<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 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 (PHONE)
(617) 623-5888 (FAX)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C>
GEORGE P. STAMAS, ESQ. LELAND E. HUTCHINSON, ESQ.
WILMER, CUTLER & PICKERING JOHN L. MACCARTHY, ESQ.
2445 M STREET, N.W. WINSTON & STRAWN
WASHINGTON, D.C. 20037 35 W. WACKER DRIVE
(202) 663-6000 (PHONE) CHICAGO, ILLINOIS 60601
(202) 663-6363 (FAX) (312) 558-5600 (PHONE)
(312) 558-5700 (FAX)
</TABLE>
------------------------
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, as amended (the "Securities Act"), 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>
PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.001 per share................................................ $50,000,000 $14,750
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act.
--------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 6, 1998
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 SOLD PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS 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.
SHARES
COMMON STOCK
-----------------
All of the shares of Common Stock offered hereby are being sold by Paradigm
Concepts, Inc. ("Paradigm" or the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $ and
$ per share. See "Underwriting" for information relating to the method of
determining the initial public offering price. The Company has applied for
quotation on the Nasdaq National Market under the symbol .
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.................................................. $ $ $
Total (3).................................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
------------------------
The Common Stock is offered by the Underwriters, as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1998.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 7
The Spin-Offs From U.S. Office Products.................................................................... 14
Use of Proceeds............................................................................................ 17
Dividend Policy............................................................................................ 17
Dilution................................................................................................... 18
Capitalization............................................................................................. 19
Selected Financial Data.................................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 29
Management................................................................................................. 38
Certain Relationships and Related Transactions............................................................. 44
Principal Stockholders..................................................................................... 45
Description of Capital Stock............................................................................... 46
Shares Eligible for Future Sale............................................................................ 48
Underwriting............................................................................................... 49
Validity of Common Stock................................................................................... 50
Experts.................................................................................................... 50
Additional Information..................................................................................... 51
Index to Unaudited Pro Forma Condensed Consolidated Financial Information, Financial Statements and
Consolidated Financial Statements......................................................................... F-1
</TABLE>
------------------------
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by its independent public
accountants and quarterly reports containing unaudited consolidated financial
statements for each of the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY AND NOTES THERETO, THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF THE COMPANY AND THE NOTES THERETO, AND THE FINANCIAL
STATEMENTS OF CERTAIN COMPANIES ACQUIRED BY THE COMPANY AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THE PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES: (I) CONSUMMATION OF THE TRANSACTIONS
DESCRIBED UNDER "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS;" (II) AN INITIAL
PUBLIC OFFERING PRICE OF $ PER SHARE OF COMMON STOCK (REPRESENTING THE
MIDPOINT OF THE PRICE RANGE); (III) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION
WILL NOT BE EXERCISED. SEE "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS." AS USED IN
THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "PARADIGM" AND
THE "COMPANY" REFER TO PARADIGM CONCEPTS, INC. AND INCLUDE PARADIGM CONCEPTS,
INC. AND ALL OF ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS AND
SUBSIDIARIES.
THE COMPANY
Paradigm is a single-source provider of a broad range of Information
Technology ("IT") business solutions. Paradigm currently consists of ten
companies who have been in business for an average of over 15 years, with a
history of superior client service. These companies offer complementary IT
solutions, which allow Paradigm to be a "one-stop" IT solutions provider in the
Northeast region of the United States, while providing personalized services to
its clients on a regional and local basis. Paradigm's clients include middle
market and Fortune 1000 companies in a wide range of industries (including
communications, health care, financial services, government, manufacturing,
pharmaceuticals, professional services, and technology). In 1997, Paradigm,
which employs over 1,000 people (approximately 65% of whom are technical
professionals), provided services to over 2,000 customers. For the fiscal year
ended April 26, 1997, Paradigm had pro forma revenues of $228.9 million and pro
forma net income of $10.7 million.
Paradigm was initially formed in October 1996 with the acquisition of Bay
State Computer Group ("Bay State") by U.S. Office Products. Since that time,
under the leadership of Paradigm's current Chief Executive Officer, James E.
Claypoole, nine complementary regional IT solutions companies have been
acquired. These companies are: (i) Aztec International ("Aztec"); (ii) Compel
Corporation ("Compel"); (iii) Digital Network Associates, Inc. ("Digital Network
Associates"); (iv) Entra Computer Corp. ("Entra"); (v) Fortran Corp.
("Fortran"); (vi) Mahon Communications Corporation ("Mahon"); (vii) Office
Equipment Service, Inc. ("Office Equipment Service"); (viii) Professional
Computer Solutions, Inc. ("Professional Computer Solutions"); and (ix)
Professional Network Services, Inc. ("Professional Network Services"). The
Company intends to continue to pursue growth through targeted strategic
acquisitions.
Paradigm's broad range of complementary IT business solutions includes: (i)
consulting and engineering services; (ii) systems and network design and
implementation services; (iii) software development and implementation services;
(iv) IT support and operational services; and (v) telephony design and
integration services. Paradigm is currently providing this broad range of
services in the Northeast region of the United States, and certain of these
services in the other regions of the United States. Paradigm intends to extend
its comprehensive services offerings to the other regions of the United States.
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, and OS/2) on a variety of
hardware platforms (Intel, Sun, HP, and Digital). In addition, Paradigm supports
its clients' hardware and software needs related to the World Wide Web and
high-end telephony services.
With the rapid evolution of technology, the market for IT solutions has
grown significantly. According to industry sources, the United States market for
outsourced IT services is expected to grow from $13 billion in 1996 to
approximately $24 billion in 2001. Although companies recognize the importance
of IT services to their business, they are often unable to keep pace with the
rate of technological change without
4
<PAGE>
outsourcing their IT needs. This trend towards outsourcing has been compounded
by the scarcity of technical professionals in the United States, and has driven
the growth of the outsourced IT solutions industry.
Paradigm's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. Paradigm intends to grow through a
combination of targeted strategic acquisitions and internal growth. Paradigm's
acquisition strategy is to extend its range of services to the regions outside
of the Northeast by acquiring existing, profitable businesses, rather than
start-up operations. Paradigm's internal growth strategies include (i)
capitalizing on existing cross-selling opportunities and (ii) expanding its IT
solutions offerings. Paradigm plans to encourage and manage cross-selling
through a Company-developed proprietary software communication tool that will
permit it to review and manage sales leads generated at any level of Paradigm's
operations, reinforced by compensation incentives.
THE TECHNOLOGY DISTRIBUTION
Prior to the completion of this Offering, all of the shares of Paradigm
Common Stock owned by U.S. Office Products will be distributed to the
stockholders of U.S. Office Products in a spin-off (the "Technology
Distribution"). U.S. Office Products is spinning off Paradigm as part of a
strategic restructuring plan (the "Strategic Restructuring Plan") in which U.S.
Office Products is spinning off the shares of four companies, including Paradigm
(the "Spin-Off Companies") that will conduct U.S. Office Products' current print
management, technology solutions, educational supplies and corporate travel
services businesses. (The spin-offs are collectively referred to as the
"Distributions.") See "The Spin-Offs From U.S. Office Products."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Paradigm....................... shares(1)
Common Stock to be outstanding after this Offering..... shares(1)(2)
Use of proceeds........................................ To fund future acquisitions, and
for general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol..........................
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Excludes shares of Common Stock subject to options exercisable as of
, 1998.
5
<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 (3)........... 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
(4)................. 95,963 95,963
OTHER DATA:
EBITDA..............
<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 (3)........... 5,353
-----------
Net income............ $ 6,814
-----------
-----------
Pro forma net income
per share........... $ 0.07
-----------
-----------
Weighted average
shares outstanding
(4)................. 95,963
OTHER DATA:
EBITDA..............
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, 1997
------------------------
MARCH 31,
--------------------------------- APRIL 30, APRIL 26,
1993 1994 1995 1996 1997 ACTUAL PRO FORMA (5)
--------- ----------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 29,535 $ 18,157
Total assets.................... 14,890 16,423 28,106 33,945 37,311 137,901 126,523
Long-term debt, less current
portion....................... 461 461 1,524 799 167 1,527 3,694
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 81,211
<CAPTION>
PRO FORMA
AS ADJUSTED
(6)
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital................. $
Total assets....................
Long-term debt, less current
portion.......................
Long-term payable to U.S. Office
Products......................
Stockholder's equity............
</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 March 5, 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) 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 these acquisitions by the Company.
(4) 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.
(5) 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.
(6) Adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby at the assumed initial public offering price and the
anticipated application of the estimated net proceeds therefrom. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY (THE
"OFFERING").
POTENTIAL VOLATILITY OF STOCK PRICE, RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE
As a result of the Technology Distribution, stockholders of U.S. Office
Products are acquiring shares of Paradigm Common Stock that are freely
tradeable at the time of this Offering without restrictions or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except that any shares held by "affiliates" of Paradigm within the
meaning of the Securities Act will be subject to the resale limitations of Rule
144 promulgated under the Securities Act ("Rule 144"). Because the Technology
Distribution is being made to existing shareholders of U.S. Office Products, who
have not made an affirmative decision to invest in Paradigm Common Stock, there
can be no assurance that some or all of those shareholders will not sell the
shares of Paradigm Common Stock into the market shortly after the Technology
Distribution. In addition, U.S. Office Products is included in certain
broad-based indices tracked by a number of investment companies and other
institutional investors, and such investors can be expected to sell the shares
of Paradigm Common Stock they receive in the Technology Distribution shortly
thereafter. Until Paradigm Common Stock issued in the Technology Distribution is
fully distributed, the price at which such stock trades may fluctuate
significantly and may be higher or lower than the price that would be expected
on a fully distributed issue.
A "when-issued" trading market in the Common Stock may develop immediately
upon the Distribution. Such trading could increase the volatility of, and
adversely affect the market price of, the Common Stock.
In addition, upon completion of this Offering and the Technology
Distribution, Paradigm will have outstanding (i) shares of Paradigm Common
Stock and (ii) immediately exerciseable options to acquire approximately
shares of Paradigm Common Stock (determined at the time of the Technology
Distribution). The officers and directors of Paradigm who together hold
shares of Paradigm Common Stock have not agreed not to sell, offer, make any
short sale or otherwise dispose of or enter into any contract, arrangement or
other commitment to sell or otherwise dispose of any Paradigm Common Stock
without the prior written consent of BancAmerica Robertson Stephens for a period
of 180 days from the date of this Prospectus (the "Lock-Up Agreements"). All the
remaining shares will be freely tradeable immediately upon completion of this
Offering or, in the case of options, upon vesting and exercise, except that
shares held or acquired by affiliates of Paradigm will be subject to the resale
limitations of Rule 144. Following this Offering and the Technology
Distribution, in view of the large number of shares freely tradeable and
available for immediate sale, the market for Paradigm Common Stock could be
highly volatile and could adversely affect the trading price of the Common
Stock.
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 an
independent 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,
its recently-hired Chief Operating Officer, Ira Cohen, and the presidents of its
nine other operating companies, Paradigm has not yet identified officers who
will manage Paradigm's operations, although Paradigm intends to employ a Chief
Financial Officer prior to the consummation of the Offering. 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
7
<PAGE>
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. 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.
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. Further, Paradigm is
subject to limitations on the number of shares it can issue without jeopardizing
the tax-free treatment of the Technology Distribution. See "Possible Limitations
on Issuances of Common Stock," "-- Material Amount of Goodwill," and "Inability
to Use Pooling-of-Interests Accounting."
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, or the acquired company
otherwise fails to perform as anticipated, the acquisition could have a material
adverse effect on the operating results and financial condition of Paradigm.
8
<PAGE>
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.
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.
RELIANCE ON KEY PERSONNEL
Paradigm's operations depend on the continued efforts of James E. Claypoole,
its Chief Executive Officer, Ira Cohen, its Chief Operating 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, and intends to enter into an employment
agreement with its Chief Operating Officer. 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 (as
defined in "The Spin-Offs From U.S. Office Products") will succeed to certain
rights of, and obligations under, such agreement following the Distributions
(the "Ledecky Services Agreement"). See "Management--Director Compensation and
Other Arrangements." Mr. Ledecky will also serve as a director of each of the
other Spin-Off Companies, and is a director or an officer of two other public
companies. Mr. Ledecky may be unable to devote substantial time to the
activities of Paradigm.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of major
client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel cost increases. Certain of these
factors may also affect the Company's personnel utilization rates which
9
<PAGE>
may cause further variation in quarterly operating results. The timing of
revenues is difficult to forecast because the Company's sales cycle is
relatively long and the Company's services are impacted by both the financial
condition and management decisions of its clients and general economic
conditions. Because a high percentage of the Company's expenses are relatively
fixed at the beginning of any period and the Company's general policy is to not
adjust its staffing levels based upon what it views as short-term circumstances,
a variation in the timing of the initiation or the completion of client
assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from quarter to quarter and could
result in losses for any particular period. In addition, many of the Company's
engagements are, and may be in the future, terminable by its clients without
penalty. A termination of a major project could require the Company to maintain
under-utilized employees, resulting in a higher than expected percentage of
unassigned professionals, or to terminate the employment of excess personnel.
Due to all of the foregoing factors, there can be no assurance that the
Company's results of operations will not be below the expectations of investors
for any given fiscal period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
COMPETITION
The IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues, and have greater name
recognition than does the Company. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior managers, the price at which
others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future. See
"Business--Competition."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Technology Distribution and this Offering, it is anticipated
that there may be no public market for the Common Stock, and there can be no
assurance, that an active public market will develop for the Common Stock, or
that the Common Stock will trade in the public market subsequent to the Offering
at or above the initial public offering price. The initial public offering price
of the Common Stock offered hereby will be determined through negotiations among
the Company and the Underwriters and may not be indicative of the market price
for the Common Stock after this Offering. See "Underwriting." The trading price
of the Common Stock could be subject to wide fluctuations in response to
variations in the Company's quarterly operating results, changes in earnings
estimates by analysts, conditions in the Company's businesses, general market or
economic conditions or other factors. In addition, in recent years the stock
market has experienced extreme price and volume fluctuations. These fluctuations
have had a
10
<PAGE>
substantial effect on the market prices for many emerging growth companies,
often unrelated to the operating performance of the specific companies. Such
market fluctuations could have a material adverse effect on the market price of
the Common Stock.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Technology Distribution, Paradigm will enter into a
tax allocation agreement with U.S. Office Products and the other Spin-Off
Companies (the "Tax Allocation Agreement"), which will provide that Paradigm and
the other 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 a tax
indemnification agreement (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 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. As a result, Paradigm
could become liable for a pro rata portion of any Distribution Taxes with
respect to not only the Technology Distribution but also any of the other
Distributions. See "The Spin-Offs From U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement" for a detailed discussion of the
Tax Allocation Agreement and Tax Indemnification Agreement.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
U.S. Office Products has sought to structure the Technology Distribution to
qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code"). Assuming the Technology Distribution qualifies as
a tax-free spin-off and is not taxable under Section 355(e) of the Code, 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. As a result of
certain U.S. federal income tax limitations under Section 355 of the Code, the
amount of Company capital stock that can be issued in connection with the
Technology Distribution without jeopardizing the tax-free treatment of the
Technology Distribution may be limited to 20% of the amount of Company capital
stock that would be issued and outstanding after giving effect to all such
issuances, if such issuances are deemed to occur prior to the Technology
Distribution. It is unclear whether stock in the Company that is acquired
pursuant to immediately exercisable options counts toward this 20% limitation.
Section 355(e) of the Code, which was added in 1997, provides generally that
a company that distributes shares in a spin-off that is otherwise tax-free will
incur material U.S. federal income tax if 50% or more, by vote or value, of the
capital stock of the company making the spin-off or of the spun-off entity is
acquired by one or more persons, acting pursuant to a plan or series of related
transactions that includes the spin-off. Stock acquired by persons acting
pursuant to a plan or arrangement, and stock acquired by certain related persons
is aggregated in determining whether this 50% test is met. There is a rebuttable
presumption that any acquisition occurring two years before or after the
spin-off is pursuant to a plan that includes the spin-off. Such presumption may
be rebutted by establishing that the spin-off and such acquisition are not
pursuant to a plan or series of related transactions. As a result of the
provisions of Section 355(e), there can be no assurance that issuances of stock
by the Company, including issuances in
11
<PAGE>
connection with an acquisition of another business by the Company, will not
create a tax liability for U.S. Office Products. The Company has entered into a
Tax Allocation Agreement and Tax Indemnification Agreement pursuant to which the
Company will be liable to U.S. Office Products and the other Spin-Off Companies
if its actions result in a tax liability related to the spin-off. See "The
Spin-Offs From U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement.
These limitations could adversely affect the pace of the Company's
acquisition program and its ability to issue Company Common Stock for other
purposes, including equity offerings.
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 of accounting. Paradigm currently
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.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
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.
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 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.
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
12
<PAGE>
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 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.
NO DIVIDENDS
The Company has never paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. See "Dividend
Policy."
DILUTION
Purchasers of Common Stock in the Offering will sustain a substantial and
immediate dilution of $ per share, based on the assumed initial public
offering price. In addition, the exercise of outstanding stock options after
this Offering could have a further dilutive effect. See "Dilution."
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.
13
<PAGE>
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
OVERVIEW
Prior to the Offering, Paradigm has been a wholly-owned subsidiary of U.S.
Office Products. At the time of the Offering, Paradigm will hold all of the
business and assets of, and will be responsible for substantially all of the
liabilities associated with, U.S. Office Products Technology Solutions Division.
Prior to the completion of the Offering, all of the shares of
Paradigm Common Stock owned by U.S. Office Products will be distributed to the
stockholders of U.S. Office Products in a spin-off. U.S. Office Products is
spinning off Paradigm as part of a Strategic Restructuring Plan in which U.S.
Office Products is spinning off the shares of the Spin-Off Companies that will
conduct U.S. Office Products' current print management, technology solutions,
educational supplies and corporate travel services businesses. At the same time
as the Distributions, U.S. Office Products is repurchasing approximately 28% of
its issued and outstanding common stock in a tender offer and is selling equity
securities to an affiliate (the "Investor") of an investment fund managed by
Clayton, Dubilier & Rice, Inc., which will give the Investor a 24.9% equity
interest in U.S. Office Products (but no interest in the Spin-Off Companies).
In connection with the Technology Distribution, Paradigm is entering into a
series of agreements with U.S. Office Products and the other Spin-Off Companies
to provide mechanisms for an orderly transition and to define certain
relationships among Paradigm, U.S. Office Products and the other Spin-Off
Companies after the Technology Distribution. These agreements are: a
distribution agreement (the "Distribution Agreement") among Paradigm, U.S.
Office Products and the other Spin-Off Companies: a tax allocation agreement
(the "Tax Allocation Agreement") among Paradigm, U.S. Office Products and the
other Spin-Off Companies; an employee benefits agreement (the "Employee Benefits
Agreement") among Paradigm, U.S. Office Products and the other Spin-Off
Companies; and a tax indemnification agreement (the "Tax Indemnification
Agreement") among Paradigm and the other Spin-Off Companies.
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 agreement
between U.S. Office Products and the Investor relating to the Investor's
investment in U.S. Office Products (the "Investment Agreement") specifies
certain terms of these agreements and provides that they are subject to the
Investor'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 among U.S. Office Products,
Paradigm, and the other Spin-Off Companies 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, Paradigm, and the other Spin-Off
Companies that are owned by persons who sold
14
<PAGE>
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, Paradigm, and the other Spin-Off Companies 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 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. 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. 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
$ .
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 AND TAX INDEMNIFICATION 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.
15
<PAGE>
The Tax Allocation Agreement will further 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 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. 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. As a result, Paradigm could become liable
for a pro rata portion of any Distribution Taxes with respect to not only the
Technology Distribution but also any of the other Distributions.
U.S. Office Products and the Company will receive an opinion of Wilmer,
Cutler & Pickering, counsel to U.S. Office Products and the Company, 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 taxable under
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
present facts or circumstances which should 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 and it is possible that the IRS may take the position
that the Technology Distribution does not qualify as a tax-free spin-off or is
taxable under Section 355(e).
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, Paradigm
will retain or assume liability for employment-related claims and severance for
persons currently or previously employed by Paradigm, while U.S. Office Products
and the other Spin-Off Companies and their respective post-Distribution
subsidiaries will retain or assume responsibility for their respective current
and previous employees. The proposed Employee Benefits Agreement reflects U.S.
Office Products' expectation that Paradigm and the other 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 the spinning off of portions of the U.S. Office
Products' cafeteria plan that relate to employees of Paradigm and the other
Spin-Off Companies and having those spun-off plans assume responsibilities for
claims submitted on or after the Distributions.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to Paradigm from the sale of shares offered by the
Company hereby, based on an assumed initial public offering price of $ per
share (after deducting the estimated underwriting discount and offering
expenses), are estimated to be $ if the Underwriters' over-allotment option
is exercised in full.
Paradigm intends to use such net proceeds to fund future acquisitions and
for general corporate purposes. See "The Spin-Offs From U.S. Office Products."
Paradigm has from time to time acquired businesses and is engaged in preliminary
discussions with third parties concerning possible acquisitions by Paradigm.
Paradigm is not a party to any agreement with respect to any acquisition and no
acquisition is currently probable. There can be no assurance that in the future
Paradigm will come to any agreement with respect to any acquisition, as to the
terms of any acquisition, or that any acquisition would ultimately be
consummated. Any acquisition might use a significant portion of the net proceeds
of this Offering. See "Risk Factors--Dependence Upon Acquisitions for Future
Growth."
DIVIDEND POLICY
Paradigm does not anticipate declaring and paying cash dividends on the
Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of dividends on the 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.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of , 1998
was approximately $ , or $ per share of Paradigm Common Stock. Pro forma
net tangible book value per share is equal to the Company's total pro forma
tangible assets less its total pro forma liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds," the pro forma net
tangible book value of the Company at , 1998, would have been
approximately $ , or approximately $ per share. This represents an
immediate increase of $ per share in the pro forma net tangible book value
to existing stockholders and an immediate dilution of $ per share in pro
forma net tangible book value to new investors purchasing Common Stock in the
Offering. The following table illustrates the per share dilution to new
investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
Offering.................................................. $
Increase per share attributable to new investors..........
---------
Pro forma net tangible book value after the Offering........
---------
Dilution per share to new investors......................... $
---------
---------
</TABLE>
The foregoing computations assume no exercise of stock options to acquire
shares of Common Stock exercisable upon consummation of the Technology
Distribution. To the extent that shares of Common Stock are issued upon exercise
of these options, the effect would be to increase the dilution to new investors.
See "Management--1998 Stock Incentive Plan."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Paradigm as of October
25, 1997 (i) on an actual basis, (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 as described in "The Spin-Offs From U.S. Office Products," and
(iii) on a pro forma, as adjusted basis to give effect to the sale by the
Company of the shares of Common Stock offered hereby and after deduction of
estimated offering expenses and underwriting discounts and commissions and the
application of the estimated net proceeds therefrom. See "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Position and Results of Operations," 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
Prospectus.
<TABLE>
<CAPTION>
OCTOBER 25, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
<S> <C> <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
Preferred Stock, $0.001 par value.......................................
shares authorized, no shares outstanding........................
Common Stock, $0.001 par value, shares authorized, no shares actual,
shares pro forma, shares pro forma, as adjusted (1)............... 96
Additional paid-in capital.............................................. 65,652
Retained Earnings....................................................... 15,463 15,463
--------- ----------- ------
Total Stockholders' Equity............................................ 87,532 81,211
--------- ----------- ------
Total Capitalization................................................ $ 96,283 $ 84,905 $
--------- ----------- ------
--------- ----------- ------
</TABLE>
- ------------------------
(1) Excludes options to acquire shares of Common Stock exercisable upon
consummation of the Technology Distribution. See "Management--1998 Stock
Incentive Plan."
19
<PAGE>
SELECTED FINANCIAL DATA
The historical Statement of Income Data for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 and the Balance Sheet Data at April 30, 1996
and April 26, 1997 have been derived from Paradigm's consolidated financial
statements that have been audited and are included elsewhere in this Prospectus.
The historical Statement of Income Data for the fiscal years ended March 31,
1993 and 1994 and the Balance Sheet Data at March 31, 1993, 1994 and 1995 have
been derived from unaudited consolidated financial statements that are not
included elsewhere in this 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 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 March 5, 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" that
appear elsewhere in this Prospectus.
20
<PAGE>
SELECTED FINANCIAL DATA (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
APRIL 26, ------------------------
--------------------
FISCAL YEAR ENDED MARCH 31, PRO
------------------------------------------ FORMA OCTOBER 26, OCTOBER 25,
1993 1994 1995 1996 1997 1997 (2) 1996 1997
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <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
Cost of revenues............ 34,121 43,630 65,858 84,113 102,129 169,150 50,571 60,840
--------- --------- --------- --------- --------- --------- ----------- -----------
Gross profit................ 12,031 15,349 23,141 29,942 34,149 59,762 15,590 18,765
Selling, general and
administrative expenses... 10,139 11,218 14,942 20,510 21,525 40,848 10,011 12,329
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
Interest expense............ 412 297 331 420 324 400 226 50
Interest income............. (75) (54) (118) (416) (168) (128) (267)
Other (income) expense...... (77) (75) (111) (964) (53) (579) (58) 11
--------- --------- --------- --------- --------- --------- ----------- -----------
Income before provision for
income taxes.............. 1,632 3,963 8,097 10,392 10,247 19,093 4,434 6,642
Provision for income taxes
(3)....................... 210 232 401 750 3,524 8,401 502 2,657
--------- --------- --------- --------- --------- --------- ----------- -----------
Net income.................. $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,723 $ 10,692 $ 3,932 $ 3,985
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Pro forma net income per
share..................... $ 0.11
---------
---------
Weighted average shares
outstanding (4)........... 95,963
OTHER DATA:
EBITDA
<CAPTION>
PRO PRO
FORMA FORMA
OCTOBER 26, OCTOBER 25,
1996 (2) 1997 (2)
----------- -----------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................... $ 113,600 $ 128,167
Cost of revenues............ 84,818 94,576
----------- -----------
Gross profit................ 28,782 33,591
Selling, general and
administrative expenses... 19,332 21,450
Non-recurring acquisition
costs.....................
----------- -----------
Operating income............ 9,450 12,141
Interest expense............ 200 200
Interest income.............
Other (income) expense...... (329) (226)
----------- -----------
Income before provision for
income taxes.............. 9,579 12,167
Provision for income taxes
(3)....................... 4,215 5,353
----------- -----------
Net income.................. $ 5,364 $ 6,814
----------- -----------
----------- -----------
Pro forma net income per
share..................... $ 0.06 $ 0.07
----------- -----------
----------- -----------
Weighted average shares
outstanding (4)........... 95,963 95,963
OTHER DATA:
EBITDA
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, 1997
------------------------
MARCH 31,
--------------------------------- APRIL 30, APRIL 26,
1993 1994 1995 1996 1997 ACTUAL PRO FORMA (5)
--------- ----------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 29,535 $ 18,157
Total assets..................... 14,890 16,423 28,106 33,945 37,311 137,901 126,523
Long-term debt, less current
portion........................ 461 461 1,524 799 167 1,527 3,694
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 81,211
<CAPTION>
PRO FORMA
AS
ADJUSTED(6)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital..................
Total assets.....................
Long-term debt, less current
portion........................
Long-term payable to U.S. Office
Products.......................
Stockholder's equity.............
</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 March 5,
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) 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 these acquisitions by the Company.
(4) 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.
(5) 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.
(6) Adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby at the assumed initial public offering price and the
anticipated application of the estimated net proceeds therefrom. See "Use of
Proceeds."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS," AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
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.
Paradigm was initially formed in October 1996 with the acquisition of Bay
State by U.S. Office Products. Since that time, under the leadership of
Paradigm's current Chief Executive Officer, James E. Claypoole, nine
complementary regional IT solutions companies were acquired. These companies
are: (i) Aztec; (ii) Compel; (iii) Digital Network Associates; (iv) Entra; (v)
Fortran; (vi) Mahon; (vii) Office Equipment Service; (viii) Professional
Computer Solutions; and (ix) Professional Network Services.
Paradigm generates revenues principally from (i) fees for services rendered
to customers (including consulting and engineering services, systems and network
implementation services, software development and implementation services,
information technology support and operational services, and telephony design
and integration services) and (ii) sales of products to customers within these
business sectors (including telephony systems and network and systems hardware
and software).
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
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
22
<PAGE>
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.
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. In addition, revenues of Purchased
Companies acquired at the end of the six months ended October 25, 1997
contributed to the increase in revenues.
23
<PAGE>
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 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.
24
<PAGE>
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 of the
Pooled Companies. 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 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
25
<PAGE>
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.
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.
26
<PAGE>
As a result of the provisions of Section 355 of the Internal Revenue Code,
the Company may be subject to constraints in its ability to issue additional
shares of Common Stock in certain transactions for two years following the date
of the Technology Distribution. In particular, if 50% or more, by vote or value,
of the capital stock of Paradigm is acquired by one or more persons acting
pursuant to a plan or series of transactions that includes the Technology
Distribution, Paradigm will suffer significant tax liability. Paradigm will
evaluate any significant future issuance of capital stock to avoid the
imposition of such tax liability. See "Risk Factors--Possible Limitations on
Issuance of Common Stock."
The Company anticipates that its current cash on hand, cash flow from
operations, the net proceeds from the Offering and additional financing
available under the Credit Facility will be sufficient to meet the Company's
liquidity requirements for its operations through the end of fiscal 1999.
However, the Company intends to pursue acquisitions which are expected to be
funded through a combination of cash and shares of Common Stock. There can be no
assurances that additional sources of financing will not be required during the
next 12 months or thereafter.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of major
client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel cost increases. Certain of these
factors may also affect the Company's personnel utilization rates which may
cause further variation in quarterly operating results. The timing of revenues
is difficult to forecast because the Company's sales cycle is relatively long
and the Company's services are impacted by both the financial condition and
management decisions of its clients and general economic conditions. Because a
high percentage of the Company's expenses are relatively fixed at the beginning
of any period and the Company's general policy is to not adjust its staffing
levels based upon what it views as short-term circumstances, a variation in the
timing of the initiation or the completion of client assignments, particularly
at or near the end of any quarter, can cause significant variations in operating
results from quarter to quarter and could result in losses for any particular
period. In addition, many of the Company's engagements are, and may be in the
future, terminable by its clients without penalty. A termination of a major
project could require the Company to maintain under-utilized employees,
resulting in a higher than expected percentage of unassigned professionals, or
to terminate the employment of excess personnel. Due to all of the foregoing
factors, there can be no assurance that the Company's results of operations will
not be below the expectations of investors for any given fiscal period.
27
<PAGE>
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, 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
<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(1).............................................. 2,695 1,779 3,056 2,820 10,350
</TABLE>
- ------------------------
(1) Reflects a one-time charge of $1,105, $366, and $803 for the second, third,
and fourth quarters, respectively, for non-recurring acquisition costs.
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.
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century and consequently
use only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000 (the "Year 2000 Issue"). The Company has reviewed the potential impact of
the Year 2000 Issue on its business, operations and financial condition and has
concluded that it will not be material.
28
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION OF THE COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS," AND "BUSINESS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
Paradigm is a single-source provider of a broad range of IT business
solutions. Paradigm currently consists of ten companies who have been in
business for an average of over 15 years, with a history of superior client
service. These companies offer complementary IT solutions, which allow Paradigm
to be a "one-stop" IT solutions provider in the Northeast region of the United
States while providing personalized services to its clients on a regional and
local basis. Paradigm's clients include middle market and Fortune 1000 companies
in a wide range of industries (including communications, health care, financial
services, government, manufacturing, pharmaceuticals, professional services, and
technology). In 1997, Paradigm, which employs over 1,000 people (approximately
65% of whom are technical professionals), provided services to over 2,000
customers. For the fiscal year ended April 26, 1997, Paradigm had pro forma
revenues of $228.9 million and pro forma net income of $10.7 million.
Paradigm's broad range of complementary IT business solutions includes: (i)
consulting and engineering services; (ii) systems and network design and
implementation services; (iii) software development and implementation services;
(iv) IT support and operational services; and (v) telephony design and
integration services. Paradigm is currently providing this broad range of
services in the Northeast region of the United States, and certain of these
services in other regions of the United States. Paradigm intends to extend its
comprehensive services offerings to the other regions of the United States.
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, and OS/2) on a variety of
hardware platforms (Intel, Sun, HP, and Digital). In addition, Paradigm supports
its clients' hardware and software needs related to 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. Paradigm intends to grow through a
combination of targeted strategic acquisitions and internal growth. Paradigm's
acquisition strategy is to extend its range of services to the regions outside
of the Northeast by acquiring existing, profitable businesses, rather than
start-up operations. Paradigm's internal growth strategies include (i)
capitalizing on existing cross-selling opportunities and (ii) expanding its IT
solutions offerings. Paradigm plans to encourage and manage cross-selling
through a company-developed proprietary software communication tool that will
permit it to review and manage sales leads generated at any level of Paradigm's
operations, reinforced by compensation incentives.
Paradigm was initially formed in October 1996 with the acquisition of Bay
State by U.S. Office Products. Since that time, under the leadership of
Paradigm's current Chief Executive Officer, James E. Claypoole, nine
complementary regional IT solutions companies have been acquired. A brief
description of Paradigm's constituent operating companies follows.
AZTEC INTERNATIONAL
Founded in 1983, Aztec is a leading provider of cost-effective service for
telecommunications equipment. With facilities strategically positioned across
the United States, Aztec is able to provide OEM rework, secondary
telecommunications equipment sales, and repair for key systems, telephone PBX,
telephones and printed circuit boards. Aztec holds the distinction of being
among the few organizations in
29
<PAGE>
the tele-service industry that is trained for and has been awarded ISO-9002
Certification. Aztec is headquartered in South Norwalk, Connecticut, and as of
December 31, 1997, had 91 employees.
BAY STATE COMPUTER GROUP
Founded in 1984, Bay State is a leading enterprise service provider,
offering solutions to both mid-size and large corporate entities. As a
full-service, multi-platform design and implementation company, Bay State
provides the engineering expertise to design, configure, implement, manage and
support a wide variety of enterprise IT environments. Bay State's areas of
expertise include strategic design and process re-engineering, Internet/intranet
development, IT infrastructure, connectivity and security services, performance
management, and engineering outsourcing for both short- and long-term technology
projects. Bay State is headquartered in Boston, Massachusetts and as of December
31, 1997, had 175 employees.
COMPEL CORPORATION
Founded in 1979, Compel designs and installs full-service communication
networks, providing a broad spectrum of solutions to handle data, voice, and
video. Using a staff of Registered Communications Distribution Designers, Compel
integrates fiber optics into customer networks. Compel's expertise ranges from
developing enterprise criteria, documenting topology, and providing
implementation, to evaluating performance. Compel is headquartered in Silver
Springs, California, and as of December 31, 1997, had 321 employees.
DIGITAL NETWORK ASSOCIATES
Founded in 1986, Digital Network Associates designs, installs, and supports
complex enterprise IT solutions. Digital Network Associates' solutions encompass
strategic planning, network design, project management, training, customer
support, and engineering services. Digital Network Associates also provides
application development in client/server, wireless client/server, groupware
collaboration, and multimedia applications. Digital Network Associates is
headquartered in New York City, and as of December 31, 1997, had 45 employees.
ENTRA COMPUTER CORP.
Founded in 1984, Entra's professional programmers develop specialized,
integrated applications for a variety of vertical industries, integrating
software for customers using popular programming languages and database
software. Entra also has a large engineering staff who design and integrate
enterprises as well as a dedicated division of Computer Aided Design engineers,
and a team that provides training for operating systems and applications. Entra
is headquartered in Youngstown, Ohio, and as of December 31, 1997, had 49
employees.
FORTRAN
Founded in 1983 by telecommunications engineers, Fortran has experience with
the attributes of a wide variety of telecommunications systems, and uses this
experience to develop failsafe systems for specific client environments ranging
from simple turnkey systems to complex voice data communications systems.
Fortran designs and integrates telecommunications systems and solutions to meet
the individual needs and requirements of its clients. Fortran engineers have
expertise in Integrated Services Digital Networks ("ISDN"), and in integrating
LAN, data and voice communications, video conferencing, voicemail and voice
processing into the ISDN of the future. Fortran is headquartered in Newington,
Virginia, and as of December 31, 1997, had 58 employees.
30
<PAGE>
MAHON
Founded in 1979, Mahon develops turnkey data, voice and video integrated
solutions. Mahon designs, installs, and maintains enterprise, telephone/voice
processing systems, and video conferencing systems. Mahon maintains a large
staff of Registered Communications Distribution Designers who provide custom
solutions for complete voice, data and video infrastructures that scale to
individual customer requirements. Mahon also has expertise in telephony
applications, including automatic call distribution, unified messaging, and
interactive voice response. Mahon is headquartered in Boston, Massachusetts, and
as of December 31, 1997, had 97 employees.
OFFICE EQUIPMENT SERVICE
Founded in 1972, Office Equipment Service provides enterprise services,
including document management solutions and technical support. Office Equipment
Service provides consultations to evaluate customer needs using a variety of
diagnostic methods and tools, ranging from user surveys to sophisticated
enterprise-monitoring devices that pinpoint areas for improvement. Office
Equipment Service is headquartered in Memphis, Tennessee, and as of December 31,
1997, had 89 employees.
PROFESSIONAL COMPUTER SOLUTIONS
Founded in 1985, Professional Computer Solutions is a leading software
development and consulting firm specializing in groupware and messaging systems,
data warehousing, Web-based development, n-tier client/server, and application
rightsizing. Professional Computer Solutions provides failsafe solutions to
clients' business needs, delivering complete enterprise designs with application
development and post-implementation support to ensure that clients realize all
of the system's benefits. Professional Computer Solutions is headquartered in
Englewood, New Jersey, and as of December 31, 1997, had 80 employees.
PROFESSIONAL NETWORK SERVICES
Founded in 1989, Professional Network Services provides comprehensive
enterprise solutions and helps organizations evaluate constantly-changing
technologies. Professional Network Services designs infrastructure, defines
service level objectives, and develops appropriate enterprise management
practices to support service levels. Professional Network Services also provides
video-conferencing and technical support to customers. Professional Network
Services is headquartered in Trumbull, Connecticut, and as of December 31, 1997,
had 62 employees.
MARKET AND INDUSTRY OVERVIEW
Since the mid-1980's, dramatic changes have occurred in the delivery of IT
solutions 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 increasingly turn to outside organizations such as Paradigm for
efficient design, development, and implementation of IT systems. According to
industry sources, the United States market for outsourced IT services is
expected to grow from approximately $13 billion in 1996 to approximately $24
billion in 2001. Due in part to the rapid pace of technological change coupled
with the scarcity of skilled IT professionals, business solutions frequently are
too sophisticated and complex for a company to undertake
31
<PAGE>
itself. Moreover, Paradigm believes the cost of developing complex business
solutions in-house has generally exceeded the internal resources of the
business. In addition, the increased use of outside IT solutions firms is being
driven by competitive pressures requiring rapid implementation of new systems
and the adverse effects of selecting inappropriate or outdated technology.
Additionally, many companies have made a strategic decision to focus on their
core competencies, minimize their fixed costs, and reduce their workforce,
thereby preventing them from investing in large IT staffs.
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 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 technological developments have introduced applications that
capitalize on "cyberspace" and create additional opportunities for business
solution companies to provide: (i) 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; (ii)
consulting and design services for Internet-specific products, such as
firewalls, Internet security systems, and network management; and (iii)
integrated voice and data systems that provide networks replacing existing
separate telephone systems and cable plants.
Demand for IT services has grown significantly and the nature of the IT
services industry has changed. According to Dataquest, 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 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. Furthermore, the IT
service industry is highly-fragmented, with a small number of large national
service providers and a large number of small- and medium-sized providers,
typically regional in scope. Recently, the industry has experienced an increase
in consolidation activity that Paradigm believes is driven in part by corporate
demands for single-source IT providers.
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 STRATEGY
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. Paradigm intends to grow
through a combination of targeted strategic acquisitions and internal growth.
32
<PAGE>
GROWTH BY ACQUISITION.
Paradigm's acquisition strategy is to identify profitable, well-managed
companies that provide services that complement the services already provided by
Paradigm, and facilitate Paradigm's expansion throughout the United States.
Paradigm's acquisition program will have as its goals the extension of the IT
business solutions offerings that it already has in place in the Northeast
region of the United States 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 identity of such acquired companies.
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 Prospectus, Paradigm
currently does not have any agreements for pending acquisitions and no
acquisitions are probable.
INTERNAL GROWTH.
CAPITALIZING ON EXISTING CROSS-SELLING OPPORTUNITIES. Paradigm's operating
companies are each regional IT solutions providers that provide complementary IT
solutions. 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 plans to encourage and
manage cross-selling through a Company-developed proprietary software
communication tool that will permit it to review and manage sales leads
generated at any level of Paradigm's operations, reinforced by compensation
incentives.
EXPANDING IT SOLUTIONS OFFERINGS. Paradigm has historically derived a
greater portion of its revenues from IT projects involving consulting and
engineering services. Paradigm plans to continue to focus on these services,
which are described below under "--The Paradigm Solution, Consulting and
engineering services." Paradigm has contractual strategic alliances with IBM,
Sun Microsystems, Hewlett Packard, Compaq, Digital, and over fifty other
manufacturers of IT equipment. As a result, Paradigm can recommend the best IT
business solutions for its clients without being restricted by narrow product
offerings, providing Paradigm the opportunity to grow its consulting and
engineering business.
Paradigm also believes that it has significant opportunities to expand its
software development and implementation services, which are described below
under "The Paradigm Solution--Software development and implementation services."
This business has historically accounted for a smaller portion of Paradigm's
revenues, and Paradigm believes that it has the expertise to extend these
services to other regions in the United States where the Company does not
currently offer them.
33
<PAGE>
THE PARADIGM SOLUTION
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:
CONSULTING AND ENGINEERING SERVICES
Business Process Reengineering
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. In providing these consulting and engineering 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.
SYSTEMS AND NETWORK DESIGN AND IMPLEMENTATION SERVICES
LAN and WAN client/server design and
integration
Internet/intranet infrastructure design and integration
Voice and data communication infrastructure
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.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
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
34
<PAGE>
latest technology and techniques. 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.
INFORMATION TECHNOLOGY SUPPORT AND OPERATIONAL SERVICES
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.
TELEPHONY DESIGN AND INTEGRATION SERVICES
Design and integrate telecommunications 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 has the
ability to integrate LAN, data and voice communications, video conferencing,
voicemail and voice processing into the ISDN of the future.
35
<PAGE>
The following graphic shows the IT business solutions offered by each of
Paradigm's ten operating companies: Aztec, Bay State, Compel, Digital Network
Associates ("DNA"), Entra, Fortran, Mahon, Office Equipment Service ("OES"),
Professional Computer Solutions ("PCSI") and Professional Network Services, Inc.
("PNS"):
[LOGO]
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, the
Chief Operating Officer, 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
36
<PAGE>
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.
As of December 31, 1997, Paradigm employed 133 sales people across the country.
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 IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues than does the Company, and
have greater name recognition. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the price at
which others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future.
Paradigm's principal competitors include Lucent Technologies Inc., Bell
Atlantic Corporation, Sapient Corporation, Cambridge Technology Partners
(Massachusetts), Inc., Digital Equipment Corporation, and International Business
Machines Corporation.
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
As of 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.
37
<PAGE>
MANAGEMENT
DIRECTORS, OFFICERS, AND KEY EMPLOYEES
Following the Offering, it is anticipated that the directors, officers, and
key employees 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*
Ira Cohen............................................ 44 Chief Operating Officer*
Elizabeth M. Claypoole............................... 32 Vice President, Treasurer, and Secretary*
Jonathan J. Ledecky.................................. 40 Director**
Phillip Arturi....................................... 40 President of Professional Network Services
Larry Glaser......................................... 38 President of Fortran
Kelby Knoedler....................................... 47 President of Entra
James Mahon.......................................... 50 President of Mahon
Darren Metz.......................................... 35 President of Office Equipment Service
Jack Meehan.......................................... 48 President of Aztec
Robert McClory....................................... 53 President of Compel
Benjamin Tandowski................................... 50 President of Professional Computer Solutions
</TABLE>
- ------------------------
* Executive Officer
** 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.
IRA COHEN has served as Chief Operating Officer of Paradigm since March 2,
1998. Mr. Cohen founded Copley Management Associates, a technology management
consulting company, in 1979. In 1984, Mr. Cohen merged Copley Management
Associates with DataTrend to form Copley Systems, Inc. In 1993, after selling
Copley Systems, Inc. (which had grown from $2 million in annual revenue to $104
million in annual revenue over the preceding nine years), Mr. Cohen was employed
by CIC Systems as Chief Operating Officer of its Copley Division from 1993
through 1996. Mr. Cohen's non-compete agreement with CIC Systems has expired.
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,
38
<PAGE>
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.
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 1970's
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, 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 and by Tie/communications.
ROBERT M. MCCLORY, PRESIDENT OF COMPEL, founded Compel in 1972 and has been
its President since that date. From 1972 to 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.
ADDITIONAL DIRECTORS; COMMITTEES
Prior to the Offering, 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 Offering. 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 Offering. 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 Offering 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.
39
<PAGE>
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 officers
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
Ira Cohen................................................ $ 200,000(3)
Chief Operating Officer
Elizabeth M. Claypoole................................... $ 142,500(1) 7,500(4)
Vice President, Treasurer, and Secretary
</TABLE>
- ------------------------
(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) Mr. Cohen was hired by Paradigm on March 2, 1998. His salary is expected to
be $200,000 during his first year with Paradigm.
(4) Options to purchase U.S. Office Products Common Stock.
OPTIONS GRANTED IN FISCAL YEAR 1997
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 26, 1997. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire Paradigm Common Stock in connection with the
Technology Distribution. See "The Spin-Offs From U.S. Office Products." Upon
consummation of the Technology Distribution, the number of stock options granted
to officers, directors, and employees of
40
<PAGE>
Paradigm and their exercise price will be determined according to a formula
agreed to by U.S. Office Products and Paradigm prior to this Offering.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS EXERCISE OPTION TERM(3)
OPTIONS GRANTED IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
- ------------------------------- -------------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James E. Claypoole (4)......... -- -- -- -- -- --
Elizabeth M. Claypoole (5)..... 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 $15.17, which expire on April 28,
2007.
AGGREGATED OPTIONS FISCAL YEAR ENDED APRIL 26, 1997 AND FISCAL YEAR-END 1997
OPTION VALUES
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 26, 1997. No options were exercised
by the Named Officers during the fiscal year ended April 26, 1997. As described
above, all options were granted by U.S. Office Products as options to acquire
U.S. Office Products Common Stock and are expected to be replaced with options
to acquire shares of Paradigm Common Stock in connection with the Technology
Distribution. See "The Spin-Offs From U.S. Office Products." Upon consummation
of the Technology Distribution, the number of stock options granted to officers,
directors, and employees of Paradigm and their exercise price will be determined
41
<PAGE>
according to a formula set by the Board of Directors or Compensation Committee
of U.S. Office Products prior to this Offering.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY(3) OPTIONS AT FISCAL YEAR
IN THE MONEY OPTIONS END($)(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.
1998 STOCK INCENTIVE PLAN
Prior to consummation of the Offering, the Company anticipates establishing
a 1998 stock incentive plan.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Jonathan J. Ledecky entered into an agreement ("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, Paradigm, or the other
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 Paradigm and the other Spin-Off
Companies to hire them away and from calling upon customers of Paradigm and the
other Spin-Off Companies to solicit or sell products or services in direct
competition with Paradigm and the other Spin-Off Companies. Mr. Ledecky is also
barred from hiring away for Consolidation Capital Corporation any person then or
in the preceding one year employed
42
<PAGE>
Paradigm, or the other Spin-Off 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 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").
It is expected that Mr. Ledecky's option will become fully exercisable as to
two-thirds of the shares it covers 12 months after the Distribution Date. 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
43
<PAGE>
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.
On March 2, 1998, Paradigm hired Ira Cohen as its Chief Operating Officer.
Paradigm expects to enter into an employment agreement with Mr. Cohen prior to
the Offering.
Effective as of the Distribution Date, Bay State 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.
CERTAIN RELATIONSHIPS AND RELATED 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. See
"Management--Employment Contracts and Related Matters."
For a discussion of matters related to the spin-off of Paradigm from U.S.
Office Products, see "The Spin-Offs from U.S. Office Products."
For a discussion of transactions between Paradigm and Mr. Ledecky, see
"Management--Director Compensation and Other Arrangements."
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of Common Stock that are expected to be beneficially owned as of the date
of this Prospectus (assuming no exercise of the Underwriters' over-allotment
option) and as adjusted to reflect the sale of the shares of Common Stock
offered hereby and the Technology Distribution by (i) all persons known by
Paradigm to own beneficially more than 5% of the Common Stock, (ii) each
director and each Named Officer who is a stockholder, and (iii) all directors
and executive officers as a group. Except as otherwise indicated, the business
address of each of the following is 52 Roland Street, Boston, Massachusetts
02129.
<TABLE>
<CAPTION>
PERCENT
------------------------
PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
James E. Claypoole (1).......................................................... *
Jonathan J. Ledecky.............................................................
Elizabeth M. Claypoole (2)...................................................... *
All current executive officers and directors as a group (five persons)..........
5% STOCKHOLDERS:
FMR Corp (3)....................................................................
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company (3)....................................
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering.
(2) Includes shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering.
(3) Based upon a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") with respect to U.S. Office Products Common Stock.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, Paradigm's authorized capital stock is expected
to consist of shares of 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 Offering, Paradigm is expected to have outstanding
approximately shares of Common Stock and no shares of Preferred Stock. Set
forth below is a summary of the terms of Paradigm's authorized capital stock.
COMMON STOCK
The holders of 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 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 Common Stock have no preemptive
rights to purchase shares of stock of Paradigm. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of Paradigm. All of the shares of Common Stock to be sold pursuant to
the Offering 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
Common Stock. For example, Preferred Stock issued by Paradigm may rank prior to
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for Common Stock or may otherwise adversely affect the market price of
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 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
46
<PAGE>
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 AND INDEMNIFICATION
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. The
Company's by-laws provide that the Company will, to the fullest extent permitted
under Delaware law, indemnify its officers and directors against any damages
arising out of their actions as officers or directors of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Common Stock will be .
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
following this Offering and the Technology Distribution could have an adverse
effect on the market price of the Common Stock. Upon completion of this Offering
and the Technology Distribution, Paradigm will have shares of Common Stock
outstanding. The shares of Common Stock offered by the Company hereby (and
any shares sold pursuant to the exercise of the Underwriters' over-allotment
option) will be freely tradeable without restriction. shares of Common Stock
of the Company issued upon consummation of the Technology Distribution will be
freely tradeable after the Technology Distribution and shares of Common Stock
issued upon consummation of the Technology Distribution will be "restricted
securities" subject to Rule 144 promulgated under the Securities Act. Beginning
180 days after the date of this Prospectus, additional shares of Common Stock
will become eligible for sale upon expiration of the Lock-Up Agreements with the
Representatives of the Underwriters.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least one year, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the outstanding Common
Stock (approximately shares of Common Stock immediately after this
Offering or shares if the Underwriters' over-allotment option is exercised
in full) or (ii) the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements, and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is not
an affiliate of the Company for at least 90 days prior to a sale and who has
beneficially owned "restricted securities" for at least two years is entitled to
sell such shares under Rule 144 without regard to the limitations described
above.
The Company intends to register the shares of Common Stock reserved for
issuance pursuant to its stock incentive plan as soon as practicable following
the date of this Prospectus. Options to acquire shares of Common Stock will
be exercisable upon consummation of the Technology Distribution. Following this
Offering and the Technology Distribution, in view of the large number of shares
freely-tradeable and available for immediate sale, the market for the Company's
Common Stock could be highly volatile, which could adversely affect the trading
price of the Common Stock.
48
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives. BancAmerica Robertson Stephens, Volpe Brown Whelan & Company,
LLC and Friedman, Billings, Ramsey & Co., Inc. (the "Representatives"), have
severally agreed, subject to the terms and conditions of an underwriting
agreement among the Company and the Underwriters (the "Underwriting Agreement"),
to purchase the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens...................................................
Volpe Brown Whelan & Company, LLC................................................
Friedman, Billings, Ramsey & Co., Inc............................................
----------
Total......................................................................
----------
----------
</TABLE>
The Representatives have advised the Company that they propose to offer the
shares of Common Stock to the public at the offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the initial public Offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall affect the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option exercisable during the
30-day period after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the same prices per share as the Company
will receive for the shares that the Underwriters have agreed to purchase
from the Company. To the extent that the Underwriters exercise such option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a percentage
of the shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the shares
are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Pursuant to the terms of the Lock-Up Agreements, the holders of
approximately shares of the Common Stock have agreed with the
Representatives that for a period of 180 days after the date of this Prospectus
(the "Lock-Up Period"), that, subject to certain limited exceptions, they will
not sell or otherwise dispose of shares of Common Stock, including shares
issuable under options or warrants exercisable during the Lock-Up Period, any
options or warrants to purchase shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock owned directly by
such holders or with respect to which they have the power of disposition without
the prior written consent of BancAmerica Robertson Stephens. However,
BancAmerica Robertson Stephens may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. There are no agreements between the Representatives and any of the
Company's stockholders providing consent by the Representatives to the sale of
shares prior to the expiration of the Lock-Up Period. The Company has agreed
that during the Lock-Up Period, the Company will not, subject to certain
exceptions, without the prior written consent of BancAmerica Robertson Stephens,
(i) consent to the disposition of any shares held by stockholders prior to the
expiration of the Lock-Up Period or (ii) issue, sell, contract to sell or
otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, other than the
Company's sale of shares in this Offering, the issuance of Common Stock upon the
49
<PAGE>
exercise of outstanding options and warrants and the Company's issuance of
options and stock under the existing stock option and stock purchase plans. See
"Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations between the Company and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions, certain financial information of the
Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
Certain persons participating in this Offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilmer, Cutler & Pickering, Washington, D.C. Certain legal matters in
connection with the Common Stock will be passed upon for the Underwriters by
Winston & Strawn, Chicago, Illinois.
EXPERTS
The financial statements included in this 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.
50
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement on Form
S-1 pursuant to the Securities Act with respect to the Common Stock offered
hereby (the "Registration Statement"). This prospectus (the "Prospectus") does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus concerning the provisions of any document filed with the Registration
Statement as exhibits 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 as an exhibit to the Registration Statement. For
further information about the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and to the financial statements,
schedules and exhibits filed as a part thereof.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof and the reports and other information filed by
the Company with the Commission in accordance with the Exchange Act may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
its Chicago Regional Officer, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the public
reference section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, and the
address of such site is http://www.sec.gov.
51
<PAGE>
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION,
FINANCIAL STATEMENTS, AND CONSOLIDATED 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-26
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-27
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-28
Statement of Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited) F-29
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-30
Notes to Financial Statements F-31
COMPEL CORPORATION
Report of Price Waterhouse LLP, Independent Accountants F-34
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-35
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-36
Statement of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997 (unaudited) F-37
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-38
Notes to Financial Statements F-39
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
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 March 5, 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 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. BALANCE SHEET
(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. STATEMENT OF INCOME
(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 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)
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.
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.
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)
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 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.
F-16
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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.
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
F-17
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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.
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,
respectively, during the period of time between the Pooled Companies most
recently completed year-end and April 30, 1996.
F-18
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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>
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>
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>
F-19
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
Depreciation expense for the fiscal years ended March 31, 1995 and 1996 and
April 26, 1997 was $454, $494 and $541, respectively.
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.
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>
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>
F-20
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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 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.
F-21
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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>
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
F-22
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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>
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.
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.
F-23
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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 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.
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.
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
F-24
<PAGE>
PARADIGM CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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.
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>
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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -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-40
<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-41
<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-42
<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-43
<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-44
<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................................................... $ 14,750
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 March 6, 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
- ----------------------------------- (Principal Executive
James E. Claypoole Officer), March 6, 1998
President, and Director
/s/ ELIZABETH M. CLAYPOOLE
- ----------------------------------- Principal Financial and March 6, 1998
Elizabeth M. Claypoole Accounting Officer
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
23.6 Consent of James E. Claypoole to be named as director
27 Financial data schedule
</TABLE>
- ------------------------
* To be supplied by amendment.
*** Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-46533.
<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
March 6, 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
March 6, 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
March 6, 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 initial public offering by the Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ JONATHAN J. LEDECKY
Dated: March 6, 1998 -------------------------------------------
Jonathan J. Ledecky
</TABLE>
<PAGE>
EXHIBIT 23.6
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 initial public offering by the Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ JAMES E. CLAYPOOLE
Dated: March 4, 1998 -------------------------------------------
James E. Claypoole
</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>
