paradigm provides telephone integration solutions, including:
- Design and integrate telecommunication systems
- Design and integrate ISDN networks
- Telephone PBX and key-system procurement and installation
- Voicemail systems installation
- Voice response units installation
- Warranty support
Paradigm seeks to maintain current knowledge of the attributes of all
telecommunications systems, and to use this knowledge to develop systems for
specific client environments--from simple key systems to complex voice/data
communications systems.
Paradigm recognizes the importance of global ISDN communication, and
therefore has the ability to integrate LAN, data and voice communications, video
conferencing, voicemail and voice processing into the ISDN of the future.
Paradigm provides these services through its Aztec, Fortran, and Mahon
operating companies.
REVENUE SOURCES
Paradigm generates revenues principally from (i) fees for services rendered
to customers (including consulting and engineering services, systems and network
integration services, software development and integration services, information
technology support and operational services, and telephony integration services)
and (ii) sales of products to customers within these business sectors (including
telephony systems, and network and systems hardware and software).
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OPERATIONS
DECENTRALIZED MANAGEMENT. Each of Paradigm's operating companies currently
manages its own business on a decentralized basis, with management direction and
oversight provided by the President and Chief Executive Officer of Paradigm
(presently the Chairman of U.S. Office Products' Technology Solutions division),
and with functional support from U.S. Office Products. Paradigm intends to
continue to operate with a decentralized management structure that it believes
will enable it to deliver superior client service and a motivating environment
for its operating companies, and that will minimize corporate-level overhead.
Paradigm anticipates that finance, accounting, legal, management information
systems, treasury, employee benefits, and certain purchasing arrangements will
be managed or provided on a centralized basis. In addition, Paradigm's senior
management will be responsible for implementing the Company's internal growth
and acquisition strategies. In particular, senior management will be assigned
responsibility for expanding cross-selling opportunities among the operating
companies.
Each of the present operating companies and any subsequently acquired
businesses will manage the professional services and technical support of their
respective businesses in a manner consistent with their traditional local
practices and as dictated by client needs. Depending on its size and the
services it provides, each operating company will employ its own senior
technical and sales professionals, including project managers, engineers,
technicians and developers, marketing personnel, and recruiters and
administrative personnel. Paradigm will seek to identify and implement
opportunities to consolidate overlapping functions and achieve cost savings, if
consistent with the client-service objectives of the operating companies. As
Paradigm grows through acquisitions, especially into other geographic regions,
it may consider establishing regional divisions to consolidate and improve
administrative support functions.
SALES AND MARKETING. Paradigm will focus its sales and marketing efforts on
companies with complex computing and communications requirements located
throughout the United States. To develop its clients, who will be principally
the chief information officers and chief financial officers of corporations,
Paradigm will use a combination of sales engineering and consulting sales
services, including trade shows, professional seminars and radio advertisements.
RETENTION OF SKILLED TECHNICAL AND SALES PROFESSIONALS. Paradigm believes
that it must be able to attract and retain skilled technical and sales
professionals to achieve its business goals. To maximize the long-term retention
of these professionals, Paradigm intends to put in place an aggressive
performance-based employee retention program. The program is expected to
include: stock options; a professional education policy; a progressive human
resources program; and other benefits designed to enhance long-term employee
retention.
COMPETITION
The market for Paradigm's services is highly competitive. Paradigm's
competitors vary in size and in the scope of the products and services that they
offer. Primary competitors generally include consulting and systems integrators,
the consulting divisions of "Big Six" accounting firms, applications development
firms, service groups of computer equipment companies, temporary staffing firms,
and other IT service providers.
Paradigm expects to face competition from established and emerging
companies. Increased competition may result in greater pricing pressure, which
could adversely affect Paradigm's gross margins. In addition, some of Paradigm's
competitors have greater financial, development, technical, marketing, and sales
resources than Paradigm. As a result, Paradigm's competitors may be able to
adapt more quickly to new or emerging technologies and to changes in client
requirements, or to devote greater resources than Paradigm to the development,
promotion, sale, and support of IT products and services. In addition, there is
a risk that clients may elect to increase their internal IT resources to satisfy
their IT solutions needs. There can be no assurance that Paradigm will continue
to provide IT services and products demanded by the market or be able to compete
successfully with existing or new competitors. An inability to compete in
40
<PAGE>
its market effectively would have a material adverse effect on Paradigm's
results of operations, financial condition, and business.
DIFFERENTIATING FACTORS. Paradigm believes that it is differentiated from
its competitors in several key respects:
- the multiyear history of its operating companies in providing successful
IT solutions to clients and in rapidly adapting to dynamic changes in
technology deployment;
- the flexibility and responsiveness provided by its operating companies,
which are focused on specific IT needs of their local clients;
- its contractual vendor alliances with major IT manufacturers, which
Paradigm believes allow it to design optimal solutions for its clients'
needs;
- dedication of senior management to implementing cross selling
opportunities across the operating companies and offering "one-stop"
solutions to clients; and
- an acquisition strategy aimed at achieving growth and geographic expansion
through the acquisition of existing, profitable businesses, rather than
through start-up operations.
LEGAL PROCEEDINGS
Paradigm is involved from time to time in legal proceedings arising in the
ordinary course of business. There are currently no material legal proceedings
pending to which Paradigm is a party or to which any of its property is subject.
EMPLOYEES
At January 1, 1998, Paradigm employed 1,067 persons, of whom approximately
692 were technical professionals. Most of Paradigm's employees work in
professional (including sales), admistrative, and technical positions. 297 of
Paradigm's employees are represented by a labor union or subject to a collective
bargaining agreement. Paradigm believes that its employee relations are
generally good.
PROPERTIES
Paradigm's headquarters are located in Boston, Massachusetts. In addition to
its headquarters, Paradigm leases office and warehouse space in a number of
locations across the United States. Paradigm does not believe that any of these
locations are material to its operations. The leases expire at various times
between 1998 and 2004.
41
<PAGE>
MANAGEMENT OF PARADIGM
DIRECTORS AND EXECUTIVE OFFICERS
Following the Technology Distribution, it is anticipated that the directors
and executive officers of Paradigm will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James E. Claypoole................................... 64 Chairman of the Board, Chief Executive Officer,
President and Director
Elizabeth M. Claypoole............................... 32 Vice President, Treasurer, and Secretary
Jonathan J. Ledecky.................................. 40 Director*
</TABLE>
- ------------------------
* Mr. Ledecky is expected to join the Paradigm Board promptly following the
Technology Distribution.
JAMES E. CLAYPOOLE has served as Chief Executive Officer, Director and
President of Paradigm since February, 1998. He founded and has served as
President of Bay State Computer Group, an operating company of Paradigm, since
1984 and as Chairman of U.S. Office Products' Technology Solutions division
since 1996. For the past 15 years, Mr. Claypoole has served as a member of the
board of directors of the Digital Dealers Association and was its President from
1992 to 1994. He was Chairman of the Digital Dealers Association in 1995. Mr.
Claypoole has also served on a variety of manufacturers' councils. Mr. Claypoole
is the father of Elizabeth M. Claypoole.
ELIZABETH M. CLAYPOOLE has served as Vice President, Treasurer, and
Secretary of Paradigm since February, 1998. She has been Vice President and
Chief Financial Officer of Bay State since 1990. Ms. Claypoole was previously
employed by the accounting firm of Deloitte & Touche LLP. Ms Claypoole is a
certified public accountant and is a member of the American Institute of
Certified Public Accountants. Ms. Claypoole is the daughter of James E.
Claypoole.
JONATHAN J. LEDECKY will serve as a Director of Paradigm and the other
Spin-Off Companies as of the Distribution Date. Mr. Ledecky founded U.S. Office
Products in October 1994, will serve as Chairman of the Board until the
Distribution Date, and served as its Chief Executive Officer until November
1997. He founded Consolidation Capital Corporation in February 1997 and serves
as its Chairman and Chief Executive Officer. Mr. Ledecky has also served as
non-executive Chairman of the Board of USA Floral Products, Inc. since April
1997 and as Non-Executive Chairman of the Board of UniCapital Corporation, since
October 1997. Mr. Ledecky served from 1989 to 1991 as the President of The
Legacy Fund, Inc., a wholly owned subsidiary of Steelcase Inc., the nation's
largest manufacturer of office furniture products. Prior to his tenure at The
Legacy Fund, Inc., Mr. Ledecky was a partner at Adler and Company and Senior
Vice President at Allied Capital Corporation, an investment management company.
Prior to the Technology Distribution, Paradigm expects to elect three
additional directors, at least two of whom will be independent directors.
Directors are elected for one year terms and hold office until their successors
have been elected and qualified or until such director's earlier resignation or
removal, though the Paradigm Board may adopt a classified board before the
distribution date. Executive officers are elected annually and hold office until
the next meeting of stockholders or until such executive officer's earlier
resignation or removal.
The Paradigm Board is expected to create an Audit Committee effective as of
the Distribution Date. The Audit Committee will be charged with reviewing
Paradigm's annual audit and meeting with Paradigm's independent accountants to
review Paradigm's internal control and financial management practices.
The Paradigm Board is expected to create a Compensation Committee effective
as of the Distribution Date. The Compensation Committee will be charged with
making recommendations to the Paradigm Board regarding compensation of
Paradigm's executive officers and administering any stock option plan Paradigm
may adopt.
42
<PAGE>
KEY EMPLOYEES
Paradigm considers the presidents of its operating companies to be key
employees. Information concerning these employees is set forth below:
PHILLIP ARTURI, PRESIDENT OF PROFESSIONAL NETWORK SERVICES, has 17 years of
experience in LAN/WAN infrastructure design, application engineering, and
systems integration. Prior to establishing Professional Network Services in
1989, Mr. Arturi implemented distributed processing solutions at GTE, and served
Caldor as MIS manager.
LARRY GLASER, PRESIDENT OF FORTRAN, established Fortran in the late 1970s as
a service and repair organization for telecommunications equipment. He has been
President of Fortran since that date.
KELBY KNOEDLER, PRESIDENT OF ENTRA, established Entra in 1984 after selling
his ownership-interest in CADO Business Systems of Ohio, which he founded in
1978. Since 1984, he has been the General Manager and President of Entra. He was
previously employed with Burroughs Corporation.
JAMES MAHON, PRESIDENT OF MAHON, has over 26 years of diverse experience in
the communications industry. Mr. Mahon was a founder and past president of
Computer Telephone Corporation (CTC), which went public in 1985. Mr. Mahon, who
has also held corporate-level positions at Rolm and Executone, founded Mahon in
1989 and has been President of Mahon since that date.
DARREN METZ, PRESIDENT OF OFFICE EQUIPMENT SERVICE, has been the President
of Office Equipment Service since 1986. He holds a B.A. in computer science from
the University of Tennessee, and an M.B.A. from the University of Memphis.
JACK MEEHAN, PRESIDENT OF AZTEC, founded Aztec in 1984 and has been its
President and Chief Executive Officer since that date. Previously, Mr. Meehan
was employed by New York Telephone Company (1969) and by Tie/communications
(1972-1984).
ROBERT M. MCCLORY, PRESIDENT OF COMPEL, founded Compel in 1972 and has been
its President since that date. From 1972-1979, he was General Manager of Parsons
Electric Company, a general contractor in Los Angeles, California. He is a
Registered Communications Distribution Designer.
BENJAMIN TANDOWSKI, PRESIDENT OF PROFESSIONAL COMPUTER SOLUTIONS, founded
Professional Computer Solutions in 1984 and has been its President since that
date. Previously, Mr. Tandowski was employed by Exxon Research and Union Carbide
Chemical and Plastics Division. He holds a Ph. D. in mechanical engineering from
the City University of New York, where he was a National Science Fellow.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by Paradigm for services rendered during the year ended April 26, 1997 to
the Chief Executive Officer and the other highly compensated executive officer
of Paradigm (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
--------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------------------------------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
James E. Claypoole....................................... $ 245,000(1) $ 50,000 $ 54,360(2)
Chief Executive Officer,
President and Director
Elizabeth M. Claypoole................................... $ 142,500(1) 7,500(3)
Vice President, Treasurer, and Secretary
</TABLE>
43
<PAGE>
(1) The salaries for the named executives include six months of salary prior to
Bay State Computer Group being acquired by U.S. Office Products. Mr.
Claypoole's salary was increased from $190,000 to $300,000 and Ms.
Claypoole's salary was increased from $125,000 to $160,000 upon the
acquisition of Bay State Computer Group by U.S. Office Products. Mr.
Claypoole's salary was increased to $315,000 in November 1997.
(2) Includes life insurance premiums of $42,360 paid by Bay State on life
insurance policies for which Mr. Claypoole's estate is the beneficiary and
payment of automobile expenses of $12,000.
(3) Options to purchase U.S. Office Products Common Stock.
OPTIONS GRANTED IN FISCAL YEAR 1997
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 26, 1997. As described above, all options were granted by
U.S. Office Products as options to acquire U.S. Office Products Common Stock and
are expected to be replaced with options to acquire Paradigm Common Stock in
connection with the Technology Distribution. See "The Technology
Distribution--Effect on Outstanding U.S. Office Products Options Held by
Paradigm Employees." No options to acquire securities of Paradigm were granted
to the Named Officers in the year ended April 26, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS EXERCISE OPTION TERM(2)
OPTIONS GRANTED IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
- ------------------------------- -------------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James E. Claypoole (3)......... -- -- -- -- -- --
Elizabeth M. Claypoole (4)..... 7,500 4.0% $ 17.83 11/8/2006 $ 84,099 $ 213,123
</TABLE>
(1) The options granted are non-qualified stock options which are exercisable at
the market price on the date of grant generally beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares and which
expire ten years from the date of grant.
(2) Total options granted means all options granted to all employees of the
Technology Solutions division of U.S. Office Products.
(3) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
(4) After the fiscal year ended April 26, 1997, James Claypoole was granted
45,000 options at an exercise price of $15.17, which expire on April 28,
2007.
(5) After the fiscal year ended April 26, 1997, Elizabeth Claypoole was granted
6,000 options at an exercise price of $15.17, which expire on April 28,
2007.
AGGREGATED OPTIONS FISCAL YEAR ENDED APRIL 26, 1997
AND FISCAL YEAR-END 1997 OPTION VALUES
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 26, 1997. No options were exercised
by the Named Officers during the fiscal year ended
44
<PAGE>
April 26, 1997. As described above, all options were granted by U.S. Office
Products as options to acquire U.S. Office Products Common Stock and are
expected to be replaced with options to acquire shares of Paradigm Common Stock
in connection with the Technology Distribution. See "The Technology
Distribution--Effect on Outstanding U.S. Office Products Options Held by
Paradigm Employees."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY(3) OPTIONS AT FISCAL YEAR
IN THE MONEY OPTIONS END($)(4)
SHARES ACQUIRED AT APRIL 26, 1997 AT APRIL 26, 1997(1)
ON EXERCISE VALUE -------------------------- ----------------------------------
NAME (#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------- ------------- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
James E.
Claypoole........ -- -- -- -- -- --
Elizabeth M.
Claypoole........ -- -- -- 1,875 5,625 -- --
</TABLE>
(1) Represents the number of shares received upon exercise or, if no shares were
received, the number of shares with respect to which options were exercised.
(2) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of the U.S.
Office Products Common Stock on the date of exercise.
(3) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(4) The value of unexercised options represents the difference between the
exercise price of such options and $15.08, the closing market price of U.S.
Office Products Common Stock at April 26, 1997.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Jonathan J. Ledecky entered into the Ledecky Services Agreement with U.S.
Office Products on January 13, 1998, to become effective on the Distribution
Date and contingent on the consummation of the Distributions. The Ledecky
Services Agreement will expire on September 30, 1998 if none of the
Distributions has occurred by that date. If the Ledecky Services Agreement
becomes effective, it will replace his November 4, 1997 employment agreement
with U.S. Office Products.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products and also provides certain benefits and obligations with
respect to Paradigm and the other Spin-Off Companies. Under the Ledecky Services
Agreement, Mr. Ledecky will remain an employee of U.S. Office Products, at an
annual salary of $48,000, through June 30, 2001, with the contract terminable
only if he violates the non-competition provision of the agreement.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions until the fourth anniversary of the Distribution
Date. These provisions generally restrict Mr. Ledecky from, among other things,
investing in or working for or on behalf of any business selling any products or
services in direct competition with U.S. Office Products and the Spin-Off
Companies (collectively, the "U.S. Office Products Companies"), within 100 miles
of any location where any of the U.S. Office Products Companies conducts
business. (For this purpose, "products or services" are those in effect as of
January 13, 1998.) The Ledecky Services Agreement prohibits Mr. Ledecky from
calling upon managerial employees of the U.S. Office Products Companies to hire
them away and from calling upon customers of the U.S. Office Products Companies
to solicit or sell products or services in direct competition with the U.S.
Office Products Companies. Mr. Ledecky is also barred from hiring away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by the U.S. Office Products Companies. The Ledecky Services Agreement
includes Mr. Ledecky's agreement that four years is a reasonable period of time
for this provision and that U.S. Office Products will assign to Paradigm and the
other Spin-Off
45
<PAGE>
Companies the ability to enforce the non-competition provisions described above
as to their own businesses.
Under the Ledecky Services Agreement, the U.S. Office Products Board has
agreed that Mr. Ledecky will receive a stock option for Paradigm Common Stock
from Paradigm as of the Distribution Date. The U.S. Office Products Board
intends the option to be compensation for Mr. Ledecky's services to Paradigm as
a director, and certain services as an employee. The option will cover up to
7.5% of the outstanding Paradigm Common Stock determined as of the Distribution
Date, with no anti-dilution provisions in the event of issuance of additional
shares of Paradigm Common Stock (other than with respect to stock splits or
reverse stock splits). The option will have a per share exercise price equal to
the price of the first trade (the "Initial Trading Price") on the day Paradigm
Common Stock is first publicly traded (the "First Trade Date").
Mr. Ledecky's option will be fully exercisable as to two-thirds of the
shares it covers when granted. The remainder of the option will become
exercisable as follows: (i) as of the 18-month anniversary of the First Trade
Date if the average closing trading price over the 15 business days preceding
that anniversary date exceeds the Initial Trading Price (with the prices
adjusted for stock splits or reverse stock splits or other corporate events that
cause Paradigm to adjust substantially all outstanding options) by at least 25%
or (ii) as of the sixth anniversary of the First Trade Date if the clause (i)
condition is not met and Mr. Ledecky is still employed by Paradigm at that
anniversary. Option exercisability will accelerate if Mr. Ledecky dies before
the option expires or if and to the extent that Paradigm accelerates the
exercise schedule of options for substantially all management option holders.
All unexercised portions of the option will expire ten years after its date of
grant or, if applicable, as of the date Mr. Ledecky violates his non-competition
agreement with Paradigm.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
In October 1996, Bay State entered into an employment agreement with James
E. Claypoole, its Chief Executive Officer and President. The employment
agreement provides for an initial three-year term and successive one-year
extensions at the option of Bay State. Pursuant to this agreement, Mr. Claypoole
is entitled to receive a minimum annual salary of $300,000, incentive bonuses as
determined by the Board of Directors of Bay State and all perquisites and
benefits customarily provided by Bay State to its employees. In the event that
Mr. Claypoole's employment is terminated for any reason other than cause, Mr.
Claypoole's employment agreement provides that Mr. Claypoole is entitled to
receive his base salary and benefits for the longer of (i) three months from the
date of termination, or (ii) the remaining time under the initial term of the
employment agreement. The employment agreement also prohibits Mr. Claypoole from
engaging in certain activities deemed competitive with Bay State or its
affiliates during the duration of his employment with Bay State and for the
longer of (i) a period of two years thereafter, or (ii) as long as Mr. Claypoole
continues to receive severance payments from Bay State.
In October 1996, Bay State entered into an employment agreement with
Elizabeth M. Claypoole, its Vice President, Treasurer, and Secretary. The
employment agreement provides for an initial three-year term and successive
one-year extensions at the option of Bay State. Pursuant to this agreement, Ms.
Claypoole is entitled to receive a minimum annual salary of $160,000, incentive
bonuses as determined by the President of Bay State and all perquisites and
benefits customarily provided by Bay State to its employees. In the event that
Ms. Claypoole's employment is terminated for any reason other than cause, Ms.
Claypoole's employment agreement provides that Ms. Claypoole is entitled to
receive her base salary and benefits for the longer of (i) three months from the
date of termination, or (ii) the remaining time under the initial term of the
employment agreement. The employment agreement also prohibits Ms. Claypoole from
engaging in certain activities deemed competitive with Bay State or its
affiliates during the duration of her employment with Bay State and for the
longer of (i) a period of two years thereafter, or (ii) as long as Ms. Claypoole
continues to receive severance payments from Bay State.
46
<PAGE>
Effective as of the Distribution Date, Bay State Computer Group will assign
Mr. and Ms. Claypooles' employment agreements to Paradigm.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Paradigm Board intends to create a Compensation Committee effective
prior to the Distribution Date. The Compensation Committee will be charged with
determining or making recommendations to the Paradigm Board regarding the
compensation of executive officers of Paradigm and administering any stock
option plan Paradigm may adopt.
Until a Compensation Committee of the Paradigm Board is created, decisions
regarding the compensation of executive officers of Paradigm will be made by the
Paradigm Board. No member of the Paradigm Board has ever been an officer of
Paradigm or any of its subsidiaries, except that Mr. Ledecky was the Chief
Executive Officer of U.S. Office Products until November 5, 1997 and will be
Chairman of U.S. Office Products until the Distribution Date, and Mr. Claypoole
has been Chairman of U.S. Office Products' Technology Solutions division.
RELATED PARTY TRANSACTIONS
On October 15, 1996, U.S. Office Products acquired Bay State, which will be
a wholly-owned subsidiary of Paradigm following the Technology Distribution,
from James E. Claypoole, Paradigm's Chairman of the Board, Chief Executive
Officer, and President, and Thomas J. Foley, Executive Vice President of Bay
State, for 906,576 shares of U.S. Office Products Common Stock valued at $20.74
per share. In connection with the acquisition, Bay State also entered into an
employment agreement with Mr. Claypoole at an annual base salary of $300,000 and
an employment agreement with Elizabeth M. Claypoole, Paradigm's Vice President,
Treasurer and Secretary, at an annual base salary of $160,000.
47
<PAGE>
PRINCIPAL STOCKHOLDERS OF PARADIGM
The following table sets forth the number and percentage of outstanding
shares of Paradigm Common Stock that are expected to be beneficially owned by
(i) all persons known by Paradigm to own beneficially more than 5% of U.S.
Office Products Common Stock, (ii) each director and each Named Officer who is a
stockholder, and (iii) all directors and executive officers as a group. The
table reflects shares of U.S. Office Products Common Stock owned as of February
12, 1998. Assuming a Distribution Ratio of one for one, the number and percent
of shares of Paradigm Common Stock beneficially owned by each of the following
should be equal to the number of shares of U.S. Office Products Common Stock
owned by them on the Distribution Date (which will exclude any shares purchased
from the persons in the Tender Offer), except that the number of shares
beneficially owned with respect to options that are exercisable within 60 days
of the Distribution Date may be different depending on the ratio at which
options for U.S. Office Products Common Stock are replaced with options for
Paradigm Common Stock. See "The Technology Distribution--Effect on Outstanding
U.S. Office Products Options Held by Paradigm Employees." Except as otherwise
indicated, the business address of each of the following is 52 Roland Street,
Boston, Massachusetts 02129.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------------------------------------------ ------------ ---------
<S> <C> <C>
James E. Claypoole (1).................................................................... 774,136 *
Jonathan J. Ledecky (2)................................................................... 2,428,125 1.7%
Elizabeth M. Claypoole (3)................................................................ 3,375 *
All current executive officers and directors as a group (four persons).................... 3,663,715 2.6%
5% STOCKHOLDERS:
FMR Corp (4).............................................................................. 15,754,406 11.2%
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company (4).............................................. 8,262,886 5.9%
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 11,250 shares which may be acquired upon exercise of options
exercisable within 60 days following the Technology Distribution.
(2) In addition, Mr. Ledecky has an option that will become exercisable on the
Distribution Date for a number of shares of Paradigm Common Stock equal to
5% of the shares issued and outstanding on the Distribution Date. See
"Management of Paradigm--Director Compensation and Other Arrangements."
Excludes options for U.S. Office Products Common Stock that will not be
converted into options for Paradigm Common Stock at the time of the
Technology Distribution.
(3) Includes 3,375 shares which may be acquired upon exercise of options
exercisable within 60 days following the Technology Distribution.
(4) Based upon a Schedule 13G filed with the SEC.
48
<PAGE>
DESCRIPTION OF PARADIGM CAPITAL STOCK
GENERAL
At the time of the Technology Distribution, Paradigm's authorized capital
stock is expected to consist of shares of Paradigm Common Stock, par value
$.001 per share, and shares of preferred stock, par value $.001 per share
(the "Preferred Stock"). At the time of the Technology Distribution, Paradigm is
expected to have outstanding approximately shares of Paradigm Common Stock
and no shares of Preferred Stock. Set forth below is a summary of the terms of
Paradigm's authorized capital stock.
PARADIGM COMMON STOCK
The holders of Paradigm Common Stock are entitled to one vote for each share
on all matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of Paradigm Common Stock are entitled to such dividends as may be
declared in the discretion of the Paradigm Board out of funds legally available
therefore. See "Dividend Policy." The holders of Paradigm Common Stock are
entitled to share ratably in the net assets of Paradigm upon liquidation after
payment or provision for all liabilities and any preferential liquidation rights
of any Preferred Stock then outstanding. The holders of Paradigm Common Stock
have no preemptive rights to purchase shares of stock of Paradigm. Shares of
Paradigm Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of Paradigm. All of the shares of Paradigm
Common Stock to be distributed pursuant to the Technology Distribution will be
fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Paradigm Board as
shares of one or more classes or series. Subject to the provisions of Paradigm's
Certificate of Incorporation and limitations prescribed by law, the Paradigm
Board is expressly authorized to adopt resolutions to issue the shares, to fix
the number of shares and to change the number of shares constituting any series,
and to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights, and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. Paradigm has no current plans to issue any shares of Preferred
Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Paradigm Board to render more difficult or to discourage an attempt to obtain
control of Paradigm by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of Paradigm's management. The
issuance of shares of the Preferred Stock pursuant to the Paradigm Board's
authority described above may adversely affect the rights of the holders of
Paradigm Common Stock. For example, Preferred Stock issued by Paradigm may rank
prior to Paradigm Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Paradigm Common Stock. Accordingly, the issuance of shares of Preferred Stock
may discourage bids for Paradigm Common Stock or may otherwise adversely affect
the market price of Paradigm Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
Paradigm is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such
49
<PAGE>
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. Paradigm has not adopted such an amendment
to its Certificate of Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to Paradigm's Certificate of Incorporation and under Delaware law,
directors of Paradigm are not liable to Paradigm or its stockholders for
monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
Paradigm has not yet appointed a Transfer Agent and Registrar for Paradigm
Common Stock but expects to do so prior to the Technology Distribution.
EXPERTS
The financial statements included in this Information Statement/Prospectus
(except as they relate to the unaudited interim periods) have been audited by
various independent accounts. The companies and periods covered by these audits
are indicated in the individual accountants' reports. Such financial statements
have been so included in reliance on the reports of the various independent
accountants given on the authority of such firms as experts in auditing and
accounting.
LEGAL MATTERS
The validity of shares of Paradigm Common Stock and certain tax matters
relating to the Distributions will be passed upon on behalf of Paradigm and U.S.
Office Products by Wilmer, Cutler & Pickering, Washington, D.C.
50
<PAGE>
PARADIGM CONCEPTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
---------
PARADIGM CONCEPTS, INC.
Introduction to Pro Forma Financial Information F-2
Pro Forma Combined Balance Sheet as of October 25, 1997 (unaudited) F-3
Pro Forma Combined Statement of Income for the six months ended October 25, 1997
(unaudited) F-4
Pro Forma Combined Statement of Income for the six months ended October 26, 1996
(unaudited) F-5
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited) F-6
Note to Pro Forma Combined Financial Statements F-7
Report of Price Waterhouse LLP, Independent Accountants F-8
Report of Rubin, Koehmstedt and Nadler, Independent Auditors F-9
Consolidated Balance Sheet as of April 30, 1996, April 25, 1997 and October 25,
1997 (unaudited) F-10
Consolidated Statement of Income for the years ended March 31, 1995 and 1996, the
fiscal year ended April 26, 1997 and the six months ended October 26, 1996
(unaudited) and October 25, 1997 (unaudited) F-11
Consolidated Statement of Stockholder's Equity for the years ended March 31, 1995
and 1996, the fiscal year ended April 26, 1997 and the six months ended October
25, 1997 (unaudited) F-12
Consolidated Statement of Cash Flows for the years ended March 31, 1995 and 1996,
the fiscal year ended April 26, 1997 and the six months ended October 26, 1996
(unaudited) and October 25, 1997 (unaudited) F-13
Notes to Consolidated Financial Statements F-15
AZTEC EAST, INC. AND AFFILIATES
Report of B.N. Kozin Company, Independent Accountants F-27
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-28
Statement of Operations for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-29
Statement of Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited) F-30
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-31
Notes to Financial Statements F-32
COMPEL CORPORATION
Report of Price Waterhouse LLP, Independent Accountants F-35
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-36
Statement of Income for the years ended December 31, 1994, 1995 and 1996 and the
nine months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-37
Statement of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997 (unaudited) F-38
Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-39
Notes to Financial Statements F-40
</TABLE>
F-1
<PAGE>
PARADIGM CONCEPTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
Paradigm Concepts, Inc. (the "Company"), formerly the Technology Solutions
division of U.S. Office Products Company ("U.S. Office Products"), through the
distribution of shares of the Company to U.S. Office Products stockholders (the
"Distribution") and to acquisitions completed through February 13, 1998.
The pro forma combined balance sheet gives effect to the Technology
Distribution as if such transaction had occurred as of the Company's most recent
balance sheet date, October 25, 1997.
The pro forma combined statements of income for the fiscal year ended April
26, 1997 and the six month periods ended October 25, 1997 and October 26, 1996
give effect to the Technology Distribution and the acquisitions of Compel
Corporation, Aztec East, Inc. and Affiliates ("Aztec East, Inc.") and three
other individually insignificant companies in business combinations accounted
for under the purchase method which have been completed during the fiscal year
ending April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"), as if all such
transactions had occurred on May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes the audited financial information of the Company for the year ended
April 26, 1997 and the unaudited financial information of the Fiscal 1998
Purchase Acquisitions for the period from May 1, 1996 through April 26, 1997.
The pro forma combined statements of income for the six months ended October
25, 1997 includes the unaudited financial information of the Company for the six
months ended October 25, 1997 and the unaudited financial information of the
Fiscal 1998 Purchase Acquisitions for the period from April 27, 1997 through the
earlier of their respective dates of acquisition or October 25, 1997.
The pro forma combined statement of income for the six months ended October
26, 1996 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
October 26, 1996.
The historical financial statements of the Company give retroactive effect
to the results of the five companies acquired by the Company during the fiscal
year ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overhead costs have been allocated to the
Company using one of several factors, dependent on the nature of the costs being
allocated, including, revenues, number and size of acquisitions and number of
employees.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-2
<PAGE>
PARADIGM CONCEPTS, INC.
PRO FORMA COMBINED BALANCE SHEET
OCTOBER 25, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARADIGM
CONCEPTS, PRO FORMA PRO FORMA
INC. ADJUSTMENTS COMBINED
------------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 579 $ (579)(a) $
Accounts receivable, net............................................ 42,406 42,406
Inventories......................................................... 10,169 10,169
Receivable from U.S. Office Products................................ 10,799 (10,799)(a)
Prepaid and other current assets.................................... 6,343 6,343
------------- ----------- ----------
Total current assets............................................ 70,296 (11,378) 58,918
Property and equipment, net........................................... 4,968 4,968
Goodwill, net......................................................... 62,204 62,204
Other assets.......................................................... 433 433
------------- ----------- ----------
Total assets.................................................... $ 137,901 $ (11,378) $ 126,523
------------- ----------- ----------
------------- ----------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt..................................................... $ 1,306 $ $ 1,306
Accounts payable.................................................... 24,612 24,612
Accrued compensation................................................ 4,799 4,799
Other accrued liabilities........................................... 10,044 10,044
------------- ----------- ----------
Total current liabilities....................................... 40,761 40,761
Long-term debt........................................................ 1,527 2,167(a) 3,694
Long-term payable to U.S. Office Products............................. 7,224 (7,224)(a)
Deferred income taxes................................................. 857 857
------------- ----------- ----------
Total liabilities............................................... 50,369 (5,057) 45,312
------------- ----------- ----------
Stockholder's equity:
Divisional equity................................................... 72,069 (6,321)(a) 65,748
Retained earnings................................................... 15,463 15,463
------------- ----------- ----------
Total stockholder's equity...................................... 87,532 (6,321) 81,211
------------- ----------- ----------
Total liabilities and stockholder's equity...................... $ 137,901 $ (11,378) $ 126,523
------------- ----------- ----------
------------- ----------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-3
<PAGE>
PARADIGM CONCEPTS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
PARADIGM INDIVIDUALLY
CONCEPTS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA
INC. EAST, INC. CORPORATION ACQUISITIONS ADJUSTMENTS COMBINED
------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 79,605 $ 9,808 $ 20,545 $ 18,209 $ $ 128,167
Cost of revenues.................... 60,840 6,056 14,452 13,228 94,576
------------- ----------- ----------- ----------- ----------- ----------
Gross profit.................. 18,765 3,752 6,093 4,981 33,591
Selling, general and administrative
expenses.......................... 12,292 2,407 2,914 3,311 (312)(b) 20,612
Amortization expense................ 37 12 789(d) 838
------------- ----------- ----------- ----------- ----------- ----------
Operating income.............. 6,436 1,333 3,179 1,670 (477) 12,141
Other (income) expense:
Interest expense.................. 50 87 71 127 (135)(f) 200
Interest income................... (267) (39) (20) 326(f)
Other............................. 11 (117) (30) (90) (226)
------------- ----------- ----------- ----------- ----------- ----------
Income before provision for income
taxes............................. 6,642 1,402 3,158 1,633 (668) 12,167
Provision for income taxes.......... 2,657 55 49 339 2,253(g) 5,353
------------- ----------- ----------- ----------- ----------- ----------
Net income.......................... $ 3,985 $ 1,347 $ 3,109 $ 1,294 $ (2,921) $ 6,814
------------- ----------- ----------- ----------- ----------- ----------
------------- ----------- ----------- ----------- ----------- ----------
Weighted average shares
outstanding....................... 95,963(h)
Net income per share................ $ 0.07
----------
----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-4
<PAGE>
PARADIGM CONCEPTS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 26, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
PARADIGM INDIVIDUALLY
CONCEPTS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA
INC. EAST, INC. CORPORATION ACQUISITIONS ADJUSTMENTS COMBINED
------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 66,161 $ 12,906 $ 16,832 $ 17,701 $ $ 113,600
Cost of revenues.................... 50,571 8,843 12,525 12,879 84,818
------------- ----------- ----------- ----------- ----------- ----------
Gross profit.................. 15,590 4,063 4,307 4,822 28,782
Selling, general and administrative
expenses.......................... 10,011 3,156 2,378 3,887 (1,460)(b) 18,507
535(c)
Amortization expense................ 10 815(d) 825
Non-recurring acquisition costs..... 1,105 (1,105)(e)
------------- ----------- ----------- ----------- ----------- ----------
Operating income.............. 4,474 897 1,929 935 1,215 9,450
Other (income) expense:
Interest expense.................. 226 80 85 104 (295)(f) 200
Interest income................... (128) (60) (10) 198(f)
Other............................. (58) (153) (50) (68) (329)
------------- ----------- ----------- ----------- ----------- ----------
Income before provision for income
taxes............................. 4,434 1,030 1,904 899 1,312 9,579
Provision for income taxes.......... 502 42 38 220 3,413(g) 4,215
------------- ----------- ----------- ----------- ----------- ----------
Net income.......................... $ 3,932 $ 988 $ 1,866 $ 679 $ (2,101) $ 5,364
------------- ----------- ----------- ----------- ----------- ----------
------------- ----------- ----------- ----------- ----------- ----------
Weighted average shares
outstanding....................... 95,963(h)
Net income per share................ $ 0.06
----------
----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-5
<PAGE>
PARADIGM CONCEPTS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
PARADIGM INDIVIDUALLY
CONCEPTS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA
INC. EAST INC. CORPORATION ACQUISITIONS ADJUSTMENTS COMBINED
------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 136,278 $ 23,626 $ 33,630 $ 35,378 $ $ 228,912
Cost of revenues........................ 102,129 15,553 25,407 26,061 169,150
------------- ----------- ----------- ----------- ----------- ----------
Gross profit...................... 34,149 8,073 8,223 9,317 59,762
Selling, general and administrative
expenses.............................. 21,525 6,063 4,961 8,138 (2,172)(b) 39,197
682(c)
Amortization expense.................... 22 1,629(d) 1,651
Non-recurring acquisition costs......... 2,274 (2,274)(e)
------------- ----------- ----------- ----------- ----------- ----------
Operating income.................. 10,350 1,988 3,262 1,179 2,135 18,914
Other (income) expense:
Interest expense...................... 324 174 124 210 (432)(f) 400
Interest income....................... (168) (111) (27) (3) 309(f)
Other................................... (53) (323) (67) (136) (579)
------------- ----------- ----------- ----------- ----------- ----------
Income before provision for income
taxes................................. 10,247 2,248 3,232 1,108 2,258 19,093
Provision for income taxes.............. 3,524 173 39 245 4,420(g) 8,401
------------- ----------- ----------- ----------- ----------- ----------
Net income.............................. $ 6,723 $ 2,075 $ 3,193 $ 863 $ (2,162) $ 10,692
------------- ----------- ----------- ----------- ----------- ----------
------------- ----------- ----------- ----------- ----------- ----------
Weighted average shares outstanding..... 95,963(h)
Net income per share.................... $ 0.11
----------
----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-6
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Represents payment of debt with available cash, the forgiveness of the
receivable from U.S. Office Products and the allocation of a total of $5,000
of debt to the Company at the date of the Distribution. The forgiveness of
the receivable and the incremental debt allocated to the Company have been
reflected as a reduction of capital of $6,321.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(b) Adjustment to reflect reductions in executive compensation as a result of
the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions.
(c) Adjustment to reflect additional corporate overhead during the period prior
to the formation of the Technology Solutions division by U.S. Office
Products as if the division had been formed at May 1, 1996.
(d) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 Purchase
Acquisitions for the periods prior to the respective dates of acquisition.
The Company has recorded goodwill amortization in the historical financial
statements from the respective dates of acquisition forward. The goodwill is
being amortized over periods ranging from 25-40 years.
(e) Adjustment to reflect the reduction in non-recurring acquisition costs
related to pooling-of-interests business combinations of $2,274 for the
fiscal year ended April 26, 1997 and $1,105 for the six months ended October
26, 1996.
(f) Adjustment to reflect the increase in interest expense and reduction in
interest income resulting from the forgiveness of the receivable from U.S.
Office Products and the net allocation of $6,321 of debt by U.S. Office
Products.
(g) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 44%. The
difference between the effective tax rate of 44% and the statutory tax rate
of 35% relates primarily to state income taxes and non-deductible goodwill.
(h) The weighted average shares outstanding used to calculate pro forma earnings
per share is based upon 95,963 shares of common stock outstanding for the
periods. This is based upon the most current number of shares of common
stock of U.S. Office Products outstanding of 133,000 less 37,037 shares
expected to be repurchased by U.S. Office Products in the Tender Offer, and
assumes a distribution ratio of one share of Paradigm Common Stock for each
share of U.S. Office Products Common Stock. The actual distribution ratio
will be determined prior to effectiveness of the Registration Statement of
which this Information Statement/Prospectus is a part, and is expected to be
less than one share of Paradigm Common Stock for every one share of U.S.
Office Products Common Stock.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Paradigm Concepts, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Paradigm Concepts, Inc.
("Paradigm") and its subsidiaries at April 30, 1996 and April 26, 1997, and the
results of their operations and their cash flows for the fiscal years ended
March 31, 1995, March 31, 1996 and April 26, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Paradigm's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Fortran Corp., a wholly-owned subsidiary, which
statements reflect total revenues of $20,243,000 and $20,775,000 for the fiscal
years ended March 31, 1995 and 1996, respectively. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Fortran
Corp., is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 4, 1998
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-9
<PAGE>
PARADIGM CONCEPTS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, OCTOBER 25,
ASSETS 1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents.................................... $ 5,609 $ 1,106 $ 579
Accounts receivable, less allowance for doubtful accounts of
$123, $351 and $790, respectively.......................... 19,966 22,342 42,406
Inventories.................................................. 4,451 3,904 10,169
Receivable from U.S. Office Products......................... 1,216 10,799
Prepaid expenses and other current assets.................... 1,287 4,575 6,343
--------- --------- -----------
Total current assets..................................... 31,313 33,143 70,296
Property and equipment, net.................................... 1,755 2,163 4,968
Goodwill, net.................................................. 62,204
Other assets................................................... 877 2,005 433
--------- --------- -----------
Total assets............................................. $ 33,945 $ 37,311 $ 137,901
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Short-term debt.............................................. $ 5,580 $ 76 $ 1,306
Accounts payable............................................. 10,805 11,803 24,612
Accrued compensation......................................... 1,857 1,651 4,799
Other accrued liabilities.................................... 4,407 6,345 10,044
--------- --------- -----------
Total current liabilities................................ 22,649 19,875 40,761
Long-term debt................................................. 799 167 1,527
Long-term payable to U.S. Office Products...................... 4,786 7,224
Deferred income taxes.......................................... 857 857
--------- --------- -----------
Total liabilities........................................ 23,448 25,685 50,369
--------- --------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity............................................ 148 148 72,069
Retained earnings............................................ 10,349 11,478 15,463
--------- --------- -----------
Total stockholder's equity............................... 10,497 11,626 87,532
--------- --------- -----------
Total liabilities and stockholder's equity............... $ 33,945 $ 37,311 $ 137,901
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
PARADIGM CONCEPTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, OCTOBER 26, OCTOBER 25,
1995 1996 1997 1996 1997
----------- ----------- ---------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.......................................... $ 74,645 $ 97,567 $ 111,746 $ 54,569 $ 64,541
Services.......................................... 14,354 16,488 24,532 11,592 15,064
----------- ----------- ---------- ----------- -----------
Total revenues.................................. 88,999 114,055 136,278 66,161 79,605
----------- ----------- ---------- ----------- -----------
Cost of revenues:
Products.......................................... 58,351 76,640 91,148 45,521 53,426
Services.......................................... 7,507 7,473 10,981 5,050 7,414
----------- ----------- ---------- ----------- -----------
Total cost of revenues.......................... 65,858 84,113 102,129 50,571 60,840
----------- ----------- ---------- ----------- -----------
Gross profit.................................... 23,141 29,942 34,149 15,590 18,765
Selling, general and administrative expenses........ 14,942 20,510 21,525 10,011 12,329
Non-recurring acquisition costs..................... 2,274 1,105
----------- ----------- ---------- ----------- -----------
Operating income................................ 8,199 9,432 10,350 4,474 6,436
Other (income) expense:
Interest expense.................................. 331 420 324 226 50
Interest income................................... (118) (416) (168) (128) (267)
Other............................................. (111) (964) (53) (58) 11
----------- ----------- ---------- ----------- -----------
Income before provision for income taxes............ 8,097 10,392 10,247 4,434 6,642
Provision for income taxes.......................... 401 750 3,524 502 2,657
----------- ----------- ---------- ----------- -----------
Net income.......................................... $ 7,696 $ 9,642 $ 6,723 $ 3,932 $ 3,985
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Unaudited pro forma net income (see Note 9)......... $ 5,081 $ 6,441 $ 4,592 $ 3,010 $ 3,985
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
PARADIGM CONCEPTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
DIVISIONAL RETAINED STOCKHOLDER'S
EQUITY EARNINGS EQUITY
----------- --------- -------------
<S> <C> <C> <C>
Balance at March 31, 1994................................................... $ 440 $ 6,305 $ 6,745
Transactions of Pooled Companies:
Capital distribution.................................................... (292) (292)
Cash dividends.......................................................... (3,087) (3,087)
Net income................................................................ 7,696 7,696
----------- --------- -------------
Balance at March 31, 1995................................................... 148 10,914 11,062
Cash dividends at Pooled Companies........................................ (7,389) (7,389)
Adjustments to conform the fiscal year-ends of Pooled Companies........... (2,818) (2,818)
Net income................................................................ 9,642 9,642
----------- --------- -------------
Balance at April 30, 1996................................................... 148 10,349 10,497
Cash dividends paid and declared at Pooled Companies...................... (5,594) (5,594)
Net income................................................................ 6,723 6,723
----------- --------- -------------
Balance at April 26, 1997................................................... 148 11,478 11,626
Unaudited data:
Issuance of U.S. Office Products common stock in conjunction with
acquisitions............................................................ 71,921 71,921
Net income................................................................ 3,985 3,985
----------- --------- -------------
Balance at October 25, 1997 (unaudited)..................................... $ 72,069 $ 15,463 $ 87,532
----------- --------- -------------
----------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
PARADIGM CONCEPTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, OCTOBER 26, OCTOBER 25,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 7,696 $ 9,642 $ 6,723 $ 3,932 $ 3,985
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............. 454 494 541 217 416
Non-recurring acquisition costs................... 2,274 1,105
Gain on sale of division at Pooled Company........ (761)
Deferred taxes.................................... (66) 645
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................. (5,963) (5,441) (2,376) (1,889) (3,607)
Inventory....................................... (2,162) 595 547 1,324 237
Prepaid expenses and other current assets....... 140 (585) (3,120) 198 2,588
Accounts payable................................ 4,272 (475) 997 (1,532) 4,159
Accrued liabilities............................. 1,652 867 20 563 3,084
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities..... 6,089 4,270 6,251 3,918 10,862
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals......................................... (888) (552) (949) (518) (838)
Payments of non-recurring acquisition costs......... (1,814) (317) (460)
Deposits............................................ (83) (421) (1,312) (1,287)
Cash received in sale of division at Pooled
Company........................................... 1,275
Cash received in acquisitions....................... 320
Other............................................... 12 4 161
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.................................. (959) 306 (3,914) (2,122) (978)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, net.... (491) 3,683 (5,504) (1,299) (1,103)
Proceeds from issuance of long-term debt............ 2,126 1,196 305 17
Payments of long-term debt.......................... (698) (937) (32) (843)
Payments of dividends at Pooled Companies........... (3,087) (7,389) (4,274) (2,243) (1,320)
Advances from (payments to) U.S. Office Products
Company........................................... 3,570 1,400 (7,145)
Capital distributed to stockholders of Pooled
Company........................................... (292)
Net change in cash due to conforming fiscal year-
ends of certain Pooled Companies.................. 176
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities......... (1,744) (3,032) (6,840) (2,157) (10,411)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.. 3,386 1,544 (4,503) (361) (527)
Cash and cash equivalents at beginning of period...... 679 4,065 5,609 5,609 1,106
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 4,065 $ 5,609 $ 1,106 $ 5,248 $ 579
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-13
<PAGE>
PARADIGM CONCEPTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED MONTHS ENDED
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, OCTOBER 26, OCTOBER 25,
1995 1996 1997 1996 1997
------------- ------------- ----------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 335 $ 526 $ 282 $ 139 $ 64
Income taxes paid................................... $ 422 $ 452 $ 2,460 $ 491 $ 704
</TABLE>
The Company issued common stock in connection with certain business
combinations during the six months ended October 25, 1997. The fair values of
the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED MONTHS ENDED
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, OCTOBER 26, OCTOBER 25,
1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable.................................. $ $ $ $ $ 16,457
Inventories.......................................... 6,503
Prepaid expenses and other current assets............ 2,608
Property and equipment............................... 2,347
Goodwill............................................. 62,241
Other assets......................................... 174
Short-term debt...................................... (2,332)
Accounts payable..................................... (8,651)
Accrued liabilities.................................. (5,543)
Long-term debt....................................... (2,203)
---------- ---------- ----------- ----------- -----------
Net assets acquired.............................. $ $ $ $ $ 71,601
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock......................................... $ $ $ $ $ 71,921
Cash received........................................ (320)
---------- ---------- ----------- ----------- -----------
Total............................................ $ $ $ $ $ 71,601
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
Paradigm Concepts, Inc. (the "Company") is a Delaware corporation which is a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Technology Solutions division as an independent publicly owned
company. This transaction is expected to be effected through the distribution of
shares of the Company to U.S. Office Products shareholders effective on or about
April 25, 1998 (the "Distribution"). Prior to the Distribution, U.S. Office
Products plans to contribute its equity interests in certain wholly-owned
subsidiaries associated with U.S. Office Products' Technology Solutions division
to the Company. U.S. Office Products and the Company will enter into a number of
agreements to facilitate the Distribution and the transition of the Company to
an independent business enterprise.
The Technology Solutions division was created by U.S. Office Products in
January 1997 and completed five business combinations accounted for under the
pooling-of-interests method during the period from October 1996 to April 1997
("the Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. With the exception of interest
expense, the Company's statement of income includes all of the related costs of
doing business including an allocation of certain general corporate expenses of
U.S. Office Products which were not directly related to these businesses
including certain corporate executives' salaries, accounting and legal fees,
departmental costs for accounting, finance, legal, purchasing, marketing, human
resources as well as other general overhead costs. These allocations were based
on a variety of factors, dependent upon the nature of the costs being allocated,
including revenues, number and size of acquisitions and number of employees.
Management believes these allocations were made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 8 for further discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and
F-15
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on March 31 and December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from March 31 and December 31 to conform to U.S. Office Products' fiscal year,
which ends on the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired in business combinations accounted for under the purchase method.
Substantially all goodwill is amortized on a straight line basis over estimated
useful lives of 25-40 years. Management periodically evaluates the
recoverability of
F-16
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill, which would be adjusted for a permanent decline in value, if any, by
comparing anticipated undiscounted future cash flows from operations to net book
value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
REVENUE RECOGNITION
Product revenue is recognized upon the delivery of products to customers as
no additional obligations to the customers exist. Returns of the Company's
product are considered immaterial. Service revenue is recognized as the services
are performed and is derived from professional services which are generally
provided to clients on a "time and expenses" basis. Payments received in advance
of services performed are recorded as deferred revenue. The Company also
performs a limited number of fixed-price engagements under which revenue is
recognized using the percentage-of-completion method (based on the ratio of
costs incurred to total estimated costs). Provision for estimated losses on
engagement is made during the period in which the loss becomes probable and can
be reasonably estimated. To date, such losses have been insignificant. The
Company reports revenue net of reimbursable expenses which are billed to and
collected from clients.
The American Institute of Public Accountants has approved a new Statement of
Position ("SOP"), SOP 97-2 which will supersede SOP 91-1, "Software Revenue
Recognition." Management has assessed this new statement and believes that its
adoption will not have a material effect on the timing of the Company's revenue
recognition or cause changes to its revenue recognition policies.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations.
F-17
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS"). SFAS 128 simplifies the standards for computing EPS
and makes the presentation comparable to international EPS standards by
replacing the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The Company intends to adopt SFAS No.
128 in the fiscal year ended April 25, 1998. The implementation of SFAS No. 128
is not expected to have a material effect on the Company's earnings per share as
determined under current accounting rules. Historical earnings per share has not
been presented as such amounts are not deemed meaningful due to the significant
change in the Company's capital structure that will occur on the consummation of
the Distribution.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
the fiscal year ended April 24, 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of October 25, 1997 and the results
of operations and of cash flows for the six months ended October 26, 1996 and
October 25, 1997, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued U.S. Office Products common stock to
acquire the Pooled Companies. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. All of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997. Upon completion of
the acquisitions of the Pooled Companies, their year-ends were changed to U.S.
Office Products' year-end of the last Saturday in April.
Commencing on May 1, 1996, the year-ends of the Pooled Companies were
changed to April 26, 1997, resulting in an adjustment to retained earnings of
$(2,818) during the fiscal year ended April 30, 1996. This adjustment consisted
of revenues, costs and expenses, and dividends of $17,294, $15,026 and $5,086,
F-18
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
respectively, during the period of time between the Pooled Companies most
recently completed year-end and April 30, 1996.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
PARADIGM
CONCEPTS, POOLED
INC. COMPANIES COMBINED
------------- ----------- ----------
<S> <C> <C> <C>
For the fiscal year ended March 31, 1995
Revenues................................................................ $ $ 88,999 $ 88,999
Net income.............................................................. $ $ 7,696 $ 7,696
For the fiscal year ended March 31, 1996
Revenues................................................................ $ $ 114,055 $ 114,055
Net income.............................................................. $ $ 9,642 $ 9,642
For the fiscal year ended April 26, 1997
Revenues................................................................ $ 57,656 $ 78,622 $ 136,278
Net income.............................................................. $ 2,109 $ 4,614 $ 6,723
For the six months ended October 26, 1996 (unaudited):
Revenues................................................................ $ 2,868 $ 63,293 $ 66,161
Net income.............................................................. $ 264 $ 3,668 $ 3,932
For the six months ended October 25, 1997 (unaudited):
Revenues................................................................ $ 79,605 $ $ 79,605
Net income.............................................................. $ 3,985 $ $ 3,985
</TABLE>
NOTE 5--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Unbilled percentage-of-completion revenues............................... $ 725 $ 2,871
Other.................................................................... 562 1,704
----------- -----------
Total prepaid expenses and other current assets...................... $ 1,287 $ 4,575
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Land..................................................................... $ 143 $ 143
Buildings................................................................ 374 374
Furniture and fixtures................................................... 2,277 3,184
Warehouse equipment...................................................... 323 272
Equipment under capital leases........................................... 169 252
Leasehold improvements................................................... 211 155
--------- ---------
3,497 4,380
Less: Accumulated depreciation........................................... (1,742) (2,217)
--------- ---------
Net property and equipment............................................... $ 1,755 $ 2,163
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the fiscal years ended March 31, 1995 and 1996 and
April 26, 1997 was $454, $494 and $541, respectively.
NOTE 7--GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
OCTOBER 25,
1997
-----------
<S> <C>
(UNAUDITED)
Goodwill......................................................................... $ 62,241
Less: Accumulated amortization................................................... (37)
-----------
Net goodwill................................................................... $ 62,204
-----------
-----------
</TABLE>
Amortization expense for the six months ended October 25, 1997 was $37.
NOTE 8--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Credit facility with bank, average interest rate of 8.5% at April 30,
1996. ................................................................. $ 4,080 $
Payable to Pooled Company shareholder.................................... 1,208
Current maturities of long-term debt..................................... 292 76
----------- ---
Total short-term debt.................................................... $ 5,580 $ 76
----------- ---
----------- ---
</TABLE>
F-20
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Notes payable, secured by certain assets of the Company, interest rates
ranging from 7.8% to 8.4%. ............................................ $ 1,002 $ 111
Capital lease obligations................................................ 89 132
----------- -----------
1,091 243
Less: Current maturities of long-term debt............................... (292) (76)
----------- -----------
Total long-term debt............................................... $ 799 $ 167
----------- -----------
----------- -----------
</TABLE>
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 76
1999................................................................ 124
2000................................................................ 43
---------
Total maturities of long-term debt $ 243
---------
---------
</TABLE>
PAYABLE TO U.S. OFFICE PRODUCTS
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. No
interest has been allocated to the Company on the outstanding payable. An
analysis of the activity in this account is as follows:
<TABLE>
<S> <C>
Balance at April 30, 1996........................................... $
Payments of long-term debt of Pooled Companies upon acquisition..... 1,710
Payments of acquisition costs....................................... 1,362
Allocated corporate expenses........................................ 388
Operating costs paid by U.S. Office Products........................ 1,326
---------
Balance at April 26, 1997........................................... $ 4,786
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 was $1,321.
The Company has earned interest on the receivable from U.S. Office Products
at the prime rate in effect at the time. The receivable from U.S. Office
Products was generated by the Company primarily as a result of U.S. Office
Products sweeping the Company's excess cash through the centralized cash
management system, which involves daily advances or sweeps of cash to keep the
cash balance at or near zero on a
F-21
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
daily basis. U.S. Office Products has not charged the Company interest on the
long-term payable to U.S. Office Products. The Company's financial statements
include allocations of interest income from U.S. Office Products totaling $146
during the year ended April 26, 1997. If the Company had been charged interest
on the long-term payable to U.S. Office Products during fiscal 1997, interest
income would have totaled $51.
The Company expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $5.0 million of debt by U.S. Office
Products resulting in incremental debt of approximately $6.3 million at October
25, 1997, which would be reflected in the financial statements as a reduction in
stockholder's equity. The Company intends to enter into a credit facility
concurrently with the Distribution which will contain certain financial and
other covenants, including maintenance of certain financial tests and ratios,
limitations on capital expenditures and restrictions on the incurrence of debt
or liens, the sale of assets, the payment of dividends, transactions with
affiliates and other transactions.
NOTE 9--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes currently payable:
Federal................................................... $ 211 $ 485 $ 2,102
State..................................................... 190 331 777
----- ----- -----------
401 816 2,879
----- ----- -----------
Deferred income tax expense (benefit)....................... (66) 645
----- ----- -----------
Total provision for income taxes...................... $ 401 $ 750 $ 3,524
----- ----- -----------
----- ----- -----------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Inventory.............................................................. $ 50 $ 105
Allowance for doubtful accounts........................................ 16 49
Accrued liabilities.................................................... 124
--- -----
Total current deferred tax assets.................................. 66 278
--- -----
Long-term deferred tax liabilities:
Property and equipment................................................. 24
Other.................................................................. (881)
--- -----
Total long-term deferred tax liabilities........................... (857)
--- -----
Net deferred tax asset (liability)................................. $ 66 $ (579)
--- -----
--- -----
</TABLE>
F-22
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 2.2 3.0 5.9
Subchapter S corporation income not subject to corporate
level taxation............................................ (32.3) (30.8) (20.8)
Nondeductible acquisition costs............................. 7.8
Other....................................................... 6.5
----- ----- -----
Effective income tax rate................................... 4.9% 7.2% 34.4%
----- ----- -----
----- ----- -----
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to their acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income per consolidated statement of income............. $ 7,696 $ 9,642 $ 6,723
Pro forma income tax provision adjustment................... 2,615 3,201 2,131
----------- ----------- -----------
Pro forma net income........................................ $ 5,081 $ 6,441 $ 4,592
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-23
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 76 $ 653
1999..................................................................... 58 598
2000..................................................................... 19 496
2001..................................................................... 479
2002..................................................................... 192
Thereafter............................................................... 431
----- -----------
Total minimum lease payments............................................. 153 $ 2,849
-----------
-----------
Less: Amounts representing interest...................................... (21)
-----
Present value of net minimum lease payments.............................. $ 132
-----
-----
</TABLE>
Rent expense for all operating leases for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 was $724, $778 and $871, respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility are expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
On or before the date of the Distribution, the Company, U.S. Office Products
and the other Spin-Off Companies, will enter into a Distribution Agreement, Tax
Allocation Agreement, and Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement. These agreements
are expected to provide, among other things, for U.S. Office Products and the
Company to
F-24
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
indemnify each other from tax and other liabilities relating to their respective
businesses prior to and following the Distribution. Certain of the obligations
of the Company and the other Spin-Off Companies to indemnify U.S. Office
Products are joint and several. Therefore, if one of the other Spin-Off
Companies fails to satisfy its indemnification obligations to U.S. Office
Products when such a loss occurs, the Company may be required to reimburse U.S.
Office Products for all or a portion of the losses that otherwise would have
been allocated to other Spin-Off Companies. In addition, the agreements will
allocate liabilities, including general corporate and securities liabilities of
U.S. Office Products not specifically related to the technology business,
between U.S. Office Products and the Company and the other Spin-Off Companies.
NOTE 12--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For the fiscal years ended March 31,
1995 and 1996 and April 26, 1997, the subsidiaries incurred expenses totaling
$314, $367 and $390, respectively, related to these plans.
NOTE 13--STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive Plan covering employees of
U.S. Office Products. The Company expects to adopt an employee stock option plan
at approximately the time of the Distribution. Upon the Distribution, the
Company expects to replace the options to purchase shares of common stock of
U.S. Office Products held by employees with options to purchase shares of common
stock of the Company. At April 26, 1997, there were approximately 580,027
options to purchase shares of U.S. Office Products common stock held by Company
employees.
Under a services agreement entered into with Jonathan J. Ledecky ("the
Ledecky Services Agreement"), the Board of Directors of U.S. Office Products has
agreed that Jonathan J. Ledecky will receive a stock option for Company Common
Stock from the Company as of the date of the Distribution. The U.S. Office
Products Board intends the option to be compensation for Mr. Ledecky's services
as a director of the Company, and certain services as an employee of the
Company. The option will cover up to 7.5% of the outstanding Company Common
Stock determined as of the date of the Distribution, with no anti-dilution
provisions in the event of issuance of additional shares of Common Stock (other
than with respect to stock splits or reverse stock splits). The option will have
a per share exercise price equal to the price of the first trade on the day the
Company's Common Stock is first publicly traded.
F-25
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
fiscal years ended March 31, 1996 and April 26, 1997 and the fiscal year ending.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 30,536 $ 27,653 $ 27,173 $ 28,693 $ 114,055
Gross profit.............................................. 9,490 7,462 6,249 6,741 29,942
Operating income (loss)................................... 5,296 3,036 1,222 (122) 9,432
Net income................................................ 5,315 2,936 1,103 288 9,642
Pro forma income (see Note 9)............................. 3,550 1,961 737 193 6,441
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 34,263 $ 31,898 $ 35,133 $ 34,984 $ 136,278
Gross profit.............................................. 7,982 7,608 9,655 8,904 34,149
Operating income.......................................... 2,695 1,779 3,056 2,820 10,350
Net income................................................ 2,617 1,315 1,708 1,083 6,723
Pro forma income (see Note 9)............................. 1,787 898 1,167 740 4,592
</TABLE>
NOTE 15--SUBSEQUENT EVENTS
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed five business combinations accounted for
under the purchase method in exchange for U.S. Office Products common stock with
a market value on their respective dates of acquisition of approximately $71.9
million. The results of operations for the six months ended October 25, 1997
include the results of the acquired companies from their respective dates of
acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Distribution and acquisitions described above
had been consummated as of the beginning of fiscal 1997. The results presented
below include certain pro forma adjustments to reflect the amortization of
intangible assets, adjustments in executive compensation and the inclusion of a
federal income tax provision on all earnings:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 26, 1997
----------------
<S> <C>
Revenues.................................................................... $ 228,912
Net income.................................................................. 10,692
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aztec East Inc. and Affiliates
We have audited the accompanying combined balance sheet of Aztec East Inc.
and Affiliates as of December 31, 1996 and 1995 and the related combined
statements of operations, of shareholders' equity and of cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aztec East Inc. and
Affiliates as of December 31, 1996 and 1995, and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
B.N. KOZIN COMPANY
Melville, New York
June 22, 1997
F-27
<PAGE>
AZTEC EAST INC. AND AFFILIATES
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C> <C>
1995 1996
--------- ---------
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash in banks................................................................. $ 486 $ 340 $ 1,186
Accounts receivable, less allowance for uncollectible of $25, $35, and $34,
respectively................................................................ 3,216 3,045 2,502
Notes receivable.............................................................. 320
Inventory..................................................................... 619 1,474 1,263
Prepaid expenses and other current assets..................................... 634 808 801
--------- --------- ------
Total current assets........................................................ 4,955 5,987 5,752
Property and equipment, net..................................................... 260 274 202
Intangible assets, net.......................................................... 347 318
Other assets.................................................................... 99 99
--------- --------- ------
Total assets................................................................ $ 5,314 $ 6,707 $ 6,272
--------- --------- ------
--------- --------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,199 $ 1,817 $ 698
Notes payable--bank........................................................... 900 400 400
Loans payable--stockholders................................................... 665 605
Accrued expenses.............................................................. 387 460 1,748
Taxes payable................................................................. 72 84 122
--------- --------- ------
Total current liabilities................................................... 3,223 3,366 2,968
Notes payable--bank............................................................. 1,366 1,066
--------- --------- ------
Total liabilities........................................................... 3,223 4,732 4,034
Stockholders' equity:
Capital stock, .01 par value, 100,000 shares authorized, 51,539 issued and
outstanding................................................................. 1 1 1
Paid-in capital............................................................... 37 37 37
Retained earnings............................................................. 2,053 1,937 2,200
--------- --------- ------
Total stockholders' equity.................................................. 2,091 1,975 2,238
--------- --------- ------
Total liabilities and stockholders' equity.................................. $ 5,314 $ 6,707 $ 6,272
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 22,613 $ 23,340 $ 17,399 $ 15,507
Cost of revenues...................................................... 15,927 15,923 11,900 9,425
--------- --------- --------- ---------
Gross profit...................................................... 6,686 7,417 5,499 6,082
Selling, general and administrative expenses.......................... 4,968 5,732 4,444 4,054
--------- --------- --------- ---------
Operating income...................................................... 1,718 1,685 1,055 2,028
Other (income) expenses:
Interest, net....................................................... (76) 24 23 61
Other, net.......................................................... (172) (86)
--------- --------- --------- ---------
(76) 24 (149) (25)
--------- --------- --------- ---------
Income before income taxes.......................................... 1,794 1,661 1,204 2,053
Provision for income taxes............................................ 84 68 49 122
--------- --------- --------- ---------
Net income............................................................ $ 1,710 $ 1,593 $ 1,155 $ 1,931
--------- --------- --------- ---------
--------- --------- --------- ---------
Unaudited pro forma information (see Note 1):
Income before provision from income taxes........................... $ 1,794 $ 1,661 $ 1,204 $ 2,053
Provision for income taxes.......................................... 718 664 482 821
--------- --------- --------- ---------
Pro forma net income................................................ $ 1,076 $ 997 $ 722 $ 1,232
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................. 51,539 $ 1 $ 37 $ 1,742 $ 1,780
Stockholder distributions.............................. (1,399) (1,399)
Net income............................................. 1,710 1,710
--------- ----------- ----------- ----------- ------
Balance at December 31, 1995............................. 51,539 1 37 2,053 2,091
Stockholder distributions.............................. (1,709) (1,709)
Net income............................................. 1,593 1,593
--------- ----------- ----------- ----------- ------
Balance at December 31, 1996............................. 51,539 1 37 1,937 1,975
Unaudited data:
Stockholder distributions.............................. (1,668) (1,668)
Net income............................................. 1,931 1,931
--------- ----------- ----------- ----------- ------
Balance at September 30, 1997 (unaudited)................ 51,539 $ 1 $ 37 $ 2,200 $ 2,238
--------- ----------- ----------- ----------- ------
--------- ----------- ----------- ----------- ------
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,710 $ 1,593 $ 1,155 $ 1,931
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 109 165 104 141
Changes in operating assets and liabilities:
Accounts receivable, net.................................... (522) 171 334 543
Inventory................................................... (221) (856) (698) 212
Prepaid expenses and other current assets................... (261) (174) (489) 327
Other assets................................................ (30) (249) 99
Intangible assets........................................... (361)
Accounts payable and accrued liabilities.................... 64 691 593 (398)
Income taxes payable........................................ 13 12
--------- ---------- ---------- ----------
Net cash provided by operating activities................. 860 1,241 750 2,855
--------- ---------- ---------- ----------
Cash flow from investing activities:
Purchases of equipment.......................................... (269) (165) (80) (41)
Issuance of notes receivable.................................... (320)
--------- ---------- ---------- ----------
Net cash used in investing activities..................... (269) (485) (80) (41)
--------- ---------- ---------- ----------
Cash flow from financing activities:
Principal payments on long-term debt............................ (100) (300)
Proceeds from long-term debt.................................... 1,567
Proceeds from notes payable..................................... 900 867
Payment on short-term debt...................................... (500)
Payments on loans payable to stockholders....................... (60)
Proceeds from loan payable to stockholders...................... 372
Distributions to stockholders................................... (1,399) (1,709) 114 (1,668)
--------- ---------- ---------- ----------
Net cash provided by (used in) financing activities....... (127) (902) 1,081 (1,968)
--------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.............. 464 (146) 1,751 846
Cash and cash equivalents, beginning of year...................... 22 486 486 340
--------- ---------- ---------- ----------
Cash and cash equivalents, end of year............................ $ 486 $ 340 $ 2,237 $ 1,186
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ 73 $ 218 $ 158 $ 171
Cash paid for taxes............................................. $ 84 $ 84 $ -- $ 121
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Aztec East Inc. and Affiliates ("the Company") is in the business of rework,
re-manufacture and repair of electronic and electromechanical equipment and
assemblies for the telecommunications industry and other commercial /industrial
markets. The Company also performs logistics management functions for their
major accounts. As of January 1, 1997, the Company changed its name to Aztec
International.
PROPERTY AND EQUIPMENT
The Company has elected to recover the cost of assets on the straight-line
method with useful lives ranging from 3-5 years.
INTANGIBLE ASSETS
The Company has elected to recover the costs of its intangible assets on the
straight-line method with an amortization period ranging from 60-180 months.
INCOME TAXES
The Company elected sub "S" status; therefore, there is no provision for
federal taxes on a corporate level. As of January 1, 1997, the Affiliated
Companies have merged and changed their names to Aztec International Inc.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
2. INVENTORIES
Inventories are stated at the lower of cost or market.
3. LEASE COMMITMENTS
The Company leases its facilities under operating leases expiring at various
times through 2006.
<TABLE>
<S> <C>
1997.............................................................. $ 399,196
1998.............................................................. 260,586
1999.............................................................. 263,292
2000.............................................................. 263,292
2001.............................................................. 203,882
2002-2006......................................................... 192,000
</TABLE>
4. NOTE RECEIVABLE
The notes receivable of $320,000 is at an interest rate of 10% and is
payable in twelve equal installments.
F-32
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PREPAIDS AND OTHER CURRENT ASSETS
The prepaids and other current assets include $592,467 and $4,496 loaned to
Unaffiliated Corporations owned by the stockholders. The loans were at a rate of
the average 30 day investment rate and are payable on demand.
6. OTHER ASSETS
The other receivables include $72,230 loaned to a stockholder in the
Company. This is payable over three years with interest based on prime.
7. BUSINESS CONCENTRATIONS
The Company receives 60% of its sales from one customer who is under
contract due to expire in 1998. The Companies have been performing services for
this customer on an ongoing basis since 1984.
8. BANK LINE OF CREDIT
The Company currently has a revolving credit line of $1,000,000 with First
Union Bank of Connecticut at an interest rate of .25% above bank's base rate.
The Company has collateralized the line with its entire assets. As at December
31, 1996, the Company has nothing outstanding. The credit line is due to expire
May 22, 1998.
9. NOTE PAYABLE
The Company has borrowed $2,000,000 from First Union Bank of Connecticut to
finance the Acquisition of Tie Communications Inc., Repair Department. The
interest rate on this debt is 2.25% above the Libor Rate and has a term of 60
months payable monthly. The current balance outstanding as of December 31, 1996
was $1,766,667.
10. LOANS PAYABLE--STOCKHOLDERS
Stockholders' loans are payable on demand and bear 12% interest.
11. 401(K) RETIREMENT PLAN
In December 1994, the Company established a defined contribution plan
(401(k)) for substantially all of its eligible employees. Employees may
contribute a percentage of their salary to the plan subject to statutory limits.
The Company will match these contributions up to certain limits.
12. STOCK OPTION PLAN
In August 1996, the Company established an Employee Incentive Stock Option
Plan. As of December 31, 1996, none of these options issued have been exercised.
13. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the nine month periods ended September
30, 1996 and 1997 have been prepared from the unaudited financial records of the
Company and in the opinion of management, reflect all adjustments, consisting
only of normal recurring items, necessary for a fair
F-33
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
presentation of the financial position, results of operations and cash flows for
the interim periods presented.
14. SUBSEQUENT EVENT (UNAUDITED)
The Company and its stockholders have entered into a definitive agreement
with U.S. Office Products Company (U.S. Office Products) pursuant to which U.S.
Office Products will acquire all outstanding shares of the Company's common
stock in exchange for common stock of U.S. Office Products.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Compel Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Compel Corporation at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 30, 1998
F-35
<PAGE>
COMPEL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 239,667 $ 235,703 $ 791,618
Trade accounts receivable, less allowance for doubtful accounts of
$122, $118 and $212, respectively................................ 5,412,655 6,372,103 7,052,999
Costs in excess of billings on uncompleted contracts............... 728,040 2,008,697 2,126,407
Inventories........................................................ 388,914 96,354
Prepaid expenses................................................... 230,256 205,755 36,279
Other current assets............................................... 72,000 68,300 162,056
------------ ------------- -------------
Total current assets........................................... 7,071,532 8,986,912 10,169,359
Property and equipment, net.......................................... 1,300,173 1,200,507 1,269,518
Other assets......................................................... 201,161 166,503 25,178
------------ ------------- -------------
Total assets................................................... $ 8,572,866 $ 10,353,922 $ 11,464,055
------------ ------------- -------------
------------ ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Line of credit..................................................... $ 1,700,000 $ 1,300,000
Current portion of long-term debt.................................. 458,086 $ 130,656 636,636
Note payable....................................................... 147,931 129,631
Accounts payable................................................... 1,552,858 3,170,087 2,404,812
Accrued liabilities................................................ 568,460 622,058 1,549,864
Due to affiliates and stockholders................................. 170,000 845,000
Billings in excess of costs on uncompleted contracts............... 468,052 1,467,673 803,167
------------ ------------- -------------
Total current liabilities...................................... 5,065,387 6,365,105 6,694,479
Long-term debt, excluding current portion............................ 294,037 322,262 214,765
Other long-term liabilities.......................................... 6,000 5,300
------------ ------------- -------------
Total liabilities.............................................. 5,365,424 6,692,667 6,909,244
Stockholders' equity:
Common stock, no par value. 1,000 shares authorized, 282 shares
issued and outstanding........................................... 14,100 14,100 14,100
Retained earnings.................................................. 3,193,342 3,647,155 4,540,711
------------ ------------- -------------
Total stockholders' equity..................................... 3,207,442 3,661,255 4,554,811
------------ ------------- -------------
Total liabilities and stockholders' equity..................... $ 8,572,866 $ 10,353,922 $ 11,464,055
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
COMPEL CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Contract revenue..................... $ 21,691,207 $ 26,293,606 $ 32,537,850 $ 23,035,599 $ 26,374,678
Contract costs....................... 16,943,984 20,192,713 24,806,202 17,472,934 19,402,422
------------- ------------- ------------- ------------- -------------
Gross profit................... 4,747,223 6,100,893 7,731,648 5,562,665 6,972,256
Selling, general and administrative
expenses........................... 4,142,486 4,468,271 4,740,899 3,607,253 4,159,972
------------- ------------- ------------- ------------- -------------
Income from operations......... 604,737 1,632,622 2,990,749 1,955,412 2,812,284
------------- ------------- ------------- ------------- -------------
Other (income) expense:
Interest expense................... 93,447 189,849 145,528 124,678 89,498
Interest income.................... (37,164) (28,419) (21,797) (15,291) (30,828)
Other expense (income)............. (22,217) (10,368) (80,795) (72,503) (31,727)
------------- ------------- ------------- ------------- -------------
34,066 151,062 42,936 36,884 26,943
------------- ------------- ------------- ------------- -------------
Income before provision for
income taxes................. 570,671 1,481,560 2,947,813 1,918,528 2,785,341
------------- ------------- ------------- ------------- -------------
Provision for state income taxes..... 6,000 21,000 30,000 38,753 50,785
------------- ------------- ------------- ------------- -------------
Net income........................... $ 564,671 $ 1,460,560 $ 2,917,813 $ 1,879,775 $ 2,734,556
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Unaudited pro forma information (see
Note 1):
Income before provision for income
taxes............................ $ 570,671 $ 1,481,560 $ 2,947,813 $ 1,918,528 $ 2,785,341
Provision for income taxes......... 228,269 592,624 1,179,125 767,411 1,114,136
------------- ------------- ------------- ------------- -------------
Pro forma net income............... $ 342,402 $ 888,936 $ 1,768,688 $ 1,151,117 $ 1,671,205
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
COMPEL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................................... 282 $ 14,100 $ 3,434,500 $3,448,600
Stockholder distributions...................................... (1,114,389) (1,114,389)
Net income..................................................... 564,671 564,671
--- --------- ------------ ------------
Balance at December 31, 1994..................................... 282 14,100 2,884,782 2,898,882
Stockholder distributions...................................... (1,152,000) (1,152,000)
Net income..................................................... 1,460,560 1,460,560
--- --------- ------------ ------------
Balance at December 31, 1995..................................... 282 14,100 3,193,342 3,207,442
Stockholder distributions...................................... (2,464,000) (2,464,000)
Net income..................................................... 2,917,813 2,917,813
--- --------- ------------ ------------
Balance at December 31, 1996..................................... 282 14,100 3,647,155 3,661,255
Unaudited data:
Stockholder distributions...................................... (1,841,000) (1,841,000)
Net income..................................................... 2,734,556 2,734,556
--- --------- ------------ ------------
Balance at September 30, 1997 (unaudited)........................ 282 $ 14,100 $ 4,540,711 $4,554,811
--- --------- ------------ ------------
--- --------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
COMPEL CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 564,671 $ 1,460,560 $ 2,917,813 $ 1,879,775 $ 2,734,556
Adjustments to reconcile net income:
Deprecation and amortization expense....... 351,553 370,361 381,904 291,154 271,439
Gain on sale of property, plant and
equipment................................ (10,603) (3,710) (11,385) (17,027) (19,545)
Changes in current assets and liabilities:
Accounts receivable...................... (1,128,424) (369,182) (959,448) (1,082,316) (680,896)
Costs in excess of billings on
uncompleted contracts.................. 393,233 437,722 (1,280,657) (54,261) (117,710)
Inventory................................ (388,914) 292,560 292,560 96,354
Prepaid expenses and other current
assets................................. (46,244) (53,705) 24,501 (82,893) 169,476
Other assets............................. (28,394) 93,693 37,658 53,916 42,269
Accounts payable......................... 458,824 (50,357) 1,617,229 235,900 (765,275)
Accrued expenses......................... (107,725) 86,789 53,598 451,668 927,806
Billings in excess of costs on
uncompleted contracts.................. 262,283 (383,846) 999,621 755,692 (664,506)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities........................... 709,174 1,199,411 4,073,394 2,724,168 1,993,968
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment.......... (209,596) (382,261) (204,584) (245,294) (449,647)
Proceeds from sale of equipment.............. 25,595 35,850 67,422 46,126 128,742
------------ ------------ ------------ ------------ ------------
Net cash used by investing
activities........................... (184,001) (346,411) (137,162) (199,168) (320,905)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (payments) on line of
credit..................................... 500,000 100,000 (1,700,000) (1,545,000) 1,300,000
Net borrowings (payments) from affiliates and
stockholders............................... 155,000 (25,000) 675,000 675,000 (230,380)
Net borrowings (payments) of notes payable... 18,611 37,122 (18,300) (13,725) (129,631)
Proceeds from issuance of long-term debt..... 125,180 500,000 85,009
Payments on long-term debt................... (268,247) (355,412) (432,896) (104,477) (301,146)
Distributions to stockholders................ (1,114,389) (1,152,000) (2,464,000) (1,416,000) (1,841,000)
------------ ------------ ------------ ------------ ------------
Net cash used by financing
activities........................... (583,845) (895,290) (3,940,196) (2,404,202) (1,117,148)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................. (58,672) (42,290) (3,964) 120,798 555,915
Cash and cash equivalents at beginning of
period....................................... 340,629 281,957 239,667 239,667 235,703
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period..... $ 281,957 $ 239,667 $ 235,703 $ 360,465 $ 791,618
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Supplemental disclosures:
Interest paid................................ $ 97,525 $ 189,849 $ 145,528 $ 124,678 $ 89,498
Income taxes paid............................ $ 80,000 $ 16,000 $ 20,000 $ 15,000 $ 18,000
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Compel Corporation (the Company), a California corporation, is engaged
principally in the design, installation and maintenance of wiring, cabling and
equipment related to data processing and communications systems. As a general
and electrical contractor, the Company serves a wide variety of commercial
customers throughout the western United States from offices in California and
Arizona.
Effective October 24, 1997, the Company and its stockholders entered into a
definitive agreement with U.S. Office Products Company (U.S. Office Products)
pursuant to which U.S. Office Products acquired all outstanding shares of the
Company's common stock in exchange for common stock of U.S. Office Products.
CONTRACT REVENUE AND COST RECOGNITION
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Management considers costs to
be the best available measure of progress on these contracts.
A contract is considered complete when all significant costs have been
incurred and the installation is operating according to specifications or has
been accepted by the customer.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers cash
equivalents to include all short-term investments with original maturities of
three months or less.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value using
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment held under
capital leases are stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets which range between 6 to 15
years. Property and equipment held under capital leases and leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 prescribes the accounting treatment for long-lived assets,
identifiable intangibles and goodwill related to those assets when there are
indications that the carrying values of those assets may not be recoverable. The
adoption of SFAS No. 121 in 1996 did not have a material effect on the Company's
financial position or results of operations.
F-40
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FEDERAL INCOME TAXES
The Company has elected to be treated as an S-Corporation for federal income
tax purposes and accordingly, no liability for federal income taxes has been
recorded. The Company is subject to franchise taxes in the state of California,
which has been appropriately reflected in the financial statements. The
unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
STATE FRANCHISE TAXES
State franchise taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Realization of the deferred tax asset is dependent an generating sufficient
taxable income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
2. DUE FROM AFFILIATE
Due from affiliate represents amounts due from an affiliated company bearing
interest at prime plus 1% and maturing December 31, 1999. The note is secured by
the affiliate's accounts receivable, inventory and property and equipment. The
outstanding balances, net of current portion, at December 31, 1995 and 1996 are
$180,000 and $120,000, respectively, and are included in other assets.
3. CONTRACTS IN PROGRESS
Amounts included in the financial statements which relate to contracts in
progress at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts........................... $ 3,738,534 $ 6,093,997
Billings on uncompleted contracts................................. 3,478,546 5,552,973
------------ ------------
$ 259,988 $ 541,024
------------ ------------
------------ ------------
</TABLE>
F-41
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONTRACTS IN PROGRESS (CONTINUED)
Amounts billed but not paid by customers under retainage provisions amounted
to $24,355 and $114,863 for December 31, 1995 and 1996, respectively, are
included in accounts receivable.
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Included in the accompanying balance sheet under the following
captions:
Costs in excess of billings on uncompleted contracts.............. $ 728,040 $ 2,008,697
Billings in excess of costs on uncompleted contracts.............. 468,052 1,467,673
---------- ------------
$ 259,988 $ 541,024
---------- ------------
---------- ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Transportation equipment.......................................... $ 1,447,655 $ 1,422,210
Machinery and equipment........................................... 1,533,360 1,710,497
Furniture and fixtures............................................ 152,429 155,772
Leasehold improvements............................................ 118,409 118,409
------------ ------------
3,251,853 3,406,888
Less accumulated depreciation and amortization.................... (1,951,680) (2,206,381)
------------ ------------
Property and equipment, net....................................... $ 1,300,173 $ 1,200,507
------------ ------------
------------ ------------
</TABLE>
Property and equipment includes property and equipment held under capital
leases of $358,204 and $470,029 and related accumulated amortization of $79,185
and $145,931 at December 31, 1995 and 1996, respectively.
Depreciation expense recorded for the years ended December 31, 1995 and 1996
was $291,176 and $235,973, respectively.
5. LEASES
At December 31, 1996, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1997................................................................ $ 139,041 $ 241,314
1998................................................................ 118,755 231,191
1999................................................................ 75,751 92,876
2000................................................................ 28,755 --
2001................................................................ 793 --
---------- ----------
Total minimum lease payments........................................ 363,095 $ 565,381
----------
----------
Less estimated executory costs...................................... (18,106)
----------
Net minimum lease payments.......................................... 344,989
Less imputed interest............................................... (43,843)
----------
Present value of net minimum capital lease payments................. 301,146
Less current portion of obligations under capital leases............ (108,640)
----------
Obligations under capital leases, excluding current portion......... $ 192,506
----------
----------
</TABLE>
F-42
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
During the years ended December 31, 1995 and 1996, the Company incurred rent
expense of approximately $263,000 and $279,000, respectively.
6. DUE TO AFFILIATES AND STOCKHOLDERS
A summary of amounts due to affiliates and stockholders at December 31, 1995
and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Prime rate unsecured note payable to an affiliated company, due on
demand.............................................................. $ 50,000 $ 500,000
Prime rate plus 2% unsecured notes payable to an affiliated company,
due on demand....................................................... 80,000 105,000
Prime rate unsecured notes payable to stockholders, due on demand..... -- 200,000
8.25% unsecured note payable to a relative of a stockholder, due on
demand.............................................................. 40,000 40,000
---------- ----------
$ 170,000 $ 845,000
---------- ----------
---------- ----------
</TABLE>
7. NOTES PAYABLE
Notes payable represents a short-term loan from an insurance company. The
unsecured note bears interest at 5.49% and is due on demand.
8. BANK LINE OF CREDIT
The Company has a $2,000,000 revolving line of credit with a bank. The line
of credit allows the Company to borrow up to 70% of eligible accounts
receivable. Bank advances on the credit line are payable on demand. The Company
is given the option to request advances at the bank's prime rate or 2% over the
London Interbank Offered Rate (LIBOR). The credit line is secured by all
accounts receivable, inventory, equipment and other assets. The credit line is
guaranteed by the stockholders of the Company and an affiliated company up to
$1,500,000 each. The line of credit agreement contains certain restrictions and
covenants. The Company must maintain certain levels of working capital and net
worth and maintain certain financial ratios. The line of credit agreement
expires May 31, 1997. At December 31, 1995, $1,700,000 was outstanding. At
December 31, 1996, no borrowings were outstanding under this agreement. The line
of credit agreement has been extended for 90 days which expires on July 31,
1997.
F-43
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
A summary of long-term debt as of December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Prime rate plus 1.5% note payable with monthly installments of $2,136, due June 2003,
secured by transportation equipment................................................... $ 150,970 $ 139,637
8.9% note payable with monthly installments of $349, due August 1998, secured by
transportation equipment.............................................................. 9,912 6,467
6.9% note payable with monthly installments of $533, due November 1997, secured by
transportation equipment.............................................................. 12,701 5,668
London Interbank Offered Rate (LIBOR) plus 2%, note payable to a bank, with monthly
installments of $50,000, plus interest, with the entire outstanding balance due in
full in February 1996, secured by substantially all assets of the Company............. 300,000 --
Prime rate plus 1% note payable to a bank, payable with monthly installments of $7,333,
plus interest, due May 1996, secured by substantially all assets of the Company....... 15,791 --
Capital lease obligations............................................................... 262,749 301,146
----------- -----------
752,123 452,918
Less current portion of long-term debt.................................................. (458,086) (130,656)
----------- -----------
Long-term debt, excluding current portion............................................... $ 294,037 $ 322,262
----------- -----------
----------- -----------
</TABLE>
A summary of long-term debt matures as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 22,016
1998.............................................................. 16,251
1999.............................................................. 14,968
2000.............................................................. 16,535
2001.............................................................. 18,267
Thereafter........................................................ 63,735
---------
$ 151,772
---------
---------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
BUY/SELL AGREEMENT
The Company has an agreement with its two stockholders which, upon the death
of a stockholder, requires the Company to purchase the shares from the
stockholder's estate. The purchase price of such shares has been defined in the
Agreement and is covered by life insurance.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-44
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS AND CREDIT CONCENTRATIONS
During the year ended December 31, 1995 and 1996, five and three customers
accounted for approximately 31% and 29% of the Company's total revenues,
respectively. Accounts receivable from these customers totaled $1,180,459 and
$682,268 as of December 31, 1995 and 1996, respectively.
During the year ended December 31, 1995 and 1996, two vendors accounted for
approximately 45% and 43% of the Company's purchases, respectively. Accounts
payable to these vendors totaled $337,902 and $767,908 as of December 31, 1995
and 1996, respectively.
12. RELATED PARTY TRANSACTIONS
The stockholders of the Company own significant ownership in several
affiliated companies. The principal business activities of the affiliated
companies are to design, install, service and maintain data grade environmental
conditioning systems; electrical contracting; and manufacturing data cabinets.
The Company purchases materials and services, as well as sells materials and
services to these affiliated companies.
The Company is a guarantor of a line of credit totaling $100,000 and an
equipment loan totaling $224,500 for an affiliated company.
During 1995 and 1996, the Company sold approximately $71,000 and $89,000 in
materials and services, charged $106,000 and $441,000 in corporate fees and
expenses to affiliated companies, respectively. Additionally, the Company
purchased $620,000 and $1,151,000 of materials and services from affiliated
companies. Included in trade payables at December 31, 1995 and 1996 is $0 and
$149,000, respectively, due to affiliated companies.
13. 401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan for the benefit of employees
who are 21 years of age, have completed at least one year of service and elect
to participate in the plan. The Company's management determines, at its
discretion, the Company's annual contribution, if any, to the plan. The
Company's annual contributions to the plan, if any, will be expensed in the year
they accrue. The Company made no contributions to the plan during 1995 or 1996.
14. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the nine month periods ended September
30, 1996 and 1997 have been prepared from the unaudited financial records of the
Company and in the opinion of management, reflect all adjustments, consisting
only of normal recurring items, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods
presented.
F-45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND TECHNOLOGY DISTRIBUTION
The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the securities. All of such
expenses except the Securities and Exchange Commission registration fee are
estimated:
<TABLE>
<S> <C>
SEC Registration.................................................. $ 25,822
Nasdaq Listing Fee................................................ $ *
Legal Fees and Expenses........................................... $ *
Accounting Fees and Expenses...................................... $ *
Printing Fees and Expenses........................................ $ *
Miscellaneous..................................................... $ *
Total......................................................... $ *
</TABLE>
- ------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of Paradigm's Certificate of Incorporation provides that
Paradigm shall indemnify its directors and officers to the fullest extent
permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of Paradigm's Certificate of Incorporation states that
directors of Paradigm will not be liable to Paradigm or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Paradigm or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the state of Delaware, which makes directors
liable for unlawful dividends or unlawful stock repurchases or redemptions or
(iv) for any transaction from which the director derived an improper personal
benefit.
Article IV of the Paradigm's Bylaws provides that Paradigm shall indemnify
its officers and directors (and those serving at the request of Paradigm as an
officer or director of another corporation, partnership,
II-1
<PAGE>
joint venture, trust or other enterprise), and may indemnify its employees and
agents (and those serving at the request of Paradigm as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred, if such officer, director,
employee or agent acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. In a derivative action, indemnification shall be limited
to expenses (including attorneys' fees) actually and reasonably incurred by such
officer, director, employee or agent in the defense or settlement of such action
or suit, and no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to Paradigm
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Unless the Paradigm Board of Directors otherwise determines in a specific
case, expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding shall be paid by the Company in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the officer or director to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Washington, District of
Columbia on February 18, 1998.
PARADIGM CONCEPTS, INC.
By: /s/ JAMES E. CLAYPOOLE
-----------------------------------
Name: James E. Claypoole
Title: Chairman of the Board of
Directors,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ----------------------------------- ------------------------- ----------------
/s/ JAMES E. CLAYPOOLE
- ----------------------------------- Chief Executive Officer, February 18,
James E. Claypoole President, and Director 1998
/s/ ELIZABETH M. CLAYPOOLE
- ----------------------------------- Principal Financial and February 18,
Elizabeth M. Claypoole Accounting Officer 1998
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation
3.2* Bylaws
4.1* Form of certificate representing shares of Common Stock
5 * Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8 * Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products, Workflow Graphics, Inc., Paradigm Concept,
Inc., TDOP, Inc., and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products, Workflow Graphics, Inc., Paradigm Concept,
Inc., TDOP, Inc., and School Specialty, Inc.
10.3 Employment Agreement, dated October 15, 1996, between Bay State Computer Group and James E. Claypoole.
10.4* Ledecky Services Agreement
10.5 Employment Agreement, dated October 15, 1996, between Bay State Computer Group and Elizabeth M. Claypoole
10.6* Form of Tax Indemnification Agreement among U.S. Office Products, Workflow Graphics, Inc., Paradigm
Concept, Inc., TDOP, Inc., and School Specialty, Inc.
10.7* Form of Employee Benefits Agreement among U.S. Office Products, Workflow Graphics, Inc., Paradigm
Concept, Inc., TDOP, Inc., and School Specialty, Inc.
11 * Statement re computation of per share earnings
21 * Subsidiaries of Registrant
23.1* Consent of Wilmer, Cutler & Pickering (contained in Exhibits 5 and 8 hereto)
23.2 Consent of Price Waterhouse, LLP
23.3 Consent of Rubin, Koehmstedt and Nadler
23.4 Consent of B.N. Kozin Company
23.5 Consent of Jonathan Ledecky to be named as a director
27 Financial data schedule
</TABLE>
- ------------------------
* To be supplied by amendment.
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 15th day of October, 1996, is by
and between Bay State Computer Group, Inc. a Massachusetts corporation (the
"Company") and a wholly-owned subsidiary of U.S. Office Products Company
("USOP"), a Delaware corporation, and James E. Claypoole ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of his skills and services, and Employee desires to continue employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM. The Company hereby employs Employee to perform the
duties described herein, and Employee hereby accepts employment with the
Company, for a term beginning on the date hereof and continuing for a period of
3 years (the "Term"). This Agreement may be terminated prior to the end of the
Term in the manner provided for in Section 6 below.
2. POSITION AND DUTIES. The Company hereby employs Employee as Director,
President, Treasurer and Clerk. As such, Employee shall have responsibilities,
duties and authority reasonably accorded to and expected of a Director,
President, Treasurer and Clerk of the Company. Employee will report directly to
the Board of Directors of the Company (the "Board"). Employee hereby accepts
this employment upon the terms and conditions herein contained and agrees to
devote all of his professional time, attention, and efforts to promote and
further the business of the Company. Employee shall faithfully adhere to,
execute, and fulfill all policies established by the Company
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be $300,000 per year, payable on a regular basis in accordance
with the Company's standard payroll procedures, but not less often than monthly.
On at least an annual basis, the Board will review Employee's performance and
may make increases to such base salary if, in its sole discretion, any such
increase is warranted.
(b) INCENTIVE BONUS. During the Term, Employee shall be eligible to receive
an incentive bonus up to the amount, based upon the criteria, and payable at
such times as are, specified in Exhibit A attached hereto. To the extent that
such bonus is to be determined in light of financial performance during a
specified fiscal period and this Agreement commences on a date after the start
of such fiscal period, any bonus payable in respect of such fiscal period's
results may be prorated. In addition, if the period of Employee's employment
hereunder expires before the end of a fiscal period, and if Employee is eligible
to receive a bonus at such time (such eligibility being subject to the
restrictions set forth in Section 6 below), any bonus payable in respect of such
fiscal period's results shall be prorated.
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the Term, Employee
shall be entitled to receive such perquisites and benefits as are customarily
provided by the Company to its employees, subject to such changes, additions, or
deletions as the Company may make from time to time, as well as such other
perquisites or benefits as may be specified from time to time by the Board.
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4. EXPENSE REIMBURSEMENT. The Company shall reimburse Employee for (or, at
the Company's option, pay) all business travel and other out-of-pocket expenses
reasonably incurred by Employee in the performance of his services hereunder
during the Term. All reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request for reimbursement,
and in a format and manner consistent with the Company's expense reporting
policy, as well as applicable federal and state tax record keeping requirements.
5. PLACE OF PERFORMANCE. Employee understands that he may be requested by
the Company to relocate from his present residence to another geographic
location in order to more efficiently carry out his duties and responsibilities
under this Agreement or as part of a promotion or a change in duties and
responsibilities. In such event, if Employee agrees to relocate, the Company
will provide Employee with a relocation allowance, in an amount determined by
the Company, to cover the reasonable costs of moving himself, his immediate
family, and their personal property and effects. The total amount and type of
costs to be covered shall be determined by the Company, in light of prevailing
Company policy at the time.
6. TERMINATION; RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the followings ways, prior to the expiration of the
Term:
(a) DEATH. The death of Employee shall immediately terminate the Term, and
no severance compensation shall be owed to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been unable to perform the material
duties of his position on a full-time basis for a period of four consecutive
months, or for a total of four months in any six-month period, then 30 days
after written notice to the Employee (which notice may be given before or after
the end of the aforementioned periods, but which shall not be effective earlier
than the last day of the applicable period), the Company may terminate
Employee's employment hereunder if Employee is unable to resume his full-time
duties with or without reasonable accommodation at the conclusion of such notice
period. Subject to Section 6(f) below, if Employee's employment is terminated as
a result of Employee's disability, the Company shall continue to pay Employee
his base salary at the then-current rate for the lesser of (i) three months from
the effective date of termination, or (ii) whatever time period is remaining
under the Term. Such payments shall be made in accordance with the Company's
regular payroll cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE." The Company may terminate the
Term 10 days after written notice to Employee "for cause," which shall be: (i)
Employee's material breach of this Agreement, which breach is not cured within
10 days of receipt by Employee of written notice from the Company specifying the
breach; (ii) Employee's gross negligence in the performance of his duties
hereunder, intentional nonperformance or intentional mis-performance of such
duties, or refusal to abide by or comply with the reasonable directives of the
Board, his superior officers, or the Company's reasonable policies and
procedures, which actions continue for a period of at least 10 days after
receipt by Employee of written notice of the need to cure or cease; (iii)
Employee's willful dishonesty, fraud, or misconduct with respect to the business
or affairs of the Company or USOP, and that in the judgment of the Company or
USOP materially and adversely affects the operations or reputation of the
Company or USOP; (iv) Employee's conviction of a felony or other crime involving
moral turpitude; or (v) Employee's abuse of alcohol or drugs (legal or illegal)
that, in the Company's judgment, materially impairs Employee's ability to
perform his duties hereunder. In the event of a termination "for cause," as
enumerated above, Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment, the
Company may, without cause, terminate the Term and Employee's employment,
effective 30 days after written notice is provided to the Employee. Should
Employee be terminated by the Company without cause, subject to Section 6(f)
below, Employee shall receive from the Company the base salary at the rate then
in effect for the longer of (i) three months from the date of termination, or
(ii) whatever time period is remaining under the Term. Such payments shall be
made in accordance with the Company's regular payroll cycle. If
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Employee resigns or otherwise terminates his employment for any reason or for no
reason, Employee shall receive no severance compensation.
(e) PAYMENT THROUGH TERMINATION. Upon termination of Employee's employment
for any reason provided above, Employee shall be entitled to receive all
compensation earned and all benefits and reimbursements (including payments for
accrued vacation and sick leave, in each case in accordance with applicable
policies of the Company) due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Employee only to the extent and in the manner expressly provided
above in this Section 6. With respect to incentive bonus compensation, Employee
shall be entitled to receive any bonus declared but not paid prior to
termination. In addition, in the event of a termination by the Company under
Section 6(b) or 6(d), Employee shall be entitled to receive incentive bonus
compensation through the end of the Company's fiscal year in which termination
occurs, calculated as if Employee had remained employed by the Company through
the end of such fiscal year, and paid in such amounts, at such times, and in
such forms as are determined pursuant to Section 3(b) above and Exhibit A
attached hereto. Except as specified in the preceding two sentences, Employee
shall not be entitled to receive any incentive bonus compensation after the
effective date of termination of his employment. All other rights and
obligations of USOP, the Company, and Employee under this Agreement shall cease
as of the effective date of termination, except that Employee's obligations
under Sections 7, 8, 9 and 10 below shall survive such termination in accordance
with their terms.
(f) RIGHT TO OFFSET. In the event of any termination of Employee's
employment under this Agreement, the Employee shall have no obligation to seek
other employment; provided, that in the event that Employee secures employment
or any consulting or other similar arrangement during the period that any
payment is continuing pursuant to the provisions of this Section 6, the Company
shall have the right to reduce the amounts to be paid hereunder by the amount of
Employee's earnings from such other employment, consulting or other arrangement.
(g) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate his
employment hereunder for "Good Reason." If the Employee terminates employment
for a Good Reason, the Employee shall have no liability to the Company for any
losses or damages arising from the termination of employment under this
Agreement. Upon a termination for a Good Reason, Company shall have no liability
to Employee for payment of any severance compensation, provided, that the
foregoing shall not limit the Employee's right to pursue remedies for breach of
contract under this Agreement. As used herein, "Good Reason" shall mean the
continuance of any of the following after 10 days' prior written notice by
Employee to the Company, specifying the basis for such Employee's having Good
Reason to terminate this Agreement.
(i) a material adverse change in Employee's status, title, position or
responsibilities;
(ii) the assignment to Employee of any duties materially and adversely
inconsistent with the Employee's position as specified in Section 2 hereof
(or such other position to which he may be promoted), including status,
offices, responsibilities or persons to whom the Employee reports as
contemplated under Section 2 of this Agreement, or any other action by the
Company which results in material and adverse change in such position,
status, offices, titles or responsibilities;
(iii) any other material breach of this Agreement by the Company,
including the failure to pay Employee on a timely basis the amounts to which
he is entitled under this Agreement;
(iv) the Company's requiring the Employee to be based anywhere other
than within a thirty (30) mile radius of the Company's current principal
executive offices, except for required travel on the Company's business to
an extent substantially consistent with your present business travel
obligations.
7. RESTRICTION ON COMPETITION.
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(a) For so long as Employee continues to be employed by the Company and/or
any other entity owned by or affiliated with the Company or USOP and thereafter
for a period equal to the longer of (x) two years, or (y) the period during
which Employee is receiving any severance pay from the Company pursuant to
Section 6(d), Employee shall not, directly or indirectly, for himself or on
behalf of or in conjunction with any other person, company, partnership,
corporation, business, group, or other entity (each, a "Person"):
(i) engage, as an officer, director, shareholder, owner, partner,
member, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant, advisor, or sales representative, in any
business selling any products or services in direct competition with the
Company or USOP, within 100 miles of any location where the Company or USOP
conducts business (the "Territory");
(ii) call upon any Person who is, at that time, within the Territory, an
employee of the Company or USOP for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company or
USOP;
(iii) call upon any Person who or that is, at that time, or has been,
within one year prior to that time, a customer of the Company or USOP within
the Territory for the purpose of soliciting or selling products or services
in direct competition with the Company or USOP within the Territory; or
(iv) on Employee's own behalf or on behalf of any competitor, call upon
any Person as a prospective acquisition candidate who or that, during
Employee's employment by the Company or USOP was either called upon by the
Company or USOP as a prospective acquisition candidate or was the subject of
an acquisition analysis conducted by the Company or USOP.
(b) The foregoing covenants shall not be deemed to prohibit Employee from
acquiring as an investment not more than one percent of the capital stock of a
competing business, whose stock is traded on a national securities exchange or
through the automated quotation system of a registered securities association.
(c) It is further agreed that, in the event that Employee shall cease to be
employed by the Company or USOP and enters into a business or pursues other
activities that, at such time, are not in competition with the Company or USOP,
Employee shall not be chargeable with a violation of this Section 7 if the
Company or USOP subsequently enters the same (or a similar) competitive business
or activity or commences competitive operations within 100 miles of the
Employee's new business or activities. In addition, if Employee has no actual
knowledge that his actions violate the terms of this Section 7, Employee shall
not be deemed to have breached the restrictive covenants contained herein if,
promptly after being notified by the Company or USOP of such breach, Employee
ceases the prohibited actions.
(d) For purposes of this Section 7, references to "USOP" shall mean U.S.
Office Products Company, together with its subsidiaries and affiliates.
(e) The covenants in this Section 7 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any provision of this Section 7 relating to the time period
or geographic area of the restrictive covenants shall be declared by a court of
competent jurisdiction to exceed the maximum time period or geographic area, as
applicable, that such court deems reasonable and enforceable, said time period
or geographic area shall be deemed to be, and thereafter shall become, the
maximum time period or largest geographic area that such court deems reasonable
and enforceable and this Agreement shall automatically be considered to have
been amended and revised to reflect such determination.
(f) All of the covenants in this Section 7 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
USOP, whether predicated on this Agreement or otherwise, shall not constitute a
defense to
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the enforcement by USOP or the Company of such covenants; provided, that upon
the failure of the Company to make any payments required under this Agreement,
the Employee may, upon 30 days' prior written notice to the Company, waive his
right to receive any additional compensation pursuant to this Agreement and
engage in any activity prohibited by the covenants of this Section 7. It is
specifically agreed that the period of two years stated at the beginning of this
Section 7, during which the agreements and covenants of Employee made in this
Section 7 shall be effective, shall be computed by excluding from such
computation any time during which Employee is in violation of any provision of
this Section 7.
(g) If the time period specified by this Section 7 shall be reduced by law
or court decision, then, notwithstanding the provisions of Section 6 above,
Employee shall be entitled to receive from the Company his base salary at the
rate then in effect solely for the longer of (i) the time period during which
the provisions of this Section 7 shall be enforceable under the provisions of
such applicable law, or (ii) the time period during which Employee is not
engaging in any competitive activity, but in no event longer than the applicable
period provided in Section 6 above. If Employee is subject to a restriction on
competitive activity as a party to that certain Agreement and Plan of
Reorganization, dated as of October , 1996, by and among U.S. Office
Products Company, BSC Acquisition Corp., James E. Claypoole and Thomas J. Foley
(the "Merger Agreement"), then Employee shall abide by, and in all cases be
subject to, the restrictive covenants (whether in this Section 7 or in the
Merger Agreement) that, in the aggregate, impose restrictions on Employee for
the longest duration and the broadest geographic scope (taking into account the
effect of any applicable court decisions limiting the scope or duration of such
restrictions), it being agreed that all such restrictive covenants are supported
by separate and distinct consideration. This Section 7(g) shall be construed and
interpreted in light of the duration of the applicable restrictive covenants.
(h) Employee has carefully read and considered the provisions of this
Section 7 and, having done so, agrees that the restrictive covenants in this
Section 7 impose a fair and reasonable restraint on Employee and are reasonably
required to protect the interests of the Company and USOP, and their respective
officers, directors, employees, and stockholders. It is further agreed that the
Company and Employee intend that such covenants be construed and enforced in
accordance with the changing activities, business, and locations of the Company
and USOP throughout the term of these covenants.
8. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business, financial, technical, economic, sales,
and/or other types of proprietary business information relating to the Company
and/or USOP (including all trade secrets), in whatever form, whether oral,
written, or electronic (collectively, the "Confidential Information"), to which
Employee has, or is given (or has had or been given), access as a result of his
employment by the Company. It is agreed that the Confidential Information is
confidential and proprietary to the Company and/or USOP because such
Confidential Information encompasses technical know-how, trade secrets, or
technical, financial, organizational, sales, or other valuable aspects of the
Company's and USOP's business and trade, including, without limitation,
technologies, products, processes, plans, clients, personnel, operations, and
business activities. This restriction shall not apply to any Confidential
Information that (a) becomes known generally to the public through no fault of
the Employee; (b) is required by applicable law, legal process, or any order or
mandate of a court or other governmental authority to be disclosed; or (c) is
reasonably believed by Employee, based upon the advice of legal counsel, to be
required to be disclosed in defense of a lawsuit or other legal or
administrative action brought against Employee; provided, that in the case of
clauses (b) or (c), Employee shall give the Company reasonable advance written
notice of the Confidential Information intended to be disclosed and the reasons
and circumstances surrounding such disclosure, in order to permit the Company to
seek a protective order or other appropriate request for confidential treatment
of the applicable Confidential Information.
9. INVENTIONS. Employee shall disclose promptly to the Company and USOP any
and all significant conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, that are conceived or made by
Employee, solely or jointly with another, during the period of employment
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or within one year thereafter, and that are directly related to the business or
activities of the Company or USOP and that Employee conceives as a result of his
employment by the Company, regardless of whether or not such ideas, inventions,
or improvements qualify as "works for hire." Employee hereby assigns and agrees
to assign all his interests therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments, or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
10. RETURN OF COMPANY PROPERTY. Promptly upon termination of Employee's
employment by the Company for any reason or no reason, Employee or Employee's
personal representative shall return to the Company (a) all Confidential
Information; (b) all other records, designs, patents, business plans, financial
statements, manuals, memoranda, lists, correspondence, reports, records, charts,
advertising materials, and other data or property delivered to or compiled by
Employee by or on behalf of the Company, USOP or their respective
representatives, vendors, or customers that pertain to the business of the
Company or USOP, whether in paper, electronic, or other form; and (c) all keys,
credit cards, vehicles, and other property of the Company or USOP. Employee
shall not retain or cause to be retained any copies of the foregoing. Employee
hereby agrees that all of the foregoing shall be and remain the property of the
Company or USOP, as the case may be, and be subject at all times to their
discretion and control.
11. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee, his employment by the
Company, and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client, or any other Person.
Further, Employee agrees to indemnify and hold harmless the Company and its
officers, directors, and representatives for any claim, including, but not
limited to, reasonable attorneys' fees and expenses of investigation, of any
such third party that such third party may now have or may hereafter come to
have against the Company or such other persons, based upon or arising out of any
non-competition agreement, invention, secrecy, or other agreement between
Employee and such third party that was in existence as of the date of this
Agreement. To the extent that Employee had any oral or written employment
agreement or understanding with the Company, this Agreement shall automatically
supersede such agreement or understanding, and upon execution of this Agreement
by Employee and the Company, such prior agreement or understanding automatically
shall be deemed to have been terminated and shall be null and void.
12. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience, and skills. Employee agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement. This
Agreement may not be assigned or transferred by the Company without the prior
written consent of Employee. Subject to the preceding two sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors, and assigns. Notwithstanding the foregoing, if Employee accepts
employment with a subsidiary or affiliate of USOP other than the Company, unless
Employee and his new employer agree otherwise in writing, this Agreement shall
automatically be deemed to have been assigned to such new employer (which shall
thereafter be an additional or substitute beneficiary of the covenants contained
herein, as appropriate), with the consent of Employee, such assignment shall be
considered a condition of employment by such new employer, and references to the
"Company" in this Agreement shall be deemed to refer to such new employer. If
the Company is merged with or into another subsidiary or affiliate of USOP, such
action shall not be considered to cause an assignment of this Agreement, and the
surviving or successor entity shall become the beneficiary of this Agreement and
all references to the "Company" shall be deemed to refer to such surviving or
successor entity. It is intended that USOP will be a third-party beneficiary of
the rights of the Company under this Agreement. No other Person shall be a
third-party beneficiary.
13. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not a promise
of future employment. Employee has no oral representations, understandings, or
agreements with the Company or any of
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its officers, directors, or representatives covering the same subject matter as
this Agreement. This Agreement together with the Merger Agreement, is the final,
complete, and exclusive statement and expression of the agreement between the
Company and Employee with respect to the subject matter hereof and thereof, and
cannot be varied, contradicted, or supplemented by evidence of any prior or
contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of the Company and Employee, and no term of this Agreement may be waived except
by a writing signed by the party waiving the benefit of such term.
14. NOTICE. Whenever any notice is required hereunder, it shall be given in
writing addressed as follows:
<TABLE>
<S> <C>
To the Company: Bay State Computer Group, Inc.
52 Roland Street
Boston, Massachusetts 02129
Attention: President
with a copy to: U.S. Office Products Company
1440 New York Avenue, N.W.
Suite 310
Washington, D.C. 20005
Attn: Mark D. Director, Esq.
To Employee: James E. Claypoole
3 Pinecrest Road
Hingham, Massachusetts 02043
</TABLE>
Notice shall be deemed given and effective three days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or, if sent by express delivery, hand
delivery, or facsimile, when actually received. Either party may change the
address for notice by notifying the other party of such change in accordance
with this Section 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid
or inoperative, the other portions of this Agreement shall be deemed valid and
operative and, so far as is reasonable and possible, effect shall be given to
the intent manifested by the portion held invalid or inoperative. This
severability provision shall be in addition to, and not in place of, the
provisions of Section 7(e) above. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
16. EQUITABLE REMEDY. Because of the difficulty of measuring economic losses
to the Company and/or USOP as a result of a breach of the restrictive covenants
set forth in Sections 7, 8, 9 and 10, and because of the immediate and
irreparable damage that would be caused to the Company and/or USOP for which
monetary damages would not be a sufficient remedy, it is hereby agreed that in
addition to all other remedies that may be available to the Company or USOP at
law or in equity, the Company and USOP shall be entitled to specific performance
and any injunctive or other equitable relief as a remedy for any breach or
threatened breach of the aforementioned restrictive covenants.
17. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. The direct expense of any arbitration proceeding shall be
borne by the Company. Each party shall bear its own counsel fees. The
arbitration proceeding shall be held in Boston, Massachusetts. Notwithstanding
the foregoing, the Company and/or USOP shall be
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entitled to seek injunctive or other equitable relief, as contemplated by
Section 16 above, from any court of competent jurisdiction, without the need to
resort to arbitration.
18. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the Commonwealth of Massachusetts without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
BAY STATE COMPUTER GROUP, INC.
By: /s/ Thomas J. Foley
-------------------------------------------------------------------
Name: Thomas J. Foley
Title:
EMPLOYEE:
/s/ James E. Claypoole
- ---------------------
James E. Claypoole
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EXHIBIT A
Under USOP's Incentive Bonus Plan, Employee will be eligible to earn up to
100% of Employee's base salary in bonus compensation, payable out of a bonus
pool determined by the Board of Directors of USOP or a compensation committee
thereof, depending upon the achievement of specified criteria and payable in the
form of cash, stock options, or other non-cash awards, in such proportions, and
in such forms, as are determined by the Board of Directors of USOP or a
compensation committee thereof. Bonuses under the Incentive Bonus Plan will be
determined by measuring Employee's performance, the Company's performance, and
USOP's performance based on the following criteria, weighted as indicated, and
measured against target performance levels established by the Board of Directors
of USOP or such compensation committee: (i) USOP's profits--25%; (ii) the profit
of the Company--50%; and (iii) revenue growth of the Company due to
acquisitions--25%.
The Company and the Employee agree that for purposes of determining the
Company's performance element (criterion (ii) of the preceding formula), any
bonus payable for the period ending on USOP's fiscal year ending April 26, 1997
(which bonus shall be prorated based on Employee's term of service between the
date hereof and such fiscal year end), the Company's target earnings before
interest and taxes for the Company's fiscal year ending March 31, 1997 shall be
$4,500,000, prorated for the period from the date of this Agreement through
April 26, 1997. This performance target shall apply solely for USOP's fiscal
year ending April 26, 1997.
The Company's earnings target referred to in the preceding paragraph will
determined one component of the Employee's eligibility for a bonus award. The
determination of the amount of any bonus awarded to Employee for the period
ending April 26, 1997 will be made by the Compensation Committee of USOP's Board
of Directors based on, among other factors, the amount by which the Company's
earnings exceed the foregoing target.
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 15th day of October, 1996, is by
and between Bay State Computer Group, Inc. a Massachusetts corporation (the
"Company") and a wholly-owned subsidiary of U.S. Office Products Company
("USOP"), a Delaware corporation, and Elizabeth M. Claypoole ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of her skills and services, and Employee desires to continue employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM. The Company hereby employs Employee to perform the
duties described herein, and Employee hereby accepts employment with the
Company, for a term beginning on the date hereof and continuing for a period of
3 years (the "Term"). This Agreement may be terminated prior to the end of the
Term in the manner provided for in Section 6 below.
2. POSITION AND DUTIES. The Company hereby employs Employee as Vice
President and Chief Financial Officer. As such, Employee shall have
responsibilities, duties and authority reasonably accorded to and expected of a
Vice President and Chief Financial Officer of the Company. Employee will report
directly to the President of the Company and the Board of Directors of the
Company (the "Board"). Employee hereby accepts this employment upon the terms
and conditions herein contained and agrees to devote all of her professional
time, attention, and efforts to promote and further the business of the Company.
Employee shall faithfully adhere to, execute, and fulfill all policies
established by the Company
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be $140,000 per year, payable on a regular basis in accordance
with the Company's standard payroll procedures, but not less often than monthly.
On at least an annual basis, the Board will review Employee's performance and
may make increases to such base salary if, in its sole discretion, any such
increase is warranted.
(b) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the Term,
Employee shall be entitled to receive such perquisites and benefits as are
customarily provided by the Company to its employees, subject to such changes,
additions, or deletions as the Company may make from time to time, as well as
such other perquisites or benefits as may be specified from time to time by the
Board.
4. EXPENSE REIMBURSEMENT. The Company shall reimburse Employee for (or, at
the Company's option, pay) all business travel and other out-of-pocket expenses
reasonably incurred by Employee in the performance of her services hereunder
during the Term. All reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request for reimbursement,
and in a format and manner consistent with the Company's expense reporting
policy, as well as applicable federal and state tax record keeping requirements.
1
<PAGE>
5. PLACE OF PERFORMANCE. Employee understands that she may be requested by
the Company to relocate from her present residence to another geographic
location in order to more efficiently carry out her duties and responsibilities
under this Agreement or as part of a promotion or a change in duties and
responsibilities. In such event, if Employee agrees to relocate, the Company
will provide Employee with a relocation allowance, in an amount determined by
the Company, to cover the reasonable costs of moving himself, her immediate
family, and their personal property and effects. The total amount and type of
costs to be covered shall be determined by the Company, in light of prevailing
Company policy at the time. If the Company relocates its headquarters outside of
a 30 mile radius from its current location and the Employee decides not to
relocate to the Company's new location, then the Company and the Employee will
each have the right to terminate the Employee's employment under this Agreement.
If the employment is terminated under this Section 5 and subject to Section
7(i), the Company shall have no liability to Employee for payment of any
severance compensation to Employee and Employee shall have no liability to the
Company for any losses or damages arising from the termination of employment
under this Section 5.
6. TERMINATION; RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the followings ways, prior to the expiration of the
Term:
(a) DEATH. The death of Employee shall immediately terminate the Term, and
no severance compensation shall be owed to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been unable to perform the material
duties of her position on a full-time basis for a period of four consecutive
months, or for a total of four months in any six-month period, then 30 days
after written notice to the Employee (which notice may be given before or after
the end of the aforementioned periods, but which shall not be effective earlier
than the last day of the applicable period), the Company may terminate
Employee's employment hereunder if Employee is unable to resume her full-time
duties with or without reasonable accommodation at the conclusion of such notice
period. Subject to Section 6(f) below, if Employee's employment is terminated as
a result of Employee's disability, the Company shall continue to pay Employee
her base salary at the then-current rate for the lesser of (i) three months from
the effective date of termination, or (ii) whatever time period is remaining
under the Term. Such payments shall be made in accordance with the Company's
regular payroll cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE." The Company may terminate the
Term 10 days after written notice to Employee "for cause," which shall be: (i)
Employee's material breach of this Agreement, which breach is not cured within
10 days of receipt by Employee of written notice from the Company specifying the
breach; (ii) Employee's gross negligence in the performance of her duties
hereunder, intentional nonperformance or intentional mis-performance of such
duties, or refusal to abide by or comply with the reasonable directives of the
Board, her superior officers, or the Company's reasonable policies and
procedures, which actions continue for a period of at least 10 days after
receipt by Employee of written notice of the need to cure or cease; (iii)
Employee's willful dishonesty, fraud, or misconduct with respect to the business
or affairs of the Company or USOP, and that in the judgment of the Company or
USOP materially and adversely affects the operations or reputation of the
Company or USOP; (iv) Employee's conviction of a felony or other crime involving
moral turpitude; or (v) Employee's abuse of alcohol or drugs (legal or illegal)
that, in the Company's judgment, materially impairs Employee's ability to
perform her duties hereunder. In the event of a termination "for cause," as
enumerated above, Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment, the
Company may, without cause, terminate the Term and Employee's employment,
effective 30 days after written notice is provided to the Employee. Should
Employee be terminated by the Company without cause, subject to Section 6(f)
below, Employee shall receive from the Company the base salary at the rate then
in effect for the longer of (i) three months from the date of termination, or
(ii) whatever time period is remaining
2
<PAGE>
under the Term. Such payments shall be made in accordance with the Company's
regular payroll cycle. If Employee resigns or otherwise terminates her
employment for any reason or for no reason, Employee shall receive no severance
compensation.
(e) PAYMENT THROUGH TERMINATION. Upon termination of Employee's employment
for any reason provided above, Employee shall be entitled to receive all
compensation earned and all benefits and reimbursements (including payments for
accrued vacation and sick leave, in each case in accordance with applicable
policies of the Company) due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Employee only to the extent and in the manner expressly provided
above in this Section 6. With respect to incentive bonus compensation, Employee
shall be entitled to receive any bonus declared but not paid prior to
termination. In addition, in the event of a termination by the Company under
Section 6(b) or 6(d), Employee shall be entitled to receive incentive bonus
compensation through the end of the Company's fiscal year in which termination
occurs, calculated as if Employee had remained employed by the Company through
the end of such fiscal year, and paid in such amounts, at such times, and in
such forms as are determined pursuant to Section 3(b). Except as specified in
the preceding two sentences, Employee shall not be entitled to receive any
incentive bonus compensation after the effective date of termination of her
employment. All other rights and obligations of USOP, the Company, and Employee
under this Agreement shall cease as of the effective date of termination, except
that Employee's obligations under Sections 7, 8, 9 and 10 below shall survive
such termination in accordance with their terms.
(f) RIGHT TO OFFSET. In the event of any termination of Employee's
employment under this Agreement, the Employee shall have no obligation to seek
other employment; PROVIDED, that in the event that Employee secures employment
or any consulting or other similar arrangement during the period that any
payment is continuing pursuant to the provisions of this Section 6, the Company
shall have the right to reduce the amounts to be paid hereunder by the amount of
Employee's earnings from such other employment, consulting or other arrangement.
(g) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate
her employment hereunder for "Good Reason." If the Employee terminates
employment for a Good Reason, the Employee shall have no liability to the
Company for any losses or damages arising from the termination of employment
under this Agreement. Upon a termination for a Good Reason and except as
provided in Section 7(i), Company shall have no liability to Employee for
payment of any severance compensation, provided, that the foregoing shall not
limit the Employee's right to pursue remedies for breach of contract under this
Agreement. As used herein, "Good Reason" shall mean the continuance of any of
the following after 10 days' prior written notice by Employee to the Company,
specifying the basis for such Employee's having Good Reason to terminate this
Agreement.
(i) a material adverse change in Employee's status, title, position or
responsibilities;
(ii) the assignment to Employee of any duties materially and adversely
inconsistent with the Employee's position as specified in Section 2 hereof
(or such other position to which she may be promoted), including status,
offices, responsibilities or persons to whom the Employee reports as
contemplated under Section 2 of this Agreement, or any other action by the
Company which results in material and adverse change in such position,
status, offices, titles or responsibilities; and
(iii) any other material breach of this Agreement by the Company,
including the failure to pay Employee on a timely basis the amounts to which
she is entitled under this Agreement.
7. RESTRICTION ON COMPETITION.
(a) For so long as Employee continues to be employed by the Company and/or
any other entity owned by or affiliated with the Company or USOP and thereafter
for a period, subject to Section 7(i), equal to the longer of (x) two years, or
(y) the period during which Employee is receiving any severance pay from the
Company pursuant to Section 6(d), Employee shall not, directly or indirectly,
for himself or
3
<PAGE>
on behalf of or in conjunction with any other person, company, partnership,
corporation, business, group, or other entity (each, a "Person"):
(i) engage, as an officer, director, shareholder, owner, partner,
member, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant, advisor, or sales representative, in any
business selling any products or services in direct competition with the
Company or USOP, within 100 miles of any location where the Company or USOP
conducts business (the "Territory");
(ii) call upon any Person who is, at that time, within the Territory, an
employee of the Company or USOP for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company or
USOP;
(iii) call upon any Person who or that is, at that time, or has been,
within one year prior to that time, a customer of the Company or USOP within
the Territory for the purpose of soliciting or selling products or services
in direct competition with the Company or USOP within the Territory; or
(iv) on Employee's own behalf or on behalf of any competitor, call upon
any Person as a prospective acquisition candidate who or that, during
Employee's employment by the Company or USOP was either called upon by the
Company or USOP as a prospective acquisition candidate or was the subject of
an acquisition analysis conducted by the Company or USOP.
(b) The foregoing covenants shall not be deemed to prohibit Employee from
acquiring as an investment not more than one percent of the capital stock of a
competing business, whose stock is traded on a national securities exchange or
through the automated quotation system of a registered securities association.
(c) It is further agreed that, in the event that Employee shall cease to be
employed by the Company or USOP and enters into a business or pursues other
activities that, at such time, are not in competition with the Company or USOP,
Employee shall not be chargeable with a violation of this Section 7 if the
Company or USOP subsequently enters the same (or a similar) competitive business
or activity or commences competitive operations within 100 miles of the
Employee's new business or activities. In addition, if Employee has no actual
knowledge that her actions violate the terms of this Section 7, Employee shall
not be deemed to have breached the restrictive covenants contained herein if,
promptly after being notified by the Company or USOP of such breach, Employee
ceases the prohibited actions.
(d) For purposes of this Section 7, references to "USOP" shall mean U.S.
Office Products Company, together with its subsidiaries and affiliates.
(e) The covenants in this Section 7 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any provision of this Section 7 relating to the time period
or geographic area of the restrictive covenants shall be declared by a court of
competent jurisdiction to exceed the maximum time period or geographic area, as
applicable, that such court deems reasonable and enforceable, said time period
or geographic area shall be deemed to be, and thereafter shall become, the
maximum time period or largest geographic area that such court deems reasonable
and enforceable and this Agreement shall automatically be considered to have
been amended and revised to reflect such determination.
(f) All of the covenants in this Section 7 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
USOP, whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by USOP or the Company of such covenants; PROVIDED,
that upon the failure of the Company to make any payments required under this
Agreement, the Employee may, upon 30 days' prior written notice to the Company,
waive her right to receive any additional compensation pursuant to this
Agreement and engage in any activity prohibited by the covenants of this Section
7. It is specifically agreed
4
<PAGE>
that the period of two years stated at the beginning of this Section 7, during
which the agreements and covenants of Employee made in this Section 7 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this Section 7.
(g) If the time period specified by this Section 7 shall be reduced by law
or court decision, then, notwithstanding the provisions of Section 6 above,
Employee shall be entitled to receive from the Company her base salary at the
rate then in effect solely for the longer of (i) the time period during which
the provisions of this Section 7 shall be enforceable under the provisions of
such applicable law, or (ii) the time period during which Employee is not
engaging in any competitive activity, but in no event longer than the applicable
period provided in Section 6 above. If Employee is subject to a restriction on
competitive activity as a party to that certain Agreement and Plan of
Reorganization, dated as of October , 1996, by and among U.S. Office
Products Company, BSC Acquisition Corp., James E. Claypoole and Thomas J. Foley
(the "Merger Agreement"), then Employee shall abide by, and in all cases be
subject to, the restrictive covenants (whether in this Section 7 or in the
Merger Agreement) that, in the aggregate, impose restrictions on Employee for
the longest duration and the broadest geographic scope (taking into account the
effect of any applicable court decisions limiting the scope or duration of such
restrictions), it being agreed that all such restrictive covenants are supported
by separate and distinct consideration. This Section 7(g) shall be construed and
interpreted in light of the duration of the applicable restrictive covenants.
(h) Employee has carefully read and considered the provisions of this
Section 7 and, having done so, agrees that the restrictive covenants in this
Section 7 impose a fair and reasonable restraint on Employee and are reasonably
required to protect the interests of the Company and USOP, and their respective
officers, directors, employees, and stockholders. It is further agreed that the
Company and Employee intend that such covenants be construed and enforced in
accordance with the changing activities, business, and locations of the Company
and USOP throughout the term of these covenants.
(i) If Employee is terminated without cause, or if the Employee terminates
employment for a Good Reason or if Employee or the Company terminate employment
pursuant to Section 5 of this Agreement, then the restrictive covenants set
forth in this Agreement shall terminate upon the termination of payment of any
severance pay from the Company pursuant to Section 6(d), provided, however, that
the Company and USOP shall have the right and option to extend the term of the
restrictive covenants for an additional one year period upon payment to Employee
of an amount equal to one-half of her base salary specified in Section 3(a).
8. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business, financial, technical, economic, sales,
and/or other types of proprietary business information relating to the Company
and/or USOP (including all trade secrets), in whatever form, whether oral,
written, or electronic (collectively, the "Confidential Information"), to which
Employee has, or is given (or has had or been given), access as a result of her
employment by the Company. It is agreed that the Confidential Information is
confidential and proprietary to the Company and/or USOP because such
Confidential Information encompasses technical know-how, trade secrets, or
technical, financial, organizational, sales, or other valuable aspects of the
Company's and USOP's business and trade, including, without limitation,
technologies, products, processes, plans, clients, personnel, operations, and
business activities. This restriction shall not apply to any Confidential
Information that (a) becomes known generally to the public through no fault of
the Employee; (b) is required by applicable law, legal process, or any order or
mandate of a court or other governmental authority to be disclosed; or (c) is
reasonably believed by Employee, based upon the advice of legal counsel, to be
required to be disclosed in defense of a lawsuit or other legal or
administrative action brought against Employee; provided, that in the case of
clauses (b) or (c), Employee shall give the Company reasonable advance written
notice of the Confidential Information intended to be disclosed and the reasons
and circumstances surrounding such disclosure, in order to permit the Company to
seek a protective order or other appropriate request for confidential treatment
of the applicable Confidential Information.
5
<PAGE>
9. INVENTIONS. Employee shall disclose promptly to the Company and USOP
any and all significant conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, that are conceived or made by
Employee, solely or jointly with another, during the period of employment or
within one year thereafter, and that are directly related to the business or
activities of the Company or USOP and that Employee conceives as a result of her
employment by the Company, regardless of whether or not such ideas, inventions,
or improvements qualify as "works for hire." Employee hereby assigns and agrees
to assign all her interests therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments, or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
10. RETURN OF COMPANY PROPERTY. Promptly upon termination of Employee's
employment by the Company for any reason or no reason, Employee or Employee's
personal representative shall return to the Company (a) all Confidential
Information; (b) all other records, designs, patents, business plans, financial
statements, manuals, memoranda, lists, correspondence, reports, records, charts,
advertising materials, and other data or property delivered to or compiled by
Employee by or on behalf of the Company, USOP or their respective
representatives, vendors, or customers that pertain to the business of the
Company or USOP, whether in paper, electronic, or other form; and (c) all keys,
credit cards, vehicles, and other property of the Company or USOP. Employee
shall not retain or cause to be retained any copies of the foregoing. Employee
hereby agrees that all of the foregoing shall be and remain the property of the
Company or USOP, as the case may be, and be subject at all times to their
discretion and control.
11. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee, her employment by the
Company, and the performance of her duties hereunder will not violate or be a
breach of any agreement with a former employer, client, or any other Person.
Further, Employee agrees to indemnify and hold harmless the Company and its
officers, directors, and representatives for any claim, including, but not
limited to, reasonable attorneys' fees and expenses of investigation, of any
such third party that such third party may now have or may hereafter come to
have against the Company or such other persons, based upon or arising out of any
non-competition agreement, invention, secrecy, or other agreement between
Employee and such third party that was in existence as of the date of this
Agreement. To the extent that Employee had any oral or written employment
agreement or understanding with the Company, this Agreement shall automatically
supersede such agreement or understanding, and upon execution of this Agreement
by Employee and the Company, such prior agreement or understanding automatically
shall be deemed to have been terminated and shall be null and void.
12. ASSIGNMENT; BINDING EFFECT. Employee understands that she has been
selected for employment by the Company on the basis of her personal
qualifications, experience, and skills. Employee agrees, therefore, that she
cannot assign all or any portion of her performance under this Agreement. This
Agreement may not be assigned or transferred by the Company without the prior
written consent of Employee. Subject to the preceding two sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors, and assigns. Notwithstanding the foregoing, if Employee accepts
employment with a subsidiary or affiliate of USOP other than the Company, unless
Employee and her new employer agree otherwise in writing, this Agreement shall
automatically be deemed to have been assigned to such new employer (which shall
thereafter be an additional or substitute beneficiary of the covenants contained
herein, as appropriate), with the consent of Employee, such assignment shall be
considered a condition of employment by such new employer, and references to the
"Company" in this Agreement shall be deemed to refer to such new employer. If
the Company is merged with or into another subsidiary or affiliate of USOP, such
action shall not be considered to cause an assignment of this Agreement, and the
surviving or successor entity shall become the beneficiary of this Agreement and
all references to the "Company" shall be deemed to
6
<PAGE>
refer to such surviving or successor entity. It is intended that USOP will be a
third-party beneficiary of the rights of the Company under this Agreement. No
other Person shall be a third-party beneficiary.
13. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not a promise
of future employment. Employee has no oral representations, understandings, or
agreements with the Company or any of its officers, directors, or
representatives covering the same subject matter as this Agreement. This
Agreement together with the Merger Agreement, is the final, complete, and
exclusive statement and expression of the agreement between the Company and
Employee with respect to the subject matter hereof and thereof, and cannot be
varied, contradicted, or supplemented by evidence of any prior or
contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of the Company and Employee, and no term of this Agreement may be waived except
by a writing signed by the party waiving the benefit of such term.
14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
<TABLE>
<S> <C>
To the Company: Bay State Computer Group, Inc.
52 Roland Street
Boston, Massachusetts 02129
Attention: President
with a copy to: U.S. Office Products Company
1440 New York Avenue, N.W.
Suite 310
Washington, D.C. 20005
Attn: Mark D. Director, Esq.
To Employee: Elizabeth M. Claypoole
5 Patriots Way
Hingham, MA 02043
</TABLE>
Notice shall be deemed given and effective three days after the deposit in the
U.S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or, if sent by express delivery, hand delivery, or
facsimile, when actually received. Either party may change the address for
notice by notifying the other party of such change in accordance with this
Section 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. This
severability provision shall be in addition to, and not in place of, the
provisions of Section 7(e) above. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
16. EQUITABLE REMEDY. Because of the difficulty of measuring economic
losses to the Company and/ or USOP as a result of a breach of the restrictive
covenants set forth in Sections 7, 8, 9 and 10, and because of the immediate and
irreparable damage that would be caused to the Company and/or USOP for which
monetary damages would not be a sufficient remedy, it is hereby agreed that in
addition to all other remedies that may be available to the Company or USOP at
law or in equity, the Company and USOP shall be entitled to specific performance
and any injunctive or other equitable relief as a remedy for any breach or
threatened breach of the aforementioned restrictive covenants.
17. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. The direct expense of any arbitration proceeding shall
7
<PAGE>
be borne by the Company. Each party shall bear its own counsel fees. The
arbitration proceeding shall be held in Boston, Massachusetts. Notwithstanding
the foregoing, the Company and/or USOP shall be entitled to seek injunctive or
other equitable relief, as contemplated by Section 16 above, from any court of
competent jurisdiction, without the need to resort to arbitration.
18. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the Commonwealth of Massachusetts without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
<TABLE>
<S> <C> <C>
BAY STATE COMPUTER GROUP, INC.
By: /s/ JAMES E. CLAYPOOLE
-----------------------------------------
Name: James E. Claypoole
Title: President
</TABLE>
<TABLE>
<C> <S>
EMPLOYEE:
/s/ ELIZABETH M. CLAYPOOLE
-------------------------------
Elizabeth M. Claypoole
</TABLE>
8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 4, 1998,
relating to the financial statements of Paradigm Concepts, Inc., which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
February 16, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 7, 1996, except for
Note 9, as to which the date is October 24, 1996, relating to the financial
statements of Fortran Corporation, which report appears in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
February 13, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 22, 1997, relating
to the combined financial statements of Aztec East Inc. and Affiliates, which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts".
B.N. KOZIN COMPANY
Melville, New York
February 13, 1998
<PAGE>
EXHIBIT 23.5
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
Paradigm Concepts, Inc. (the "Company") in the registration statement on Form
S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the distribution by U.S. Office Products Company, the sole
shareholder of the Company, of shares of common stock, par value $.001, of the
Company.
<TABLE>
<S> <C>
/s/ JONATHAN J. LEDECKY
Dated: February 12, 1998 -------------------------------------------
Jonathan J. Ledecky
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the audited consolidated financial statements of the company
included in the Registration Statement on Form S-1 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-26-1997
<CASH> 1,106
<SECURITIES> 0
<RECEIVABLES> 22,693
<ALLOWANCES> (351)
<INVENTORY> 3,904
<CURRENT-ASSETS> 33,143
<PP&E> 2,163
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,311
<CURRENT-LIABILITIES> 19,875
<BONDS> 4,953
0
0
<COMMON> 0
<OTHER-SE> 11,626
<TOTAL-LIABILITY-AND-EQUITY> 37,311
<SALES> 136,278
<TOTAL-REVENUES> 136,278
<CGS> 102,129
<TOTAL-COSTS> 102,129
<OTHER-EXPENSES> 23,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324
<INCOME-PRETAX> 10,247
<INCOME-TAX> 3,524
<INCOME-CONTINUING> 6,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,723
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS has not been presented as such amounts are not deemed
meaningful due to the significant change in the Company's
capital structure that will occur upon the consummation
of the Distribution.
</FN>
</TABLE>
