<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998.
REGISTRATION NO. 333-53411
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
OFFICE CENTRE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5112 04-3341936
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------
38 EAST 32ND STREET
4TH FLOOR
NEW YORK, NEW YORK 10016
(212) 779-6700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------
ROBERT J. GILLON, JR.
CHIEF EXECUTIVE OFFICER
OFFICE CENTRE CORPORATION
38 EAST 32ND STREET
4TH FLOOR
NEW YORK, NEW YORK 10016
(212) 779-6700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Floyd I. Wittlin, Esq. John A. Good, Esq.
Richards & O'Neil, LLP Baker, Donelson, Bearman & Caldwell
885 Third Avenue 2000 First Tennessee Building, 20th Floor
New York, New York 10022-4802 Memphis, Tennessee 38103
(212) 207-1200 (901) 526-2000
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same 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. [ ]
------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 NOR MAY
OFFERS TO BUY BE ACCEPTED 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.
SUBJECT TO COMPLETION, DATED JULY 21, 1998
PROSPECTUS
4,000,000 SHARES
[OFFICE CENTRE LOGO]
COMMON STOCK
------------------
Of the 4,000,000 shares of common stock, par value $.001 per share (the
"Common Stock"), of Office Centre Corporation (the "Company") being offered
hereby (the "Offering"), 3,575,000 shares are being offered by the Company and
425,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price per
share will be between $10 and $12. For factors considered in determining the
initial public offering price, see "Underwriting." The Common Stock has been
approved for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "OCCI."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE 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 PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................
- ---------------------------------------------------------------------------------------------------------------------------
Total(4)...................
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) Before deducting expenses of the Offering payable by the Selling
Shareholders estimated to be $ .
(4) The Company and one of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 600,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts,
Proceeds to the Company and Proceeds to Selling Stockholders will be
$ , $ , $ , and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if issued to and accepted by them,
and subject to the Underwriters' right to withdraw, cancel, or modify such Offer
and reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made on or about , 1998.
MORGAN KEEGAN & COMPANY, INC.
MCDONALD & COMPANY SECURITIES, INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[A MAP OF THE UNITED STATES WITH THE OFFICE CENTRE LOGO IN THE MIDDLE,
CONTAINING STARS AND DOTS SHOWING THE COMPANY'S CENTRES AND SATELLITES
AND A SQUARE SHOWING THE HEADQUARTERS OF THE COMPANY'S BUYING GROUP,
WITH PICTURES OF A COMPUTER, AN OFFICE CENTRE DELIVERY TRUCK,
AN EMPLOYEE HOLDING A BOX OF SUPPLIES, AND A CERTAIN STOCK ITEM.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants.
<PAGE> 4
PROSPECTUS SUMMARY
Simultaneously with and conditioned on the closing of the Offering, Office
Centre Corporation will acquire in separate transactions (the "Acquisitions") in
exchange for cash and shares of Common Stock, twelve commercial office products
businesses (collectively, the "Founding Companies"). Unless otherwise indicated,
all references herein to the "Company" mean Office Centre Corporation after
consummation of the Acquisitions and include the Founding Companies, and
references herein to "Office Centre Corporation" shall mean Office Centre
Corporation and its wholly-owned subsidiary prior to consummation of the
Acquisitions.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in this
Prospectus, including the information set forth under "Risk Factors" and in the
financial statements, including the notes thereto. Unless otherwise indicated,
all share (including the number of options granted at the time of the Offering
and shares issued in connection with the Acquisitions), per share and financial
information set forth herein has been adjusted to give effect to (i) a one-for-
3.36 reverse stock split effective as of the closing of the Offering (the
"Reverse Split"), and (ii) the Acquisitions and assumes an initial public
offering price of $11 per share, the midpoint of the range set forth on the
cover page of this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of the Underwriters'
over-allotment option. In addition, all references to years, unless otherwise
noted, refer to the Company's fiscal year which ends on December 31 of each
year.
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "estimates" and words of similar import, constitute
"forward-looking statements" and involve known and unknown risks, uncertainties
and other factors set forth under "Risk Factors" and elsewhere in this
Prospectus, that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These statements appear under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
Prospectus. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements.
THE COMPANY
Office Centre Corporation has been established for the purpose of becoming
a nationwide office products supplier that serves primarily small and
medium-sized corporate customers. The Founding Companies serve the New York
City; Los Angeles; Atlanta; Dallas/Fort Worth; Boston; Baltimore; Sacramento;
Richmond, Virginia; Grand Rapids, Michigan; and Montgomery, Alabama metropolitan
areas. Following the Acquisitions, the Company believes that it will be one of
the 20 largest office products suppliers in the United States in terms of sales.
The Company, through its wholly-owned subsidiary, UDI Corp. ("UDI"), also
operates one of the largest office products buying groups in the United States,
with approximately 1,100 office products stationers and office furniture dealers
as members. In addition to selling office supplies, the Company also sells
office furniture and technology supplies, performs and outsources printing
services and conducts limited retail operations. The Company had pro forma
revenues and operating income for the year ended December 31, 1997 of
approximately $126.8 million and $5.2 million, respectively, and for the three
months ended March 31, 1998 of approximately $33.8 million and $1.6 million,
respectively.
In 1996, the office products industry generated approximately $125 billion
in revenues, and the Company estimates that the segment supplying the small and
medium-sized corporate customer (i.e., companies with 20 to 250 employees)
represented approximately $18 billion of such revenues. Historically, the
distribution of office products to the corporate segment has been fragmented and
served by numerous stationers, most of which operated in only one metropolitan
area and had annual sales of less than $15 million. In recent years, large
consolidators have grown rapidly through acquisitions of medium and large-sized
contract stationers, which primarily serve companies with more than 250
employees.
The Company is considered a "commercial stationer," rather than a contract
stationer, and its typical customer is the 20 to 250 employee company. This
segment of the industry remains highly fragmented, as much
3
<PAGE> 5
of the consolidation in the industry has involved contract stationers. There are
approximately 3,200 independent commercial stationers with estimated aggregate
1996 sales of $18 billion. To successfully compete with other suppliers, most
commercial stationers have "partnered" with national wholesalers in order to be
more efficient with warehousing and distribution and have joined industry buying
groups such as UDI in order to offer more competitive prices and marketing
programs.
The Company has adopted an integrated operating and acquisition strategy
designed to provide superior localized service to small and medium-sized
companies, and to achieve growth internally as well as through the acquisition
of other commercial stationers.
The key elements of the Company's operating strategy are as follows:
- Focus on Serving Small and Medium-Sized Companies. The Company
believes that small and medium-sized companies will be the fastest
growing sector of the economy in the United States in terms of
revenues over the next three to five years, and that these companies
tend to be very loyal customers, generally purchasing office
products from one primary supplier. The Company believes that this
market segment is more fragmented and offers better margins than the
large company (over 250 employees) segment.
- Leverage Wholesaler Resources. The Company intends to leverage the
resources of two national wholesalers, S.P. Richards and United
Stationers, as well as regional and niche wholesalers. Such
resources include custom catalogs, electronic ordering, wrap and
label capabilities and national distribution. The Company believes
that this will allow it to (i) reduce inventory, warehousing and
distribution costs; and (ii) minimize the need to build an extensive
distribution system.
- Achieve Operating Efficiencies and Economies of Scale. The Company
will seek to achieve operating efficiencies and economies of scale
through: (i) volume purchasing of office products; (ii) combining
certain administrative functions at the corporate level; (iii)
implementing a centre/satellite strategy and eliminating redundant
facilities and services; (iv) implementing Company-wide integrated
technology and operating systems; (v) providing a Company-wide
proprietary catalog to increase advertising rebates from
manufacturers; and (vi) increasing sales volumes by broadening the
complement of products and services its stationers offer. The
Company intends to combine the buying power of UDI with that of the
Company's stationers in order to obtain more favorable prices and
rebates, which office product manufacturers and wholesalers have
historically offered only to high volume purchasers.
- Capitalize on Private Brand Image. The Company has developed a
private brand image program that includes Office Centre brand
products, retail store signage, proprietary catalogs and a web site.
The Company believes this three-year old program enhances its name
recognition with commercial stationers and customers and offers a
significant profit opportunity.
- Operate with Decentralized Management. The Company intends to
operate with decentralized management, and has entered into
long-term employment contracts with senior management employees at
each of the Founding Companies and intends to continue to enter into
such contracts in connection with future acquisitions. Under the
Company's "centre and satellite" strategy, experienced local
management will make decisions relating to the day-to-day operations
of a particular centre and its related satellites and will be
responsible for the profitability and growth of that operation. The
Company believes that the operating autonomy provided by this
decentralized structure, together with the implementation of
reporting systems and financial controls at the corporate level,
will enable it to combine the superior customer service and
responsiveness of a locally-oriented stationer with the resources
and economies of scale of a large company.
The Company will face several risks in implementing its operating strategy.
First, the Founding Companies have been operated independently and there can be
no assurance that the Company will be able to successfully integrate their
businesses on a profitable basis. Second, the Company may experience
unanticipated delays, complications or expenses in implementing, integrating and
operating its technology and operating systems at all of its locations. Third,
the Company is dependent upon S.P. Richards and United Stationers to supply it
with
4
<PAGE> 6
products and the loss of either of these two national wholesalers as a source of
product could adversely affect the Company. Fourth, some of the Founding
Companies were marginally profitable or operated at a loss during the fiscal
year ended December 31, 1997, and there can be no assurance that management of
those companies will be able to operate these locations profitably within the
Company's decentralized management structure. See "Risk Factors."
The key elements of the Company's acquisition strategy are as follows:
- Target Major Metropolitan Areas. The Company intends to expand
aggressively through acquisitions into an additional 35 major
metropolitan areas throughout the country. The Company will first
seek to make a centre acquisition in a targeted area by acquiring an
established, high quality commercial stationer with revenues of $7
million to $20 million. It will then seek to acquire additional,
smaller synergistic commercial stationers, or satellites, typically
with revenues of $5 million or less, within the metropolitan market
surrounding the centre stationers. The Company intends to
substantially integrate the operations of acquired satellites with
the centre stationers in order to leverage more effectively the
Company's distribution capabilities, thereby eliminating a
substantial portion of the operating expenses of the acquired
satellites and increasing the Company's margins.
- Leverage UDI Membership and Exclusivity Agreements. Through UDI,
the Company maintains relationships with a large network of
stationers that are potential acquisition candidates for the
Company. Ten of the Founding Companies are members of UDI. In order
to strengthen its acquisition pipeline, the Company has entered into
exclusivity agreements with approximately 60 UDI members, which the
Company believes collectively had 1997 revenues in excess of $120
million. The exclusivity agreements provide that, at the Company's
request, the acquisition candidates will engage in good faith
discussions with the Company with respect to the sale of their
respective companies and that they will not solicit offers from, or
engage in any such discussions with, any other party for a period of
six to nine months. In addition, the exclusivity agreements permit
the Company to conduct due diligence on the acquisition candidates.
- Retain Local Management and Image. The Company intends to acquire
successful commercial stationers with strong management in its
targeted centre locations. In most instances, the Company expects to
retain the management, sales personnel and name of the acquired
centre stationer. To preserve local market knowledge and customer
relationships, the Company has entered into long-term employment
contracts with senior management employees at each of the Founding
Companies and intends to continue to do so in connection with
stationers acquired in the future.
The Company will face several risks in implementing its acquisition
strategy. These risks include diversion of management's attention and resources
to acquisitions, competition among large consolidators of office products
companies to acquire independent stationers, thus possibly limiting the number
of acquisitions targets and increasing the cost of purchasing them, and the risk
that the acquired companies will not be managed profitably or successfully
integrated. Moreover, there can be no assurance that the Company will be able to
obtain the additional debt or equity financing necessary to implement its
acquisition strategy on favorable terms, if at all. See "Risk Factors."
5
<PAGE> 7
The following chart sets forth the corporate structure of the Company after
the Acquisitions:
Office Centre
- ------------------------------- Corporation -------------------------------
--------------
- ------------- ------------ ----------- ------------ -----------------
The Supply New England King Office Sierra Office Office Solutions
Room Companies Office Supply Supply, Inc. Systems and Business Products
Inc. Inc. Products, Inc. and Services, Inc
- ------------- ------------ ----------- ------------- -----------------
- ------------- ------------ ----------- ------------- -----------------
UDI Corp. Office Centre "SOS" Office Office Centre Office Express,
- ------------- Fort Worth, Inc Supply Company Georgia, Inc. Inc.
(d/b/a Greenwood -------------- (d/b/a Georgia --------------
Outfitters, BCB Impression Products
Office Products, and Southern Office
BCB Specialists and Centre)
Metro Data Supply) ------------------
-------------------
- ------------------ ------------------ --------------- -----------------
The Office Channel UDI Office Centre Art Retailers King Office Supply
Broadcasting Canada, Ltd. Together, Inc. Co., Inc.
Network, Inc. ------------------ --------------- ------------------
- ------------------
Office Centre Corporation, a Delaware corporation, was incorporated in
October 1996. Its principal executive offices are located at 38 East 32nd
Street, New York, New York 10016 and its telephone number is (212) 779-6700.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Office Centre Corporation....... 3,575,000 shares
Common Stock offered by the Selling Stockholders........ 425,000 shares(1)
Common Stock to be outstanding after the Offering....... 8,500,000 shares(2)
Use of proceeds......................................... To pay the cash portion of the purchase
price for the Founding Companies, to repay
certain indebtedness and to pay certain
obligations due upon consummation of the
Offering and for working capital and general
corporate purposes, including possible
future acquisitions. The Company will not
receive any proceeds from the sale of shares
by the Selling Stockholders. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.................. OCCI
</TABLE>
- ---------------
(1) See "Principal and Selling Stockholders."
(2) Includes 3,354,482 shares of Common Stock to be issued in connection with
the Acquisitions. See Note 1 to the Unaudited Pro Forma Combined Financial
Statements of the Company. Excludes shares issuable upon exercise of
currently outstanding options, options to be granted upon the closing of the
Offering and options to be granted in connection with the Acquisitions. See
"Management -- Employment Agreements; Covenants Not To Compete" and
"Management -- Director Compensation," and "Business -- Current
Business -- The Acquisitions of the Founding Companies."
6
<PAGE> 8
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ------------------------
PRO PRO FORMA
FORMA ------------------------
1995 1996 1997 1997(1) 1997(1) 1998(1)
------- -------- -------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues................ $88,639 $104,151 $118,952 $ 126,846 $ 29,806 $ 33,814
Gross margin............ $27,921 $ 33,499 $ 38,667 41,035 9,994 10,948
======= ======== ========
Operating expenses...... 34,454(2) 8,331(2) 9,020(2)
Goodwill amortization... 1,419(3) 323(3) 332(3)
---------- ---------- ----------
Operating income........ 5,162 1,340 1,596
Other income (expense),
net(4)................ (79) (70) (77)
---------- ---------- ----------
Income before income
taxes................. $ 5,083 $ 1,270 $ 1,519
========== ========== ==========
Net Income(5)........... $ 2,482 $ 633 $ 779
========== ========== ==========
Net income per share
Basic and Diluted..... $ .29 $ .07 $ .09
========== ========== ==========
Shares used in computing
pro forma net income
per share(6)
Basic and Diluted..... 8,500,000 8,500,000 8,500,000
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
-----------------------------
PRO FORMA
PRO FORMA(7) AS ADJUSTED(8)
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets(9)............................................. $97,232 $99,664
Total short-term debt....................................... 9,221 202
Total long-term debt........................................ 2,122 708
Stockholders' equity........................................ 36,982 66,886
</TABLE>
- ---------------
(1) The combined pro forma statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1997 and assume
the acquisition of Total Office Products by The Supply Room Companies, Inc.
on January 1, 1997. These results are not necessarily indicative of the
results the Company would have obtained had these events actually then
occurred or of the Company's future results.
(2) Adjusted to reflect the acquisition of the Founding Companies and
adjustments to salaries, bonuses and benefits of certain owners and officers
of the Founding Companies and Office Centre Corporation pursuant to
employment agreements ("Compensation Differential").
(3) Includes $1.2 million, $300,000 and $300,000 of additional goodwill
amortization attributable to the Acquisitions for the year ended December
31, 1997, and the three months ended March 31, 1997 and 1998, respectively.
(4) Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the repayment of certain debt paid from the net
proceeds of the Offering. See "Use of Proceeds."
(5) Assumes all income is subject to a corporate income tax rate of 40% and that
all goodwill amortization is nondeductible for income tax purposes.
(6) Includes (i) 1,434,155 shares outstanding prior to the Acquisitions and the
Offering; (ii) 3,354,482 shares to be issued to the stockholders of the
Founding Companies in connection with the Acquisitions; (iii) 136,363 shares
to be issued to certain consultants of the Company; and (iv) 3,575,000
shares to be issued by the Company in the Offering. Outstanding options have
no material dilutive effect.
(7) The combined pro forma balance sheet data assumes the Acquisitions were
consummated on March 31, 1998.
(8) Adjusted for the sale of 3,575,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $11 per share and the
application of the net proceeds therefrom and the repayment of certain
indebtedness. See "Use of Proceeds."
(9) Includes $46.7 million of additional goodwill attributable to the
Acquisitions.
7
<PAGE> 9
SUMMARY HISTORICAL STATEMENT OF OPERATIONS DATA
FOR THE FOUNDING COMPANIES
The following table presents summary historical statement of operations
data for the Founding Companies for each of the three most recent calendar years
and for the three months ended March 31, 1997 and 1998, respectively. Each
Founding Company has a fiscal year ending December 31, or has been converted to
a December 31 year end for purposes of the following table. Operating expenses
and operating income (loss) have not been adjusted for the Compensation
Differential, goodwill amortization, or costs associated with the Company's new
corporate management and with being a public company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
THE SUPPLY ROOM COMPANIES, INC. ("TSR")
Revenues.......................................... $19,950 $26,997 $29,953 $ 7,090 $7,814
Gross margin...................................... 6,534 8,258 9,175 2,404 2,575
Operating expenses(1)............................. 6,253 7,962 8,723 2,095 2,188
Operating income.................................. 281 296 452 309 387
NEW ENGLAND OFFICE SUPPLY, INC. ("NEW ENGLAND")
Revenues.......................................... $ 8,161 $11,733 $14,665 $ 3,547 $4,132
Gross margin...................................... 2,062 2,859 3,690 950 1,058
Operating expenses(1)............................. 1,823 2,662 3,373 869 850
Operating income.................................. 239 197 317 81 208
KING OFFICE SUPPLY, INC. AND SUBSIDIARY ("KING")
Revenues.......................................... $11,757 $12,443 $13,893 $ 3,481 $3,870
Gross margin...................................... 4,419 4,565 5,113 1,282 1,409
Operating expenses(1)............................. 4,131 4,341 4,736 1,165 1,240
Operating income.................................. 288 224 377 117 169
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
("SIERRA")
Revenues.......................................... $ 8,991 $11,090 $12,215 $ 2,924 $3,459
Gross margin...................................... 2,806 3,588 4,120 945 1,063
Operating expenses................................ 2,624 3,416 3,829 936 1,063
Operating income.................................. 182 172 291 9 0
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES,
INC. ("OFFICE SOLUTIONS")
Revenues.......................................... $ 5,397 $ 7,367 $10,879 $ 2,275 $3,339
Gross margin...................................... 1,459 2,105 2,908 628 883
Operating expenses................................ 1,053 1,728 2,653 646 698
Operating income (loss)........................... 406 377 255 (18) 185
GREENWOOD OUTFITTERS, INC. ("GREENWOOD")
Revenues.......................................... $ 5,915 $ 7,296 $ 8,920 $ 2,051 $2,718
Gross margin...................................... 1,889 2,490 3,035 723 980
Operating expenses................................ 1,812 2,183 2,652 582 701
Operating income.................................. 77 307 383 141 279
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
"SOS" OFFICE SUPPLY COMPANY ("SOS")
Revenues.......................................... $ 5,010 $ 5,290 $ 5,484 $ 1,334 $1,526
Gross margin...................................... 1,708 1,785 1,889 452 464
Operating expenses................................ 1,586 1,667 1,994 514 383
Operating income (loss)........................... 122 118 (105) (62) 81
GEORGIA IMPRESSION PRODUCTS, INC. ("GEORGIA
IMPRESSION")
Revenues.......................................... $ 3,467 $ 3,279 $ 3,642 $ 752 $ 836
Gross margin...................................... 725 724 993 195 252
Operating expenses................................ 630 631 811 161 153
Operating income.................................. 95 93 182 34 99
OFFICE EXPRESS, INC. ("OFFICE EXPRESS")
Revenues.......................................... $ 1,802 $ 2,313 $ 2,856 $ 703 $ 796
Gross margin...................................... 542 691 915 237 243
Operating expenses................................ 501 604 785 185 207
Operating income.................................. 41 87 130 52 36
SOUTHERN OFFICE CENTRE, INC. ("SOUTHERN OFFICE
CENTRE")
Revenues.......................................... $ 2,729 $ 2,562 $ 2,531 $ 592 $ 618
Gross margin...................................... 722 710 602 139 140
Operating expenses................................ 664 672 653 160 159
Operating income (loss)........................... 58 38 (51) (21) (19)
METRO DATA SUPPLY, INC. ("METRO DATA")
Revenues.......................................... $ 1,593 $ 1,899 $ 2,167 $ 502 $ 546
Gross margin...................................... 333 406 473 110 136
Operating expenses................................ 309 356 452 97 129
Operating income.................................. 24 50 21 13 7
BCB OFFICE PRODUCTS COMPANY AND BCB SPECIALTIES,
INC. ("BCB")
Revenues.......................................... $ 883 $ 951 $ 745 $ 201 $ 223
Gross margin...................................... 353 319 241 68 77
Operating expenses................................ 324 343 281 57 71
Operating income (loss)........................... 29 (24) (40) 11 6
</TABLE>
- ---------------
(1) Includes historical goodwill amortization.
9
<PAGE> 11
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the specific risk factors
set forth below as well as the other information set forth in this Prospectus in
evaluating an investment in the Common Stock.
ABSENCE OF COMBINED OPERATING HISTORY
Office Centre Corporation was founded in October 1996 and has been a
holding company for UDI since May 1997. Office Centre Corporation has entered
into agreements to acquire the Founding Companies simultaneously with and
conditioned on the closing of the Offering. The Founding Companies have been
operating independently and there can be no assurance that the Company will be
able to successfully integrate these businesses on a profitable basis. The
Company's management group has been assembled only recently, and there can be no
assurance that the management group will be able to oversee the combined entity
and effectively implement the Company's operating or acquisition strategies. The
pro forma financial data included in this Prospectus cover periods during which
Office Centre Corporation and the Founding Companies were not under common
control and are not necessarily indicative of the combined results which would
have been achieved had Office Centre Corporation and the Founding Companies been
under common control during such periods. See "Business -- Current
Business -- The Acquisitions of the Founding Companies" and "Management."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to grow significantly through the acquisition of
additional office products stationers. This strategy will entail reviewing and
potentially reorganizing acquired business operations, corporate infrastructure
and systems and financial controls. Acquisitions may involve a number of special
risks, including adverse short-term effects on the Company's reported operating
results, diversion of management's attention and resources to acquisitions,
dependence on retention, hiring and training of key personnel, the possible loss
of acquired customer bases, possible adverse effects on earnings resulting from
amortization of goodwill created in purchase transactions and the risks
associated with the past operations and other unanticipated problems arising in
the acquired companies, some or all of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The success of the Company's acquisition strategy will depend on the extent to
which it is able to identify, acquire, profitably manage and successfully
integrate additional companies, and there can be no assurance that the Company's
strategy will succeed. There also can be no assurance that the Company will seek
to acquire, or that it will be successful in acquiring, any of the acquisition
candidates who have entered into exclusivity agreements with the Company. In
addition, there can be no assurance that companies acquired in the future will
achieve sales and profitability that justify the Company's investment in them.
The Company believes that during the next few years competing sellers of office
products will continue the recent trend of consolidation. The Company believes
there is likely to be significant competition among the large consolidators of
office products companies to acquire independent stationers, which could limit
the Company's ability to locate suitable acquisition targets and could increase
the cost of purchasing such acquisition targets. See "-- Substantial
Competition," "Industry Overview," "Business -- Acquisition Strategy," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Historical Combined Operating Data -- Combined Liquidity and
Capital Resources."
RISKS RELATED TO ACQUISITION FINANCING
The Company currently intends to finance possible future acquisitions using
a combination of cash and shares of Common Stock. The Company will need
additional debt or equity financing in order to implement fully its acquisition
strategy. There can be no assurance that the Company will be able to obtain such
financing if and when it is needed or that, if available, such financing will be
available on terms the Company deems acceptable. If the Company does not have
sufficient cash resources, the Common Stock does not maintain sufficient value,
or potential acquisition candidates are unwilling to accept the Common Stock as
part of the consideration for the sale of their businesses, the Company may be
unable to implement its acquisition strategy. The Company has obtained a $35
million revolving credit facility from First Union National Bank ("First Union")
secured by substantially all assets of the Company, including receivables and
inventory. The facility is available for
10
<PAGE> 12
acquisitions, refinancing of existing indebtedness, working capital and other
general corporate purposes. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Historical Combined
Operating Data -- Combined Liquidity and Capital Resources" and "Business --
Acquisition Strategy."
PRIOR OPERATING LOSSES OF CERTAIN FOUNDING COMPANIES
Certain of the Founding Companies incurred losses or were marginally
profitable during 1996, 1997 and for the three months ended March 31, 1998.
Future losses at any of the Founding Companies or at other companies acquired by
the Company in the future could have an adverse effect on the results of
operations, cash flows and financial condition of the Company. The Company's
prospects for increased revenue and profitability are dependent upon the
successful implementation of its operating and acquisition strategies. There can
be no assurance that these strategies will be implemented successfully, that the
Company's revenues will increase or that the Company will be operated
profitably.
GEOGRAPHIC CONCENTRATION
Commercial stationers generally serve customers located in the geographic
areas surrounding their facilities. For the year ended December 31, 1997,
approximately 23.6%, 11.5%, 10.9% and 9.5% of the Company's pro forma combined
revenues were attributable to TSR (located in Richmond, Virginia), New England
(located in Boston, Massachusetts), King (located in New York City) and Sierra
(located in Sacramento, California), respectively. For the three months ended
March 31, 1998, approximately 23.1%, 12.3%, 11.4% and 10.2% of the Company's pro
forma combined revenues were attributable to TSR, New England, King and Sierra,
respectively. As a result of the concentration of more than one-half of the
Company's pro forma revenues in four geographic areas, any significant economic
downturn in the Richmond, Boston, New York or Sacramento markets generally, or
any significant economic downturn in these markets that affects small and
mid-sized companies in particular, could have a material adverse effect on the
Company. See "Business -- Geographic Concentration."
POTENTIAL FOR NEGATIVE IMPACT ON UDI MEMBERSHIP
If the Company acquires commercial stationers that serve the same markets
as those served by members of UDI, certain UDI members may withdraw from UDI due
to this competition. Such withdrawals could adversely affect the revenues of
UDI.
DEPENDENCE ON TWO NATIONAL WHOLESALERS
The operations of the Company depend to a great degree on two national
wholesalers, S.P. Richards and United Stationers. For the fiscal year ended
December 31, 1997, these two national wholesalers accounted for approximately
60% of the products purchased by the Founding Companies. Although alternative
wholesalers may exist for products distributed by the Company, the loss of
either of the two national wholesalers as a source of product could have a
material adverse effect on the Company. See "Business -- Operating Strategy."
DEPENDENCE ON IMPLEMENTATION AND OPERATION OF SYSTEMS
The Company believes that the successful implementation of its technology
and operating systems at additional locations will enhance customer service,
improve inventory management and increase the speed and accuracy of order
fulfillment at such locations. However, the Company may experience unanticipated
delays, complications or expenses in implementing, integrating and operating
these systems, which could have a material adverse effect on the Company's
operations and financial performance. In addition, interruptions or disruptions
in system operations could adversely affect operations and financial performance
at some or all locations. Although the Company believes that its technology and
operating systems will be adequate for its current needs, such systems will
require modification, improvement or replacement as the Company expands or as
new technologies make the Company's systems obsolete. Such modifications,
improvements or replacements may require substantial expenditures and may
interfere with operations during periods of implementation, any of which could
11
<PAGE> 13
have a material adverse effect on the Company's financial performance. See
"Business -- Operating Strategy" and "Business -- Business After Acquisitions
and the Offering."
SUBSTANTIAL COMPETITION
The office products industry is highly competitive. The Company competes
with small commercial office products stationers who sell to customers in a
limited geographic area and several large retailers, mail order companies and
contract stationers, a number of which have greater financial resources than the
Company. In addition, the Company intends to enter new markets by acquiring
existing commercial stationers and expects that one or more of these competitors
will have a presence in each of these new markets. As a result of this
competition, the Company may lose customers or have difficulty in acquiring new
customers. In addition, the Company's revenues and/or margins may decline as a
result of lower pricing in response to competitive pressures on pricing of
products. Moreover, UDI competes with other industry buying groups for members.
See "Business -- Competition."
The Company may compete with the large consolidators of office products
companies to acquire independent stationers, which could lead to higher prices
being paid for such stationers. See "-- Risks Related to the Company's
Acquisition Strategy" and "Business -- Acquisition Strategy."
ABSENCE OF OR CHANGE IN CONTRACTUAL RELATIONSHIPS WITH CUSTOMERS
Companies in the office products industry generally do not enter into sales
contracts with their customers requiring them to make any specific volume of
purchases over any specific term. Instead, sales are generally made pursuant to
purchase orders or similar documentation with respect to specific sales. As a
result of these practices, the Company's customers generally have the right to
terminate their relationships with the Company without penalty and with little
or no notice. Accordingly, a customer from which the Company generates
substantial revenue in one period may not be a substantial customer in a
subsequent period. If the Company's customers elect to reduce or cease purchases
from the Company, the Company could experience a material adverse effect on its
business, financial condition or results of operations. Two of the Founding
Companies are currently certified as women-owned and/or minority-owned small
businesses. These Founding Companies are required to notify certain customers
that are state agencies and other customers of any changes in ownership or
control. Such customers could elect to reduce or cease purchases from these
Founding Companies after the consummation of the Acquisitions based on the loss
of their women-owned or minority-owned status. See "Business -- Customers."
ACQUISITION PRICE FOR FOUNDING COMPANIES EXCEEDS ASSET VALUE
Valuations of the Founding Companies have not been established by
independent appraisals, but, other than with respect to King, have been
determined through arm's-length negotiations between representatives of Office
Centre Corporation and representatives of the Founding Companies. The
consideration being paid for each of the Founding Companies, including Founding
Companies whose stockholders will become affiliates of the Company upon
consummation of the Offering, is based primarily on the value of such Founding
Company as a going concern and not on the value of the acquired assets. The
purchase price for King was not determined by arm's length negotiations but was
determined using a valuation methodology consistent with that used in setting
the purchase price for the four largest Acquisitions besides King. No assurance
can be given that the future performance of the Founding Companies will be
commensurate with the consideration to be paid to acquire the Founding Companies
or the price of the Common Stock offered hereby. See "Business -- Current
Business -- The Acquisitions of the Founding Companies" and "Certain
Transactions." See "Business -- Current Business -- The Acquisitions of the
Founding Companies" for a discussion of the principles followed in determining
the consideration being paid for each Founding Company.
EFFECT OF GOODWILL AMORTIZATION ON NET INCOME
The Company's balance sheet immediately following the Offering and
consummation of the Acquisitions of the Founding Companies will include an
amount designated as "goodwill" that represents, on a pro forma
12
<PAGE> 14
combined basis, 48.6% of assets and 72.4% of stockholders' equity at March 31,
1998. Goodwill arises when an acquirer pays more for a business than the fair
value of the tangible and separately measurable intangible net assets. Generally
accepted accounting principles require that this and all other intangible assets
be amortized over the period benefited. Management has determined that period to
be no less than 40 years.
If management were not to separately recognize a material intangible asset
having a benefit period less than 40 years, or were not to give effect to
shorter benefit periods of factors giving rise to a material portion of the
goodwill, earnings reported in periods immediately following the acquisition
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if management
determined then that the remaining balance of goodwill was impaired.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in arriving at the amount
incurred to acquire each of the Founding Companies. Management concluded that
the anticipated future cash flows associated with intangible assets recognized
in the Acquisitions will continue for 40 years and there is no persuasive
evidence that any material portion will dissipate over a period shorter than 40
years.
The amount of goodwill amortized in a particular period is reported as an
expense that reduces the Company's net income for that period. The amount
amortized, however, may not give rise to a deduction for tax purposes. In
addition, the Company will be required to amortize the goodwill, if any, from
future acquisitions. A reduction in net income resulting from the amortization
of goodwill may have an adverse impact upon the market price of the Company's
Common Stock. The Company plans to amortize goodwill associated with the
acquisitions of the Founding Companies over a period of 40 years. The Company
plans to evaluate continually whether events or circumstances have occurred that
may warrant revisions to the remaining useful life of goodwill, and any
shortening of such useful life may have a material adverse effect on the
Company's results of operations.
PROCEEDS OF OFFERING PAYABLE FOR EXISTING OBLIGATIONS AND TO AFFILIATES
Approximately $16.6 million of the net proceeds of the Offering will be
used to pay the cash portion of the purchase price for the Founding Companies.
Approximately $2.0 million of such amount will be paid to Yancey S. Jones, a
director of the Company, and/or M. Addison Jones, the brother of Yancey Jones,
both of whom are principal stockholders of one of the Founding Companies. Under
the merger agreement for the Acquisition of TSR, Office Centre Corporation may
substitute $1 million of cash consideration for $1 million of Common Stock
valued at the initial public offering price per share otherwise deliverable in
connection with such Acquisition. If this election is made, the amount of the
proceeds of the Offering paid to Mr. Yancey Jones and Mr. M. Addison Jones, in
the aggregate, will increase by $1 million. Approximately $1 million of such
amount will be paid to Robert J. Gillon, Jr., the Chairman, Chief Executive
Officer and President of the Company and a principal stockholder of one of the
Founding Companies. Approximately $7.8 million of the net proceeds of the
Offering will be used to repay debt of the Founding Companies, approximately
$1.7 million of which will be used to repay debt that is payable to, or
guaranteed by, shareholders of the Founding Company who are executive officers
and/or directors of Office Centre Corporation or members of their immediate
families. Approximately $8.0 million of the net proceeds of the Offering will be
used to repay debt of Office Centre Corporation. Approximately $4.3 million of
the net proceeds of the Offering will be received by the Selling Stockholders,
who together own approximately 91.2% of the Common Stock (prior to the
consummation of the Acquisitions and the Offering). Approximately $425,000 and
$587,500 of the net proceeds of the Offering will be used to pay the cash
portions of consideration for consulting services which become due upon
consummation of the Offering to (i) an affiliate of Richard T. Case, an
executive officer of the Company, and (ii) an affiliate of John D. Kaweske, a
founder of the Company, respectively. In addition to borrowings available under
the Company's credit facility with First Union, approximately $9.5 million in
cash and cash equivalents will remain available to the Company on a pro forma
basis, as adjusted for the Acquisitions and the Offering, at March 31, 1998 to
meet the Company's cash requirements following the closing of the Offering. See
"Use of Proceeds," "Business -- Current Business -- The Acquisitions of the
Founding Companies" and "Certain Transactions."
13
<PAGE> 15
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of Robert
J. Gillon, Jr., its Chief Executive Officer and Chairman of the Board, Joseph E.
Hajjar, its Senior Vice President, Chief Financial Officer, Treasurer and
Secretary, Mr. Case, its Senior Vice President of Corporate Development, and
senior management of the Founding Companies. Furthermore, the Company will
likely be dependent on the senior management of companies that may be acquired
in the future. If any of these people becomes unable to continue in his or her
present role, or if the Company is unable to attract and retain other management
employees, the Company's business could be adversely affected. The Company has
key man life insurance covering Mr. Gillon in the amount of $3 million.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Offering, executive officers and directors
of the Company, and existing stockholders of the Company who are not executive
officers or directors of the Company, will beneficially own approximately 11.3%,
and 12.5%, respectively, of the then outstanding shares of Common Stock (10.8%,
and 9.7%, respectively, if the Underwriters' over-allotment option is exercised
in full). These stockholders are likely to continue to exercise substantial
control over the Company's affairs. Clifford M. Davie and a trust of Mr. Davie
(the "Davie Trust"), who, following the completion of the Offering, together
will own 6.7% of the then outstanding shares of Common Stock (6.4% if the
Underwriters' over-allotment option is exercised in full), have agreed with the
Company that following the completion of the Offering through December 31, 2002,
they will vote all shares of Common Stock owned by them in the same proportion
as all other outstanding shares of Common Stock are voted. They have irrevocably
authorized certain officers of the Company as their proxy to vote their shares
in accordance with such agreement. See "Principal and Selling
Stockholders -- Standstill Agreements with Founders."
HOLDING COMPANY STRUCTURE
The Company is a holding company, the principal assets of which are the
shares of the capital stock of its subsidiaries. As a holding company without
independent means of generating operating revenues, the Company depends on
dividends and other payments from its subsidiaries to fund its obligations and
meet its cash needs. Expenses of the Company include salaries of its executive
officers, insurance, professional fees and service of any indebtedness that may
be outstanding from time to time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Introduction."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The 4,000,000 shares of Common Stock being sold in the Offering will be
freely tradeable unless acquired by affiliates of the Company. The market price
of the Common Stock could be adversely affected by the sale of substantial
amounts of Common Stock in the public market following the Offering, or the
perception that such sales could occur.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 3,354,482 shares of Common
Stock as a portion of the consideration for their businesses, and two
consultants of Office Centre Corporation will receive, in the aggregate, 136,363
shares of Common Stock in exchange for services rendered. See
"Business -- Current Business -- The Acquisitions of the Founding Companies" and
"Certain Transactions." These shares are not being offered by this Prospectus.
Certain of the stockholders of the Founding Companies who will receive, in the
aggregate, 1,332,455 shares of Common Stock also have certain piggy-back
registration rights with respect to such shares. See "Shares Eligible for Future
Sale." Following the completion of the Offering, certain other stockholders of
Office Centre Corporation will beneficially own, in the aggregate, an additional
1,097,786 shares of Common Stock. See "Certain Transactions." None of these
4,500,000 shares were acquired in transactions registered under the Securities
Act of 1933, as amended (the "Securities Act"), and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration, including the exemption provided by
Rule 144 ("Rule 144") under the Securities Act.
14
<PAGE> 16
The Company, all of its existing stockholders and all of the former
stockholders of the Founding Companies who will receive Common Stock in
connection with the Acquisitions, have agreed that they will not offer or sell
any shares of Common Stock for a period of 180 days (the "Lockup Period") after
the date of this Prospectus without the prior written consent of the
Underwriters, except that the Company may issue shares of Common Stock in
connection with acquisitions. Walter H. Gordenstein, Mr. Davie and the Davie
Trust have agreed with the Company that they will not sell or transfer more than
25% of the Common Stock owned by them during each six month period in the two
years following the Lockup Period. After the Lockup Period (or such longer
period to which a shareholder has agreed), such shares may be sold in accordance
with Rule 144 promulgated under the Securities Act, subject to the volume,
holding period, and other limitations of Rule 144. See "Underwriting."
Upon the consummation of the Offering, the Company will have outstanding
options to purchase 1,124,600 shares of Common Stock, of which 824,600 will be
exercisable at the initial public offering price per share, and 300,000 of which
will be exercisable at $9.12 per share. The Company has granted or is committed
to grant 560,000 of these options to current employees of Office Centre
Corporation and UDI and is committed to grant 40,000 of these options to
independent directors of Office Centre Corporation. The remaining 524,600
options will be granted to certain employees of the Founding Companies who will
become employees of the Company upon consummation of the Acquisitions. The
Company expects to file a registration statement on Form S-8 under the
Securities Act to register 1,500,000 shares of Common Stock issuable upon
exercise of options to be granted under the Company's 1998 Stock Option Plan.
Accordingly, such shares will be freely tradeable by holders who are not
affiliates of the Company and, subject to the volume and manner of sale
limitations of Rule 144, by holders who are affiliates of the Company.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock available for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
ABSENCE OF PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price has been determined by
negotiations between the Company and the Underwriters and may bear no relation
to the market price for the Common Stock after the Offering. (See "Underwriting"
for factors considered in determining the initial public offering price.) There
can be no assurance that the price so determined is representative of the
current or future market value of the Common Stock offered hereby. Although the
Common Stock has been approved for quotation on the Nasdaq National Market,
there can be no assurance that an active public market for the Common Stock will
develop or continue after the Offering. The market price of the Common Stock
after the Offering may be subject to significant fluctuations from time to time
in response to numerous factors, including the depth and liquidity of the market
for the Common Stock, variations in the reported financial results of the
Company, investor perception of the Company, and changes in conditions in the
economy in general and the office products industry in particular.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of $8.83 per
share. After giving effect to the Acquisitions of the Founding Companies, the
total consideration paid to the Company by its existing stockholders (which
consideration represents the combined stockholders' equity before the Offering,
adjusted to reflect the payment of approximately $16.6 million in cash in
connection with the Acquisitions) will be $38.6 million. See "Dilution." In the
event the Company issues additional shares of Common Stock in the future,
including shares which may be issued in connection with possible future
acquisitions, purchasers of Common Stock in the Offering may experience further
dilution in the net tangible book value per share of the Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Amended and Restated Certificate of Incorporation and Amended and
Restated By-Laws of the Company contain various provisions that may discourage
future takeover attempts which the Company's stockholders may deem to be in
their best interests and perpetuating the Company's existing management. Among
other things, such provisions: (i) provide the Board of Directors with broad
discretion to issue preferred
15
<PAGE> 17
stock; (ii) provide for three year terms for the directors of the Company and
the election of such directors on a staggered basis; (iii) prohibit certain
business combinations without the affirmative vote of the holders of at least
80% of the then outstanding shares of Common Stock and at least 66% of each
series of preferred stock then outstanding; and (iv) require the approval of 80%
of all shares of Common Stock eligible to vote for any proposed amendment to the
Certificate of Incorporation or By-Laws that seeks to modify or remove the
foregoing provisions. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless the
business combination is approved in a prescribed manner. Further, pursuant to
the Company's 1998 Stock Option Plan, in the event of a change in control of the
Company, all stock options and stock appreciation rights ("SARs") granted under
the Plan will automatically vest and become exercisable. These provisions could
delay or hinder the removal of incumbent directors and could discourage or make
more difficult a proposed merger, tender offer or proxy contest involving the
Company or may otherwise adversely affect the market price of the Common Stock.
See "Description of Capital Stock -- Certain Provisions of Delaware Law and the
Company's Certificate of Incorporation and By-Laws" and "Management -- 1998
Stock Option Plan."
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,575,000 shares of
Common Stock offered hereby by the Company, assuming an initial public offering
price at the midpoint of the range set forth on the cover page of this
Prospectus, after deducting underwriting discounts and other Offering expenses
(estimated to be approximately $3.5 million (excluding amounts of approximately
$5.2 million previously paid), all of which are payable by the Company), are
estimated to be approximately $35.9 million. The Company will not receive any
proceeds from the sale of shares by the Selling Stockholders. The net proceeds
to the Company of the Offering are expected to be applied as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Cash portion of acquisition consideration for the Founding
Companies(1).............................................. $16,560
Payment of debt of the Founding Companies(2)(3)............. 7,819
Payment of debt of Office Centre Corporation(4)............. 8,000
Cash consideration to consultants and financial
advisers(5)............................................... 1,113
Working capital and general corporate purposes, including
possible future acquisitions.............................. 2,363
-------
Total............................................. $35,855
=======
</TABLE>
- ---------------
(1) See "Business -- Current Business -- The Acquisitions of the Founding
Companies" for a discussion of the principles followed in determining the
consideration paid for each Founding Company and a description of the
aggregate consideration to be paid for each Founding Company. Includes the
cash portion of consideration for King and TSR, of which $3,026,867 will be
paid to affiliates of the Company as follows: (i) $1,000,000 to Mr. Gillon;
(ii) $1,520,150 to Mr. Yancey Jones; and (iii) $506,717 to Mr. M. Addison
Jones. Under the merger agreement for the Acquisition of TSR, Office Centre
Corporation may substitute $1 million of cash consideration for $1 million
of Common Stock otherwise deliverable in connection with such Acquisition.
If this election is made, the amount of the proceeds of the Offering paid to
Mr. Yancey Jones and Mr. M. Addison Jones, in the aggregate, will increase
by $1 million.
(2) Includes $2,710,000 and $2,374,000 of the indebtedness of TSR and King,
respectively, to be repaid from the proceeds of the Offering, of which
approximately $665,000, plus certain interest and costs, is personally
guaranteed by Mr. Gillon, $750,000 is personally guaranteed by Mr. Yancey
Jones and/or Mr. M. Addison Jones and $290,000 is payable to Mr. Yancey
Jones and/or Mr. M. Addison Jones. See "Certain Transactions."
(3) All indebtedness of the Founding Companies will be repaid by Office Centre
Corporation in connection with the Acquisitions. The terms of the material
indebtedness of the Founding Companies to be repaid from the proceeds of the
Offering are as follows: (i) as of March 31, 1998, approximately $1,589,000
was outstanding under TSR's revolving line of credit with a bank which bears
interest at the lower of LIBOR plus 3.75% or the prime rate plus 1.50% and
expires on February 28, 1999; (ii) an earnout payment of $450,000 incurred
by TSR in connection with the acquisition of Total Office Products which
bears no interest and is payable in semi-annual installments through August
2002; (iii) as of March 31, 1998, approximately $636,800 was outstanding
pursuant to New England's note to a bank, which note is payable in sixty
monthly principal payments of $12,736 and which bears interest at a rate of
1% above the prime rate and matures in May 2002; (iv) as of March 31, 1998,
approximately $1,839,800 was outstanding under King's line of credit with a
financial institution which bears annual interest of 2.5% above the prime
rate and expires in August 1998; (v) as of March 31, 1998, approximately
$290,423 was outstanding under a purchase money note payable by King in
monthly installments of $12,433, which note bears annual interest of 12% and
matures in June, 2000; and (vi) as of March 31, 1998, approximately
$1,083,800 was outstanding under Sierra's revolving line of credit with a
bank which bears interest of 7% above the prime rate for balances up to
$1,000,000 and 10% above the prime rate for balances in excess of $1,000,000
and expires in March 1999. The other indebtedness of the Founding Companies
to be repaid from the proceeds of the Offering bears interest at rates
ranging from 0% to 16% per annum, with a weighted average interest rate of
8.63% per annum. Such indebtedness would otherwise mature at various dates
from the date hereof through 2002.
(4) The Company's existing revolving credit facility with First Union allows the
Company to borrow up to a maximum of $35 million to be used for
acquisitions, refinancing of existing indebtedness, working capital and
other general corporate purposes. Borrowings under this facility bear
interest at the prime lending rate plus an applicable margin of up to .75%
or LIBOR plus an applicable margin of up to 2.5%. Borrowings under this
facility are secured by substantially all of the Company's assets.
(5) Consists of cash consideration of $587,500 payable to a consultant which is
an affiliate of a founder of the Company, cash consideration of $425,000
payable to a consultant which is an affiliate of an executive officer of the
Company and cash consideration of $100,000 payable to one of the
Underwriters. See "Certain Transactions" and "Underwriting."
Pending such uses, the net proceeds will be invested in short-term,
interest-bearing investment grade securities or government issued securities.
The Company has no agreement or letter of intent to acquire any company
other than the Founding Companies. The Company intends to finance possible
future acquisitions using a combination of cash and shares of Common Stock. The
Company will need additional debt or equity financing in order to fully
implement its acquisition strategy. There can be no assurance that the Company
will be able to obtain such financing if and when it is needed or that, if
available, such financing will be available on terms the Company deems
acceptable. See "Risk Factors -- Risks Related to Acquisition Financing."
17
<PAGE> 19
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future because it intends to retain its earnings, if
any, to finance the expansion of its business and for general corporate
purposes. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions, covenants under existing credit facilities with respect to the
payment of dividends and other factors that the Company's Board of Directors
deems relevant. Under the Company's revolving credit facility with First Union,
the Company is prohibited from paying dividends or making distributions.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on a pro forma combined basis to reflect the Acquisitions;
and (ii) on a pro forma combined basis to reflect the Acquisitions and, as
adjusted to give effect to the sale of 3,575,000 shares of Common Stock offered
hereby by the Company, assuming an initial public offering price of $11 per
share, the midpoint of the range set forth on the cover page of this Prospectus,
and the application of the estimated net proceeds therefrom. For a description
of the adjustments, see Notes to the Unaudited Pro Forma Combined Financial Data
included elsewhere in this Prospectus. The following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma financial statements
of the Company and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
------------------------
PRO FORMA
COMBINED AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and capital lease
obligations............................................... $ 9,221 $ 202
------- -------
Long-term debt and capital lease obligations, excluding
current portion........................................... 2,122 708
------- -------
Short and long-term amounts due to stockholders of Founding
Companies and related parties............................. 17,039 --
------- -------
Stockholders' equity:
Preferred Stock, $1.00 par value, 1,000 shares authorized;
no shares outstanding.................................. -- --
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 4,812,000 shares issued and outstanding pro
forma combined and 8,500,000 shares issued and
outstanding pro forma as adjusted...................... 4 9
Additional paid-in capital.................................. 37,416 67,315
Retained earnings........................................... (438) (438)
------- -------
Total stockholders' equity.................................. 36,982 66,886
------- -------
Total capitalization........................................ $65,364 $67,796
======= =======
</TABLE>
18
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company at March 31, 1998 was
($11.5) million or a deficit of ($2.33) per share after giving effect to the
Acquisitions. "Pro forma net tangible book value per share" is the pro forma
tangible net worth (total tangible assets less total liabilities) of the Company
divided by the number of shares of Common Stock outstanding after giving effect
to the Acquisitions. After giving effect to the sale by the Company of 3,575,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $11 per share, the midpoint of the range set forth on the cover page of
this Prospectus (after deducting underwriting discounts and commissions and
estimated Offering expenses to be paid by the Company), the pro forma net
tangible book value of the Company at March 31, 1998, was $18.4 million or $2.17
per share, representing an immediate increase in net tangible book value of
$4.50 per share to existing stockholders and an immediate dilution of $8.83 per
share to the investors purchasing the shares in the Offering ("New Investors").
The following table illustrates per share dilution to New Investors:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $11.00
Pro forma net tangible book value before the Offering....... $(2.33)
Increase attributable to the sale of shares offered
hereby.................................................... 4.50
------
Pro forma net tangible book value after the Offering........ 2.17
------
Dilution in net tangible book value to New Investors........ $ 8.83
======
</TABLE>
The following table sets forth at the date of this Prospectus the number of
shares of Common Stock acquired from the Company, the total consideration to the
Company and the average price per share paid by existing stockholders,
stockholders of the Founding Companies, consultants to the Company and New
Investors, after giving effect to the Acquisitions and the Offering, based on an
assumed initial public offering price of $11 per share, the midpoint of the
range set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
SHARES ACQUIRED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER % AMOUNT % PER SHARE
--------- ----- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 1,434,155 16.9% $ 256,000(1) 0.3% $ 0.15
Stockholders of the Founding
Companies(2).......................... 3,354,482 39.5 36,899,000 47.3 11.00
Consultants to the Company.............. 136,363 1.6 1,500,000 1.9 11.00
--------- ----- ----------- -----
4,925,000 58.0 38,655,000 49.5 7.85
New Investors........................... 3,575,000 42.0 39,325,000 50.5 11.00
--------- ----- ----------- -----
Total................................... 8,500,000 100.0% $77,980,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Based on the net tangible book value of Office Centre Corporation at March
31, 1997.
(2) Represents the number of shares of Common Stock and the related fair value
of such shares to be issued in connection with the Acquisitions, but
excludes all contingent consideration. See "Business -- Current
Business -- The Acquisitions of the Founding Companies."
19
<PAGE> 21
SELECTED COMBINED PRO FORMA FINANCIAL DATA
In May 1997, Office Centre Corporation acquired UDI Corp. and UDI II Corp.
in a stock for stock exchange. For accounting purposes, the transaction was
accounted for as a reverse acquisition with the results of UDI's operations
presented on a historical basis as the results of Office Centre Corporation. UDI
II Corp. was subsequently merged with and into UDI Corp., with UDI Corp.
remaining as the surviving entity. Office Centre Corporation will acquire the
Founding Companies simultaneously with and conditioned on the consummation of
the Offering. The Acquisitions will be accounted for under the purchase method
of accounting, whereby their assets and liabilities are recorded at their
estimated fair market value.
The following table presents selected combined pro forma statement of
operations data for the year ended December 31, 1997 and the three months ended
March 31, 1997 and 1998, and selected combined pro forma and pro forma, as
adjusted, balance sheet data as of March 31, 1998. Each Founding Company has a
fiscal year ending December 31, or has been converted to a December 31 year end
for purposes of the following table.
The combined pro forma statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1997 (see notes
below). The combined pro forma balance sheet data assume that the Acquisitions
were consummated on March 31, 1998 and, as adjusted, reflect the consummation of
the Offering (see notes below).
The data presented below should be read in conjunction with the pro forma
financial statements of the Company and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
------------ PRO FORMA
PRO FORMA ----------------------
1997(1) 1997(1) 1998(1)
------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
COMBINED PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 126,846 $ 29,806 $ 33,814
Cost of revenues........................................ 85,811 19,812 22,866
---------- --------- ---------
Gross margin............................................ 41,035 9,994 10,948
Operating expenses...................................... 34,454(2) 8,331(2) 9,020(2)
Goodwill amortization................................... 1,419(3) 323(3) 332(3)
---------- --------- ---------
Operating income........................................ 5,162 1,340 1,596
Other income (expense), net(4).......................... (79) (70) (77)
---------- --------- ---------
Income before income taxes.............................. $ 5,083 $ 1,270 $ 1,519
========== ========= =========
Net Income(5)........................................... $ 2,482 $ 633 $ 779
========== ========= =========
Net income per share
Basic and Diluted..................................... $ .29 $ .07 $ .09
========== ========= =========
Shares used in computing pro forma net income per
share(6)
Basic and Diluted..................................... 8,500,000 8,500,000 8,500,000
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------
PRO FORMA
PRO FORMA(7) AS ADJUSTED(8)
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
COMBINED PRO FORMA BALANCE SHEET DATA:
Total assets(9)............................................. $97,232 $99,664
Total short-term debt....................................... 9,221 202
Total long-term debt........................................ 2,122 708
Stockholders' equity........................................ 36,982 66,886
</TABLE>
20
<PAGE> 22
- ---------------
(1) The combined pro forma statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1997 and assume
the acquisition of Total Office Products by The Supply Room Companies, Inc.
on January 1, 1997. These results are not necessarily indicative of the
results the Company would have obtained had these events actually then
occurred or of the Company's future results.
(2) Adjusted to reflect the acquisition of the Founding Companies and the
Compensation Differential.
(3) Includes $1.2 million, $300,000 and $300,000 of additional goodwill
amortization attributable to the Acquisitions for the year ended December
31, 1997, and the three months ended March 31, 1997 and 1998, respectively.
(4) Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the repayment of certain debt paid from the net
proceeds of the Offering. See "Use of Proceeds."
(5) Assumes all income is subject to a corporate income tax rate of 40% and that
all goodwill amortization is nondeductible for income tax purposes.
(6) Includes (i) 1,434,155 shares outstanding prior to the Acquisitions and the
Offering; (ii) 3,354,482 shares to be issued to the stockholders of the
Founding Companies in connection with the Acquisitions; (iii) 136,363 shares
to be issued to certain consultants of the Company; and (iv) 3,575,000
shares to be issued by the Company in the Offering. Outstanding options have
no material dilutive effect.
(7) The combined pro forma balance sheet data assume the Acquisitions were
consummated on March 31, 1998.
(8) Adjusted for the sale of 3,575,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $11 per share and the
application of the net proceeds therefrom and the repayment of certain
indebtedness. See "Use of Proceeds."
(9) Includes $46.7 million of additional goodwill attributable to the
Acquisitions.
21
<PAGE> 23
SELECTED FINANCIAL DATA OF OFFICE CENTRE CORPORATION
The following selected financial data of Office Centre Corporation, which
has been designated as the accounting acquirer of the Founding Companies, should
be read in conjunction with the consolidated financial statements of Office
Centre Corporation and related notes thereto and other financial data included
elsewhere in this Prospectus. The financial data set forth below as of and for
each of the periods ended December 31, 1995, 1996 and 1997 have been derived
from the audited consolidated financial statements of Office Centre Corporation
included elsewhere in this Prospectus. The financial data as of and for the
periods ended December 31, 1993 and 1994 have been derived from unaudited
financial statements of Office Centre Corporation not included in this
Prospectus. The financial data as of and for the three months ended March 31,
1997 and 1998 have been derived from the unaudited consolidated financial
statements included elsewhere in this Prospectus. In May 1997, Office Centre
Corporation acquired all of the outstanding shares of UDI Corp. and UDI II Corp.
(which were subsequently merged to form UDI) in exchange for shares of Office
Centre Corporation. The transaction was accounted for as a reverse acquisition
with the results of UDI's operations presented on a historical basis as the
results of Office Centre Corporation. Accordingly, this discussion relates to
the results of UDI as the only operating unit of the registrant. These
historical results are not indicative of the results that may be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 4,573 $ 9,825 $ 12,984 $ 10,931 $ 11,002 $ 2,786 $ 2,600
Gross margin............... 2,181 4,021 4,369 5,000 5,513 1,382 1,293
Operating costs and
expenses................. 1,496 2,877 4,262 5,189 4,981 1,092 2,226
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).... $ 685 $ 1,144 $ 107 $ (189) $ 532 $ 290 $ (933)
========= ========= ========= ========= ========= ========= =========
Net income (loss).......... $ 404 $ 658 $ 81 $ (185) $ 183 $ 156 $ (716)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share
Basic and Diluted........ $ .30 $ .49 $ .06 $ (.14) $ .13 $ .12 $ (.50)
========= ========= ========= ========= ========= ========= =========
Shares used in computing
net income (loss) per
share Basic and
Diluted.................. 1,355,091 1,355,091 1,355,091 1,355,091 1,371,758 1,355,091 1,434,155
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------- AS OF MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)............. $ 349 $ 706 $ 416 $ (25) $ (4,354) $ (5,810)
Total assets............... 6,233 17,970 19,127 19,961 25,467 24,026
Total long-term debt....... -- -- 366 189 96 96
Stockholders' equity....... 432 858 285 100 393 (58)
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the financial statements and related notes thereto and
other financial data appearing elsewhere in this Prospectus.
INTRODUCTION
Office Centre Corporation was founded in October 1996 for the purpose of
becoming a nationwide office products supplier that serves primarily small and
medium-sized corporate customers. Upon acquiring the Founding Companies, the
Company believes that it will be one of the largest office products suppliers in
the United States. The Company, through its wholly-owned subsidiary, UDI, also
operates one of the largest office products buying groups in the United States,
with approximately 1,100 office products stationers and office furniture dealers
as members. Revenues of the Founding Companies are derived primarily from the
sale of a wide variety of office supplies, office furniture and other office
products to small and medium-sized corporate customers. Certain of the Founding
Companies also have limited retail operations. UDI's revenues primarily consist
of membership fees, fees received for the programs offered to members and volume
rebates received from national office products wholesalers and certain
manufacturers.
Revenues from the sale of office products are recognized upon shipment of
the product to customers, at the point of sale for retail operations and upon
delivery of the service provided in the case of printing and other services. UDI
recognizes revenues ratably throughout the year as membership fees and volume
rebates are earned. Cost of revenues includes the cost of the merchandise plus
the cost of in-bound freight and direct labor and other direct costs of printing
services. In the case of UDI, the cost of revenues includes the cost of programs
provided and the portion of rebates it will pass along to buying group members
who achieve specified volume requirements. Operating costs and expenses include
warehouse and customer delivery expenses, employee salaries, wages and benefits,
sales commissions, telephone expenses, promotional expenses, depreciation and
occupancy costs.
The Founding Companies have been operated historically as independent,
privately-owned entities, and their results of operations reflect varying tax
structures, including both S and C Corporations, which have influenced the
historical level of owners' compensation. Gross profit margins and operating
costs and expenses as a percentage of revenues may not be comparable among the
individual Founding Companies. Owners of certain of the Founding Companies have
agreed to certain reductions in their compensation and benefits commencing upon
the consummation of the Offering. The Compensation Differential of $3,141,000,
$570,000 and $1,311,000 for the year ended December 31, 1997 and the three
months ended March 31, 1997 and 1998, respectively, has been reflected as a pro
forma adjustment in the Unaudited Pro Forma Combined Statements of Operations.
The Company believes that, following the Acquisitions, it will be able to
realize operating efficiencies and achieve certain synergies among the Founding
Companies. In particular, with a larger operational scale, the Company believes
that it can obtain more favorable prices and other purchasing terms on office
products through volume purchasing and through the use of a Company-wide
proprietary catalog. The Company will also seek to reduce costs over time
through the implementation of its centre and satellite strategy and by combining
certain administrative functions at the corporate level, such as cash
management, insurance, payroll processing and employee benefits, marketing and
advertising, long distance services and a variety of professional services. The
Company anticipates that these savings will be offset to some extent by costs
and expenditures related to the Company's new corporate management, corporate
expenses relating to being a public company and systems integration. These
various costs and possible cost savings may make historical operating results
not comparable to, or indicative of, future performance.
Office Centre Corporation has been designated as the accounting acquirer of
the Founding Companies. The $46.7 million excess of merger consideration over
the estimated fair value of the net assets of the Founding Companies will be
recorded as goodwill and amortized over a 40-year period. The pro forma impact
of this amortization expense, which is not deductible for tax purposes, is $1.2
million per year.
23
<PAGE> 25
HISTORICAL COMBINED OPERATING DATA
The combined revenues, cost of revenues and gross margin of the Founding
Companies for the periods presented do not represent combined results presented
in accordance with generally accepted accounting principles, but are only a
summation of the revenues, cost of revenues, and gross margin of the individual
Founding Companies on an historical basis.
The following table sets forth certain combined revenues, cost of revenues
and gross margin of the Founding Companies on a historical basis and shows such
results as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------------------
1995 1996 1997 1997 1998
--------------- ---------------- ---------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $88,639 100.0% $104,151 100.0% $118,952 100.0% $28,238 100.0% $32,477 100.0%
Cost of revenues.......... 60,718 68.5 70,652 67.8 80,285 67.5 18,723 66.3 21,904 67.4
------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross margin.............. $27,921 31.5% $ 33,499 32.2% $ 38,667 32.5% $ 9,515 33.7% $10,573 32.6%
======= ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. Revenues increased 15.0% from $28.2 million for the three months
ended March 31, 1997 to $32.5 million in the three months ended March 31, 1998.
The increase primarily reflects both internal growth attributable to volume
increases for substantially all the Founding Companies and growth through
acquisitions. Most notably, revenues for Office Solutions grew by 46.8%, aided
by the full quarter impact of the acquisition of a customer list in March 1997;
revenues for Greenwood grew by 32.5%, aided by additions of new customers; and
revenues for TSR grew by 10.2%, aided by the full quarter impact of the
acquisition of a printing operation acquired in the third quarter of 1997 and
the acquisition of TOP in March 1998. Other notable increases from internal
growth were experienced by New England, King, Sierra and SOS, whose revenues
grew 16.5%, 11.2%, 18.3% and 14.4%, respectively.
Gross Margin. Gross margin increased 11.1% from $9.5 million or 33.7% of
revenues for the three months ended March 31, 1997 to $10.6 million or 32.6% of
revenues for the three months ended March 31, 1998. As a percentage of revenue,
gross margin declined by 1.1%. This includes the impact of cost increases from
the national wholesalers, which have not yet been fully reflected in the selling
prices of the Founding Companies. In addition, certain of the Founding Companies
have experienced increased revenues in technology supplies, which carry lower
margins.
Year Ended 1997 Compared to 1996
Revenues. Revenues increased 14.2% from $104.2 million in 1996 to $119.0
million in 1997. The increase primarily reflects internal growth attributable to
volume increases for substantially all the Founding Companies and growth through
acquisitions. Most notably, revenues for Office Solutions grew by 47.7% aided by
the acquisition of a customer list in March 1997, and TSR by 10.9%, aided by the
acquisition of three office products businesses in the first quarter of 1996 and
a printing operation in the third quarter of 1997. Other notable increases from
internal growth were experienced by King, Sierra and Greenwood, whose revenues
grew 11.7%, 10.1% and 22.3%, respectively.
Gross Margin. Gross margin increased 15.4%, from $33.5 million or 32.2% of
revenues for the year ended December 31, 1996 to $38.7 million or 32.5% of
revenues for 1997. The increase in gross margin is consistent with the growth in
revenues and to a lesser extent to the increase in profit margin UDI realized on
the programs it provided members.
Year Ended 1996 Compared to 1995
Revenues. Revenues increased 17.5% from $88.6 million in 1995 to $104.2
million in 1996. The increase primarily reflects internal growth attributable to
volume increases at substantially all the Founding Companies
24
<PAGE> 26
and growth through acquisitions. Most notably, revenues for TSR grew 35.3% due
in part to the full year benefit of two office products businesses acquired in
the first quarter of 1995 and three acquired in the first quarter of 1996. The
increase in revenue from the Founding Companies was offset in part by a decrease
in UDI revenues of $2.1 million. In 1995, the stipulated rebate UDI received
from the two national wholesalers was increased by 1% of member purchases as an
incentive by the wholesalers to stimulate member volume. In 1996, the rebate was
reduced to the pre-1995 levels, resulting in the decrease in UDI revenues.
Gross Margin. Gross margin increased 20.0%, from $27.9 million or 31.5% of
revenues for the year ended December 31, 1995 to $33.5 million or 32.2% of
revenues for 1996. The increase in gross margin is consistent with the growth in
revenues. The UDI rebate decrease had an insignificant impact on gross margin
since the portion of the rebate retained by UDI and not passed along to UDI
members remained consistent with the 1995 level.
Combined Liquidity and Capital Resources
The Founding Companies' principal sources of liquidity have historically
been cash flows from operating activities and, to a lesser extent, borrowings.
Approximately $16.6 million of the proceeds from the Offering will be used to
fund the cash portion of the consideration to be paid in connection with the
Acquisitions, $7.8 million will be used to repay borrowings of the Founding
Companies, and $8 million will be used to repay amounts outstanding on the
Company's First Union revolving credit facility. As of March 31, 1998, on a pro
forma combined basis, after giving effect to the application of the proceeds of
the Offering (assuming net proceeds of the Offering of $35.9 million), the
Company would have cash and cash equivalents of approximately $9.5 million,
working capital of approximately $12.8 million, no debt outstanding (excluding
capital leases) and the borrowing capacity under the First Union credit
facility. Although there can be no assurance of its ability to do so, the
Company expects to fund its future cash requirements with funds generated from
operations, from borrowed funds and from other sources.
In July 1998, the Company obtained a $35 million revolving credit facility
from First Union which replaced a prior $10 million line with First Union.
Availability under the credit facility is based on 85% of eligible accounts
receivable plus 60% of eligible inventory. Amounts outstanding bear interest at
the prime lending rate plus an applicable margin of up to .75% or LIBOR plus an
applicable margin of up to 2.5%. The Company's obligations under the credit
facility are to be guaranteed by the current and future subsidiaries of the
Company and are secured by a security interest in substantially all assets of
the Company. The First Union credit facility contains customary covenants,
including restrictions on other indebtedness, approval of acquisitions in excess
of $20 million (and certain acquisitions greater than $5 million, depending on
the percentage of the consideration paid in cash or stock), limits on capital
expenditures, restrictions on transactions with affiliates and sales of assets,
as well as various financial covenants customary for transactions of this type.
The Company paid a financing fee of $150,000 for the credit facility and pays a
commitment fee of .375% per annum on the daily average of the unused portion of
the credit facility.
The Founding Companies' capital expenditures were $1.1 million, $1.8
million, and $1.4 million for the three years ended December 31, 1995, 1996 and
1997, respectively. These capital expenditures were primarily for office
equipment, delivery vehicles, computers and facility additions and improvements.
Office Centre Corporation does not currently have any commitments to make
significant capital expenditures in the next twelve months. Office Centre
Corporation believes that funds generated from operations, together with the
proceeds from the Offering and possible future sources of borrowings will be
sufficient to finance its current operations and planned capital expenditure
requirements at least through the twelve months following the Offering. Although
Office Centre Corporation is not currently involved in negotiations and has no
current commitments with respect to any acquisitions (other than the
Acquisitions), to the extent Office Centre Corporation is successful in
consummating possible future acquisitions, it may be necessary to finance such
acquisitions through the issuance of additional equity securities, incurrence of
indebtedness or a combination of both.
25
<PAGE> 27
RESULTS OF OPERATIONS OF OFFICE CENTRE CORPORATION
In May 1997, Office Centre Corporation acquired all of the outstanding
shares of UDI Corp. and UDI II Corp. (which were subsequently merged to form
UDI) in exchange for shares of Common Stock. The transaction was accounted for
as a reverse acquisition with the results of UDI's operations presented on a
historical basis as the results of Office Centre Corporation. Accordingly, this
discussion relates to the results of UDI as the only operating unit of the
registrant.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. Revenues declined 6.7% from $2.8 million for the three months
ended March 31, 1997 to $2.6 million in the three months ended March 31, 1998.
This decline reflects the impact of lower volume in one of the wholesaler
programs offset in part by increases in direct manufacturer volume and program
revenue derived from OffiSat.
Gross Margin. Gross margin declined 6.4% from $1.4 million or 49.6% of
revenues for the three months ended March 31, 1997 to $1.3 million or 49.7% of
revenues for the three months ended March 31, 1998. Gross margin declined
primarily as a result of decreased revenue.
Operating Costs and Expenses. Operating costs and expenses increased
103.8% from $1.1 million or 39.2% of revenues for the three months ended March
31, 1997 to $2.2 million or 85.6% in the three months ended March 31, 1998. The
increase in operating expenses is primarily attributable to $1.3 million of
costs incurred in the operation of Office Centre Corporation's corporate
functions, which were initiated in May 1997. For the three months ended March
31, 1998, the increase in operating expenses includes non-recurring cash and
stock related compensation charges for awards to certain officers and
stockholders of Office Centre Corporation totalling $732,000, accounting and
administrative functions and audit and other costs associated with becoming a
public entity. These expenses were offset in part by decreases, of $127,000, in
compensation paid to officers of UDI and reductions in other selling, general
and administrative costs.
Year Ended 1997 Compared to 1996
Revenues. Revenues for 1997 remained constant with 1996 levels, increasing
by $71,000. The mix in revenues shows increases in income from UDI's
manufacturers' rebate programs and advertising and promotional income, which
more than offset the declines in income from UDI's wholesalers' rebate programs.
Gross Margin. Gross margin increased 10.3% from $5.0 million or 45.7% of
revenues for the year ended December 31, 1996 to $5.5 million or 50.1% of
revenues for 1997. Gross profit improved as higher margins were realized from
the growth in promotional fees from UDI's catalog and flyer programs.
Operating Costs and Expenses. Operating costs and expenses declined .04%
from $5.2 million or 47.4% of revenues in 1996 to $5.0 million or 45.3% of
revenues in 1997. This decline in operating expenses was primarily attributable
to a $554,000 decrease in compensation paid to the officers of UDI and
reductions in other selling, general and administrative costs. These were offset
in part by $649,000 of costs for the start up of Office Centre Corporation's
corporate function, which began in May 1997.
Year Ended 1996 Compared to 1995
Revenues. Revenues declined 15.8% or $2.1 million in 1996 from $13.0
million in 1995 to $10.9 million in 1996. The primary reason for the overall
revenue decline was the decrease in revenues from wholesalers rebates of $3.1
million. In 1995, the stipulated rebate UDI received from the two national
wholesalers was increased by 1% of member purchases as an incentive by the
wholesalers to stimulate member volume. In 1996, the rebate percentage was
reduced to the pre-1995 levels resulting in the decrease in UDI revenues.
Gross Margin. Gross margin increased $631,000 in 1996 from $4.4 million or
33.6% of revenues in 1995 to $5.0 million or 45.7% of revenues in 1996,
resulting from increases from membership fees and other programs. The revenue
decline associated with the wholesaler program did not impact gross margin
negatively because the
26
<PAGE> 28
portion of the rebate retained by UDI and not passed along to UDI members
remained consistent with the 1995 level.
Operating Costs and Expenses. Operating costs and expenses increased 21.8%
from $4.3 million or 32.8% of revenues in 1995 to $5.2 million or 47.5% of
revenues in 1996. This increase resulted primarily from sales commissions and
bonuses paid to UDI's owners.
Liquidity and Capital Resources of Office Centre Corporation
At March 31, 1998, Office Centre Corporation had a working capital deficit
of $5.8 million. The primary capital requirements have been to fund Office
Centre Corporation's working capital throughout the year. In addition, Office
Centre Corporation has expended $649,000 in 1997 and $1.3 million for the three
months ended March 31, 1998, in costs associated with operating its corporate
functions and $4.0 million in costs associated with its initial public offering
and a $1.5 million investment in TSR which was made in 1997.
Net cash provided by (used in) operating activities for 1995, 1996, and
1997 was $(453,000), $77,000, and $444,000, respectively. The cash flow from
operations is primarily a result of the net income (loss) each year, adjusted
for non-cash charges, and has been impacted by increases in accounts receivable,
including rebates due from the wholesalers, offset by increases in accounts
payable and rebates due to members.
Net cash used in investing activities in 1995, 1996, and 1997 of $30,000,
$143,000 and $1.7 million, respectively, were primarily to fund capital
expenditures and, in 1997, to make an investment in TSR as part of the overall
consideration to be paid for the acquisition of that company.
Net cash provided by (used in) financing activities for 1995, 1996 and 1997
was $255,000, ($56,000) and $745,000, respectively. In 1997 and 1996, UDI repaid
loans to former stockholders of $564,000 and $126,000, respectively, and
incurred $2.9 million and $92,000, respectively, for initial public offering
costs.
NEW ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 130, which must be adopted by the Company in 1999, establishes
standards for the reporting and display of comprehensive income and its
components in a complete set of financial statements. SFAS No. 131, which must
also be adopted by the Company in fiscal year 1999, changes the way segment
information is reported and establishes standards for related disclosures about
products and services, geographic areas, and major customers.
The Company believes that the adoption of these new standards will not have
a material impact on the Company's financial position or results of operations.
Management is currently evaluating the effect of SFAS No. 131 on consolidated
financial statement disclosures.
INFLATION
Office Centre Corporation does not believe that inflation has had a
material impact on its operations or the operations of the Founding Companies
during 1995, 1996 or 1997.
SEASONALITY
The Company's revenues are generally not impacted by seasonal influences.
Quarterly results may be materially affected by the timing of acquisitions.
YEAR 2000
The Company relies on various computer applications for the operations of
its business, which are primarily purchased or licensed from third-party vendors
and software providers. The Company has received or expects to receive the
necessary modifications from these vendors to be year 2000 compliant by the end
of 1998 or the early
27
<PAGE> 29
part of 1999. The Company believes that year 2000 compliance will not materially
impact its operations or result in a material expenditure and its software
vendors will absorb substantially all of the costs of becoming year 2000
compliant. Consequently, the Company will not be required to make material
expenditures to become year 2000 compliant. King's software vendor will not
absorb the cost of King becoming year 2000 compliant, but the Company believes
that the King software will be appropriately modified to be year 2000 compliant
without any material remediation cost being incurred by the Company.
The Company places orders by means of computerized information systems with
its two largest vendors, S.P. Richards and United Stationers. If either of these
wholesalers does not become year 2000 compliant, the Company may experience
delays in placing orders with, and having orders fulfilled by, these
wholesalers. Such delays could have an adverse effect on the future operating
results and cash flows of the Company. The Company believes that if other
vendors or third parties' computerized information systems do not become year
2000 compliant, the Company will be able to secure goods and services from other
independent providers without any material adverse effect on the future
operating results or cash flows of the Company.
The Company will continue to communicate with other entities that provide
and receive data from the Company to ensure they are aware of the year 2000
issues. There can be no assurance that such other entities will become year 2000
compliant.
28
<PAGE> 30
INDUSTRY OVERVIEW
In 1996, the office products industry generated approximately $125 billion
in revenues, and the Company estimates that the industry segment supplying the
small and medium-sized corporate customer represented approximately $18 billion
of such revenues. Historically, the distribution of office products has been
fragmented and served by numerous stationers, most of which operated in only one
metropolitan area and had annual sales of less than $15 million. In recent
years, large consolidators have grown rapidly through acquisitions of medium and
large-sized contract stationers, which primarily serve companies with more than
250 employees. The commercial stationer segment of the industry supplying the 20
to 250 employee companies remains highly fragmented.
There are five primary types of suppliers in the office products industry:
contract stationers, retailers, national mail order houses, warehouse clubs/mass
marketers and commercial stationers.
Contract stationers focus principally on serving companies with 250 or more
employees. The four largest contract stationers (Boise Cascade, Corporate
Express, BT Office Products and U.S. Office Products) have grown rapidly,
primarily through acquisitions of medium and large contract stationers. These
large contract stationers have been rapidly building or acquiring warehouses to
provide nationwide product distribution to their corporate customers.
The large retailers (Office Max, Staples and Office Depot) or "superstores"
have rapidly built stores that provide availability of product primarily to the
retail consumer. Initially attracting a wide variety of customers through
advertising low prices, their competitive strength is the wide variety of
products offered and extended hours of operation which make their product
readily available. This is especially important to the small office and home
office market. Staples and Office Depot have also acquired contract stationers
and they now sell to all market segments. Staples also recently acquired Quill
Corporation, one of the largest mail order companies.
While not having grown historically through acquisitions, the mail order
companies (including Viking Office Supplies and Global Directmail) nonetheless
have capitalized on the growing acceptance in the United States of ordering
items by mail. Mail order companies have built a strong following by offering
outstanding service and reliability, especially to the home office and the
individual end-user in a company.
Viking Office Supplies recently announced that it had reached a definitive
agreement to merge with Office Depot. Consummation of that merger would join one
of the largest mail order companies with one of the largest office products
retailers.
Warehouse club/mass marketers (such as WalMart, Target and K-Mart)
represent a relatively small share of the office products industry and typically
carry only 200 to 500 stock keeping units ("SKUs") of office products.
Merchandise is purchased directly from the manufacturer and shipped directly to
stores for sale to the public.
The commercial stationers' typical customer is the 20 to 250 employee
company. This segment remains highly fragmented, with approximately 3,200
independent commercial stationers with estimated aggregate 1996 sales of $18
billion. To successfully compete with other suppliers, most commercial
stationers have "partnered" with national wholesalers in order to be more
efficient with warehousing and distribution and have joined industry buying
groups such as UDI in order to offer more competitive prices and marketing
programs. The Company is considered a commercial stationer.
29
<PAGE> 31
BUSINESS
CURRENT BUSINESS
UDI. The current business of Office Centre Corporation consists
exclusively of the business of its wholly-owned subsidiary, UDI. UDI operates
one of the largest office products buying groups in the United States, with
approximately 1,100 office products stationers and office furniture dealers as
members servicing the United States and parts of Canada. The buying group allows
small and medium-sized office products stationers and office furniture dealers
to combine their buying power to negotiate better purchasing terms than they
would be able to obtain individually and to participate in a rebate program with
wholesalers and manufacturers, as well as other programs with manufacturers. In
addition, UDI offers its members access to a number of marketing programs
designed to improve their operations and profitability. As a for-profit operator
of a buying group, UDI retains a fee equal to approximately 1% to 2% of its
members' qualifying annual purchases, subject to certain exceptions, as well as
certain other fees, including fees received in connection with the marketing
programs UDI offers to it members.
The Company believes that the majority of UDI's members have annual sales
of $2 million to $7 million. Aggregated revenues of UDI's members are estimated
by the Company to be approximately $3 billion. Ten of the Founding Companies are
members of UDI. The Company intends to combine the purchasing power of UDI and
the Founding Companies and, as its revenues increase, the Company believes that
it will be able to increase the discounts and rebates received. There are other
buying groups in the office products industry, and the Company may, from time to
time, seek to acquire other buying groups.
Founding Companies. Office Centre Corporation presently does not operate
any commercial office products stationers, but has entered into agreements to
acquire, simultaneously with the closing of the Offering, twelve commercial
office products businesses comprising the Founding Companies. The Founding
Companies serve the New York City; Los Angeles; Atlanta; Dallas/Fort Worth;
Boston; Baltimore; Sacramento; Richmond, Virginia; Grand Rapids, Michigan; and
Montgomery, Alabama metropolitan areas. In addition to selling office products
supplies, the Founding Companies also sell office furniture and provide printing
services and conduct limited retail operations.
30
<PAGE> 32
Each of the Founding Companies is a commercial stationer principally
serving small to mid-sized companies in its local market. The following table
sets forth certain information about the Founding Companies:
<TABLE>
<CAPTION>
PRINCIPAL LINES OF BUSINESS
---------------------------------------------------
OFFICE
PRODUCT RETAIL
SUPPLIES, OPERATIONS(1)
FURNITURE AND
AND ADVERTISING
NAME OF FOUNDING PRINTED OFFICE SPECIALTY
COMPANY MARKETS MATERIAL EQUIPMENT ITEMS PRINTING 1997 REVENUES
---------------- ---------------------- --------- --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
TSR Virginia X X X X $29,953,000
Mid-Atlantic
Region
New England Massachusetts X X -- -- $14,665,000
Rhode Island
King New York X X X -- $13,893,000
Metropolitan Area
Sierra Northern California X -- -- X $12,215,000
Office Solutions Southern California X X -- -- $10,879,000
Greenwood Dallas/Fort Worth X X -- -- $ 8,920,000
SOS Western Michigan X X X -- $ 5,484,000
Georgia Impression Atlanta, Georgia X X -- -- $ 3,642,000
Office Express Montgomery, Alabama X X -- -- $ 2,856,000
Southern Office Atlanta, Georgia X X -- -- $ 2,531,000
Centre
Metro Data Dallas, Texas X X -- -- $ 2,167,000
BCB Dallas, Texas X X -- -- $ 745,000
</TABLE>
- ---------------
(1) At retail, TSR, King and SOS principally sell office product supplies, and
also have limited sales of furniture and office equipment.
For additional information concerning the Founding Companies, see the
Unaudited Pro Forma Combined Financial Statements and the notes thereto, as well
as the audited financial statements of certain Founding Companies, all contained
elsewhere in this Prospectus.
The Acquisitions of the Founding Companies. Simultaneously with the
Offering, Office Centre Corporation will acquire the Founding Companies. The
twelve Founding Companies were selected for acquisition by Office Centre
Corporation for several reasons. Office Centre Corporation believed that in
order to implement its acquisition and operating strategies it needed to have
total annual revenue of at least $100 million and net operating income in excess
of $4 million. The Company had pro forma revenues and operating income for the
year ended December 31, 1997 of approximately $126.8 million and $5.2 million,
respectively, and for the three months ended March 31, 1998 of approximately
$33.8 million and $1.6 million, respectively. Following the Acquisitions, the
Company believes that it will be one of the 20 largest office products suppliers
in the United States in terms of sales. The twelve Founding Companies also were
selected to give the Company a presence in several different geographical
markets. The larger Founding Companies provide the Company with strong
management teams which will be critical in integrating future acquisitions, as
well as strong relationships with national wholesalers of office products. None
of the Founding Companies is affiliated with one another.
The aggregate consideration to be paid by Office Centre Corporation for the
Founding Companies is approximately $55.0 million, subject to certain
adjustments, consisting of an aggregate of approximately $18.1 million in cash
and an aggregate of approximately $36.9 million in shares of Common Stock valued
at the initial public offering price per share. The Company will also repay
approximately $7.8 million in debt of the Founding Companies. See "Use of
Proceeds."
31
<PAGE> 33
The following table sets forth the aggregate consideration being paid for
each Founding Company:
<TABLE>
<CAPTION>
VALUE OF
COMMON TOTAL DEBT
CASH STOCK OTHER CONSIDERATION REPAID
------- -------- -------------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TSR........................................ $ 2,757 $ 8,107(1) $1,500(2) $12,364(3) $ 2,710
New England................................ 2,000 4,498(1) 6,498(4)(5) 1,125
King....................................... 2,937 3,629 6,566(5)(6) 2,374
Sierra..................................... 272 4,861 5,133(5) 1,309
Office Solutions........................... 3,826 3,825 7,651(7) --
Greenwood.................................. 2,650 6,550(1) 9,200(8) --
SOS........................................ 600 2,910 3,510(9) --
Georgia Impression......................... 325 977 1,302 24
Office Express............................. 195 1,107 1,302 17
Southern Office Centre..................... 300 -- 300 186
Metro Data................................. 531 435 966 25
BCB........................................ 167 -- 167(10) 49
------- ------- ------ ------- -------
TOTAL:..................................... $16,560 $36,899 $1,500 $54,959 $ 7,819
======= ======= ====== ======= =======
</TABLE>
- ---------------
(1) Pursuant to the definitive merger agreements, as amended, between the
Company and each of TSR, New England, and Greenwood, respectively, the
Company, in its sole discretion, may substitute cash in the amount of $1
million with respect to each such transaction as consideration in lieu of $1
million of Common Stock otherwise deliverable under each such agreement.
(2) Represents the purchase price for shares of TSR stock purchased in September
1997.
(3) Additional consideration may be payable in cash and shares of Common Stock,
based upon TSR's earnings before interest, taxes, depreciation and
amortization ("EBITDA") for 1998.
(4) Additional consideration may be payable in shares of Common Stock based upon
New England's EBITDA for 1998.
(5) Subject to adjustment based on the amount of outstanding liabilities at
closing.
(6) Additional consideration may be payable in cash and shares of Common Stock
based upon King's EBITDA for 1998.
(7) Additional consideration may be payable in shares of Common Stock based upon
Office Solution's EBITDA for the period January 1, 1998 through the closing
date and for the twelve months following the Offering.
(8) Additional consideration may be payable in cash and/or shares of Common
Stock, based upon Greenwood's EBITDA for 1998.
(9) Excludes ten-year options to purchase 25,000 shares of Common Stock at the
initial public offering price per share, which vest ratably over three
years.
(10) Subject to adjustment based upon liabilities and working capital at
closing.
The consideration to be paid for the Founding Companies other than King,
was determined through arm's-length negotiations between representatives of
Office Centre Corporation and representatives of each Founding Company. See
"Certain Transactions." The factors considered by Office Centre Corporation in
determining the consideration to be paid for the Founding Companies include,
among others, the historical operating results, the net worth, the levels and
type of indebtedness, and the future prospects of the Founding Companies.
Each acquisition has been structured as a merger under applicable state
law. Each merger agreement contains customary representations and warranties
with respect to the applicable Founding Company made by the selling stockholders
of such Founding Company, including, but not limited to, representations and
warranties as to due organization, capitalization, accuracy of financial
statements, good title to property, adequate insurance, compliance with laws
(including environmental laws) and contracts, rights to use intellectual
property, absence of litigation and undisclosed liabilities, and payment of
taxes. The representations and warranties contained in the merger agreements
survive the closing for periods ranging from approximately eight months through
the expiration of the applicable statute of limitations, and breaches of
representations and warranties are subject to indemnification by the selling
stockholders.
32
<PAGE> 34
Under the merger agreements, the consummation of each Acquisition is
subject to customary conditions, none of which is in the control of the
stockholders of the Founding Companies. These conditions include, among others,
the continuing accuracy on the closing date of the Acquisitions of the
representations and warranties of the Founding Companies and of Office Centre
Corporation, the performance by each of them of all covenants included in the
agreements relating to the Acquisitions, and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
each Founding Company. In addition, each Acquisition is subject to consummation
of the Offering.
In addition, set forth below is a summary of registration rights granted,
and employment agreements to be entered into in connection with the
Acquisitions.
TSR. Certain stockholders of TSR will have the right to participate in
certain registrations of Common Stock of Office Centre Corporation, beginning on
the first anniversary date of this Offering and ending on the third anniversary
date of this Offering. Upon consummation of the Offering, Office Centre
Corporation and TSR will enter into a three-year employment agreement under
which Yancey Jones will serve as President of TSR and will be paid an annual
base salary of $150,000. For a discussion of the other terms of Mr. Jones'
employment agreement see "Management -- Employment Agreements; Covenants Not to
Compete." Another stockholder of TSR, M. Addison Jones, the brother of Yancey
Jones, will enter into a three-year employment agreement with Office Centre
Corporation and TSR under which he will be paid an annual base salary of
$80,000, plus a bonus of up to 100% of his base salary subject to achieving
certain profitability objectives determined by Office Centre Corporation and
TSR. In addition, Office Centre Corporation will grant him ten-year options to
purchase 25,000 shares of Common Stock at the initial public offering price per
share, vesting ratably over a three-year period. Each of Yancey and M. Addison
Jones will agree not to compete with Office Centre Corporation in any state in
which Office Centre Corporation conducts business for a period of two years
following the termination of his employment. See "Certain Transactions."
New England. Indira Patel, the sole stockholder of New England, will enter
into a three-year employment agreement with Office Centre Corporation and New
England whereby she will be employed as the President of New England. Pursuant
to the employment agreement, she will be paid an annual base salary of $120,000,
plus a bonus of (i) up to 100% of her base salary subject to achieving certain
profitability objectives determined by Office Centre Corporation and New England
and (ii) if Ms. Patel actively assists in acquiring a target company, an amount
ranging from $5,000 -- $50,000, depending on the annualized sales of the target
company. Further, pursuant to the employment agreement, Office Centre
Corporation will grant her ten-year options to purchase 75,000 shares of Common
Stock at the initial public offering price per share, vesting ratably over a
three-year period. Office Centre Corporation and New England will enter into a
three-year employment agreement with Dennis McCarthy. Mr. McCarthy will be paid
an annual salary of $72,000 (to be increased to $100,000 in 1999), plus a bonus
of up to 100% of his base salary subject to achieving certain profitability
objectives determined by Office Centre Corporation and New England. Pursuant to
their employment agreements, each of Ms. Patel and Mr. McCarthy agrees not to
compete with Office Centre Corporation in certain northeast states for a period
of one year following his or her termination of employment.
King. Robert J. Gillon, a stockholder of King, has entered into a
three-year employment agreement with Office Centre Corporation under which he
will be paid an annual base salary of $250,000. For a discussion of the other
terms of Mr. Gillon's employment agreement see "Management -- Employment
Agreements; Covenants Not to Compete." See also "Management -- Executive
Compensation" and "Certain Transactions."
Sierra. One of the stockholders of Sierra, Michael Kipp, will enter into a
three-year employment agreement with Office Centre Corporation and Sierra
whereby he will be employed as President of Sierra. Pursuant to the employment
agreement, Mr. Kipp will be paid an annual base salary of $120,000, plus a bonus
of (i) up to 100% of his base salary subject to achieving certain profitability
objectives determined by Office Centre Corporation and Sierra and (ii) if Office
Centre Corporation acquires certain target companies, $200,000, subject to
downward adjustment depending on the annualized revenues of such target
companies. In addition, Mr. Kipp will be granted ten-year options to purchase
50,000 shares of Common Stock at the initial public offering price, vesting
ratably over a three-year period. Mr. Kipp also agrees not to compete with
Office Centre Corporation in certain counties
33
<PAGE> 35
within the State of California for a period of 18 months following a termination
of his employment (unless such termination is without cause).
Office Solutions. One of the stockholders of Office Solutions, Robert J.
Mareina, will enter into a three-year employment agreement with Office Centre
Corporation and Office Solutions, whereby he will be employed as President of
Office Solutions. Under the employment agreement, he will be paid an annual base
salary of $150,000, plus a bonus of (i) up to 100% of his base salary subject to
achieving certain profitability objectives determined by Office Centre
Corporation and Office Solutions and (ii) if Mr. Mareina actively assists in
acquiring a certain target company, an amount ranging from $5,000 -- $10,000,
depending on the annualized sales of the target company. In addition, Mr.
Mareina will be granted ten-year options to purchase 75,000 shares of Common
Stock at the initial public offering price, vesting ratably over a three-year
period. Further, pursuant to his employment agreement, Mr. Mareina agrees not to
compete with Office Centre Corporation in certain counties within the State of
California for a period of 18 months following a termination of his employment.
Greenwood. Raleigh Green and Robert Wood, the stockholders of Greenwood,
will have the right to participate in certain registrations of Common Stock of
Office Centre Corporation, beginning on the first anniversary date of this
Offering and ending on the third anniversary date of this Offering. Upon
consummation of the Offering, Mr. Green will be the Co-President, Sales and
Marketing, and Mr. Wood will be the Co-President, Operations and Finance, of
Greenwood, each pursuant to a three-year employment agreement with Greenwood
under which each of them will be paid an annual base salary of $150,000, plus a
bonus of (i) up to 100% of his base salary subject to achieving certain
profitability objectives determined by Office Centre Corporation and Greenwood
and (ii) if he actively assists in acquiring a certain target company, an amount
ranging from $7,500 -- $22,500, depending on the annualized sales of the target
company. Pursuant to each employment agreement, Office Centre Corporation will
grant to each of Messrs. Green and Wood ten-year options to purchase 25,000
shares of Common Stock at the initial public offering price, vesting ratably
over a three-year period. Further, pursuant to his employment agreement, each
agrees not to compete with Office Centre Corporation in any state in which
Office Centre Corporation conducts business for a period of three years from the
date of this Offering (unless his employment is terminated without cause or for
good reason).
SOS. Upon consummation of the Offering, David Shapiro, a stockholder of
SOS, will be the President of SOS pursuant to the terms of a three-year
employment agreement with Office Centre Corporation and SOS under which he will
be paid an annual base salary of $105,000, plus a bonus of (i) up to 100% of his
base salary subject to achieving certain profitability objectives determined by
Office Centre Corporation and SOS and (ii) if he actively assists in acquiring a
certain target company, an amount ranging from $7,500 -- $22,500, depending on
the annualized sales of the target company. Office Centre Corporation will grant
to Mr. Shapiro, ten-year options to purchase 25,000 shares of Common Stock at
the initial public offering price per share, vesting ratably over a three-year
period. In addition, Mr. Shapiro agrees not to compete with Office Centre
Corporation in areas within 75 miles of where Office Centre Corporation conducts
business for a period of 18 months from the termination of his employment.
Georgia Impression. Each of William Carroll and Ronald Pace, the
stockholders of Georgia Impression, will enter into a three-year employment
agreement with Office Centre Corporation and Georgia Impression, whereby Mr.
Pace will be employed as President and Mr. Carroll as Vice President of Georgia
Impression. Under the employment agreements, each will be paid an annual base
salary of $80,000, plus a bonus of (i) up to 100% of his base salary subject to
achieving certain profitability objectives determined by Office Centre
Corporation and Georgia Impression and (ii) $3,750. Also, Office Centre
Corporation will grant each of them ten-year options to purchase 25,000 shares
of Common Stock at the initial public offering price per share, vesting ratably
over a three year period. Each of Messrs. Carroll and Pace also agrees not to
compete with Office Centre Corporation in any state in which Office Centre
Corporation conducts business for a period of three years from the date of
termination of his employment.
Office Express. Upon consummation of the Offering, James Motley, a
stockholder of Office Express, will be the President, and Gary Blackwell, a
stockholder of Office Express, will be the Vice President of Office Express,
each pursuant to a three-year employment agreement with Office Centre
Corporation and Office
34
<PAGE> 36
Express. Under such employment agreements, each of them will be paid an annual
base salary of $100,000, plus a bonus of (i) up to 100% of his base salary
subject to achieving certain profitability objectives determined by Office
Centre Corporation and Office Express and (ii) if he actively assists in
acquiring a certain target company, an amount ranging from $5,000 -- $10,000,
depending on the annualized sales of the target company. Further, Office Centre
Corporation will grant to each of them ten-year options to purchase 12,500
shares of Common Stock at the initial public offering price, vesting ratably
over a three-year period. Each of them also agrees not compete with Office
Centre Corporation in any state in which Office Centre Corporation conducts
business for a period of 18 months following termination of his employment.
Southern Office Centre. Each of Rogers A. Grogan, Diane Selby and Edward A.
Zimmerman, the stockholders of Southern Office Centre, will enter into a
one-year employment agreement with Southern Office Centre, under which they will
be paid an annual base salary of $50,000 each, plus a bonus of up to 100% of his
or her base salary subject to achieving certain profitability objectives
determined by Office Centre Corporation and Southern Office Centre. Further,
pursuant to the employment agreements, each agrees not to compete with Office
Centre Corporation in any state in which Office Centre Corporation conducts
business for a period of one year following termination of his or her
employment.
Metro Data. Each of Carey Beck (a stockholder of Metro Data) and Aaron Beck
will enter into a three-year employment agreement with Office Centre Corporation
and Metro Data, whereby Aaron Beck will be employed as Senior Vice President of
Metro Data and Carey Beck as its Vice President. Under the employment
agreements, each will be paid an annual base salary of $86,000, plus a bonus of
up to 100% of his base salary subject to achieving certain profitability
objectives determined by Office Centre Corporation and Metro Data. Pursuant to
Carey Beck's employment agreement, Office Centre Corporation will grant him
ten-year options to purchase 25,000 shares of Common Stock at the initial public
offering price per share, vesting ratably over a three year period. Each of
Carey and Aaron Beck also agree not to compete with Office Centre Corporation in
the Dallas-Fort Worth Metroplex for a period of 18 months from the date of
termination of his employment.
BCB. Bernard Mandel, the sole stockholder of BCB will enter into a
three-year employment agreement with BCB, under which he will be paid an annual
base salary of $60,000, plus a bonus of up to 100% of his base salary subject to
achieving certain profitability objectives determined by Office Centre
Corporation and BCB. In addition, Mr. Mandel agrees not to compete with Office
Centre Corporation in any state in which Office Centre Corporation conducts
business for a period of three years following termination of his employment.
BUSINESS AFTER ACQUISITIONS AND THE OFFERING
The following discussion of the business of the Company assumes the
completion of the Acquisitions and the Offering and the integration of the
operations of the Founding Companies into Office Centre Corporation. Where
operations are currently conducted by Office Centre Corporation or certain of
the Founding Companies and the Company intends, after consummation of the
Acquisitions, to implement such operations at other Founding Companies and other
companies acquired in the future, such intentions are noted by forward-looking
words such as "will" or "intends".
The Company's integrated acquisition and operating strategies contemplate a
system of "centres," which are commercial stationers located in major
metropolitan areas, and "satellites," which are smaller, synergistic commercial
stationers located in surrounding markets in which the centre is located. This
integration is intended to leverage more effectively the Company's distribution
capabilities and eliminate a substantial portion of the satellites' operating
expenses. The centre stationers will fulfill all management functions and
maintain all inventory for the satellites in their respective markets.
General Operations. The Company sells a wide variety of office supplies,
office furniture and other office products directly to small and medium-sized
business customers (generally companies having 20 to 250 employees). The Company
provides next-day delivery of ordered items which enables certain customers to
reduce overhead costs by reducing inventory and the associated personnel and
space requirements. The Company believes that many of its customers purchase
office products based on a long-term business relationship with one primary
supplier. Accordingly, the Company's operations, and the improvements and
enhancements that the
35
<PAGE> 37
Company intends to implement, are focused primarily on achieving superior
customer satisfaction, as well as operating efficiencies and economies of scale.
The Company purchases office products from manufacturers and wholesalers,
and maintains cross-docking facilities (which are facilities similar to
warehouses where the Company can receive goods from multiple sources and
promptly load them onto trucks for same day delivery to customers) at or near
each of the centre locations. Certain of the Founding Companies maintain
cross-docking facilities which stock only high volume items and carry
approximately 250 to 500 SKUs. The remaining items are not kept in inventory,
but are obtained by such Founding Companies from wholesalers. Following the
consummation of the Acquisitions, the Company intends to implement this
inventory system at all of its centre stationers and to obtain items not kept in
stock from two national wholesalers with whom the Company has relationships,
S.P. Richards and United Stationers, as well as regional and niche wholesalers.
Orders for items received from the wholesalers will be combined with orders
picked from inventory at the cross-docking facilities and delivered by the
Company to its customers.
Order Processing, Fulfillment and Distribution. Certain Founding Companies
use an electronic data interchange ("EDI") system and/or fulfill orders using a
system that combines the inventory they maintain and the "wrap and label"
capabilities of the wholesalers. The Company intends, where appropriate, to
implement these systems at other Founding Companies following the consummation
of the Offering and at companies acquired in the future. The EDI system enables
customers to place orders directly with the Founding Company's computer system
and generate customized usage reports. Once an order is placed, the
order-processing system, which is electronically linked to national wholesalers,
automatically determines on a real-time basis whether an ordered item is to be
filled from inventory at the centre stationer's cross-docking facility or from a
wholesaler. When a customer order needs to be filled from a wholesaler, the
system electronically routes the order to the wholesaler. The order is wrapped,
labeled by customer and local stationer name and delivered for next-day service
to the centre stationer. This capability is called "wrap and label." On the same
day that it receives the items supplied by the wholesalers, the centre stationer
is able to deliver the order directly to the customer without having to break
down or sort through any of the received shipments. Orders for items not
supplied by a wholesaler are filled at the centre cross-docking facility by
"picking" orders arranged according to the location of items within the
facility, improving the efficiency of personnel in filling orders. When orders
have been picked, they will be combined with the ready orders from the
wholesalers, staged and loaded onto trucks. The orders are then delivered by
trucks based on their routing. The Company delivers ordered items using
Company-owned trucks, leased trucks, and unaffiliated delivery companies. Under
its centre/satellite strategy, the Company's satellite locations will serve as
local sales and marketing operations only, and the centre locations will fulfill
all orders and deliveries within their respective regions.
Technology Systems. Certain Founding Companies have developed operating
and technology systems designed to improve and enhance their operations,
including computerized inventory management and order processing systems and
warehouse management and distribution systems. The Company intends, where
appropriate, to implement these systems at other Founding Companies following
the consummation of the Offering and at companies acquired in the future. One
such system, a CD-ROM based computer program called E-Cat (Electronic Catalog),
displays all the products and prices offered by the Founding Company and enables
a customer to process orders electronically and track an ordered item. The
Company believes that this program increases significantly the speed and
accuracy of order processing and fulfillment while reducing personnel
requirements at centre facilities. An Internet version of the E-Cat program is
also available.
Management Information Systems and Reporting. The Founding Companies
currently utilize various compatible management and financial information
systems which cater to the specialized needs of the commercial stationer. These
user-based systems support the customer service, order entry, order fulfillment,
billing and inventory management functions. The Company intends to integrate
these systems with a common core general ledger system following the
consummation of the Acquisitions. This will allow the Company to improve and
standardize its existing reporting capabilities and financial controls at the
corporate level, while allowing the local stationer to continue to have superior
customer service capability and focus. The Company tracks important data related
to each Founding Company's operations and financial performance against prior
year performance and budgeted goals and objectives. In addition, the Company has
developed a daily and
36
<PAGE> 38
monthly reporting process which allows management at the corporate level to
monitor key operational statistics and ratios such as each Founding Company's
revenues, gross profit and expenses, cash flows, receivables, inventory turnover
and number of employees. The Company will use such information to prepare and
provide each Founding Company with monthly and quarterly financial data which
will enable them to track and benchmark their performance with the other
Founding Companies.
Products
SOURCING. In 1997, the Founding Companies purchased approximately 60% of
its office products from wholesalers and the remainder from manufacturers. The
principal wholesalers of the office products sold by the Company are S.P.
Richards and United Stationers and the principal manufacturers include 3M, ACCO,
Avery Dennison, Hon, Pentel, Rubbermaid and Smead. In the twelve months
following the consummation of the Acquisitions, the Company intends to increase
the amount of office products it purchases from wholesalers in order to reduce
its inventory, warehousing and distribution costs. In addition, each Founding
Company and each company acquired in the future will be able to order products
from the manufacturers or wholesalers at prices and on terms negotiated by the
Company, therefore benefitting from the Company's purchasing power and
expertise.
MERCHANDISING AND PRODUCTS. The Company offers a full complement of name
brand office products, including paper products, desktop accessories, writing
instruments, technology supplies, office furniture and janitorial supplies, and
provides printing services. To market these products and services, after
consummation of the Acquisitions the Company intends to provide its customers
with catalogs containing full color photographs and descriptions of offered
items. One of these catalogs, which will be produced by wholesalers and will
bear the name of the Company's local operation, will list approximately 20,000
items, all of which will be available for next-day delivery. To supplement the
wholesaler produced catalog, the Company also intends to use a 5,000 item
proprietary catalog similar to the catalog being used by UDI. This catalog will
contain the highest volume items and will feature the Office Centre brand
products. The Company intends to purchase the highest volume items listed in the
proprietary catalog directly from the manufacturers at a lower cost than from
the wholesalers. The Company believes that the proprietary catalog will increase
operating margins by including Office Centre brand products and capturing
additional manufacturers' advertising rebates. In addition, UDI is developing a
multimedia program to be used by the Company's sales representatives to sell
printing services to its customers.
INVENTORY MANAGEMENT. The Company has developed a custom bar coding
system, which certain of the Founding Companies use to track their 250 to 500
SKU inventory through prompt recording of incoming and outgoing products. The
use of bar codes enables orders to be filled more accurately, eliminating costly
returns and pick-ups. In addition, this system will enable the Company to
forecast product demand by SKU, enabling it to select the highest selling items
for its proprietary catalog. The Company believes that the proprietary bar
coding system will be a significant factor in reducing its inventory investment
through increased inventory turns. Additionally, all picking slips will be bar
coded for more accurate invoicing with less effort and error. The Company
intends to implement this bar coding system at additional facilities during the
twelve months following the consummation of the Acquisitions.
OFFICE CENTRE PRIVATE LABEL PRODUCTS. The Company has over 250 of the
highest volume items manufactured with the Office Centre brand name. The Company
offers these products through customized catalogs. The Company believes that the
Office Centre brand name products provide stationers with an additional source
of image recognition and enhance profitability.
BROADENED OFFERED PRODUCTS AND SERVICES. The Company intends to broaden
the complement of products and services it offers to increase its sales to
existing customers. For example, following the consummation of the Offering, the
Company intends to utilize its wholesalers to provide janitorial supplies,
office furniture and advertising specialties at its facilities, as appropriate.
Sales and Marketing
The Company focuses its marketing efforts on the small and medium-sized
corporate customers. The Company believes that a significant opportunity exists
in this segment and that the larger contract stationers
37
<PAGE> 39
primarily are positioned to serve the large corporate segment. To address the
high degree of customer satisfaction demanded by the small to medium-sized
company, the Company emphasizes training of sales and customer service
personnel. The Company intends to hire a Vice President of Marketing who will
operate from its corporate headquarters and, using the UDI staff, coordinate the
sales and marketing efforts of sales representatives at the Company's centre
locations. The centre locations will provide marketing and sales programs to the
satellites in their respective regions. The duties of the Vice President of
Marketing will include developing all marketing and promotional materials,
assisting the centres in recruiting and training sales representatives,
supervising the Company's in-house training programs and supporting centre
management and sales representatives with computerized analyses of sales by
product and customer.
The Company's stationers establish and maintain relationships with
customers by assigning a sales representative to most customers. Sales
representatives, who are compensated almost exclusively on a commission and/or
incentive basis, have frequent contact with their customers and share
responsibility for increasing account penetration and providing customer
service. Sales representatives also are responsible for marketing efforts
directed to prospective customers. The Company has approximately 160 sales
representatives in the field, covering ten metropolitan areas. The Company
intends to emphasize a team approach and generally will integrate management,
sales, customer service, purchasing and other personnel into the relationship
with each customer. The Company believes that its decentralized management
strategy offers it a competitive advantage because, by not adhering to a
standardized national model, it has greater flexibility to respond to the needs
of each local market while achieving the buying power and operating efficiencies
of a large company.
The Company provides training and information about products and markets to
the Company's stationers through OffiSat, a digital, interactive, closed-circuit
satellite system developed by UDI. OffiSat enables the Company to perform
Company-wide training without the associated travel cost. UDI utilizes the
OffiSat system to broadcast programming to the 150 UDI members who have OffiSat
satellite dishes at their facilities. Through a system of digital signal
encoding, broadcasts can target one specific stationer or can be sent to some or
all of the Company's stationers and the stationers can participate in the
broadcasts. The Company also intends to utilize OffiSat to market its offered
products and services to its customers. The Company intends to sponsor regional
meetings, where appropriate, at which customers invited by the Company's local
stationers will view OffiSat programs targeting the end user of the Company's
products and services.
UDI has developed a number of other marketing programs which the Company
intends, where appropriate, to implement at the Founding Companies following the
consummation of the Offering and at companies acquired in the future. The
Company intends to utilize the experienced staff of UDI to implement such
programs. For example, UDI has developed operational and technology systems
designed to improve and enhance the operations of local stationers, including
E-Cat and EDI. UDI also has developed a web site which allows UDI members'
customers to order office products by computer. The web site offers more than
20,000 office products, many with picture confirmation, and allows the user to
search for products by category. E-Cat is currently in use in over 1,000
companies in the United States.
The Company's private brand image program is currently being used by
approximately 150 of UDI's members, and private label Office Centre products are
currently offered in UDI's customized catalogs. In 1997, sales of Office Centre
brand name products by UDI members totaled more than $5 million. The Company
believes that the development of this kind of affiliation between UDI's members
and the Office Centre name and organization will facilitate acquisitions within
the UDI network.
The Company intends to capitalize on cross-marketing and business
development opportunities that it believes will be available to the Company as a
national distributor of office products. The Company intends to leverage the
diverse industry specializations and marketing strengths of individual Founding
Companies to expand the overall penetration of products and services within
additional geographic markets. The Company also intends to increase sales by
marketing to customers with multiple locations. Marketing to customers with
multiple locations will be done by Company personnel and implemented through
Company facilities and through participating UDI members. The Company believes
its ability to offer a high level of service and product selection, volume
purchasing discounts and customized central billing will offer customers with
multiple locations a cost-effective way to purchase office supplies.
38
<PAGE> 40
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with small commercial office products stationers who sell to customers
in a limited geographic area, and several large retailers, mail order companies
and contract stationers, including Boise Cascade, Corporate Express, BT Office
Products, Office Max, Staples, Office Depot, U.S. Office Products, Viking Office
Supplies, Quill, and Global Directmail, all of which have greater financial
resources than the Company. Viking Office Supplies recently announced that it
had reached a definitive agreement to merge with Office Max. In addition, Quill
recently merged with Staples. These mergers would join two of the largest mail
order companies with two of the largest office products retailers. In the
Company's target markets, the Company believes customers are concerned not only
with the overall reduction of their office products costs but also on
dependability, superior levels of service, and flexible delivery capabilities.
The Company believes that it competes favorably on the basis of service, price
and experience.
The Company also expects that there will be competition to acquire
independent commercial stationers as the office products industry undergoes
continuing consolidation, which could limit the Company's ability to locate
suitable acquisition targets and could increase the cost of purchasing such
acquisition targets. The Company believes that its decentralized management
strategy, long-term relationships with its stationers and other operational
strategies will make it an attractive acquirer of other commercial stationers.
In addition, the Company believes it has an advantage over its competitors due
to its long-term relationships with UDI member stationers.
UDI competes with other office products buying groups for members.
Currently, there are at least seven other buying groups in the United States.
While these groups historically have competed for members based upon product
costs and rebates, the Company believes that programs designed to increase
members' sales and to decrease members' expenses will become more important to
membership retention and growth. UDI believes its technology programs offer it a
competitive advantage among the buying groups and it intends to use these
programs to increase membership and participation.
GEOGRAPHIC CONCENTRATION
Commercial stationers generally serve customers located in the geographic
areas surrounding their facilities. For the year ended December 31, 1997,
approximately 23.6%, 11.5%, 10.9% and 9.5% of the Company's pro forma revenues
were attributable to TSR (located in Richmond, Virginia), New England (located
in Boston, Massachusetts), King (located in New York City) and Sierra (located
in Sacramento, California), respectively. For the three months ended March 31,
1998, approximately 23.1%, 12.3%, 11.4% and 10.2% of the Company's pro forma
revenues were attributable to TSR, New England, King and Sierra, respectively.
This geographic concentration exposes the Company to the risk of a significant
economic downturn in the Richmond, Boston, New York or Sacramento markets. The
Company's acquisition strategy, which will target an additional 35 major
metropolitan areas throughout the country, should mitigate the potential adverse
effects of geographic concentration.
CUSTOMERS
None of the Company's customers accounted for more than ten percent of the
Company's pro forma revenues for 1997. Purchases by certain customers of two of
the Founding Companies may be attributable to the status of such Founding
Companies as women-owned and/or minority-owned small businesses. Such customers
could elect to reduce or cease purchases from these Founding Companies after the
consummation of the Acquisitions based on the loss of their women-owned or
minority-owned status.
EMPLOYEES
As of March 31, 1998, the Company had 680 full-time employees, 138 of whom
were employed primarily in management and administration, 176 in warehouse and
distribution, 77 in printing operations, 168 in marketing, 87 in customer
service, and 34 in retail sales. As of March 31, 1998, one of the Founding
Companies had entered a collective bargaining agreement covering 40 employees.
The Company considers its relations with its employees to be satisfactory.
39
<PAGE> 41
PROPERTIES
The Company operates 36 properties, consisting of centre and satellite
facilities for office products operations and administrative offices. Of these
facilities, 35 are leased and one is owned. These facilities are used
principally for operations, general and administrative functions, storage and
cross-docking space and retail space. The Company's facilities range from
approximately 400 square feet to 29,200 square feet. All of the leased
properties are leased for terms expiring on dates ranging from November 1998 to
May 2007, some with options to extend the lease term. The Company believes that
no single lease is material to its operations, that the owned and leased
facilities are adequate to serve its current level of operations and that
alternative facilities presently are available at market rates.
INTELLECTUAL PROPERTY
The Company holds a federal registered trademark for the name "OC Office
Centre" and the associated Company logo. No assurance can be given that such
trademark will be effective to prevent others from using the trademark
concurrently or to permit the Company to use the trademark in certain locations.
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. Management
believes that none of these actions will have a material adverse effect on the
financial condition or results of operations of the Company.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid or hazardous wastes; and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of hazardous substances. Two Founding
Companies conduct printing operations which may generate, or may have generated
in the past, hazardous wastes. Each of these Founding Companies believes that it
has conducted such operations and disposed of any such wastes in compliance with
applicable environmental laws and regulations.
The Company is not aware of any environmental conditions relating to
present or past waste generation at or from these facilities, or any other of
the Company's facilities or operations, that would be likely to have a material
adverse effect on the financial condition or results of operations of the
Company and does not anticipate any material expenditures to comply with
environmental laws, regulations or ordinances. However, there can be no
assurance that environmental liabilities in the future will not have a material
adverse effect on the financial condition or results of operations of the
Company.
OPERATING STRATEGY
The Company has adopted an integrated operating and acquisition strategy
designed to provide superior localized service to small and medium-sized
companies, which the Company defines as companies with 20 to 250 employees, and
to achieve growth internally as well as through the acquisition of other
commercial stationers. The key elements of the Company's operating strategy are
as follows:
Focus on Serving Small and Medium-Sized Companies. The Company believes
that small and medium-sized companies will be the fastest growing sector of the
economy in the United States in terms of revenues over the next three to five
years, and that these companies tend to be very loyal customers, generally
purchasing office products from one primary supplier. The Company believes that
this market segment is more fragmented and offers better margins than the large
company (over 250 employees) segment. In the Company's target markets, the
Company believes customers are concerned not only with the overall reduction of
their office products costs but also on dependability, superior service and
flexible delivery capabilities. Accordingly, the Company is
40
<PAGE> 42
focused on providing its customers with knowledgeable sales personnel, next day
delivery service and delivery of products exactly as ordered, as well as
competitive pricing on the highest volume items.
Leverage Wholesaler Resources. The Company intends to leverage the
resources of two national wholesalers, S.P. Richards and United Stationers, as
well as regional and niche wholesalers. Such resources include custom catalogs,
electronic ordering, wrap and label capabilities and national distribution. The
two national wholesalers, which together have approximately 105 warehouses
stocking over $650 million of inventory, will provide the backbone of the
Company's distribution network. These wholesalers are able to provide the
Company with next-day delivery of product wrapped and labeled by customer and
local stationer name ("wrap and label" capability), which the local stationer
can deliver to its customers on the same day. The Company believes that by
utilizing the wholesalers' proven distribution capabilities it can ensure prompt
and efficient delivery of products. The Company believes that leveraging the
resources of the wholesalers will allow it to (i) reduce inventory, warehousing
and distribution costs; and (ii) minimize the need to build an extensive
distribution system.
Achieve Operating Efficiencies and Economies of Scale. The Company will
seek to achieve operating efficiencies and economies of scale through (i) volume
purchasing of office products; (ii) combining certain administrative functions
at the corporate level; (iii) implementing a centre/satellite strategy and
eliminating redundant facilities and services; (iv) implementing Company-wide
integrated technology and operating systems; (v) providing a Company-wide
proprietary catalog to increase advertising rebates from manufacturers; and (vi)
increasing sales volumes by broadening the complement of products and services
its stationers offer. The Company intends to combine the buying power of UDI
with that of the Company's stationers in order to obtain more favorable prices
and rebates, which office product manufacturers and wholesalers have
historically offered only to high volume purchasers. UDI has already been
successful in obtaining lower pricing and annual rebates based on the volume of
purchases for its members. As the Company's revenues increase, the Company
believes that it will be able to increase the discounts and rebates currently
obtained by the Founding Companies and by companies to be acquired in the future
and enable such companies to leverage the wholesalers' "wrap and label"
capabilities. The Company also intends to centralize certain administrative
functions such as cash management, insurance, payroll processing and employee
benefits, marketing and advertising, long distance services and a variety of
professional services to further reduce costs.
Capitalize on Private Brand Image. The Company has developed a private
brand image program that includes Office Centre brand products, retail store
signage, proprietary catalogs and a web site. Currently, approximately 290 UDI
member stationers have paid $1,500 each to participate in this program. Under
the private brand program, the Company has over 250 of the highest volume items
manufactured with the Office Centre name and in 1997 over $5 million of Office
Centre brand product was sold by UDI members. The Company believes this
three-year old program enhances its name recognition with commercial stationers
and customers and offers a significant profit opportunity.
Operate with Decentralized Management. The Company intends to operate with
decentralized management and has entered into long-term employment contracts
with senior management at each of the Founding Companies and intends to continue
to enter into such contracts in connection with future acquisitions. Under the
Company's "centre and satellite" strategy, the centre stationers will fulfill
all management functions for the satellites in their respective regions.
Experienced local management will make decisions relating to the day-to-day
operations of a particular centre and its related satellites and will be
responsible for the profitability and growth of that operation. The Company's
senior managers will provide the centre stationers with strategic planning and
guidance with respect to acquisitions, marketing and operations. The Company
intends to motivate its employees and align their interests with those of the
Company's stockholders by using Common Stock as a currency in its acquisition
program and granting options to purchase Common Stock as a part of employee
compensation. The Company believes that the operating autonomy provided by this
decentralized structure, together with the implementation of reporting systems
and financial controls at the corporate level, will enable it to combine the
superior customer service and responsiveness of a locally-oriented stationer
with the resources and economies of scale of a large company.
41
<PAGE> 43
ACQUISITION STRATEGY
The Company is principally a commercial stationer and its acquisition focus
will continue to be on commercial stationers. The Company believes that, due to
the fragmented nature of the commercial stationer market, there are
opportunities for acquiring additional commercial stationers nationwide. The key
elements of the Company's acquisition strategy are as follows:
Target Major Metropolitan Areas. The Company intends to expand
aggressively through acquisitions into an additional 35 major metropolitan areas
throughout the country. The Company will first seek to make a centre acquisition
in a targeted area by acquiring an established, high quality commercial
stationer with revenues of $7 million to $20 million. It will then seek to
acquire additional, smaller synergistic commercial stationers, or satellites,
typically with revenues of $5 million or less, within the metropolitan market
surrounding the centre stationers. The Company believes that the local presence
created through the acquisition of a centre stationer will facilitate the
identification of satellite acquisition targets. The Company intends to
substantially integrate the operations of acquired satellites with the centre
stationers. This integration is intended to leverage more effectively the
Company's distribution capabilities, thereby eliminating a substantial portion
of the operating expenses of the acquired satellites and increasing the
Company's margins.
Leverage UDI Membership and Exclusivity Agreements. Through UDI, the
Company maintains relationships with a large network of stationers that are
potential acquisition candidates for the Company. UDI's membership consists of
approximately 1,100 office products stationers and office furniture dealers
servicing the United States and parts of Canada. Ten of the Founding Companies
are members of UDI. The Company intends to utilize the assistance of UDI sales
representatives to approach acquisition candidates who are UDI members.
Approximately 290 UDI member stationers are already participating in the
Company's private brand image program. The Company believes that the development
of this kind of affiliation between UDI's member stationers and the Office
Centre name and organization will facilitate acquisitions within the buying
group. The Company also intends to leverage the industry contacts of its
Founding Companies, four of which belong or formerly belonged to industry buying
groups other than UDI. In order to strengthen its acquisition pipeline, the
Company has entered into exclusivity agreements with approximately 60 UDI
members, which the Company believes collectively had 1997 revenues in excess of
$120 million. The exclusivity agreements provide that, at the Company's request,
the acquisition candidates will engage in good faith discussions with the
Company with respect to the sale of their respective companies and that they
will not solicit offers from, or engage in any such discussions with, any other
party for a period of six to nine months. In addition, the exclusivity
agreements permit the Company to conduct due diligence on the acquisition
candidates. The Company is currently collecting data on the acquisition
candidates with a view toward sequencing the candidates for potential future
acquisitions. The Company is not in negotiations for acquisition of any
candidates. There can be no assurance that the Company will seek to acquire, or
that it will be successful in acquiring, any of the acquisition candidates who
have entered into exclusivity agreements with the Company. A number of the
exclusivity agreements terminate each month, beginning in August 1998.
Retain Local Management and Image. The Company intends to acquire
successful commercial stationers with strong management in its targeted centre
locations. In most instances, the Company expects to retain the management,
sales personnel and name of the acquired centre stationer. To preserve local
market knowledge and customer relationships, the Company has entered into
long-term employment contracts with senior management level employees at each of
the Founding Companies and intends to continue to do so in connection with
stationers acquired in the future. The Company believes that its decentralized
management strategy will make it an attractive acquirer of additional centre
stationers, particularly those companies whose owners wish to remain involved in
the day-to-day operations of their companies. The Company also intends to retain
the name of the local stationer to maintain continuity with local customers.
42
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
directors, executive officers and persons who will become directors or executive
officers of the Company following the consummation of the Offering:
<TABLE>
<CAPTION>
AGE POSITION
--- --------
<S> <C> <C>
Robert J. Gillon, Jr. 54 Chairman of the Board, President and Chief Executive Officer
Chief Financial Officer, Senior Vice President, Treasurer
Joseph E. Hajjar 45 and Secretary
Richard T. Case 49 Senior Vice President, Corporate Development
Thomas F. Mooney 55 Vice President, Purchasing
Yancey S. Jones 48 Director, President -- TSR
Charles J. Murphy 50 Director
Edward A. Schefer 63 Director
</TABLE>
Robert J. Gillon, Jr. has been Chief Executive Officer of Office Centre
Corporation since May 1997, President of the Company since March 1997, a
director of the Company since March 1997 and Chairman of the Board of the
Company since August 1997. From February 1994 until the present, Mr. Gillon has
been Chief Executive Officer and President of King. From August 1989 until
December 1993, Mr. Gillon was Chief Executive Officer of Emco Corporation, a
regional wholesaler of office supplies in the New York area. Prior to that, for
more than 20 years, Mr. Gillon served in various management positions in sales,
marketing, product development and general management with IBM.
Joseph E. Hajjar has been Chief Financial Officer, Senior Vice President,
Treasurer and Secretary of Office Centre Corporation since September 1997. Mr.
Hajjar was employed from November 1994 to August 1997 as Vice President of
Finance for Bovis, Inc., one of the largest companies in the construction
management, general contracting and construction consulting field. From April
1992 to November 1994, Mr. Hajjar was employed by ENSERCH Corporation where his
most recent position was Chief Financial Officer of ENSERCH Environmental
Corporation, one of the largest firms in environmental consulting and
remediation (now part of Foster-Wheeler Corporation). Mr. Hajjar's 25 years of
finance and accounting experience includes 13 years with the accounting and
management consulting firm of Price Waterhouse, LLP. Mr. Hajjar is a certified
public accountant.
Richard T. Case has been Senior Vice President, Corporate Development, of
Office Centre Corporation since May 1, 1998. From February 1, 1997 until he
joined Office Centre Corporation, Mr. Case provided consulting services to
Office Centre Corporation. Since April 1981, Mr. Case has been President of
Benchmark Associates. Through Benchmark Associates, Mr. Case has served as a
consultant to companies in numerous industries in the area of financial
turnarounds, strategic planning, acquisitions and mergers, operational analysis,
product development and strategic marketing. From March 1979 until April 1981,
Mr. Case was Senior Vice President of Marketing for one of the largest divisions
of American Hospital Supply Corporation, a manufacturer and distributor of
health care products (now part of Baxter International Inc.). From May 1975
until March 1979, Mr. Case was Director of New Business Development, responsible
for acquisition and mergers, at American Hospital.
Thomas F. Mooney has been Vice President of Purchasing of Office Centre
Corporation since May 8, 1998. Prior to joining Office Centre Corporation, Mr.
Mooney served as the Vice President of Purchasing for Corporate Express from
March 1994 until May 1997. From March 1988 until March 1994, Mr. Mooney served
as a Vice President of Purchasing of Hanson Office Products, a contract
stationer.
Yancey S. Jones has been a director of Office Centre Corporation since May
13, 1998. Mr. Jones has been the President and Chief Executive Officer of TSR
since October 1988. Mr. Jones currently serves as the treasurer of TriMega, a
national office products buying group that is also a member of Business Products
Group
43
<PAGE> 45
International ("BPGI"), a global office supply buying group. He is a past
president of the Richmond Office Products Association, and was a charter member
of the Virginia Office Products Association. He is also the founder and chairman
of the board of MEGA Office Furniture, LLC, an office furniture superstore
chain, founded in May 1996.
Charles J. Murphy has been a director of Office Centre Corporation since
May 13, 1998. Since March 1996, Mr. Murphy has been a Managing Director of
Sextant Group, Inc., a private investment firm. Prior to joining Sextant Group,
Inc., Mr. Murphy headed CS First Boston's global equity business and was a
member of its Executive Board. At CS First Boston, Mr. Murphy managed global
investment banking from 1992 to April 1995, having held both coverage and
management positions in the capital markets, corporate finance and regulated
industry groups. Mr. Murphy has been a Trustee of Manhattan College and recently
has become a member of the Executive Committee of the Boston College Wall Street
Council. Mr. Murphy is also an adjunct professor at New York University.
Edward A. Schefer has been a director of Office Centre Corporation since
May 13, 1998. From April 1992 until he retired in January 1998, Mr. Schefer
served as Vice President of Management Information Systems at American Home
Products Corp., a diversified health care company.
Pursuant to the listing requirements of the Nasdaq National Market, the
Company is required to have at least two independent directors on its Board of
Directors and to establish an audit committee, at least a majority of which
members are independent. See "-- Committees of the Board of Directors." At each
annual meeting of stockholders, approximately one-third of the directors are
elected by the holders of the Common Stock for a term of three years to succeed
those directors whose terms are expiring. All officers serve at the discretion
of the Board of Directors. See "Description of Capital Stock -- Common Stock."
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive a fee of $2,000 per meeting of the Board of Directors
or committees thereof and will be granted options to purchase 20,000 shares of
Common Stock at an exercise price equal to the initial public offering price,
vesting ratably over the initial term of his directorship beginning on the first
anniversary of the date of the Offering, and expiring ten years after the date
of grant. Directors also are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof, or for other
expenses incurred in their capacity as directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to conduct
the annual audit of the books and records of the Company, reviewing the proposed
scope of such audit and approving the audit fees to be paid, reviewing
accounting and financial controls of the Company with the independent public
accountants and the Company's financial and accounting staff and reviewing and
approving transactions between the Company and its directors, officers and
affiliates. Messrs. Murphy and Schefer are the members of the Audit Committee.
The Compensation Committee provides a general review of the Company's
compensation plans to ensure that they meet corporate objectives. As described
below, the Company's existing plans with respect to executive compensation are
largely based on contractual commitments set forth in employment agreements that
are either in effect or are to be entered into upon consummation of the
Acquisitions. The responsibilities of the Compensation Committee also include
administering the 1998 Stock Option Plan, and selecting the officers and
salaried employees to whom awards will be granted. Messrs. Gillon, Jones, Murphy
and Schefer are the members of the Compensation Committee.
44
<PAGE> 46
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to Office Centre
Corporation's chief executive officer and the two other most highly compensated
executive officers whose aggregate salaries and bonuses exceeded $100,000 during
the year ended December 31, 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
Robert J. Gillon, Jr..................................... $167,000 $150,000 --
Chairman, Chief Executive Officer and President(1)
Walter H. Gordenstein.................................... $294,700 -- $64,000(3)
President, Chief Executive Officer and Chairman of
UDI(2)
Joseph E. Hajjar......................................... $ 61,000 $110,000(4) --
Chief Financial Officer, Senior Vice President,
Treasurer and Secretary
</TABLE>
- ---------------
(1) Excludes compensation paid to Mr. Gillon by King.
(2) Mr. Gordenstein ceased to serve as President and Chief Executive Officer of
UDI on February 11, 1998 and ceased to serve as Chairman of UDI on April 15,
1998.
(3) Reflects life insurance premium payments of approximately $63,000 and $1,000
paid to Mr. Gordenstein in director fees.
(4) Consists of the fair market value at the time awarded of 50,000 shares of
Common Stock awarded to Mr. Hajjar.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During 1997, the compensation committee of Office Centre Corporation
consisted of Messrs. Gillon, Gordenstein, Davie and Kaweske, each of whom were
officers of the Company. For a discussion of certain relationships involving
such persons, see "Certain Transactions."
EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE
On May 1, 1997, Office Centre Corporation entered into an employment
agreement with Mr. Gillon pursuant to which Mr. Gillon serves as the President
and Chief Executive Officer of the Company for a term expiring on the third
anniversary of the date of the consummation of the Offering. Mr. Gillon receives
an annual base salary of $250,000. Mr. Gillon will be eligible for annual
bonuses determined by the Board of Directors of Office Centre Corporation. The
employment agreement does not require the payment of bonuses or establish a
range or cap on the amount of such bonuses. See "-- Executive Compensation." In
addition, Mr. Gillon's employment agreement automatically renews at the end of
the current term and each succeeding year for an additional year unless
terminated or the Company or Mr. Gillon provides notice of its or his intent not
to renew at least six months prior to the end of the current term. If the
Company elects not to renew Mr. Gillon's employment agreement, the Company must
pay Mr. Gillon as severance an amount equal to the greater of: (i) his then
current annual salary, or (ii) $250,000. If Mr. Gillon's employment is
terminated at any time by the Company without cause, he will be entitled to
receive the greater of (i) his base salary for the remainder of the term had his
employment not been terminated and (ii) $250,000 (or such greater amount as is
Mr. Gillon's annual base salary at the time of termination). Pursuant to an
amendment to his employment agreement dated May 14, 1998, Mr. Gillon was awarded
options to purchase 50,000 shares of Common Stock, with one-third vesting on the
first anniversary of the date of grant, one-third on the second anniversary of
the date of grant and one-third on the third anniversary of the date of grant.
The options are exercisable for ten years from the date of grant. The exercise
price for the options is the initial public offering price per share. Pursuant
to his employment agreement, in 1997 Mr. Gillon received a signing bonus of
$150,000 and in 1998 received a non-recurring bonus of $250,000. Under his
employment agreement, Mr. Gillon agrees not to compete with the Company during
his employment with the Company and for one year thereafter, provided, that if
his employment is terminated by the Company other than
45
<PAGE> 47
for cause, Mr. Gillon will not compete with the Company until the date which is
the later of (i) the first anniversary of the date of such termination, and (ii)
the date in which his employment would have expired but for his termination.
On April 15, 1998, Office Centre Corporation entered into an employment
agreement with Mr. Gordenstein pursuant to which Mr. Gordenstein is employed by
UDI at an annual base salary of $200,000. Mr. Gordenstein will be eligible for
annual bonuses determined by the Board of Directors of Office Centre
Corporation. The employment agreement does not require the payment of bonuses or
establish a range or cap on the amount of such bonuses. See "-- Executive
Compensation." Mr. Gordenstein's employment agreement terminates on the date of
the consummation of the Offering. Pursuant to his employment agreement, Mr.
Gordenstein agrees not to compete with the Company during his employment with
the Company and for one year thereafter.
Effective May 1, 1998, Office Centre Corporation entered into a three-year
employment agreement with Mr. Case pursuant to which Mr. Case serves as the
Senior Vice President, Corporate Development of the Company. Mr. Case receives
an annual base salary of $200,000. Mr. Case will be eligible for annual bonuses
based upon meeting or exceeding certain annual performance objectives. Payment
of such bonuses is not required but, if paid, will range from 40% to 100% of Mr.
Case's annual base salary depending upon the extent to which he achieves the
annual objectives established by the Company. If Mr. Case's employment with the
Company is terminated at any time without cause, the Company must pay Mr. Case
as severance the unpaid base salary he would have been entitled to receive for
the remainder of the current term and the earned but unpaid bonus during the
year of termination. Pursuant to his employment agreement, Mr. Case is eligible
to receive options to purchase 300,000 shares of Common Stock, with one-third
vesting on January 1, 1999, one-third on January 1, 2000 and one-third on
January 1, 2001. The options are exercisable until December 1, 2007. The
exercise price per share for the options is $9.12. Pursuant to his employment
agreement, Mr. Case agrees not to compete with the Company during his employment
with the Company and for one year thereafter.
On August 22, 1997, Office Centre Corporation entered into an employment
agreement with Mr. Hajjar pursuant to which Mr. Hajjar serves as Senior Vice
President and Chief Financial Officer of the Company for a term expiring on the
third anniversary of the date of the consummation of this Offering. Mr. Hajjar
receives an annual base salary of $185,000. Mr. Hajjar will be eligible for
annual bonuses of up to 25% of his annual base salary determined by the Board of
Directors of Office Centre Corporation, although payment of a bonus is not
required. If Mr. Hajjar's employment is terminated at any time without cause,
the Company must pay Mr. Hajjar as severance an amount equal to the base salary
he would have been entitled to receive for the one year period following his
termination without cause. Pursuant to his employment agreement, at the time of
the Offering Mr. Hajjar will be awarded options to purchase 50,000 shares of
Common Stock, with one-third vesting on the first anniversary of the Offering,
one-third on the second anniversary of the Offering and one-third on the third
anniversary of the Offering. The options are exercisable for ten years from the
date of the Offering. The exercise price for the options is the initial public
offering price per share. Pursuant to his employment agreement, Mr. Hajjar
agrees not to compete with the Company during his employment with the Company
and for one year thereafter.
Effective May 8, 1998, Office Centre Corporation entered into a three-year
employment agreement with Mr. Mooney pursuant to which Mr. Mooney serves as a
Vice President of the Company. Mr. Mooney receives an annual base salary of
$115,000. Mr. Mooney will be eligible for annual bonuses of up to 50% of his
annual base salary determined by the Board of Directors of Office Centre
Corporation based upon Mr. Mooney's performance, although payment of a bonus is
not required. If Mr. Mooney's employment with the Company is terminated at any
time without cause, the Company must pay Mr. Mooney as severance an amount equal
to the base salary he would have been entitled to receive for the one year
period following his termination without cause. Pursuant to his employment
agreement at the time of the Offering Mr. Mooney will be awarded options to
purchase 50,000 shares of Common Stock, with one-third vesting on the first
anniversary of the Offering, one-third on the second anniversary of the Offering
and one-third on the third anniversary of the Offering. The options are
exercisable for ten years from the date of this Offering. The exercise price for
the options is the initial public offering price per share. Pursuant to his
employment agreement, Mr. Mooney agrees not to compete with the Company during
his employment with the Company and for one year thereafter.
46
<PAGE> 48
Simultaneous with the Offering, Office Centre Corporation will enter into a
three-year employment agreement with Mr. Jones pursuant to which Mr. Jones will
serve as President of TSR. Mr. Jones will receive an annual base salary of
$150,000. Mr. Jones will be eligible for annual bonuses which will be dependent
upon the achievement of profitability objectives for his division. Payment of
such bonuses is not required but, if paid, will range from $0 if Mr. Jones'
division achieves less than 100% of the profitability objectives to 100% of his
annual base salary if Mr. Jones' division achieves 130% of the profitability
objectives. Mr. Jones will also receive additional bonuses if he actively
assists in acquiring a target company in an amount equal to .5% of the
annualized sales of such target company for the twelve months preceding such
acquisition. If Mr. Jones terminates his employment for good reason (as defined
in his employment agreement) at any time after six months following the
commencement of his employment, the Company must pay Mr. Jones as severance an
amount equal to the base salary he would have been entitled to receive for the
remainder of the then current term of the employment agreement had such
termination not occurred. Mr. Jones will also agree not to compete with the
Company during his employment with the Company and for two years thereafter.
Pursuant to his employment agreement, at the time of the Offering Mr. Jones will
be awarded options to purchase 50,000 shares of Common Stock, which will vest
ratably over three years. The options are exercisable for ten years from the
date of the Offering. The exercise price for the options is the initial public
offering price per share.
Annual bonuses for the Company's executive officers will be determined by
evaluating the responsibilities of the position held, the experience and
individual performance of the executive officer and the overall performance of
the Company. The Compensation Committee believes that, to the extent funds are
available, annual bonuses should be paid by the Company so that the total
compensation paid to the executive officer is maintained at levels at least
competitive with those offered by companies with which the Company competes for
executive talent in order to attract and retain executive officers of the
caliber that the Company desires.
1998 STOCK OPTION PLAN
In March 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan is administered by the Compensation Committee, which consists of four
directors, two of which are independent members of the Board of Directors.
Pursuant to the Plan, the Company may grant options to purchase up to 1,500,000
shares of Common Stock to officers, directors, consultants and employees of the
Company, its subsidiaries and affiliates. Such options may be either incentive
stock options or options which do not qualify for treatment as incentive stock
options. The Plan also provides for the grant of stock appreciation rights
("SARs") in conjunction with all or part of any stock option granted under the
Plan. SARs are exercisable at such time and to the extent as the stock options
to which they relate.
Options granted under the Plan are non-transferable by the optionee during
his lifetime, and will expire if not exercised within ten years from the date of
the grant and terminate upon an optionee's termination of employment or service
with the Company or a subsidiary, except that, under certain circumstances,
options are exercisable for a period of three months after retirement or
termination of employment and for a period of one year after death or
disability, unless such options expire earlier.
Incentive stock options are also subject to the following limitations (i)
the aggregate fair market value (determined at the time an option is granted) of
stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under all such plans of the
Company or its subsidiaries) shall not exceed $100,000; and (ii) if the
individual to whom the incentive stock options were granted is considered as
owning stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, then (A) the option price at the time of grant
may not be less than 110% of the fair market value per share for such Common
Stock and (B) the option period must be no more than five years from the date of
grant.
In the event of a Change in Control of the Company, for a period of 60 days
thereafter, holders of options under the Plan shall have the right to surrender
all or a portion of the options held by them (whether or not exercisable) and to
receive cash in an amount equal to the amount by which the Change of Control
Price per share of Common Stock on the date of such election exceeds the
exercise price, multiplied by the numbers of shares underlying the options held
by them. The Plan defines "Change in Control" as (i) an acquisition of 20% or
more
47
<PAGE> 49
of the outstanding common voting stock of the Company; (ii) a change in the
majority of the composition of the Board of Directors of the Company; (iii) a
reorganization, merger, consolidation or sale of all or substantially all of the
assets of the Company; or (iv) dissolution or liquidation of the Company. The
Change in Control Price is the highest price of a share of Common Stock on the
exchange on which the shares are listed during the 60-day period prior to the
Change in Control.
Upon the consummation of the Offering, options to acquire 1,074,600 shares
will have been granted under the Plan and no SARs will have been granted under
the Plan.
48
<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock immediately prior to and immediately
following the Offering (assuming no exercise of the Underwriters' over-allotment
option) by: (i) all persons known to the Company to be the beneficial owner of
5% or more of the Company's Common Stock; (ii) each Selling Stockholder; (iii)
each director; (iv) each Named Executive Officer; and (v) all executive officers
and directors as a group. Except as otherwise indicated below, each of the
persons listed has sole voting and investment power with respect to their
shares.
<TABLE>
<CAPTION>
COMMON
STOCK NUMBER OF
BENEFICIALLY PERCENTAGE COMMON SHARES
OWNED OWNERSHIP STOCK TO BENEFICIALLY PERCENTAGE
PRIOR TO PRIOR TO BE SOLD OWNED OWNERSHIP
NAME AND ADDRESS OF THE THE IN THE AFTER THE AFTER THE
BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING OFFERING
------------------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Clifford M. Davie(2)........................ 770,304 53.7% 200,000 570,304 6.7%
20 Royal Palm Way
Unit 103
Boca Raton, FL 33432
Walter H. Gordenstein(3).................... 537,054 37.5% 225,000 312,054 3.7%
c/o UDI Corp.
90 Tapley Street
Springfield, MA 01101
Robert J. Gillon, Jr.(4).................... -- -- -- 329,937 3.9%
c/o Office Centre Corporation
38 East 32nd Street
New York, NY 10016
Yancey S. Jones(5).......................... -- -- -- 552,782 6.5%
c/o The Supply Room Companies, Inc.
4103 West Clay Street
Richmond, VA 23230
Joseph E. Hajjar(6)......................... 50,000 3.5% -- 50,000 0.6%
c/o Office Centre Corporation
38 East 32nd Street
New York, NY 10016
All directors and executive officers as a
group(7).................................. 50,000 3.5% -- 962,264 11.3%
</TABLE>
- ---------------
(1) Gives effect to the transfer of 35,465 shares of Common Stock from the
stockholders of the Company (other than Joseph Hajjar) to Joseph Hajjar,
pursuant to the terms of an agreement dated as of July 9, 1998, among the
Company and all of the stockholders of the Company.
(2) Includes 37,670 shares held by Dean Witter Reynolds, custodian for Clifford
M. Davie IRA Rollover Trust (the "Davie Trust"). Clifford Davie and the
Davie Trust have agreed that following the completion of the Offering
through December 31, 2002, they will vote all shares of Common Stock owned
by them in the same proportion as all other outstanding shares of Common
Stock are voted. See "-- Standstill Agreements with Founders." Does not
include 29,064 shares held by John Davie, Clifford Davie's son, as to which
Clifford Davie disclaims beneficial ownership. Mr. Davie has formerly served
as a director and as Treasurer of Office Centre Corporation and as a
director of UDI and certain of UDI's subsidiaries. For additional
information about Mr. Davie, see "Certain Transactions."
(3) Does not include 25,000 shares of Common Stock which may be acquired by
Peter B. Gordenstein, Walter H. Gordenstein's son, upon the exercise of
options which are not exercisable within 60 days, of which Walter
Gordenstein disclaims beneficial ownership. Walter Gordenstein has granted
the Underwriters an option to purchase 204,640 shares of Common Stock solely
to cover over-allotments, if any. To the extent such option is exercised,
the number and percent of shares beneficially owned by Mr. Gordenstein after
the Offering will
49
<PAGE> 51
be reduced accordingly. In the past, Mr. Gordenstein has served as a
director and President of Office Centre Corporation, a director, President
and Chief Executive Officer of UDI and a director and officer of certain of
UDI's subsidiaries. For additional information about Mr. Gordenstein, see
"Management" and "Certain Transactions."
(4) Consists of an estimated 329,937 shares to be acquired upon consummation of
the Offering in connection with the Acquisition of King. Does not include
50,000 shares which may be acquired by Mr. Gillon upon the exercise of
options not exercisable within 60 days.
(5) Consists of an estimated 552,782 shares to be acquired upon consummation of
the Offering in connection with the Acquisition of TSR. Does not include
50,000 shares which may be acquired by Yancey S. Jones upon the exercise of
options not exercisable within 60 days. Does not include an estimated
184,261 shares to be acquired by M. Addison Jones, the brother of Yancey
Jones, upon consummation of the Offering in connection with the Acquisition
of TSR, or 25,000 shares which may be acquired by M. Addison Jones upon the
exercise of options not exercisable within 60 days, as to all of which
Yancey Jones disclaims beneficial ownership.
(6) Does not include 50,000 shares of Common Stock which may be acquired by Mr.
Hajjar upon the exercise of options not exercisable within 60 days.
(7) Does not include 50,000, 50,000, 300,000, 50,000, 20,000 and 20,000 shares
of Common Stock which may be acquired by Messrs. Gillon, Hajjar, Case,
Mooney, Schefer and Murphy, respectively, upon the exercise of options not
exercisable within 60 days. See "Management -- Employment Agreements;
Covenants Not to Compete" and "Management--Director Compensation."
INVOLVEMENT OF FOUNDER IN LEGAL PROCEEDINGS
In January 1993, an involuntary bankruptcy petition (In Re Interco Systems,
Inc., Case No. 93-20144, United States Bankruptcy Court for the Western District
of New York) was filed against a company of which Clifford M. Davie, a founder
and principal stockholder of Office Centre Corporation, was president and chief
executive officer. In such proceeding, the bankruptcy trustee filed adversary
proceedings against Mr. Davie which were settled by Mr. Davie's returning his
interest in a real estate project and paying $475,000 in cash to the bankrupt
estate. The bankruptcy case has proceeded to the distribution phase of the
liquidation.
STANDSTILL AGREEMENTS WITH FOUNDERS
On May 13, 1998, Office Centre Corporation, Mr. Davie and the Davie Trust
entered into an agreement (the "Davie Standstill Agreement") whereby Mr. Davie
and the Davie Trust have agreed not to sell or transfer more than 25% of the
shares of Common Stock owned by each of them during each six month period in the
two years following the expiration of the Lockup Period. Pursuant to the Davie
Standstill Agreement, Mr. Davie and the Davie Trust have agreed that following
the completion of the Offering through December 31, 2002, they will vote all
shares of Common Stock owned by them in the same proportion as all other
outstanding shares of Common Stock are voted. They have irrevocably authorized
certain officers of the Company as their proxy to vote their shares in
accordance with such agreement through December 31, 2002. Mr. Davie also agreed
that he will not participate in any manner in the management of the Company, nor
will he acquire any additional capital stock or other securities of the Company
or seek to influence the voting thereof by other stockholders of the Company. In
addition, Mr. Davie has agreed not to compete with the Company until May 2003.
On April 15, 1998, Office Centre Corporation and Mr. Gordenstein entered
into an agreement whereby Mr. Gordenstein has agreed not to sell or transfer
more than 25% of the shares of Common Stock owned by him during each six month
period in the two years following the expiration of Lockup Period. In addition,
Mr. Gordenstein has agreed not to compete with the Company until April 2003.
50
<PAGE> 52
CERTAIN TRANSACTIONS
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
Mr. Gillon, Chairman, Chief Executive Officer and President of Office
Centre Corporation, is also the President and Chief Executive Officer of King
and, until the consummation of the Acquisition of King, will own approximately
70% of the stock of King. Upon the closing of the Acquisition of King, Office
Centre Corporation will pay to King's stockholders aggregate consideration of
approximately $6.6 million, subject to adjustment, consisting of approximately
$2.9 million in cash and $3.6 million in shares of Common Stock. Office Centre
Corporation will also repay approximately $2.4 million of debt of King, of which
$665,000, plus certain interest and costs, was personally guaranteed by Robert
J. Gillon, Jr. The consideration to be paid for King was not negotiated at arm's
length but was determined based on the average multiple of EBITDA used to
determine the purchase price of the three other largest Founding Companies. The
Board of Directors of Office Centre Corporation, including all of its
disinterested directors, unanimously determined in its good faith business
judgment that the consideration to be paid for King was consistent with that
paid for the other Founding Companies and that the other terms and conditions of
the King acquisition were substantially similar to those of the other
Acquisitions, each of which was the subject of arm's length negotiations.
Effective June 30, 1996, King purchased substantially all of the assets,
(principally accounts receivable, inventory and leasehold improvements) subject
to the assumption of substantially all of the liabilities, of King Office Supply
Co. for $647,142. The liabilities assumed included a $75,000 promissory note
which was subsequently personally guaranteed by Mr. Gillon. Office Centre
Corporation will repay such promissory note in connection with the Acquisition
of King. Also effective June 30, 1996, King purchased certain machinery,
equipment and leasehold improvements relating to the coffee business of Carnegie
Coffee Company for $75,000. On March 1, 1997, King acquired the accounts
receivable, inventory, machinery and equipment of Commercial Office Supply
Company, Inc., doing business as Commercial Office Supply Co., for approximately
$265,000.
Office Centre Corporation has incurred costs payable to King of
approximately $9,500 per month since March 1997 for the use of office space and
certain administrative services. In addition, Office Centre Corporation is
obligated to reimburse King, without markup, for certain disbursements made by
King on behalf of Office Centre Corporation. As a member of UDI, in the ordinary
course of business, King receives wholesale rebates from UDI and reimburses UDI
for direct manufacturer purchases made through UDI.
Prior to becoming an executive officer of the Company, Mr. Case was the
President and owner of Benchmark Associates, Inc. The Company retained the
services of Benchmark Associates, Inc. pursuant to a one-year consulting
agreement that expired February 1, 1998. Under this consulting agreement
Benchmark was paid approximately $94,000, $34,379 of which consisted of
reimbursement for expenses. Pursuant to the Benchmark consulting agreement, at
the time of the Offering, Benchmark will receive $425,000 in cash and $325,000
in the form of shares of Common Stock valued at the initial public offering
price per share. From February 1, 1998 until Mr. Case became an employee of the
Company on May 1, 1998, the Company retained the services of Mr. Case pursuant
to a consulting agreement under which he was paid approximately $104,200, of
which approximately $56,300 consisted of reimbursement for expenses. The
consulting services provided to the Company by Benchmark Associates, Inc. and
Mr. Case included working closely with management in developing the Company's
acquisition strategy, identifying and conducting due diligence on acquisition
candidates, negotiating the acquisitions of the Founding Companies, and
obtaining exclusivity agreements from potential future acquisition candidates.
In September 1997, Office Centre Corporation purchased 1,250 shares of
common stock of TSR for $1.5 million. Yancey S. Jones, a director of Office
Centre Corporation, is an officer and director of TSR and, until the closing of
the Acquisition of TSR, Mr. Jones and his brother, M. Addison Jones, will be the
principal shareholders of TSR. Upon the closing the Acquisition of TSR, Office
Centre Corporation will pay to TSR's stockholders aggregate consideration of
approximately $10.9 million, subject to adjustment, consisting of approximately
$2.8 million in cash and approximately $8.1 million in shares of Common Stock
valued at the initial public offering price per share. Office Centre Corporation
may, in its sole discretion, substitute cash in the amount of $1 million with
respect to the Acquisition as consideration in lieu of $1 million of Common
Stock
51
<PAGE> 53
otherwise deliverable in connection with such Acquisition. Office Centre
Corporation will also repay approximately $2.7 million of debt of TSR, $750,000
of which is personally guaranteed by Yancey S. Jones and/or M. Addison Jones and
$290,000 of which is payable to Yancey S. Jones and/or M. Addison Jones. See
"Business -- Current Business -- The Acquisitions of the Founding Companies" for
a description of the factors considered by Office Centre Corporation in
determining the consideration to be paid for TSR. The consideration to be paid
for TSR was determined by the Board of Directors (including independent
directors) of Office Centre Corporation prior to the time Mr. Jones became a
member of the Board of Directors.
TSR entered into a ten-year lease dated January 1, 1992 with Yancey Jones
and M. Addison Jones for commercial space in Virginia. The monthly rent under
the lease is $6,000 in the first three years, $7,000 for the next two years,
$8,000 for the next year, and increasing by 2% thereafter.
TSR entered into a ten-year lease dated October 1, 1993 with Mr. Jones for
commercial space in Virginia for a monthly rent of $4,300 in the first year,
increasing by 4% per year thereafter.
TRANSACTIONS WITH FOUNDERS
In connection with the formation of Office Centre Corporation, Office
Centre Corporation issued 1,291,157 shares of Common Stock at an aggregate
purchase price of approximately $4,442 to Messrs. Davie, Gordenstein and John D.
Kaweske. These shares were issued to Messrs. Davie, Gordenstein and Kaweske in
connection with the founding of Office Centre Corporation, prior to the
acquisition of UDI by Office Centre Corporation and prior to the commencement of
Office Centre Corporation's business. The three founders paid an amount in cash
equal to the par value of the shares purchased and the issuance was recorded by
Office Centre Corporation at such amount.
On May 23, 1997, Messrs. Davie and Gordenstein entered into two Stock
Purchase Agreements with Office Centre Corporation pursuant to which Mr.
Gordenstein and the Davie Trust transferred all of their capital stock in UDI
Corp. and UDI II Corp. to Office Centre Corporation, whereupon UDI Corp. and UDI
II Corp. became wholly-owned subsidiaries of Office Centre Corporation. In
consideration therefor, Mr. Gordenstein received an aggregate of 26,292 shares
of Common Stock and the Davie Trust received an aggregate of 37,670 shares of
Common Stock. The consideration was determined by the Board of Directors of
Office Centre Corporation at the time consisting of Messrs. Gordenstein, Gillon,
Davie and Kaweske. The principle used in determining the amount of consideration
was to give Mr. Gordenstein and the Davie Trust an interest in Office Centre
Corporation proportionate to the interests they held in UDI.
From time to time, UDI has borrowed funds from its directors, officers and
principal shareholders. In 1997, UDI repaid loans of approximately $200,000 and
approximately $364,000 made to UDI by Messrs. Gordenstein and Davie,
respectively, at an interest rate of 7%.
UDI entered into a three-year lease dated January 1, 1997, with Mr.
Gordenstein for office space in Massachusetts for a monthly rent of $2,767 (plus
lessee's proportionate share of any increase in the annual real estate taxes on
the property above the real estate taxes assessed for fiscal year ending June
30, 1997).
On July 20, 1995, Mr. Davie and Buying Group Services, Inc. ("Buying
Group"), a company wholly-owned by Mr. Davie, entered into an agreement with UDI
pursuant to which Mr. Davie and Buying Group were retained by UDI to provide
consulting services for a period of eight years. These consulting services
consist of providing marketing ideas to UDI, recruiting new UDI members,
servicing existing UDI members and implementing UDI marketing programs. Mr.
Davie and/or Buying Group receive a base salary equal to the greater (i) $50,000
or (ii) the base salary of the highest paid sales representative of UDI, and
commissions based on one-half of the income derived from certain fees UDI
receives from certain UDI members. Pursuant to this agreement, Mr. Davie and
Buying Group received compensation of approximately $555,800 in 1997, which
consisted of an annual salary of approximately $190,400, sales commissions of
approximately $283,600 and consulting fees of approximately $12,500 paid to Mr.
Davie or Buying Group, life insurance premium payments of approximately $68,300,
and $1,000 in director fees paid to Mr. Davie. This Agreement will be terminated
upon the consummation of the Offering.
52
<PAGE> 54
On January 9, 1998, Office Centre Corporation entered into a license
agreement with John Davie, who is the son of Clifford Davie. Pursuant to the
license agreement, John Davie granted to Office Centre Corporation a
royalty-free, perpetual license to use the marketing concept and name "Smart
Consumer" in the office products, office services and office furniture business
worldwide (the "License"). In consideration of the License, Office Centre
Corporation issued John Davie 29,064 shares of Common Stock and, if Office
Centre Corporation exploits the License in Taiwan, agreed to pay an additional
fee of 15% of all profits therefrom. If after 18 months of consummation of the
Offering, Office Centre Corporation does not spend reasonable amounts of time
and money exploiting the License, John Davie will have a 30-day option to
repurchase the License for either $500,000 or 14,532 shares of Common Stock.
John Davie also agreed not to compete with the business of Office Centre
Corporation within a 25 mile radius of any business location of Office Centre
Corporation or any of its subsidiaries from the date of the agreement until the
end of the 30-day option period.
Pursuant to a Financial Advisory Agreement, Office Centre Corporation has
retained R.K. Grace & Company ("R.K. Grace") to provide financial advice in
connection with its business plan and its acquisition program from February 1,
1997 through December 31, 1998. Mr. Kaweske, a founder and former director and
officer of Office Centre Corporation, is the Chief Executive Officer and a
founder of R.K. Grace. R.K. Grace receives a monthly fee of $5,000 plus expenses
and, in the event the Offering closes during the term of the agreement, it will
receive $587,500 in cash and $1,175,000 in the form of shares of Common Stock
valued at the initial public offering price per share. Also pursuant to the
Financial Advisory Agreement, Office Centre Corporation issued 47,741 shares of
Common Stock to Mr. Kaweske. In 1997, Office Centre Corporation paid R.K. Grace
approximately $97,200.
FUTURE TRANSACTIONS WITH AFFILIATES
In the future, transactions with affiliates of the Company are anticipated
to be minimal and will be approved by a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors, and
will be made on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.001 per share and 1,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"). After giving effect to the
Acquisitions, but prior to the consummation of the Offering, the Company will
have outstanding 4,925,000 shares of Common Stock and no shares of Preferred
Stock. Upon completion of the Offering, the Company will have outstanding
8,500,000 shares of Common Stock. As of July 1, 1998, there were six record
holders of Common 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.
The holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are entitled
to share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued pursuant to the Offering will be upon
payment therefor, fully paid and non-assessable.
53
<PAGE> 55
PREFERRED STOCK
The Company's stockholders have approved the creation of a class of
preferred shares, $1.00 par value, to consist of up to 1,000 shares for which
the Board of Directors shall have the authority, without further action by the
stockholders, to issue in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series. The issuance of preferred shares could adversely affect the
voting power of holders of Common Shares and the likelihood that such holders
would receive dividends or payments upon liquidation. In the event of issuance,
the preferred shares could be utilized, under certain circumstances, as a method
of discouraging, deferring or preventing a change in control of the Company.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("DGCL")
("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 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 and who 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 bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or By-laws.
The Certificate of Incorporation and By-Laws of the Company contain various
provisions which may have the effect of discouraging future takeover attempts
which the Company's stockholders may deem to be in their best interests and
perpetuating the Company's existing management. Among other things, such
provisions: (i) provide the Board of Directors with broad discretion to issue
preferred stock; (ii) provide for three year terms for the directors of the
Company and the election of such directors on a staggered basis; (iii) prohibit
certain business combinations without the affirmative vote of the holders of at
least 80% of the then outstanding shares of Common Stock and at last 66% of each
series of preferred stock then outstanding; and (iv) require the approval of 80%
of all shares of Common Stock eligible to vote for any proposed amendment to the
Certificate of Incorporation or By-Laws that seeks to modify or remove the
foregoing provisions.
The Company's Certificate of Incorporation provides that liability of
directors of the Company is eliminated to the fullest extent permitted under the
DGCL. As a result, no director of the Company will be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for any wilful or negligent payment of an unlawful dividend, stock
purchase or redemption; or (iv) for any transaction from which the director
derived an improper personal benefit.
54
<PAGE> 56
In addition, pursuant to indemnification agreements with each of its
executive officers and directors, the Company has agreed to indemnify each such
person from any action or omission by him in his capacity as officer or director
of the Company other than actions or omissions resulting from knowingly
fraudulent, deliberately dishonest or intentional misconduct. The Company
maintains directors' and officers' liability insurance in the amount of $5
million.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the consummation of the Acquisitions,
the Company will have outstanding 8,500,000 shares of Common Stock. The
4,000,000 shares sold in the Offering will be freely tradeable without
restriction unless purchased by affiliates of the Company. None of the remaining
4,500,000 outstanding shares of Common Stock (collectively, the "Restricted
Shares") have been registered under the Securities Act, which means that they
may be resold publicly only upon registration under the Securities Act or in
compliance with an exemption from the registration requirements of the
Securities Act, including the exemption provided by Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or any affiliate of the Company, the acquirer or
subsequent holder thereof may sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If two years have
elapsed since the later of the date of acquisition of restricted shares of
Common Stock from the Company or from any affiliate of the Company and the
acquirer or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale, such person would
be entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
Upon the consummation of this Offering, the Company will have outstanding
options to purchase 1,124,600 shares of Common Stock, of which 824,600 options
will be exercisable at the initial public offering price per share, and 300,000
of which options will be exercisable at $9.12 per share. The Company has granted
or is committed to grant 560,000 of these options to current employees of Office
Centre Corporation and UDI and is committed to grant 40,000 of these options to
independent directors of Office Centre Corporation. The remaining 524,600
options will be granted to certain employees of the Founding Companies who will
become employees of the Company upon consummation of the Acquisitions. The
Company expects to file a registration statement on Form S-8 under the
Securities Act to register 1,500,000 shares of Common Stock issuable upon
exercise of options to be granted under the 1998 Stock Option Plan. Accordingly,
such shares will be freely tradeable by holders who are not affiliates of the
Company and, subject to the volume and manner of sale limitations of Rule 144,
by holders who are affiliates of the Company.
Pursuant to the agreements relating to the Acquisitions of TSR and
Greenwood, the Company granted recipients of Common Stock in such Acquisitions
certain piggy-back registration rights on customary terms and conditions. Up to
approximately 1,332,455 shares of Common Stock will be covered by such
registration rights following the Offering. Such registration rights are subject
to certain notice requirements, timing restrictions and volume limitations which
may be imposed by the Underwriters.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect prevailing market
prices and the ability of the Company to raise equity capital in the future.
55
<PAGE> 57
UNDERWRITING
Morgan Keegan & Company, Inc., McDonald & Company Securities, Inc. and
Credit Lyonnais Securities (USA) Inc. (the "Underwriters") have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NAME OF NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Morgan Keegan & Company, Inc................................
McDonald & Company Securities, Inc..........................
Credit Lyonnais Securities (USA) Inc........................
Total.....................................................
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any of such shares are
purchased. The Company and the Selling Stockholders have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share of Common Stock. The Underwriters may allow, and
such dealers may allow, a discount not in excess of $ per share to
other dealers. The initial public offering price and the concessions and
discount to dealers may be changed by the Underwriters after the initial public
offering.
The Company and Mr. Gordenstein have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
additional 600,000 shares of Common Stock (of which the first 204,640 shares
will be sold by Mr. Gordenstein and the remaining shares will be sold by the
Company) at the initial public offering price, less underwriting discounts and
commissions, as shown on the cover page of this Prospectus. The Underwriters may
exercise such option solely for the purpose of covering over-allotments incurred
in the sale of the shares of Common Stock offered hereby.
The Company has agreed to pay Credit Lyonnais Securities (USA) Inc. at the
time of closing of the Offering a financial advisory fee equal to $100,000 for
services rendered in structuring the Offering.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Company, all of its existing stockholders and all of the former
stockholders of the Founding Companies who will receive Common Stock in
connection with the Acquisitions, have agreed that they will not offer or sell
any shares of Common Stock for a period of 180 days (the "Lockup Period") after
the date of this Prospectus without the prior written consent of the
Underwriters, except that the Company may issue shares of Common Stock in
connection with acquisitions. Messrs. Gordenstein and Davie and the Davie Trust
have agreed with the Company that they will not sell or transfer more than 25%
of the Common Stock owned by each of them during each six month period in the
two years following the Lockup Period. After the Lockup Period (or such longer
period to which a shareholder has agreed), all of such shares may be sold in
accordance with Rule 144, subject to the volume, holding period, and other
limitations of Rule 144.
The Underwriters have reserved for sale, at the initial public offering
price of $ per share, up to 350,000 shares of Common Stock for
employees, directors and certain other persons who have a business relationship
with the Company and have expressed an interest in purchasing such shares of
Common Stock in the Offering. The number of shares available for sale to the
general public in the Offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the Underwriters to the general public on the same terms as the other
shares offered hereby. The Representatives are aware of the "Free-Riding and
Withholding" Conduct Rules of the National Association of Securities Dealers in
connection with the sale of certain issuer-directed securities and will comply
with those rules.
56
<PAGE> 58
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated among the Company
and the Underwriters. Among the factors considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, were the Company's historical performance and capital structure,
estimates of the business potential and earnings prospects of the Company, an
overall assessment of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "OCCI."
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids for and purchases
of Common Stock so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve the purchase of Common Stock in
the open market in order to cover a syndicate short position. Penalty bids
permit the Underwriters to reclaim a selling concession from a syndicate member
when the shares of Common Stock originally sold by such syndicate member are
purchased in a stabilizing transaction or syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions, and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market, or otherwise,
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Richards & O'Neil, LLP, 885
Third Avenue, New York, New York 10022-4873. Certain legal matters in connection
with the sale of the Common Stock offered hereby will be passed upon for the
Underwriters by Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee
Building, 20th Floor, Memphis, Tennessee 38103.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Grant Thornton LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
shares of Common Stock offered hereby, reference is made to such Registration
Statement, including the exhibits, financial statements, and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois
57
<PAGE> 59
60661-2511. Copies of such materials can be obtained from the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Company is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) System. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
58
<PAGE> 60
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
Introduction to Unaudited Pro Forma Combined Financial
Statements............................................. F-3
Unaudited Pro Forma Combined Balance Sheet................ F-4
Unaudited Pro Forma Combined Statement of Operations...... F-5-F-7
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-8-F-15
HISTORICAL FINANCIAL STATEMENTS
OFFICE CENTRE CORPORATION AND SUBSIDIARIES (REGISTRANT)
Report of Independent Certified Public Accountants........ F-16
Financial Statements
Consolidated Balance Sheets............................ F-17
Consolidated Statements of Operations.................. F-18
Consolidated Statement of Changes in Stockholders'
Equity (Deficiency)................................... F-19
Consolidated Statements of Cash Flows.................. F-20
Notes to Consolidated Financial Statements............. F-21-F-28
THE SUPPLY ROOM COMPANIES, INC.
Report of Independent Certified Public Accountants........ F-29
Financial Statements
Balance Sheets......................................... F-30
Statements of Operations............................... F-31
Statement of Changes in Stockholders' Equity........... F-32
Statements of Cash Flows............................... F-33
Notes to Financial Statements.......................... F-34-F-41
NEW ENGLAND OFFICE SUPPLY, INC.
Report of Independent Certified Public Accountants........ F-42
Financial Statements
Balance Sheets......................................... F-43
Statements of Operations and Retained Earnings......... F-44
Statements of Cash Flows............................... F-45
Notes to Financial Statements.......................... F-46-F-50
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
Report of Independent Certified Public Accountants........ F-51
Financial Statements
Consolidated Balance Sheets............................ F-52
Consolidated Statements of Operations.................. F-53
Consolidated Statement of Changes in Stockholders'
Equity................................................ F-54
Consolidated Statements of Cash Flows.................. F-55
Notes to Consolidated Financial Statements............. F-56-F-61
</TABLE>
F-1
<PAGE> 61
<TABLE>
<CAPTION>
PAGE
<S> <C>
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
Report of Independent Certified Public Accountants........ F-62
Financial Statements
Balance Sheet.......................................... F-63
Statement of Operations and Retained Earnings.......... F-64
Statement of Cash Flows................................ F-65
Notes to Financial Statements.......................... F-66-F-69
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC.
Report of Independent Certified Public Accountants........ F-70
Financial Statements
Balance Sheets......................................... F-71
Statements of Operations and Retained Earnings......... F-72
Statements of Cash Flows............................... F-73
Notes to Financial Statements.......................... F-74-F-77
GREENWOOD OUTFITTERS, INC.
Report of Independent Certified Public Accountants........ F-78
Financial Statements
Balance Sheets......................................... F-79
Statements of Operations and Retained Earnings......... F-80
Statements of Cash Flows............................... F-81
Notes to Financial Statements.......................... F-82-F-83
GEORGIA IMPRESSION PRODUCTS, INC.
Report of Independent Certified Public Accountants........ F-84
Financial Statements
Balance Sheets......................................... F-85
Statements of Operations and Retained Earnings......... F-86
Statements of Cash Flows............................... F-87
Notes to Financial Statements.......................... F-88-F-91
MEGA OFFICE FURNITURE, L.L.C. (EQUITY INVESTMENT OF THE
SUPPLY ROOM, INC.)
Report of Independent Certified Public Accountants........ F-92
Financial Statements
Balance Sheets......................................... F-93
Statements of Operations............................... F-94
Statement of Changes in Members' Capital............... F-95
Statements of Cash Flows............................... F-96
Notes to Financial Statements.......................... F-97-F-103
</TABLE>
F-2
<PAGE> 62
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
Office Centre Corporation, a Delaware corporation, was founded in October
1996 for the purpose of becoming a nationwide office products supplier, that
serves primarily small and medium sized corporate customers. During 1997, Office
Centre Corporation acquired all of the outstanding shares of UDI Corp. and UDI
II Corp. (collectively referred to as "UDI") in a stock-for-stock exchange. UDI
II Corp. was subsequently merged with and into UDI Corp., with UDI Corp.
remaining as the surviving entity. The transaction was accounted for as a
reverse acquisition, with the results of UDI's operations presented on a
historical basis.
The unaudited pro forma combined financial statements give effect to the
acquisitions by Office Centre Corporation of The Supply Room Companies, Inc.
("TSR"), New England Office Supply, Inc. ("New England"), King Office Supply,
Inc. and Subsidiary ("King"), Sierra Office Systems and Products, Inc.
("Sierra"), Office Solutions Business Products and Services, Inc. ("Office
Solutions"), Greenwood Outfitters, Inc. ("Greenwood"), Metro Data Supply, Inc.
("Metro Data"), BCB Office Products Company ("BCB"), "SOS" Office Supply Company
("SOS"), Georgia Impression Products, Inc. ("Georgia Impression"), Office
Express, Inc. ("Office Express"), and Southern Office Centre, Inc. ("Southern
Office Centre") (together the "Founding Companies"). These acquisitions (the
"Acquisitions") will occur simultaneously with and as a condition to the closing
of the initial public offering (the "Offering") and will be accounted for using
the purchase method of accounting whereby the assets and liabilities are
recorded at fair market value. Office Centre Corporation has been identified as
the accounting acquirer for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on March 31, 1998. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred on January 1, 1997. The pro forma combined
statements of operations reflect the operating results of Office Centre
Corporation and each of the Founding Companies, for the calendar year ended
December 31, 1997 and for the three months ended March 31, 1997 and 1998. Office
Centre Corporation and each of the Founding Companies have a fiscal year ending
December 31, with the exception of TSR, whose fiscal year-end is the last Friday
closest to September 30; Sierra and Metro Data, whose year-ends are March 31;
Office Solutions, whose fiscal year-end is September 30; SOS, whose fiscal
year-end is July 31; and Georgia Impression, whose fiscal year-end is June 30.
Sierra's and Metro Data's operating results for the year ended March 31,
1997 were adjusted by adding the subsequent period April 1, 1997 to December 31,
1997 and subtracting the interim period April 1, 1996 to December 31, 1996.
TSR's and Office Solutions' operating results for the year ended September 30,
1997 were adjusted by adding the subsequent period October 1, 1997 to December
31, 1997 and subtracting the interim period October 1, 1996 to December 31,
1996. SOS's operating results for the year ended July 31, 1997 were adjusted by
adding the subsequent period August 1, 1997 to December 31, 1997 and subtracting
the interim period August 1, 1996 to December 31, 1996. Georgia Impression's
operating results for the year ended June 30, 1997 were adjusted by adding the
subsequent period July 1, 1997 to December 31, 1997 and subtracting the interim
period July 1, 1996 to December 31, 1996.
The pro forma financial statements include adjustments to reflect (i) the
effect of the Acquisitions of the Founding Companies and the Offering, (ii) the
reductions in salaries, lease costs and certain benefits to the owners of the
Founding Companies, (iii) the effect of contractual compensation of Office
Centre Corporation's new corporate management, (iv) amortization of goodwill
over forty years, (v) elimination of interest expense as a result of the
repayment of certain debt with a portion of the proceeds of the Offering and
(vi) all income subject to a corporate income tax rate of 40% and all goodwill
amortization treated as nondeductible.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions, in fact, had occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since the Founding Companies were not under
common control, historical combined results may not be comparable to, or
indicative of, future performance. The unaudited pro forma combined financial
statements should be read in conjunction with the other financial statements and
notes thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere herein.
F-3
<PAGE> 63
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OFFICE
CENTRE
CORPORATION NEW OFFICE
(REGISTRANT) TSR ENGLAND KING SIERRA SOLUTIONS GREENWOOD
------------ ------ ------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 1,395 $ 5 $ 3 $ 13 $ 29 $ 244 $ 348
Accounts receivable, net................ 15,936 3,707 2,663 2,417 1,657 1,335 1,086
Due from related parties................ -- -- -- -- -- -- --
Due from affiliate...................... -- -- -- 120 -- -- --
Inventories............................. -- 1,324 369 473 337 330 166
Other current assets.................... 825 155 121 119 58 93 17
------- ------ ------ ------ ------ ------ ------
Total current assets.................. 18,156 5,191 3,156 3,142 2,081 2,002 1,617
INVESTMENT IN AFFILIATE.................. 1,500 1,318 -- -- -- -- --
DUE FROM STOCKHOLDER..................... -- -- -- -- 800 -- --
PROPERTY AND EQUIPMENT, NET.............. 415 900 374 233 1,078 212 118
GOODWILL, NET............................ -- 952 92 781 -- -- --
DEFERRED OFFERING COSTS.................. 3,955 -- -- -- -- -- --
OTHER ASSETS............................. -- 154 21 146 29 -- --
------- ------ ------ ------ ------ ------ ------
$24,026 $8,515 $3,643 $4,302 $3,988 $2,214 $1,735
======= ====== ====== ====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term debt......................... $ 2,997 $1,968 $ 633 $2,023 $1,334 $ -- $ --
Accounts payable and accrued expenses... 20,849 2,482 1,410 1,758 1,406 1,134 675
Due to related parties.................. -- -- -- -- -- -- --
Due to affiliate........................ 120 -- -- -- -- -- --
Income taxes payable.................... -- 45 34 45 49 199 2
Liabilities to stockholders............. -- -- -- 78 -- -- --
------- ------ ------ ------ ------ ------ ------
Total current liabilities............. 23,966 4,495 2,077 3,904 2,789 1,333 677
DUE TO RELATED PARTIES................... -- 290 -- -- -- -- --
LONG-TERM DEBT........................... 96 501 492 273 110 -- --
LEASE OBLIGATIONS........................ -- 154 -- -- 389 116 --
DEFERRED INCOME TAXES.................... 22 62 -- 19 -- -- --
------- ------ ------ ------ ------ ------ ------
24,084 5,502 2,569 4,196 3,288 1,449 677
------- ------ ------ ------ ------ ------ ------
STOCKHOLDERS' EQUITY
Common stock............................ 1 2,411 515 -- 329 435 150
Additional paid-in capital.............. 379 -- -- -- -- -- --
Retained earnings (accumulated
deficit).............................. (438) 602 559 106 371 330 1,038
Less: Treasury stock.................... -- -- -- -- -- -- (130)
------- ------ ------ ------ ------ ------ ------
(58) 3,013 1,074 106 700 765 1,058
------- ------ ------ ------ ------ ------ ------
$24,026 $8,515 $3,643 $4,302 $3,988 $2,214 $1,735
======= ====== ====== ====== ====== ====== ======
<CAPTION>
SOUTHEAST SATELLITES
GREENWOOD -------------------------------
SATELLITES PRO
--------------- SOUTHERN FORMA PRO
METRO GEORGIA OFFICE OFFICE ACQUISITION FORMA
DATA BCB SOS IMPRESSION EXPRESS CENTRE ADJUSTMENTS COMBINED
------ ------ ------ ---------- ------- -------- ----------- --------
(NOTE 2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 116 $ 5 $ 758 $ 307 $ 27 $ 4 $ (183) $ 3,071
Accounts receivable, net................ 310 72 487 361 257 206 -- 30,494
Due from related parties................ -- 1 -- -- -- 5 -- 6
Due from affiliate...................... -- -- -- -- -- -- (120) --
Inventories............................. 16 31 132 54 13 124 -- 3,369
Other current assets.................... -- 8 1 3 -- 3 -- 1,403
------ ------ ------ ------ ------ ------ ------- -------
Total current assets.................. 442 117 1,378 725 297 342 (303) 38,343
INVESTMENT IN AFFILIATE.................. -- -- -- -- -- -- (1,500) 1,318
DUE FROM STOCKHOLDER..................... -- -- -- -- -- -- -- 800
PROPERTY AND EQUIPMENT, NET.............. 44 15 198 50 441 65 (421) 3,722
GOODWILL, NET............................ -- -- -- -- -- -- 46,655 48,480
DEFERRED OFFERING COSTS.................. -- -- -- -- -- -- 3,955
OTHER ASSETS............................. 4 9 100 1 2 8 140 614
------ ------ ------ ------ ------ ------ ------- -------
$ 490 $ 141 $1,676 $ 776 $ 740 $ 415 $44,571 $97,232
====== ====== ====== ====== ====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term debt......................... $ 16 $ 17 $ 18 $ 24 $ 38 $ 186 $ (33) $ 9,221
Accounts payable and accrued expenses... 184 212 465 167 180 286 -- 31,208
Due to related parties.................. -- 8 -- -- -- 9 (9) 8
Due to affiliate........................ -- -- -- -- -- -- (120) --
Income taxes payable.................... 2 -- 30 125 26 -- -- 557
Liabilities to stockholders............. -- -- -- -- -- -- 16,560 16,638
------ ------ ------ ------ ------ ------ ------- -------
Total current liabilities............. 202 237 513 316 244 481 16,398 57,632
DUE TO RELATED PARTIES................... -- 7 -- -- -- 58 (58) 297
LONG-TERM DEBT........................... 9 17 -- -- 339 -- (327) 1,510
LEASE OBLIGATIONS........................ -- -- 49 -- -- -- -- 708
DEFERRED INCOME TAXES.................... -- -- -- -- -- -- -- 103
------ ------ ------ ------ ------ ------ ------- -------
211 261 562 316 583 539 16,013 60,250
------ ------ ------ ------ ------ ------ ------- -------
STOCKHOLDERS' EQUITY
Common stock............................ 30 1 12 48 -- 47 (3,975) 9
Additional paid-in capital.............. -- -- -- -- 1 15 37,021 37,416
Retained earnings (accumulated
deficit).............................. 249 (121) 1,102 544 156 (186) (4,750) (438)
Less: Treasury stock.................... -- -- -- (132) -- -- 262 --
------ ------ ------ ------ ------ ------ ------- -------
279 (120) 1,114 460 157 (124) 28,558 36,982
------ ------ ------ ------ ------ ------ ------- -------
$ 490 $ 141 $1,676 $ 776 $ 740 $ 415 $44,571 $97,232
====== ====== ====== ====== ====== ====== ======= =======
<CAPTION>
PRO
FORMA
OFFERING AS
ADJUSTMENTS ADJUSTED
----------- --------
(NOTE 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 6,387 $ 9,458
Accounts receivable, net................ -- 30,494
Due from related parties................ -- 6
Due from affiliate...................... -- --
Inventories............................. -- 3,369
Other current assets.................... -- 1,403
------- -------
Total current assets.................. 6,387 44,730
INVESTMENT IN AFFILIATE.................. -- 1,318
DUE FROM STOCKHOLDER..................... -- 800
PROPERTY AND EQUIPMENT, NET.............. -- 3,722
GOODWILL, NET............................ -- 48,480
DEFERRED OFFERING COSTS.................. (3,955) --
OTHER ASSETS............................. -- 614
------- -------
$ 2,432 $99,664
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term debt......................... $(9,019) $ 202
Accounts payable and accrued expenses... -- 31,208
Due to related parties.................. (8) --
Due to affiliate........................
Income taxes payable.................... -- 557
Liabilities to stockholders............. (16,638) --
------- -------
Total current liabilities............. (25,665) 31,967
DUE TO RELATED PARTIES................... (297) --
LONG-TERM DEBT........................... (1,510) --
LEASE OBLIGATIONS........................ -- 708
DEFERRED INCOME TAXES.................... -- 103
------- -------
(27,472) 32,778
------- -------
STOCKHOLDERS' EQUITY
Common stock............................ 5 9
Additional paid-in capital.............. 29,899 67,315
Retained earnings (accumulated
deficit).............................. -- (438)
Less: Treasury stock.................... -- --
------- -------
29,904 66,886
------- -------
$ 2,432 $99,664
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 64
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFICE CENTRE
CORPORATION NEW OFFICE
(REGISTRANT) TSR ENGLAND KING SIERRA SOLUTIONS GREENWOOD
------------- --------- ------- ------ ------ --------- ---------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $2,600 $9,151 $4,132 $3,870 $3,459 $3,339 $2,718
Cost of revenues........................ 1,307 6,201 3,074 2,461 2,396 2,456 1,738
------ ------ ------ ------ ------ ------ ------
Gross margin........................ 1,293 2,950 1,058 1,409 1,063 883 980
Operating expenses...................... 2,226 2,465 849 1,235 1,063 698 701
Goodwill amortization................... -- 32 1 5 -- -- --
------ ------ ------ ------ ------ ------ ------
Operating income (loss)............. (933) 453 208 169 -- 185 279
Other income (expense)
Interest income....................... 16 (4) -- -- 3 3 --
Interest expense...................... (101) (63) (39) (65) (81) (4) --
Other income (expense)................ -- (99) 4 -- 19 -- --
------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes.......... (1,018) 287 173 104 (59) 184 279
Provision for income taxes.............. (302) 128 5 42 (16) 74 1
------ ------ ------ ------ ------ ------ ------
Net income (loss)................... $ (716) $ 159 $ 168 $ 62 $ (43) $ 110 $ 278
====== ====== ====== ====== ====== ====== ======
Pro forma net income per share
Basic and Diluted.....................
Shares used in computing pro forma net
income per share
Basic and Diluted.....................
<CAPTION>
GREENWOOD SOUTHEAST SATELLITES
SATELLITES -------------------------------
-------------- SOUTHERN PRO FORMA
METRO GEORGIA OFFICE OFFICE -----------------------
DATA BCB SOS IMPRESSION EXPRESS CENTRE ADJUSTMENTS COMBINED
----- ------ ------ ---------- ------- -------- ----------- ---------
(NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $546 $ 223 $1,526 $836 $796 $618 $ -- $ 33,814
Cost of revenues........................ 410 146 1,062 584 553 478 -- 22,866
---- ------ ------ ---- ---- ---- ------ ---------
Gross margin........................ 136 77 464 252 243 140 -- 10,948
Operating expenses...................... 129 71 383 153 207 159 (1,319) 9,020
Goodwill amortization................... -- -- -- -- -- -- 294 332
---- ------ ------ ---- ---- ---- ------ ---------
Operating income (loss)............. 7 6 81 99 36 (19) 1,025 1,596
Other income (expense)
Interest income....................... 1 -- 7 -- -- -- -- 26
Interest expense...................... -- (1) (2) -- (12) (12) 335 (45)
Other income (expense)................ -- -- -- -- 1 17 -- (58)
---- ------ ------ ---- ---- ---- ------ ---------
Income (loss) before taxes.......... 8 5 86 99 25 (14) 1,360 1,519
Provision for income taxes.............. 2 -- 5 39 11 -- 751 740
---- ------ ------ ---- ---- ---- ------ ---------
Net income (loss)................... $ 6 $ 5 $ 81 $ 60 $ 14 $(14) $ 609 $ 779
==== ====== ====== ==== ==== ==== ====== =========
Pro forma net income per share
Basic and Diluted..................... $ 0.09
=========
Shares used in computing pro forma net
income per share
Basic and Diluted..................... 8,500,000
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 65
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFICE CENTRE
CORPORATION NEW OFFICE
(REGISTRANT) TSR ENGLAND KING SIERRA SOLUTIONS GREENWOOD
------------- --------- ------- ------ ------ --------- ---------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $2,786 $8,658 $3,547 $3,481 $2,924 $2,275 $2,051
Cost of revenues........................ 1,404 5,775 2,597 2,199 1,979 1,647 1,328
------ ------ ------ ------ ------ ------ ------
Gross margin........................ 1,382 2,883 950 1,282 945 628 723
Operating expenses...................... 1,092 2,458 856 1,162 936 646 582
Goodwill amortization................... -- 13 13 3 -- -- --
------ ------ ------ ------ ------ ------ ------
Operating income (loss)............. 290 412 81 117 9 (18) 141
Other income (expense)
Interest income....................... 32 10 -- -- 21 3 --
Interest expense...................... (30) (79) (23) (58) (78) (4) --
Other income (expense)................ -- (35) (42) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes.......... 292 308 16 59 (48) (19) 141
Provision for income taxes.............. 136 128 3 8 (20) 24 1
------ ------ ------ ------ ------ ------ ------
Net income (loss)................... $ 156 $ 180 $ 13 $ 51 $ (28) $ (43) $ 140
====== ====== ====== ====== ====== ====== ======
Pro forma net income per share
Basic and Diluted.....................
Shares used in computing pro forma net
income per share
Basic and Diluted...................
<CAPTION>
GREENWOOD SOUTHEAST SATELLITES
SATELLITES -------------------------------
------------ SOUTHERN PRO FORMA
METRO GEORGIA OFFICE OFFICE ------------------------
DATA BCB SOS IMPRESSION EXPRESS CENTRE ADJUSTMENTS COMBINED
----- ---- ------ ---------- ------- -------- ----------- ----------
(NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $502 $201 $1,334 $752 $703 $592 $ -- $ 29,806
Cost of revenues........................ 392 133 882 557 466 453 -- 19,812
---- ---- ------ ---- ---- ---- ----- ----------
Gross margin........................ 110 68 452 195 237 139 -- 9,994
Operating expenses...................... 97 57 514 161 185 160 (575) 8,331
Goodwill amortization................... -- -- -- -- -- -- 294 323
---- ---- ------ ---- ---- ---- ----- ----------
Operating income (loss)............. 13 11 (62) 34 52 (21) 281 1,340
Other income (expense)
Interest income....................... -- -- 9 2 -- -- -- 77
Interest expense...................... -- (3) (2) -- (12) (10) 250 (49)
Other income (expense)................ -- (21) -- -- -- -- -- (98)
---- ---- ------ ---- ---- ---- ----- ----------
Income (loss) before taxes.......... 13 (13) (55) 36 40 (31) 531 1,270
Provision for income taxes.............. -- -- (3) 10 16 (12) 346 637
---- ---- ------ ---- ---- ---- ----- ----------
Net income (loss)................... $ 13 $(13) $ (52) $ 26 $ 24 $(19) $ 185 $ 633
==== ==== ====== ==== ==== ==== ===== ==========
Pro forma net income per share
Basic and Diluted..................... $ 0.07
==========
Shares used in computing pro forma net
income per share
Basic and Diluted................... 8,500,000
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 66
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFICE CENTRE
CORPORATION NEW OFFICE
(REGISTRANT) TSR ENGLAND KING SIERRA SOLUTIONS GREENWOOD
------------- --------- ------- ------- ------- --------- ---------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $11,002 $37,847 $14,665 $13,893 $12,215 $10,879 $ 8,920
Cost of revenues................... 5,489 26,304 10,975 8,780 8,095 7,971 5,885
------- ------- ------- ------- ------- ------- -------
Gross margin................... 5,513 11,543 3,690 5,113 4,120 2,908 3,035
Operating expenses................. 4,981 10,621 3,226 4,690 3,829 2,653 2,652
Goodwill amortization.............. -- 58 147 46 -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income (loss)........ 532 864 317 377 291 255 383
Other income (expense)
Interest income.................. 84 15 -- 1 130 10 --
Interest expense................. (189) (283) (141) (254) (326) (14) --
Other income (expense)........... -- (147) -- -- (22) -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes..... 427 449 176 124 73 251 383
Provision for income taxes......... 244 238 10 15 30 101 3
------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 183 $ 211 $ 166 $ 109 $ 43 $ 150 $ 380
======= ======= ======= ======= ======= ======= =======
Pro forma net income per share
Basic and Diluted................
Shares used in computing pro forma
net income per share
Basic and Diluted................
<CAPTION>
GREENWOOD SOUTHEAST SATELLITES
SATELLITES -------------------------------
--------------- SOUTHERN PRO FORMA
METRO GEORGIA OFFICE OFFICE ------------------------
DATA BCB SOS IMPRESSION EXPRESS CENTRE ADJUSTMENTS COMBINED
------ ------ ------- ---------- ------- -------- ----------- ----------
(NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $2,167 $ 745 $ 5,484 $3,642 $2,856 $2,531 $ -- $ 126,846
Cost of revenues................... 1,694 504 3,595 2,649 1,941 1,929 -- 85,811
------ ------ ------- ------ ------ ------ ------- ----------
Gross margin................... 473 241 1,889 993 915 602 -- 41,035
Operating expenses................. 452 281 1,994 811 785 653 (3,174) 34,454
Goodwill amortization.............. -- -- -- -- -- -- 1,168 1,419
------ ------ ------- ------ ------ ------ ------- ----------
Operating income (loss)........ 21 (40) (105) 182 130 (51) 2,006 5,162
Other income (expense)
Interest income.................. 1 -- 34 7 -- -- -- 282
Interest expense................. (1) (11) (8) (3) (42) (53) 1,150 (175)
Other income (expense)........... -- (18) (23) -- -- 24 -- (186)
------ ------ ------- ------ ------ ------ ------- ----------
Income (loss) before taxes..... 21 (69) (102) 186 88 (80) 3,156 5,083
Provision for income taxes......... 4 -- 6 52 16 -- 1,882 2,601
------ ------ ------- ------ ------ ------ ------- ----------
Net income (loss).............. $ 17 $ (69) $ (108) $ 134 $ 72 $ (80) $ 1,274 $ 2,482
====== ====== ======= ====== ====== ====== ======= ==========
Pro forma net income per share
Basic and Diluted................ $ 0.29
==========
Shares used in computing pro forma
net income per share
Basic and Diluted................ 8,500,000
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 67
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
NOTE 1 -- ACQUISITION OF THE FOUNDING COMPANIES
The following table sets forth the consideration to be paid (the "Purchase
Consideration") in cash and shares of restricted Common Stock to the Founding
Companies, and the allocation of the consideration to the net assets acquired
and resulting goodwill at March 31, 1998. The number of shares to be issued to
the Founding Companies is based upon the assumed Initial Public Offering ("IPO")
price of $11 per share.
<TABLE>
<CAPTION>
NET
SHARES OF ASSETS
COMMON VALUE OF TOTAL (LIABILITIES)
CASH STOCK SHARES CONSIDERATION ACQUIRED GOODWILL
------- --------- -------- ------------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TSR(2)........................ $ 4,257 737,042 $ 8,107(1) $12,364 $3,013 $ 9,351
New England................... 2,000 408,909 4,498(1) 6,498 1,074 5,424
King.......................... 2,937 329,937 3,629 6,566 106 6,460
Sierra........................ 272 441,920 4,861 5,133 700 4,433
Office Solutions.............. 3,826 347,773 3,825 7,651 765 6,886
Greenwood..................... 2,650 595,455 6,550(1) 9,200 1,058 8,142
SOS........................... 600 264,545 2,910 3,510 1,114 2,396
Georgia Impression(3)......... 325 88,773 977 1,302 277 1,025
Office Express(4)............. 195 100,610 1,107 1,302 95 1,207
Southern Office Centre(5)..... 300 -- -- 300 (57) 357
Metro Data.................... 531 39,518 435 966 279 687
BCB........................... 167 -- -- 167 (120) 287
------- --------- ------- ------- ------ -------
$18,060 3,354,482 $36,899 $54,959 $8,304 $46,655
======= ========= ======= ======= ====== =======
</TABLE>
- ---------------
(1) Pursuant to the definitive merger agreements, as amended, between the
Company and each of TSR, New England, and Greenwood, respectively, the
Company, in its sole discretion, may substitute cash in the amount of $1
million with respect to each such transaction as consideration in lieu of $1
million of Common Stock otherwise deliverable under each such agreement.
(2) Cash includes the purchase of 1,250 shares of TSR stock for $1.5 million in
September 1997.
(3) Net assets as of March 31, 1998 have been adjusted to reflect entitlement of
Georgia Impression stockholders to cash in excess of $100,000 available at
closing provided no amounts are outstanding under Georgia Impression's line
of credit and all payables are current.
(4) Net assets as of March 31, 1998 have been adjusted to reflect the transfer
of real estate valued at $421,000 (net of depreciation) and a related
mortgage balance of $360,000 prior to closing.
(5) Net assets have been adjusted to reflect required conversion to equity prior
to closing of debt owed by Southern to a stockholder in the amount of
$67,000.
The total Purchase Consideration does not reflect contingent consideration
related to earn out arrangements included in the merger agreements for TSR, New
England, King, Office Solutions and Greenwood.
Office Centre Corporation has agreed to issue to the stockholders of TSR
additional consideration based on TSR's 1998 earnings before interest, taxes and
depreciation and amortization ("EBITDA") of up to $3 million in shares of
restricted common stock, valued at the IPO price per share, to be deposited in
escrow and released only if TSR achieves certain profitability objectives in
1998.
F-8
<PAGE> 68
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Office Centre Corporation will contingently issue to the sole stockholder
of New England additional shares of restricted common stock equal to 4.5 times
the increase in New England's 1998 EBITDA over its 1997 EBITDA, divided by the
IPO price per share.
Office Centre Corporation will contingently issue to the stockholders of
King cash and shares of restricted common stock equal to 3.5 times the increase
in King's 1998 EBITDA over its 1997 EBITDA, divided by the IPO price per share.
The contingent consideration of cash and shares of restricted stock will be paid
in the same ratio as the consideration of cash and shares of restricted stock
set forth at the time of the Offering.
Office Centre Corporation will contingently issue to the sole stockholder
of Office Solutions additional shares of restricted common stock equal to 3.5
times the amount by which the actual EBITDA of Office Solutions for the twelve
months following the acquisition exceeds the annualized EBITDA of Office
Solutions for the period between January 1, 1998 and the date of the
acquisition, divided by the IPO price per share.
Office Centre Corporation will contingently issue to the stockholders of
Greenwood cash and shares of restricted common stock equal to 3.05 times the
amount of the increase in Greenwood's 1998 EBITDA over its 1997 EBITDA less an
adjustment for owners' compensation in certain circumstances. The contingent
consideration of cash and shares of restricted stock will be paid in the same
ratio as the consideration of cash and shares of restricted stock set forth at
the time of the Offering.
The holders of all of the shares of restricted Common Stock to be issued as
consideration for the Acquisitions have contractually agreed with the Company
not to offer, sell or otherwise dispose of any of those shares for a period of
180 days after the Offering.
F-9
<PAGE> 69
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments (amounts in thousands):
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS OFFERING ADJUSTMENTS
-------------------------------- -------------------------------------------
TOTAL TOTAL
ACQUISITION OFFERING
(A) (B) ADJUSTMENTS (C) (D) (E) ADJUSTMENTS
-------- ------- ----------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......... $ -- $ (183) $ (183) $33,859 $(10,912) $(16,560) $ 6,387
Accounts receivable, net........... -- -- -- -- -- -- --
Due from related parties........... -- -- -- -- -- -- --
Due from affiliate................. -- (120) (120) -- -- -- --
Inventories........................ -- -- -- -- -- -- --
Other current assets............... -- -- -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
Total current assets......... -- (303) (303) 33,859 (10,912) (16,560) 6,387
INVESTMENT IN AFFILIATE.............. -- (1,500) (1,500) -- -- -- --
DUE FROM STOCKHOLDER................. -- -- -- -- -- -- --
PROPERTY AND EQUIPMENT, NET.......... -- (421) (421) -- -- -- --
GOODWILL, NET........................ -- 46,655 46,655 -- -- -- --
DEFERRED OFFERING COSTS.............. -- -- -- (3,955) -- -- (3,955)
OTHER ASSETS......................... -- 140 140 -- -- -- --
-------- ------- ------- ------- -------- -------- --------
$ -- $44,571 $44,571 $29,904 $(10,912) $(16,560) $ 2,432
======== ======= ======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt.................... $ -- $ (33) $ (33) $ -- $ (9,019) $ -- $ (9,019)
Accounts payable and accrued
expenses......................... -- -- -- -- -- -- --
Due to related parties............. -- (9) (9) -- (8) -- (8)
Due to affiliate................... -- (120) (120) -- -- -- --
Income taxes payable............... -- -- -- -- -- -- --
Liabilities to stockholders........ 16,560 -- 16,560 -- (78) (16,560) (16,638)
-------- ------- ------- ------- -------- -------- --------
Total current liabilities.... 16,560 (162) 16,398 -- (9,105) (16,560) (25,665)
DUE TO RELATED PARTIES............... -- (58) (58) -- (297) -- (297)
LONG-TERM DEBT....................... -- (327) (327) -- (1,510) -- (1,510)
LEASE OBLIGATIONS.................... -- -- -- -- -- -- --
DEFERRED INCOME TAXES................ -- -- -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
16,560 (547) 16,013 -- (10,912) (16,560) (27,472)
STOCKHOLDERS' EQUITY
Common stock....................... -- (3,975) (3,975) 5 -- -- 5
Additional paid-in capital......... (16,560) 53,581 37,021 29,899 -- -- 29,899
Retained earnings (deficit)........ -- (4,750) (4,750) -- -- -- --
Less: treasury stock............... -- 262 262 -- -- -- --
-------- ------- ------- ------- -------- -------- --------
--
Total Stockholders' Equity....... (16,560) 45,118 28,558 29,904 -- -- 29,904
-------- ------- ------- ------- -------- -------- --------
$ -- $44,571 $44,571 $29,904 $(10,912) $(16,560) $ 2,432
======== ======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
(a) Records a pro forma liability for the cash portion of the consideration to
be paid to stockholders of the Founding Companies in connection with the
Acquisitions less $1.5 million which was previously paid to TSR.
(b) Records the purchase of the Founding Companies by Office Centre Corporation,
including consideration of $18.1 million in cash and issuance of 3,354,482
shares of restricted common stock valued at $11 per share (or $36.9 million)
for a total estimated purchase price of $55 million. The excess of the
purchase price over the estimated fair value of net assets
F-10
<PAGE> 70
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
acquired is $46.7 million. The adjustment also reflects a reduction of
$421,000 in Property and Equipment, net and $360,000 in related short term
and long term debt pertaining to a facility owned by one of the stockholders
of the Founding Companies, the elimination of $120,000 in related party
receivables and payables between Office Centre Corporation and certain
Founding Companies, the exchange of debt for equity in one of the Founding
Companies prior to the Offering; the entitlement to excess cash available at
closing to one of the Founding Companies' owners, and the recording of
goodwill associated with acquisition of a customer list by one of the
Founding Companies.
(c) Records the cash proceeds from the issuance of shares of Office Centre
Corporation Common Stock, net of estimated offering costs (based on an
assumed initial public offering of $11 per share). Offering costs primarily
consist of underwriting discounts and commissions, accounting fees, legal
fees, printing expenses and consulting fees, including any fees pursuant to
a financial advisory agreement with R.K. Grace & Company, a related party.
(d) Represents the repayment of $9 million in short-term debt, $1.4 million in
long-term debt and $479,000 in payments to related parties.
(e) Records the use of Offering proceeds to pay the cash portion of the
consideration due to the stockholders of the Founding Companies in
connection with the Acquisitions.
F-11
<PAGE> 71
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
------- ---- ------- ------ ------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $ -- $ -- $ -- $ -- $ --
Cost of revenues...................... -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Gross margin........................ -- -- -- -- -- --
Operating expenses.................... (1,311) (8) -- -- -- (1,319)
Goodwill amortization................. -- -- 294 -- -- 294
------- ---- ------- ------ ------- ------
Operating income (loss)............. 1,311 8 (294) -- -- 1,025
Other income (expenses)
Interest income..................... -- -- -- -- -- --
Interest expense.................... -- -- -- 335 -- 335
Other income (expense).............. -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Income (loss) before taxes....... 1,311 8 (294) 335 -- 1,360
Provision for income taxes............ -- -- -- -- 751 751
------- ---- ------- ------ ------- ------
Net income (loss)................ $ 1,311 $ 8 $ (294) $ 335 $ (751) $ 609
======= ==== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
------- ---- ------- ------ ------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $ -- $ -- $ -- $ -- $ --
Cost of revenues...................... -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Gross margin........................ -- -- -- -- -- --
Operating expenses.................... (570) (5) -- -- -- (575)
Goodwill amortization................. -- -- 294 -- -- 294
------- ---- ------- ------ ------- ------
Operating income (loss)............. 570 5 (294) -- -- 281
Other income (expenses)
Interest income..................... -- -- -- -- -- --
Interest expense.................... -- -- -- 250 -- 250
Other income (expense).............. -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Income (loss) before taxes....... 570 5 (294) 250 -- 531
Provision for income taxes............ -- -- -- -- 346 346
------- ---- ------- ------ ------- ------
Net income (loss)................ $ 570 $ 5 $ (294) $ 250 $ (346) $ 185
======= ==== ======= ====== ======= ======
</TABLE>
F-12
<PAGE> 72
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
------- ---- ------- ------ ------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $ -- $ -- $ -- $ -- $ --
Cost of revenues...................... -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Gross margin........................ -- -- -- -- -- --
Operating expenses.................... (3,141) (33) -- -- -- (3,174)
Goodwill amortization................. -- -- 1,168 -- -- 1,168
------- ---- ------- ------ ------- ------
Operating income (loss)............. 3,141 33 (1,168) -- -- 2,006
Other income (expenses)
Interest income..................... -- -- -- -- -- --
Interest expense.................... -- -- -- 1,150 -- 1,150
Other income (expense).............. -- -- -- -- -- --
------- ---- ------- ------ ------- ------
Income (loss) before taxes....... 3,141 33 (1,168) 1,150 -- 3,156
Provision for income taxes............ -- -- -- -- 1,882 1,882
------- ---- ------- ------ ------- ------
Net income (loss)................ $ 3,141 $ 33 $(1,168) $1,150 $(1,882) $1,274
======= ==== ======= ====== ======= ======
</TABLE>
- ---------------
(a) Reflects the net reduction in salaries, bonuses and benefits to the owners
and officers of the Founding Companies and Office Centre Corporation to
which they have agreed prospectively.
(b) Reflects occupancy costs reduced pursuant to lease agreement renegotiated
with related parties.
(c) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40-year period.
(d) Reflects a reduction of interest expense eliminated by the retirement of all
interest-bearing debt from the proceeds of the Offering, excluding interest
related to capital lease obligations.
(e) Reflects the incremental provision for Federal and state income taxes
assuming all income is subject to a corporate income tax rate of 40% and
that all goodwill amortization is non-deductible.
NOTE 4 -- EARNINGS PER SHARE
Basic and diluted net income per share is computed by dividing net income
by the 8,500,000 common shares outstanding upon the completion of the
Acquisitions and the Offering. The dilutive effect of options outstanding have
not been included in the computation as the effect is not material.
NOTE 5 -- THE SUPPLY ROOM ACQUISITION OF TOP
In March 1998, TSR acquired the office and furniture supply operations
known as Total Office Products ("TOP") from Baltimore Stationery Company
("BSC"), located in Baltimore, Maryland. The acquisition agreement requires a
minimum purchase price of $613,000, plus additional amounts up to a maximum
amount of $1,212,500 contingent upon future gross profit levels. The minimum
purchase price was allocated principally to intangible assets, and has been
included in the accompanying unaudited pro forma combined balance sheet.
Pro forma revenues and the related expenses of the acquired business have
been added to the results of operations of TSR for the period January 1, 1998
through the date of acquisition and for the first quarter of 1997 and calendar
year ended December 31, 1997.
The pro forma adjustments reflect: (i) the elimination of the corporate
overhead allocation agreement between TOP and BSC, which will not be incurred in
the future and the addition of a contractual lease obligation, (ii) amortization
of goodwill over forty years, customer lists over ten years and covenants not to
compete over
F-13
<PAGE> 73
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
four years, and (iii) assuming all income is subject to a corporate income tax
rate of 40% and that goodwill amortization is nondeductible, for income tax
purposes.
The pro forma combined statement of operations below gives effect to the
transaction as if it had occurred on January 1, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------
PRO FORMA
MERGER AS
TSR TOP ADJUSTMENTS ADJUSTED
------- ------ ----------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................. $ 7,814 $1,337 $ -- $ 9,151
Cost of revenues.......................... 5,239 962 -- 6,201
------- ------ ----- -------
Gross margin......................... 2,575 375 -- 2,950
Operating expenses........................ 2,162 350 (47) 2,465
Goodwill amortization..................... 26 -- 6 32
------- ------ ----- -------
Operating income..................... 387 25 41 453
Other income (expense)
Interest income......................... (4) -- -- (4)
Interest expense........................ (63) -- -- (63)
Other income (expense).................. (99) -- -- (99)
------- ------ ----- -------
Income before taxes.................. 221 25 41 287
Provision for income taxes................ 89 11 28 128
------- ------ ----- -------
Net income........................... $ 132 $ 14 $ 13 $ 159
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------
PRO FORMA
MERGER AS
TSR TOP ADJUSTMENTS ADJUSTED
------- ------ ----------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................. $ 7,090 $1,568 $ -- $ 8,658
Cost of revenues.......................... 4,686 1,089 -- 5,775
------- ------ ----- -------
Gross profit......................... 2,404 479 -- 2,883
Operating expenses........................ 2,091 435 (68) 2,458
Goodwill amortization..................... 4 -- 9 13
------- ------ ----- -------
Operating income..................... 309 44 59 412
Other income (expenses)
Interest income......................... 10 -- -- 10
Interest expense........................ (79) -- -- (79)
Other income (expense).................. (35) -- -- (35)
------- ------ ----- -------
Income before taxes.................. 205 44 59 308
Provision for income taxes................ 90 19 19 128
------- ------ ----- -------
Net income........................... $ 115 $ 25 $ 40 $ 180
======= ====== ===== =======
</TABLE>
F-14
<PAGE> 74
OFFICE CENTRE CORPORATION AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
PRO FORMA
MERGER AS
TSR TOP ADJUSTMENTS ADJUSTED
------- ------ ----------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................. $29,953 $7,894 $ -- $37,847
Cost of revenues.......................... 20,778 5,526 -- 26,304
------- ------ ----- -------
Gross profit......................... 9,175 2,368 -- 11,543
Operating expenses........................ 8,699 2,195 (273) 10,621
Goodwill amortization..................... 24 -- 34 58
------- ------ ----- -------
Operating income..................... 452 173 239 864
Other income (expenses)
Interest income......................... 15 -- -- 15
Interest expense........................ (283) -- -- (283)
Other income (expense).................. (147) -- -- (147)
------- ------ ----- -------
Income before taxes.................. 37 173 239 449
Provision for income taxes................ 22 69 147 238
------- ------ ----- -------
Net Income........................... $ 15 $ 104 $ 92 $ 211
======= ====== ===== =======
</TABLE>
F-15
<PAGE> 75
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Office
Centre Corporation and Subsidiaries (the "Company") as of December 31, 1996 and
1997 and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 1997. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Office Centre
Corporation and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 6, 1998 (except for
Note C, as to which the
date is July 10, 1998)
F-16
<PAGE> 76
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 910,294 $ 371,146 $ 1,394,704
Accounts receivable, net of allowance for doubtful
accounts of $261,583 in 1996, $341,292 in 1997 and
$383,489 in 1998
From members............................................ 11,069,159 12,386,148 12,797,580
Rebates from wholesalers................................ 6,581,207 5,402,910 1,544,240
Other programs.......................................... 354,926 1,969,708 1,594,138
Prepaid and other current assets.......................... 130,854 74,375 202,302
Prepaid and refundable income taxes....................... 440,490 283,061 201,719
Deferred tax assets....................................... 136,510 114,176 421,176
----------- ----------- -----------
Total current assets.................................. 19,623,440 20,601,524 18,155,859
INVESTMENT IN AFFILIATE..................................... -- 1,500,000 1,500,000
PROPERTY AND EQUIPMENT, NET................................. 245,363 406,319 415,411
DEFERRED OFFERING COSTS..................................... 92,386 2,958,772 3,954,691
----------- ----------- -----------
$19,961,189 $25,466,615 $24,025,961
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Line of credit............................................ $ 1,350,000 $ 5,615,000 $ 2,904,094
Current portion of notes payable.......................... 89,788 93,027 93,027
Accounts payable -- trade................................. 12,632,453 13,648,225 17,233,078
Rebates due to members
Wholesaler program...................................... 4,446,166 3,601,941 1,022,783
Manufacturer program.................................... 366,618 1,251,738 1,504,022
Accrued expenses.......................................... 198,907 653,879 1,089,002
Due to King Office Supply, Inc............................ -- 91,946 119,945
Due to stockholders....................................... 564,193 -- --
----------- ----------- -----------
Total current liabilities............................. 19,648,125 24,955,756 23,965,951
NOTES PAYABLE -- LONG-TERM PORTION.......................... 189,455 96,429 96,429
DEFERRED TAXES.............................................. 23,818 21,805 21,805
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value; 50,000,000 authorized
shares; 1,355,091, 1,405,091 and 1,434,155 shares issued
and outstanding at December 31, 1996 and 1997 and March
31, 1998, respectively.................................. 1,355 1,405 1,434
Additional paid-in capital................................ 3,307 113,257 378,228
Retained earnings (accumulated deficit)................... 95,129 277,963 (437,886)
----------- ----------- -----------
99,791 392,625 (58,224)
----------- ----------- -----------
$19,961,189 $25,466,615 $24,025,961
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 77
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Wholesaler program................ $ 9,759,585 $ 6,669,243 $ 5,425,774 $ 1,459,657 $ 1,173,714
Manufacturer program.............. 1,491,801 2,063,563 2,126,520 509,838 527,220
Advertising and promotion
income.......................... 1,057,884 971,285 2,305,090 571,735 617,518
Membership fees................... 328,537 360,293 303,345 76,260 51,126
Other income...................... 346,209 867,054 840,959 168,433 230,173
----------- ----------- ----------- ----------- -----------
12,984,016 10,931,438 11,001,688 2,785,923 2,599,751
----------- ----------- ----------- ----------- -----------
Cost of revenues
Wholesaler program................ 7,261,353 4,446,162 3,571,285 960,757 800,000
Other programs.................... 1,353,525 1,485,708 1,917,229 442,881 506,878
----------- ----------- ----------- ----------- -----------
8,614,878 5,931,870 5,488,514 1,403,638 1,306,878
----------- ----------- ----------- ----------- -----------
Gross margin.................. 4,369,138 4,999,568 5,513,174 1,382,285 1,292,873
Operating costs and expenses........ 4,261,595 5,188,541 4,981,467 1,091,897 2,226,443
----------- ----------- ----------- ----------- -----------
Operating income (loss)....... 107,543 (188,973) 531,707 290,388 (933,570)
Other income (expense)
Interest income................... 80,984 99,050 84,636 31,908 16,681
Interest expense.................. (51,410) (87,181) (189,410) (30,187) (100,986)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... 137,117 (177,104) 426,933 292,109 (1,017,875)
Provision for income taxes.......... 56,513 8,418 244,099 135,773 (302,026)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)............. $ 80,604 $ (185,522) $ 182,834 $ 156,336 $ (715,849)
=========== =========== =========== =========== ===========
Net income (loss) per share of
common stock
Basic and Diluted............... $ .06 $ (.14) $ .13 $ .12 $ (.50)
----------- ----------- ----------- ----------- -----------
Weighted average common stock
outstanding
Basic and Diluted............... 1,355,091 1,355,091 1,371,758 1,355,091 1,434,155
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 78
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.................. 1,355,091 $1,355 $ 3,307 $ 200,047 $ 204,709
Net income................................ 80,604 80,604
--------- ------ -------- --------- ---------
Balance at December 31, 1995................ 1,355,091 1,355 3,307 280,651 285,313
Net loss.................................. (185,522) (185,522)
--------- ------ -------- --------- ---------
Balance at December 31, 1996................ 1,355,091 1,355 3,307 95,129 99,791
Issuance of common stock in connection
with employment agreement (Note H),
50,000 shares at $2.20 per share, $.001
par value.............................. 50,000 50 109,950 110,000
Net income................................ 182,834 182,834
--------- ------ -------- --------- ---------
Balance at December 31, 1997................ 1,405,091 1,405 113,257 277,963 392,625
Issuance of common stock in connection
with license agreement-related party... 29,064 29 264,971 265,000
Net loss (unaudited)...................... (715,849) (715,849)
--------- ------ -------- --------- ---------
Balance at March 31, 1998 (unaudited)....... 1,434,155 $1,434 $378,228 $(437,886) $ (58,224)
========= ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE> 79
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)...................... $ 80,604 $ (185,522) $ 182,834 $ 156,336 $ (715,849)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities
Depreciation and amortization........ 35,735 48,723 69,326 24,786 25,148
Deferred taxes....................... (235,397) 143,078 20,321 -- (307,000)
Stock compensation to officer........ -- -- 110,000 -- --
Stock issued pursuant to licensing
agreement.......................... -- -- -- 265,000
Provision for bad debts.............. 169,633 217,846 109,943 25,986 42,197
Changes in operating assets and
liabilities Accounts receivable.... (1,511,459) (361,096) (1,863,417) 4,020,579 3,780,611
Prepaid and refundable income
taxes, net...................... (214,584) (255,121) 157,509 136,773 81,342
Prepaid expenses and other current
assets.......................... (2,647) (94,251) 53,664 94,314 (128,611)
Accounts payable................... 1,087,045 708,748 171,547 (3,738,995) 1,007,695
Rebates due members................ 200,654 36,879 885,120 1,088,847 252,284
Due to affiliate................... -- -- 91,946 -- 27,999
Accrued expenses................... (62,234) (182,562) 454,972 75,351 433,123
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by
operating activities................. (452,650) 76,722 443,765 1,883,977 4,763,939
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities
Purchase of property and equipment..... (29,507) (142,989) (227,547) (27,707) (33,556)
Investment in affiliate................ -- -- (1,500,000) -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities......................... (29,507) (142,989) (1,727,547) (27,707) (33,556)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities
Net borrowings (payments) under line
of credit.......................... 100,000 250,000 4,265,000 (1,135,000) (2,710,906)
Payments on long-term debt........... -- (86,703) (89,787) -- --
Loans (repayments) from
stockholders....................... 442,461 (126,463) (564,193) (564,193) --
Initial public offering costs........ -- (92,386) (2,866,386) (65,257) (995,919)
Purchase of treasury stock........... (287,053)
-- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities............... 255,408 (55,552) 744,634 (1,764,450) (3,706,825)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS................. (226,749) (121,819) (539,148) 91,820 1,023,558
Cash and cash equivalents at beginning of
period................................. 1,258,862 1,032,113 910,294 910,294 371,146
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of
period................................. $1,032,113 $ 910,294 $ 371,146 $1,002,114 $1,394,704
========== ========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for
Interest........................... $ 50,802 $ 84,346 $ 159,216 $ 29,187 $ 123,218
Taxes.............................. 506,494 120,461 76,000 -- --
</TABLE>
During 1995, the repurchase of $365,946 of treasury stock was financed through
the issuance of a note payable to the former stockholder.
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 80
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Formation of the Company
Office Centre Corporation (the "Company") was founded in October 1996 to
create a nationwide office products supplier, serving primarily small and medium
sized corporate customers. During 1997, the Company acquired all of the
outstanding shares of UDI Corp. and UDI II Corp. (collectively referred to as
"UDI") in a stock-for-stock exchange. The transaction was accounted for as a
reverse acquisition with the results of UDI's operations presented on a
historical basis as the results of the Company. The stock exchange is reflected
in stockholders' equity for all periods presented along with the retirement of
previously acquired treasury stock.
UDI is an office products buying group. Members receive the benefit of
UDI's consolidated buying power and the more favorable purchasing terms it
receives with industry manufacturers and wholesalers.
Acquisitions and Public Offering
During 1997 and 1998, the Company entered into definitive agreements to
acquire twelve commercial office products businesses. The companies to be
acquired are The Supply Room Companies, Inc. (the "Supply Room"), New England
Office Supply, Inc., King Office Supply, Inc., Sierra Office Systems and
Products, Inc., Office Solutions Business Products and Services, Inc., Greenwood
Outfitters, Inc., SOS Office Supply Company, Georgia Impression Products, Inc.,
Office Express, Inc., Southern Office Centre, Inc., Metro Data Supply, Inc. and
BCB Office Products Company (collectively referred to as the "Founding
Companies"), ten of which are members of UDI. These acquisitions will occur
simultaneously with and conditioned on the closing of a contemplated initial
public offering (the "Offering") and will be accounted for using the purchase
method of accounting. The expected aggregate consideration that will be paid by
the Company to acquire approximately $8.3 million of net assets of the Founding
Companies is approximately $18.1 million in cash and shares of the Company's
common stock valued at approximately $36.9 million, including $1.5 million paid
to the Supply Room in September 1997 (see Note E).
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries UDI I and UDI II.
All intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
Interim Reporting
The accompanying condensed financial information as of the three months
ended March 31, 1997 and 1998, including such information in the notes to
financial statements, is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results of any other
interim period or for an entire year.
F-21
<PAGE> 81
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Revenue Recognition
UDI recognizes revenue on the accrual basis for: (i) periodic buying group
fees of 1% to 2% of member purchases from manufacturers and (ii) annual rebate
income from manufacturers and wholesalers paid to UDI primarily based on the
volume of member purchases. Portions of such rebates, which are determined by
management of the Company, are passed on to certain eligible members and accrued
as an operating expense. Revenue is also recognized for membership fees and
other programs offered to UDI's members on the accrual method.
The volume of gross purchases generated by UDI members with manufacturers
was $65,354,000, $81,642,000 and $94,456,000 for the years ended December 31,
1995, 1996 and 1997, respectively, and $23,053,000 and $24,787,000 for the three
months ended March 31, 1997 and 1998, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Deferred Offering Costs
Deferred offering costs incurred in connection with the Company's
contemplated Offering amounted to approximately $92,000, $2,867,000, and
$996,000 during the years ended December 31, 1996 and 1997, and the three-month
period ended March 31, 1998, respectively. Such deferred offering costs will be
charged against the proceeds of such Offering when completed. In the event the
Offering is unsuccessful, such costs would be charged against earnings.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization expense is recorded on the
straight-line basis over the estimated useful lives of the assets. Repairs and
maintenance are charged directly to expense as incurred.
Earnings Per Share
As of December 31, 1997, the Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share," which was also applied to December 31, 1996 and 1995. Basic earnings
per share exclude dilution and are computed by dividing income available to
common shareholders by the weighted-average common shares outstanding for the
period. The dilutive effect of options outstanding has not been included in the
computation of earnings per share as the effect is not material (see Note J).
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits
F-22
<PAGE> 82
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
are expected to be realized in future years. A valuation allowance has been
established to reduce deferred tax assets as it is more likely than not that
some portion of such deferred tax assets will not be realized. The effect of a
change in tax rates on deferred taxes is recognized in income in the period that
includes the enactment date.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents,
line of credit and promissory notes classified as long-term debt. The carrying
value of these instruments approximates their fair value because of their short
maturity and their stipulated interest rates being based on current market
rates.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31, ESTIMATED
1996 1997 1998 USEFUL LIVES
-------- -------- --------- -------------
<S> <C> <C> <C> <C>
Office furniture and fixtures..................... $350,176 $564,802 $574,089 5 to 7 years
Leasehold improvements............................ 29,089 42,010 66,279 3 to 10 years
-------- -------- --------
379,265 606,812 640,368
Less accumulated depreciation and amortization.... 133,902 200,493 224,957
-------- -------- --------
$245,363 $406,319 $415,411
======== ======== ========
</TABLE>
Depreciation and amortization expense amounted to $32,719, $45,707 and
$66,591 for the years ended December 31, 1995, 1996 and 1997, respectively, and
$24,366 and $24,464 for the three months ended March 31, 1997 and 1998,
respectively.
NOTE C -- LINE OF CREDIT
As of December 31, 1997, UDI had a demand line of credit with First Union
National Bank (formerly CoreStates Bank NA) ("First Union") which allowed the
Company to borrow a maximum of $10,000,000 at a rate of .5% above prime (8.75%
at December 31, 1997). The line was collateralized by all of the assets of UDI.
As of December 31, 1997 and March 31, 1998, the Company had $5,615,000 and
$2,904,000, respectively, outstanding under this line. As of December 31, 1996,
the Company had $1,350,000 outstanding under a similar line. Availability under
the line is based primarily on 85% of certain eligible accounts receivable plus
60% of eligible inventory.
On July 10, 1998, the Company obtained a $35 million revolving credit
facility from First Union which replaced a prior $10 million facility. Amounts
outstanding bear interest at the prime lending rate plus an applicable margin of
up to .75% or LIBOR plus an applicable margin of up to 2.5%. The Company's
obligations under the revolving credit facility are to be guaranteed by the
current and future subsidiaries of the Company and are secured by a priority
security interest in substantially all other assets of the Company. Pursuant to
the First Union commitment, the revolving credit facility contains customary
covenants, including restrictions on other indebtedness, approval of
acquisitions in excess of $20 million (and certain acquisitions greater than $5
million depending on the percentage of consideration paid in cash or stock),
limits on capital expenditures, restrictions on transactions with affiliates and
sales of assets, as well as various financial covenants. The Company paid a
financing fee of $150,000 for the facility and pays a commitment fee of .375%
per annum on the daily average of the unused portion of the credit facility.
Prior to completion of an IPO the Company's borrowings under the facility are
limited to $10 million. Borrowings under the facility are limited to $25 million
in the event the proceeds from an IPO does not exceed $25 million.
F-23
<PAGE> 83
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
In the event the Company does not complete its IPO by December 31, 1998,
maximum outstanding borrowings based on UDI's receivables shall be reduced
commencing on March 31, 1999 to $6,000,000 and further reductions through
December 31, 1999 to $3,000,000.
The line is collateralized by all of UDI's assets and guaranteed by the
Company. Among other provisions, the demand line agreement provides that: (i)
the annual compensation paid to the president of UDI does not exceed $200,000
and (ii) a maximum amount of $7,500,000 on this line may be used by the Company
for nonoperational purposes in connection with the Offering and anticipated
business acquisitions.
NOTE D -- INCOME TAXES
The provision for income taxes is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Federal
Current provision (benefit)...... $220,930 $(28,840) $169,887 $102,947 $ 3,780
Current refundable............... -- (75,210) -- -- --
Deferred taxes................... (179,599) 105,542 15,444 -- (250,000)
-------- -------- -------- -------- ---------
41,331 1,492 185,331 102,947 (246,220)
-------- -------- -------- -------- ---------
State
Current provision (benefit)...... 70,980 (5,960) 53,891 32,826 1,194
Current refundable............... -- (24,650) -- -- --
Deferred taxes................... (55,798) 37,536 4,877 -- (57,000)
-------- -------- -------- -------- ---------
15,182 6,926 58,768 32,826 (55,806)
-------- -------- -------- -------- ---------
$ 56,513 $ 8,418 $244,099 $135,773 $(302,026)
======== ======== ======== ======== =========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Current "expected" provision (benefit) for Federal
income taxes..................................... 34.0% (34.0)% 34.0% 34.0% (34.0)%
State and local taxes, net of Federal income tax
benefit.......................................... 7.3 2.6 9.1 7.5 (6.2)
Allocations to Canadian operations................. -- 28.6 .8 -- --
Other.............................................. (0.1) 7.6 13.3 5.0 10.5
----- ----- ----- ----- -----
41.2% 4.8% 57.2% 46.5% (29.7)%
===== ===== ===== ===== =====
</TABLE>
F-24
<PAGE> 84
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Deferred tax assets
Reserve for bad debts..................................... $150,339 $134,631 $134,631
Accrued compensation expense.............................. 187,000
Nondeductible accruals.................................... 120,000
Net operating loss carryforward -- Canadian subsidiary.... 59,521 63,420 63,420
Other items............................................... 9,049 8,089 8,089
-------- -------- --------
218,909 206,140 513,140
Valuation allowance......................................... (82,399) (91,964) (91,964)
-------- -------- --------
Net deferred tax assets................................ 136,510 114,176 421,176
Deferred tax liability
Accelerated depreciation.................................. (23,818) (21,805) (21,805)
-------- -------- --------
Net deferred taxes..................................... $112,692 $ 92,371 $399,371
======== ======== ========
</TABLE>
NOTE E -- DUE TO AFFILIATES AND STOCKHOLDERS
Transactions With King
As of December 31, 1997, the amount due to King Office Supply, Inc.
("King") is comprised of disbursements made by King on behalf of the Company for
various operating expenses totalling $142,179 during the year ended December 31,
1997 and $59,495 for the three months ended March 31, 1998. The Chief Executive
Officer of the Company is an officer, director and controlling shareholder of
King.
The Company has accounts receivable due from King for direct manufacturers'
purchases which amounted to $32,584 and $133,566 at December 31, 1996 and 1997,
respectively, and $239,258 for the three months ended March 31, 1998. In
addition, the Company has accounts payable due to King for wholesaler rebates
accrued during the year which amounted to $30,227 and $47,758 at December 31,
1996 and 1997, respectively, and $10,900 for the three months ended March 31,
1998.
Transactions With The Supply Room
In September 1997, the Company purchased 10% of the outstanding common
stock of The Supply Room for $1,500,000.
Due to Stockholders
Due to stockholders represents loans made to the Company by certain
stockholders at an interest rate of 7%. These amounts were fully repaid by the
Company in 1997.
NOTE F -- PROFIT SHARING PLAN
The Company has established a profit sharing plan covering substantially
all employees who meet eligibility requirements. Contributions are made annually
at the discretion of the board of directors and are funded prior to the filing
of the Company's Federal tax return. Plan expense for 1995, 1996 and 1997 was
approximately $100,000, $100,000 and $30,000, respectively.
F-25
<PAGE> 85
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE G -- STOCK REDEMPTION
During 1995, pursuant to a stock redemption agreement, 750 shares of stock
in UDI Corp. and 1,000 shares of stock in UDI II Corp. were purchased, from one
of their stockholders at a cost of $203,501 and $449,498, respectively. The
redemption agreement provides for: (i) a $272,500 cash payment, (ii) a note
payable in the amount of $100,000 at a 5% interest rate, and (iii) cash
installment payments of $75,000 per year for four years. The note payable
outstanding, net of a 5% discount on the installment payment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Amounts outstanding......................................... $279,243 $189,456 $189,456
Less current portion........................................ 89,788 93,027 93,027
-------- -------- --------
Long-term................................................... $189,455 $ 96,429 $ 96,429
======== ======== ========
</TABLE>
The long-term portion of the outstanding principal on this note of $96,429
at March 31, 1998 is scheduled to be repaid in 1999.
NOTE H -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under operating leases of which two leases
are on month-to-month terms and one lease has a term expiring in 1999, with the
related lessor being a founder of the Company and a former officer of UDI.
Remaining future minimum lease payments under this related party operating lease
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998........................................................ $ 37,751
1999........................................................ 33,204
----------
$ 70,955
==========
</TABLE>
Total rental expense paid by the Company was $35,636, $76,216 and $114,256
for the years ended December 31, 1995, 1996 and 1997, respectively, which
comprised $27,904, $36,328 and $48,958 paid to the related party in those years,
respectively, and $11,388 and $13,034 for the three months ended March 31, 1997
and 1998, respectively.
Consulting Agreement
Pursuant to a Financial Advisory Agreement, the Company has retained R.K.
Grace & Company ("R.K. Grace") to provide financial advice in connection with
its business plan and its acquisition program, from February 1, 1997 through
December 31, 1998. A founder and former director and officer of the Company is
the Chief Executive Officer and a founder of R.K. Grace. R.K. Grace receives a
monthly fee of $5,000 plus expenses and, in the event that the Offering closes
during the term of the agreement, it will receive $587,500 in cash and
$1,175,000 in the form of unregistered shares of common stock valued at the
initial public offering price per share. Also pursuant to the Financial Advisory
Agreement, the Company has issued 47,732 shares of common stock to the former
officer. The Company paid consulting fees and expenses to R.K. Grace & Company
of approximately $97,200 for services during the year ended December 31, 1997
and $15,000 for the three months ended March 31, 1998.
F-26
<PAGE> 86
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Employment Contracts
As of December 31, 1997, the Company was obligated under separate
employment contracts with three officers of the Company. The contracts contain
employment terms expiring at various dates through the third anniversary of the
offering and provide for, among other things, annual compensation, performance
bonuses, certain fringe benefits and life insurance and noncompetition
agreements. Historical compensation expense to key officers for the years ended
December 31, 1995, 1996 and 1997 and the three-month periods ended March 31,
1997 and 1998 amounted to $1,528,000, $1,575,000, $1,439,000, $318,000 and
$746,000, respectively. Remaining future annual salaries with respect to these
contracts are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998................................................... $ 635,000
1999................................................... 635,000
2000................................................... 635,000
2001................................................... 400,000
----------
$2,305,000
==========
</TABLE>
In September 1997, the Company issued 50,000 shares of common stock to an
officer in connection with an employment agreement. Accordingly, $110,000 was
included in operating costs and expensed to record the compensatory issuance of
these 50,000 shares having a fair value of $2.20 per share (based on an
externally prepared valuation).
Dispute With Third-Party Administrator
During June 1994, a health plan was established for the employees of UDI
and its buying groups' members. The health plan was organized as a legal entity,
UDI-Cooperative Health Plan ("UDI-CHP"), separate and apart from the UDI buying
groups and the Company. During 1996, a third-party benefit administrator ("TPA")
to the plan advised UDI-CHP and UDI that they were obligated to reimburse the
TPA for certain underfunded claims incurred and paid through September 1997.
UDI-CHP disputed such claims on the basis of errors committed by the TPA in
calculating adequate premiums. UDI disputed the claims as unenforceable as UDI
is a separate entity and only UDI-CHP is contractually bound to the TPA. Both
parties to the dispute claim approximately $1 million in damages from the other.
The Company has been advised by legal counsel that a materially adverse effect
on the Company as a result of this dispute would be remote.
Concentrations
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable from
members. Management continually monitors the financial condition of its members
to reduce the risk of loss. In addition, the Company maintains credit insurance
or has obtained irrevocable letters of credit equal to each member's average
monthly purchases, thus reducing its exposure to credit risk.
The operations of the Company depend to a great degree on two national
wholesalers, S. P. Richards and United Stationers. For the fiscal year ended
December 31, 1997 these two national wholesalers accounted for approximately 60%
of the products purchased by the Founding Companies. Although alternative
wholesalers may exist for products distributed by the Company, the loss of
either of the two national wholesalers as a source of product could have a
material adverse effect on the Company.
F-27
<PAGE> 87
OFFICE CENTRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE I -- LICENSE AGREEMENT -- RELATED PARTY
On January 9, 1998, the Company entered into a license agreement with the
son of a stockholder of the Company. Pursuant to the license agreement, the
Company was granted a royalty-free, perpetual license to use the marketing
concept and name "Smart Consumer" in the office products, office services and
office furniture business worldwide (the "License"). In consideration of the
License, the Company issued 29,064 shares of its common stock and, if the
Company exploits the License in Taiwan, agreed to pay an additional fee of 15%
of all profits therefrom. Under certain conditions, the licensor will have a
30-day option to repurchase the License for either $500,000 in cash or 14,532
shares of the Company's common stock. The aggregate value of the shares, which
was $265,000, was charged to operations during the three months ended March 31,
1998.
NOTE J -- SUBSEQUENT EVENTS
1998 Stock Option Plan
In March 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan is administered by the Compensation Committee, which consists of four
directors, two of which are independent members of the board of directors.
Pursuant to the Plan, the Company may grant options to purchase up to 1,500,000
shares of Common Stock to officers, directors, consultants and employees of the
Company, its subsidiaries and affiliates. Such options may be either incentive
stock options or options which do not qualify for treatment as incentive stock
options. The Plan also provides for the grant of stock appreciation rights
("SARs") in conjunction with all or part of any stock option granted under the
Plan. SARs are exercisable at such time and to the extent as the stock options
to which they relate.
As of March 31, 1998, no options or SARs have been granted under the Plan.
Stock Split
The Board of Directors will approve a one-for 3.36 reverse stock split of
the Company's common stock upon the consummation of the offering, and will be
effective as of that date. All share, per share, and other financial information
contained in this report have been adjusted to reflect the impact of the
proposed common stock reverse split.
Officer Compensation
In May 1998, the Company granted to two executive officers bonuses
aggregating $352,000. The Company recorded compensation expense for that amount
during the three months ended March 31, 1998.
F-28
<PAGE> 88
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
THE SUPPLY ROOM COMPANIES, INC.
We have audited the accompanying balance sheets of The Supply Room
Companies, Inc. (the "Company"), as of September 27, 1996 and October 3, 1997
and the related statements of operations, changes in stockholders' equity and
cash flows for the fiscal years ended September 27, 1996 and October 3, 1997.
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 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 audits provide 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 The Supply Room Companies,
Inc., as of September 27, 1996 and October 3, 1997 and the results of its
operations and its cash flows for the fiscal years then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 19, 1998
F-29
<PAGE> 89
THE SUPPLY ROOM COMPANIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 3, MARCH 31,
1996 1997 1998
------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 25,770 $ 103,260 $ 4,592
Accounts receivable, net of allowance for doubtful
accounts of $29,915 in 1996 and 1997, $45,000 at
March 31, 1998................................... 3,582,101 4,024,650 3,707,255
Inventories......................................... 1,489,834 1,463,298 1,324,369
Prepaid expenses and other current assets........... 7,836 10,500 100,168
Income tax receivable............................... 11,185 -- --
Deferred tax benefit................................ 14,967 14,571 54,705
Due from affiliate.................................. -- 400,000 --
Due from related party -- current portion........... -- 26,194 --
---------- ---------- ----------
Total current assets........................ 5,131,693 6,042,473 5,191,089
PROPERTY AND EQUIPMENT -- NET......................... 629,440 832,016 900,317
OTHER ASSETS
Investment in affiliate............................. 200,000 1,489,718 1,317,913
Goodwill, net of accumulated amortization........... 196,135 483,045 952,774
Due from related party, net of current portion...... -- 104,777 --
Security deposits and other assets.................. 27,664 35,653 153,584
---------- ---------- ----------
423,799 2,113,193 2,424,271
---------- ---------- ----------
$6,184,932 $8,987,682 $8,515,677
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit...................................... $2,368,670 $1,806,132 $1,589,097
Current portion of long-term debt................... 163,255 624,866 316,703
Current maturities of capital lease obligations..... 48,728 54,727 62,394
Accounts payable -- trade........................... 1,696,537 2,326,444 2,271,180
Accrued expenses and other current liabilities...... 331,896 452,991 210,887
Due to related parties -- current portion........... -- 51,146 --
Income taxes payable................................ -- 24,795 44,918
---------- ---------- ----------
Total current liabilities................... 4,609,086 5,341,101 4,495,179
LONG-TERM DEBT, NET................................... 212,622 257,171 501,281
DUE TO RELATED PARTIES, NET........................... 290,000 266,886 290,000
CAPITAL LEASE OBLIGATIONS, NET........................ 181,380 126,653 154,303
DEFERRED INCOME TAXES................................. 38,209 29,024 62,436
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: no par value, 15,000 authorized
shares; 10,000, 11,970 and 11,970 shares issued
at September 27, 1996, October 3, 1997 and March
31, 1998, respectively........................... 441,496 2,410,821 2,410,821
Retained earnings................................... 412,139 556,026 601,657
---------- ---------- ----------
853,635 2,966,847 3,012,478
---------- ---------- ----------
$6,184,932 $8,987,682 $8,515,677
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 90
THE SUPPLY ROOM COMPANIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------- --------------------------
SEPTEMBER 27, OCTOBER 3, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................. $24,869,002 $30,027,157 $14,381,474 $15,031,798
Cost of goods sold.................... 17,133,959 20,777,574 9,814,388 10,367,942
----------- ----------- ----------- -----------
Gross margins............... 7,735,043 9,249,583 4,567,086 4,663,856
Operating costs and expenses.......... 7,430,712 8,667,132 4,140,368 4,288,339
----------- ----------- ----------- -----------
Operating income............ 304,331 582,451 426,718 375,517
Other income (expense)
Interest income..................... 40,055 29,105 31,270 2,394
Interest expense.................... (217,022) (272,312) (138,941) (133,356)
Equity in net loss of affiliated
companies........................ -- (104,311) (47,039) (147,205)
Other income (expense).............. -- -- 1,475 (5,318)
----------- ----------- ----------- -----------
Income before provision for
income taxes.............. 127,364 234,933 273,483 92,032
Provision for income taxes............ 45,595 91,046 116,622 46,401
----------- ----------- ----------- -----------
NET INCOME.................. $ 81,769 $ 143,887 $ 156,861 $ 45,631
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE> 91
THE SUPPLY ROOM COMPANIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNTS EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance at September 30, 1995............................... 10,000 $ 441,496 $330,370
Net income................................................ -- -- 81,769
------ ---------- --------
Balance at September 27, 1996............................... 10,000 441,496 412,139
Net income................................................ -- -- 143,887
Common stock issued....................................... 1,970 1,969,325 --
------ ---------- --------
Balance at October 3, 1997.................................. 11,970 2,410,821 556,026
Net income (unaudited).................................... -- -- 45,631
------ ---------- --------
Balance at March 31, 1998 (unaudited)....................... 11,970 $2,410,821 $601,657
====== ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-32
<PAGE> 92
THE SUPPLY ROOM COMPANIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
--------------------------- ---------------------
SEPTEMBER 27, OCTOBER 3, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 81,769 $ 143,887 $156,861 $ 45,631
Adjustment to reconcile net income to net cash (used in)
provided by operating activities
Deferred income taxes -- net.......................... 10,682 (8,789) 29,391 (6,188)
Depreciation and amortization......................... 172,559 202,241 98,205 166,211
Provision for bad debts............................... 12,597 -- -- --
(Gain) loss on sale of fixed assets................... (5,778) -- -- 5,318
Equity in net loss of affiliated companies............ -- 104,311 47,039 147,205
Related party notes receivable foregiveness........... -- -- -- 130,971
Changes in operating assets and liabilities
Accounts receivable................................. (935,610) (150,035) 162,642 317,395
Inventories......................................... (231,561) 80,094 (258,750) 138,929
Prepaid expenses and other current assets........... 54,029 (1,452) (48,067) (89,668)
Income taxes receivable............................. (11,185) 11,185 11,185 --
Other assets........................................ (1,771) (7,989) (26,230) 2,069
Accounts payable -- trade........................... 133,801 531,051 259,973 (55,264)
Accrued expenses and other current liabilities...... 123,823 81,771 (10,877) (242,104)
Income taxes payable................................ (21,691) 24,795 70,214 20,123
---------- ----------- --------- ---------
Net cash (used in) provided by operating activities... (618,336) 1,011,070 491,586 580,628
---------- ----------- --------- ---------
Cash flows from investing activities
Investment in affiliate................................... -- (1,546,258) (13,506) --
Purchase of property, plant and equipment................. (172,234) (138,460) (116,341) (189,999)
Acquisition of businesses................................. (246,535) -- -- (165,494)
Proceeds from sale of property and equipment.............. 10,988 -- -- --
---------- ----------- --------- ---------
Net cash used in investing activities................. (407,781) (1,684,718) (129,847) (355,493)
---------- ----------- --------- ---------
Cash flows from financing activities
Principal payments on long-term debt...................... (272,626) (236,324) (61,043) (106,768)
Net increase (decrease) in line of credit................. 1,080,771 (562,538) (323,516) (217,035)
Proceeds from note payable................................ 181,994 50,000 -- --
Capital contributions..................................... -- 1,500,000 -- --
---------- ----------- --------- ---------
Net cash provided by (used in) financing activities... 990,139 751,138 (384,559) (323,803)
---------- ----------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (35,978) 77,490 (22,820) (98,668)
Cash and cash equivalents at beginning of period............ 61,748 25,770 25,770 103,260
---------- ----------- --------- ---------
Cash and cash equivalents at end of period.................. $ 25,770 $ 103,260 $ 2,950 $ 4,592
========== =========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest................................................ $ 203,832 $ 285,502 $152,131 $ 133,356
Income taxes............................................ 54,387 55,040 36,371 42,000
Summary of noncash items:
On July 1, 1997, the Company purchased all the common stock of Proximus Acquisitions, Inc., in exchange for 720
shares of stock valued at $469,325. Assets acquired and liabilities assumed were as follows:
Fair value of assets acquired.......................................... $ 879,293
Value of stock issued.................................................. (469,325)
Liabilities assumed.................................................... 409,968
</TABLE>
A debt obligation and a receivable in the amount of $400,000 were recorded as of
October 3, 1997 as a result of the Company's co-signing a demand note with MEGA.
The note was subsequently paid off by MEGA in November 1997.
The Company sold a 7.6% ownership in MEGA on September 30, 1997 in return for
notes receivable from two officers in the amount of $130,971. The notes were
forgiven by the Company in November 1997.
The accompanying notes are an integral part of these statements.
F-33
<PAGE> 93
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Supply Room Companies, Inc. (the "Company") is primarily in the
business of selling office supplies and office equipment to commercial and
retail enterprises located in the Commonwealth of Virginia and the mid-Atlantic
region.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Accounting Period
The Company elected to operate on a 52-53 week fiscal year, beginning
October 1, 1995. The Company's fiscal year ends on the last Friday nearest the
end of September.
Interim Reporting
The accompanying condensed financial information as of March 31, 1998 and
the six months ended March 31, 1997 and 1998, including such information in the
notes to financial statements, is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results of any other
interim period or for an entire year.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Retail store revenue is recognized at the time of sale.
Inventories
Inventories, which consist of office supplies, office furniture and
equipment, printing supplies and stationery, are stated at the lower of cost or
market, determined on a first-in, first-out basis.
Investments
The investment in affiliate is accounted for under the equity method of
accounting.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line and accelerated methods over their estimated useful lives. Repairs
and maintenance are charged to expense as incurred.
F-34
<PAGE> 94
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Deferred Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Deferred tax assets and
liabilities are measured using enacted tax law.
Goodwill
Goodwill is amortized on a straight-line basis over a 15-year period.
Accumulated amortization at September 27, 1996, October 3, 1997 and March 31,
1998, was $31,130, $44,011 and $69,776, respectively.
Valuation of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company has determined no provision is necessary for the impairment of
long-lived assets at September 27, 1996, October 3, 1997 and March 31, 1998.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents, due
from affiliate and related party, capital lease obligations, line of credit and
promissory notes classified as long-term debt. The carrying value of these
instruments approximates their fair value because of their short maturity and
their stipulated interest rates being based on current market rates.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 3, MARCH 31, ESTIMATED
1996 1997 1998 USEFUL LIVES
------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Vehicles.................................... $ 344,484 $ 396,209 $ 405,908 5 years
Furniture and fixtures...................... 387,986 460,198 783,544 7 years
Machinery and equipment..................... 333,225 591,958 359,948 5 years
Leasehold improvements...................... 78,265 87,532 87,257 7-15 years
---------- ---------- ----------
1,143,960 1,535,897 1,636,657
Less accumulated depreciation and
amortization.............................. 514,520 703,881 736,340
---------- ---------- ----------
$ 629,440 $ 832,016 $ 900,317
========== ========== ==========
</TABLE>
Depreciation expense amounted to $147,187 and $189,361 and $90,000 and
$177,381 for the years ended September 27, 1996 and October 3, 1997, and the six
months ended March 31, 1997 and 1998, respectively.
F-35
<PAGE> 95
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE C -- INVESTMENT IN AFFILIATE
On August 31, 1996, the Company acquired a 7.6% interest in MEGA Office
Furniture, LLC (MEGA) for a cost of $200,000. The president and chief executive
officer of the Company is a principal shareholder of MEGA and also serves as its
chairman. On September 11, 1997, the Company acquired an additional 19% interest
in MEGA for a cost of $1,500,000. The Company has accounted for the investment
using the equity method of accounting, and has recognized its proportionate
share of MEGA's operations retroactive to the date of purchase of the original
investment in a manner consistent with the step purchase method of a subsidiary.
The purchase price of the 19% interest exceeded the underlying equity of MEGA by
$738,000, which difference is considered goodwill and will be amortized over a
15-year period. The Company's share of MEGA's operating losses totaled $104,311
and $147,205 in the year ended October 3, 1997 and the six months ended March
31, 1998, respectively.
At September 27, 1997, MEGA had current assets and noncurrent assets of
approximately $2,302,000 and $2,164,000, respectively, based on financial
information included elsewhere in the Offering document. MEGA had current
liabilities and noncurrent liabilities of $2,518,000 and $190,000, respectively,
at September 27, 1997. In addition, MEGA had sales and net losses of $7,444,000
and $1,080,000 for the nine months ended September 27, 1997, respectively. The
Company measures impairment on this investment based on a comparison of the
carrying value to projected future cash flows. If MEGA continues to recognize
significant losses, a write-down in the carrying value of the asset may be
necessary.
On September 30, 1997, the Company sold its 7.6% interest in MEGA to the
Company's president and vice-president for its net book value of $130,971, in
return for five-year, interest-bearing note receivables from each of the
officers. The notes were forgiven on November 28, 1997, with compensation
expense recognized for the book value.
NOTE D -- LINE OF CREDIT
The Company has an available revolving line of credit with Crestar Bank of
up to $3,500,000, with interest at the lower of 30-day LIBOR plus 375 basis
points or prime plus 1.50%, which expired January 31, 1998. Interest is payable
monthly. The line of credit is collateralized by the assets of the Company. The
$3,500,000 line-of-credit agreement states that the maximum principal amount
outstanding at any time be equal to 85% of eligible receivables, plus 50% of
certain inventory value. In addition, the Company must maintain certain
financial requirements and quarterly ratios in connection with the
line-of-credit agreement. At October 3, 1997, September 27, 1996 and March 31,
1998, the Company was in compliance with the covenants. The remaining unused
portion of the revolving line of credit at October 3, 1997 and March 31, 1998
was $1,693,868 and $1,910,903, respectively. The payment of the line is
guaranteed by the Company's shareholders. Subsequent to year-end, the agreement
was renewed with Crestar Bank to February 28, 1999, with terms substantially
similar to those described above.
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 3, MARCH 31,
1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
Richmond Office Supply Company, Inc., collateralized by
a subordinated interest in certain tangible and
intangible personal property and accounts receivable,
interest at 9%; $3,732 paid monthly, final installment
due October 1998...................................... $ 86,245 $ 47,655 $ 27,022
</TABLE>
F-36
<PAGE> 96
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 3, MARCH 31,
1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
Payable to officers, collateralized by a subordinated
interest in all the Company's assets, with interest at
9%, interest paid quarterly, principal due ranging
from September 30, 1998 to September 30, 2001......... $290,000 $ 290,000 $ 290,000
Minimum earn-out payments due on purchase of Total
Office Products....................................... 450,000
Crestar Bank, collateralized by certain Company assets,
payable in monthly principal payments ranging from
$1,000 to $8,000 at interest rates ranging from 8.25%
to 8.5% which mature on dates ranging from March 25,
1999 through January 15, 2002......................... 258,350 294,536 225,706
Commercial Bank, collateralized by equipment and
consumer goods, interest at 10.50%, $3,328 paid
monthly, final installment due May 7, 2001............ -- 121,143 107,231
Payable to stockholder; collateralized by computer
equipment, principal and interest of $1,553 paid
monthly, interest at 12%.............................. -- 28,032 --
Crestar Bank, collateralized by inventory, furniture,
fixtures and equipment; note due on demand, interest
at lower of 30-day LIBOR plus 3.75% or prime plus
1.5%, interest payable monthly, co-signed with MEGA... -- 400,000 --
Installment loans to commercial banks, collateralized by
vehicles, interest from 8.75% to 10.25%; $1,848 paid
monthly, final installment June 19, 1999.............. 31,282 18,703 8,025
-------- ---------- ----------
$665,877 $1,200,069 $1,107,984
======== ========== ==========
</TABLE>
As of October 3, 1997, aggregate maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
October 2, 1998........................................... $ 676,012
October 1, 1999........................................... 164,058
September 29, 2000........................................ 115,775
September 28, 2001........................................ 240,201
September 27, 2002........................................ 4,023
----------
$1,200,069
==========
</TABLE>
The Company must maintain certain quarterly financial ratio covenants with
its primary lender, Crestar Bank. For the year ended October 3, 1997 and the six
months ended March 31, 1998, the Company was in compliance with the
requirements.
Related Party Borrowings
During the year ended October 3, 1997, the Company co-signed on three
demand notes with a bank for MEGA. The notes were in the amounts of $600,000,
$250,000, and $400,000, of which only the $400,000 note remains outstanding as
of October 3, 1997. The Company has recorded the $400,000 as an amount due from
affiliate and due to bank as of October 3, 1997. The note was subsequently paid
in full on November 7, 1997.
F-37
<PAGE> 97
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
The Company also co-signed on two letters of credit in the amounts of
$85,000 and $50,000. Neither letter of credit has been drawn upon as of January
2, 1998. The notes and letters of credit were collateralized by the assets of
the Company and MEGA, and were personally guaranteed by the president of the
Company.
NOTE F -- CAPITAL LEASES
During the year ended September 27, 1996, the Company entered into capital
leases for certain equipment that met the criteria for capitalization. The
assets were recorded in the accompanying financial statements at a cost of
$281,801, and the related obligations were recorded at the present value of
future minimum lease payments. Accumulated depreciation at September 27, 1996
and October 3, 1997 was $63,292 and $116,524, respectively, and $137,841 at
March 31, 1998.
The following is a schedule of future minimum payments under the lease:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
October 2, 1998........................................... $ 72,951
October 1, 1999........................................... 69,320
September 29, 2000........................................ 46,608
September 28, 2001........................................ 28,036
--------
Total lease payments................................... 216,915
Less portion representing interest.......................... (35,535)
--------
Present value of future lease payments...................... 181,380
Current maturities.......................................... 54,727
--------
$126,653
========
</TABLE>
NOTE G -- OPERATING LEASES
Related Party
The Company leases its main business location from two of its shareholders.
The lease began January 1, 1992, and expires December 31, 2001. Payments are
currently $7,000 per month and will escalate in increments of 2% annually until
January 1, 2002.
Beginning October 1, 1993, the Company leases certain premises from the
president of the Company. The lease expires September 30, 2003. Payments are
$4,300 per month and will escalate in increments of 4% annually until October 1,
2002.
Total rental expense and payments to shareholders for the years ended
September 27, 1996 and October 3, 1997, were $139,811 and $151,044,
respectively, and $73,836 and $89,116 for the six months ended March 31, 1997
and March 31, 1998, respectively.
F-38
<PAGE> 98
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
October 2, 1998........................................... $157,806
October 1, 1999........................................... 162,167
September 29, 2000........................................ 166,662
September 28, 2001........................................ 171,301
September 27, 2002........................................ 70,619
Thereafter................................................ 73,444
--------
$801,999
========
</TABLE>
Other Leases
The Supply Room Companies, Inc. is a lessee in noncancelable leasing
arrangements for office buildings and warehouses in various locations expiring
at various dates. Future minimum lease payments at October 3, 1997, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
October 2, 1998........................................... $ 315,893
October 1, 1999........................................... 245,588
September 29, 2000........................................ 181,156
September 28, 2001........................................ 186,648
September 27, 2002........................................ 137,655
----------
$1,066,940
==========
</TABLE>
Total rental expense for the years ended September 27, 1996 and October 3,
1997, was $267,320 and $274,728, respectively, and $136,837 and $155,912 for the
six months ended March 31, 1997 and 1998, respectively.
NOTE H -- ACQUISITIONS
Effective March 2, 1998, the Company acquired the office furniture and
office supply operations known as Total Office Products ("TOP") from Baltimore
Stationery Company, located in Baltimore, Maryland. The purchase price included
$162,500 in cash paid at closing, with additional earn-out payments to be made
to the seller equal to 14.1% of the semiannual gross profit of TOP in excess of
$750,000, for four years from the date of closing. The required minimum amount
of total earn-out payments to be made to the seller is $450,000. The Company has
allocated the minimum amount of the purchase price, $612,500, based on the fair
values of the assets purchased, which included customer lists, a noncompete
agreement and goodwill. The goodwill will be amortized over a forty-year period.
On July 1, 1997, the Company purchased the printing business of Proximus
Acquisition, Inc., in Richmond, Virginia, in return for the issuance of 720
shares of the Company's common stock valued at $469,325. The assets purchased
included printing presses and inventory, which, along with goodwill, had a fair
value of approximately $879,000, and liabilities assumed had a fair value of
approximately $410,000. The purchase price includes goodwill in the amount of
$276,115, which is being amortized on a straight-line method over 15 years from
the date of acquisition. This purchase was a noncash transaction.
F-39
<PAGE> 99
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
On February 1, 1996, the Company purchased the retail office supply
business of Ann's Books and Cards, Ltd., in Ashland, Virginia, for approximately
$11,600. The assets purchased consisted of inventory and a computer.
Also on February 1, 1996, the Company purchased the retail office supply
business of Service Stationers, Inc., in Harrisonburg, Virginia, for
approximately $153,250. The assets purchased consisted of inventory, fixed
assets and prepaid expenses.
On April 1, 1996, the Company purchased the retail office supply business
of Leimkuhler-Biden, Inc., in Baltimore, Maryland, for approximately $85,000.
Assets purchased consisted of inventory, furniture and fixtures, and vehicles.
None of the above acquisitions were considered to be significant.
NOTE I -- STOCK OPTIONS
On April 30, 1994, the Company granted two officers hired during the
purchase of an office supply company the right to purchase a maximum of 555
shares each of common stock at a per share price of $360. The options are
exercisable within ten years of the date they were granted, in accordance with
the following terms: 10% expiring each April 1 until April 1, 2002, and 15%
expiring each April 1 thereafter until April 1, 2004. The Company shall have the
right to repurchase from the officers all or any portion of the option at
repurchase prices established in the option agreement. No options were exercised
during the years ended September 27, 1996 and October 3, 1997, and for the six
months ended March, 1998.
NOTE J -- DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a retirement savings and investment plan for substantially
all full-time employees, which allows participants to make contributions by
salary reduction pursuant to Section 401(k) of the Internal Revenue Code.
Matching employer contributions to the plan are limited to 6% of a participant's
compensation. Employer contributions to the plan for the years ended September
27, 1996 and October 3, 1997 were $28,731 and $34,154, respectively, and $15,894
and $21,322 for the six months ended March 31, 1997 and 1998, respectively.
NOTE K -- INCOME TAXES
The Company has recognized as of September 27, 1996 and October 3, 1997 a
current deferred tax asset of $14,967 and $14,571, respectively, and $54,705 at
March 31, 1998, for the deductible difference related to the allowance for bad
debt expense and inventory capitalization, and a noncurrent deferred tax
liability of $38,209, $29,024, and $62,436, respectively, for the taxable
difference related to the depreciation of property and equipment.
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------- ---------------------
SEPTEMBER 27, OCTOBER 3, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Current.......................................... $34,913 $99,835 $ 87,231 $52,589
Deferred......................................... 10,682 (8,789) 29,391 (6,188)
------- ------- -------- -------
$45,595 $91,046 $116,622 $46,401
======= ======= ======== =======
</TABLE>
F-40
<PAGE> 100
THE SUPPLY ROOM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 27, 1996 and October 3, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income. Increases to the
provision consist primarily of the tax effect of nondeductible expenses.
Decreases to the provision are related to the tax effect of the excess of tax
over financial depreciation.
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------- ---------------------
SEPTEMBER 27, OCTOBER 3, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Current "expected" provision for Federal income
taxes.......................................... 34.0% 34.0% 34.0% 34.0%
Adjustments in income taxes resulting from
State income taxes, net of Federal income tax
benefit........................................ 4.0 4.0 4.0 4.0
-- Permanent differences -- other
miscellaneous............................... (2.2) .8 4.6 12.4
---- ---- ----- -----
Income tax expense............................... 35.8% 38.8% 42.6% 50.4%
==== ==== ===== =====
</TABLE>
NOTE L -- AGREEMENT WITH OFFICE CENTRE CORPORATION
The Company and its stockholders have entered into a definitive agreement
(the "Agreement") with Office Centre Corporation and Subsidiaries ("Office
Centre") whereby Office Centre will acquire, by merger, all of the issued and
outstanding stock of the Company, in exchange for cash and common stock of
Office Centre upon the consummation of the initial public offering of Office
Centre.
In September 1997, the Company issued 1,250 shares of its common stock
(approximately 10% of the Company's common stock, issued and outstanding) to
Office Centre for $1,500,000.
F-41
<PAGE> 101
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
NEW ENGLAND OFFICE SUPPLY, INC.
We have audited the accompanying balance sheet of New England Office
Supply, Inc. (the "Company"), as of December 31, 1997, and the related
statements of operations and retained earnings and cash flows for the year then
ended. 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 above present fairly,
in all material respects, the financial position of New England Office Supply,
Inc., as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
February 9, 1998 (except for
Notes C and D, as to which
the date is April 9, 1998)
F-42
<PAGE> 102
NEW ENGLAND OFFICE SUPPLY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 199,962 $ 2,585
Accounts receivable, net of allowance for doubtful
accounts of $60,000 at December 31, 1997 and March 31,
1998................................................... 2,354,788 2,663,232
Inventories............................................... 338,787 368,682
Prepaid expenses and other current assets................. 50,744 121,824
---------- ----------
Total current assets................................. 2,944,281 3,156,323
PROPERTY AND EQUIPMENT -- NET............................... 400,184 373,749
OTHER ASSETS
Covenants not to compete, net............................. 45,100 20,650
Goodwill, net of accumulated amortization................. 94,002 92,439
---------- ----------
$3,483,567 $3,643,161
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit............................................ $ 300,000 $ --
Current portion of long-term debt......................... 552,832 552,832
Current portion of covenants payable...................... 80,000 80,000
Accounts payable -- trade................................. 1,000,227 1,312,970
Accrued expenses and other current liabilities............ 47,280 97,504
Income taxes payable...................................... 2,800 34,286
---------- ----------
Total current liabilities............................ 1,983,139 2,077,592
LONG-TERM DEBT, NET......................................... 522,178 483,970
COVENANTS PAYABLE, NET...................................... 18,400 7,800
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: no par value, 200,000 shares authorized;
25,000 shares issued and outstanding................... 514,700 514,700
Retained earnings......................................... 445,150 559,099
---------- ----------
959,850 1,073,799
---------- ----------
$3,483,567 $3,643,161
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 103
NEW ENGLAND OFFICE SUPPLY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................ $14,664,883 $3,546,577 $4,131,605
Cost of goods sold................................... 10,974,620 2,597,053 3,073,153
----------- ---------- ----------
Gross margin.................................. 3,690,263 949,524 1,058,452
Operating costs and expenses......................... 3,372,892 868,572 850,216
----------- ---------- ----------
Operating income.............................. 317,371 80,952 208,236
Other income (expense)
Interest expense................................... (141,667) (23,028) (39,341)
Other income (expense)............................. -- (42,000) 4,000
----------- ---------- ----------
Income before provision for income taxes...... 175,704 15,924 172,895
Provision for income taxes........................... 9,965 2,844 5,300
----------- ---------- ----------
NET INCOME.................................... 165,739 13,080 167,595
Retained earnings at beginning of period............. 506,411 506,411 445,150
Distributions........................................ (227,000) (45,212) (53,646)
----------- ---------- ----------
Retained earnings at end of period................... $ 445,150 $ 474,279 $ 559,099
=========== ========== ==========
Unaudited Pro Forma Information
Pro forma net income before provision for income
taxes........................................... $ 175,704 $ 15,924 $ 172,895
Provision for income taxes......................... 129,082 21,070 79,558
----------- ---------- ----------
Pro forma income (loss).................... $ 46,622 $ (5,146) $ 93,337
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE> 104
NEW ENGLAND OFFICE SUPPLY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................... $ 165,739 $ 13,080 $ 167,595
Adjustments to reconcile net income to net cash (used
in) provided by operating activities
Depreciation and amortization................... 260,898 56,169 54,813
Provision for bad debts......................... 46,000 -- --
Changes in operating assets and liabilities
Accounts receivable.......................... (844,457) (640,264) (308,444)
Inventories.................................. (156,566) (31,292) (29,895)
Prepaid expenses and other current assets.... (27,967) (16,350) (71,080)
Accounts payable -- trade.................... 198,285 540,502 312,743
Accrued expenses and other current
liabilities................................ (15,478) 43,853 50,224
Income taxes payable............................ 2,800 -- 31,486
--------- --------- ---------
Net cash (used in) provided by operating
activities........................................ (370,746) (34,302) 207,442
--------- --------- ---------
Cash flows from investing activities
Purchase of property and equipment................... (232,781) (95,320) (2,365)
--------- --------- ---------
Cash flows from financing activities
Principal payments on long-term debt................. (159,112) (48,750) (48,808)
Net increase (decrease) in line of credit............ 300,000 30,000 (300,000)
Proceeds from note payable........................... 884,162 200,000 --
Distribution to shareholders......................... (227,000) (45,212) (53,646)
--------- --------- ---------
Net cash provided by (used in) financing
activities...................................... 798,050 136,038 (402,454)
--------- --------- ---------
INCREASE (DECREASE) IN CASH....................... 194,523 6,416 (197,377)
Cash at beginning of period............................ 5,439 5,439 199,962
--------- --------- ---------
Cash at end of period.................................. $ 199,962 $ 11,855 $ 2,585
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest.......................................... $ 125,000 $ 22,500 $ 28,000
Income taxes...................................... 7,000 2,800 8,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 105
NEW ENGLAND OFFICE SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
New England Office Supply, Inc. (the "Company") was incorporated on
September 12, 1985, in the Commonwealth of Massachusetts. During 1992, the
stockholder acquired the stock of New England Office Supply, Inc., which was
doing business under the name of Allen Stationery Co. The Company is engaged in
the distribution and sales of office supplies and related products, primarily
throughout the states of Massachusetts and Rhode Island.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Interim Reporting
The accompanying financial information as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998, including such information in the
notes to financial statements, is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results of any other
interim period or for an entire year.
Inventories
Inventories, which consist of office supplies, office furniture and
equipment, printing supplies and stationery, are stated at the lower of cost or
market, determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line method over their estimated useful lives. Repairs and maintenance
are charged to expense as incurred.
Income Taxes
Federal income taxes are payable personally by the stockholders of the
Company pursuant to an election under Subchapter S of the Internal Revenue
Service Code not to have the Company taxed as a corporation. Accordingly,
Federal income taxes are not reflected in the accompanying financial statements.
The unaudited pro forma income tax information included in the Statements
of Operations and Retained Earnings 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 and state income taxes for
all periods presented.
Other Assets
Other assets consist of goodwill and covenants not to compete. Goodwill is
amortized on a straight-line basis over a 15-year period. Covenants not to
compete are stated at cost and amortized on a straight-line basis over the
contractual lives which range from 4 to 6 years. Accumulated amortization for
the goodwill and the covenants at
F-46
<PAGE> 106
NEW ENGLAND OFFICE SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
December 31, 1997 was $93,702 and $524,900, respectively, and $95,265 and
$549,350 at March 31, 1998, respectively.
Valuation of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company has determined no provision is necessary for the impairment of
long-lived assets at December 31, 1997.
Covenants Payable
Covenants payable represent the discounted value of the amount due to
employees arising from covenants not to compete. During 1997, approximately
$86,000 was paid under these agreements.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of covenants payable and a
promissory note classified as long-term debt. The carrying value of these
instruments approximates their fair value because of their short maturity and
their stipulated interest rate being based on current market rates,
respectively.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, ESTIMATED
1997 1998 USEFUL LIVES
------------ --------- ------------
<S> <C> <C> <C>
Transportation equipment......................... $285,932 $267,273 5 years
Furniture and fixtures........................... 155,881 155,881 7 years
Machinery and equipment.......................... 120,352 120,352 5 years
Computer equipment............................... 165,143 169,374 5 years
-------- --------
727,308 712,880
Less accumulated depreciation and amortization... 327,124 339,131
-------- --------
$400,184 $373,749
======== ========
</TABLE>
Depreciation expense amounted to $114,206, $23,040 and $12,007 for the year
ended December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively.
NOTE C -- LINE OF CREDIT
The Company has a $700,000 revolving line of credit which was renewed
during 1997. Bank advances on the credit line are payable on demand and carry an
interest rate of 1% over the bank's prime lending rate. The
F-47
<PAGE> 107
NEW ENGLAND OFFICE SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
credit line is secured by substantially all assets of the Company and is
personally guaranteed by the shareholder of the Company. The Company's line of
credit contains restrictive covenants, including limitations on owner
distributions and salary, and capital expenditures. In the event of default of
such covenants, the line of credit along with the long-term debt (Note D) will
become due on demand. The balance due under the credit line was $300,000 at
December 31, 1997.
The line of credit expired on March 31, 1998 and was renewed and increased
to $1,500,000 on April 9, 1998.
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
Note payable to bank, due on March 24, 1998.
Interest at 1% above the prime rate...................... $ 400,000 $ 400,000
Note payable to bank, original amount $764,162, due in
sixty fixed monthly principal payments of $12,736 plus
interest at 1% above the prime rate due May 2002......... 675,010 636,802
---------- ----------
1,075,010 1,036,802
Less current maturities of long-term debt.................. 552,832 552,832
---------- ----------
Long-term debt, excluding current maturities............... $ 522,178 $ 483,970
========== ==========
</TABLE>
Long-term debt agreements are secured by substantially all assets of the
company and are personally guaranteed by the shareholder of the Company.
As of December 31, 1997, aggregate maturities of long-term debt are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1998...................................................... $ 552,832
1999...................................................... 152,832
2000...................................................... 152,832
2001...................................................... 152,832
2002...................................................... 63,682
----------
$1,075,010
==========
</TABLE>
The Company's loan agreements contain restrictive covenants, including
limitations on owner distributions and salary, and capital expenditures. On
April 9, 1998 the note payable of $400,000 due on March 24, 1998 was paid in
full and the note payable to bank due May 2002 was replaced with a note payable
in the amount of $850,000 due April 2003 which is payable in sixty monthly
payments of $14,167.
NOTE E -- COMMITMENTS AND CONTINGENCIES
Operating Leases
Prior to March 1, 1997, the Company leased 15,000 square feet of office and
warehouse space under a lease agreement that expires on October 31, 1999. The
Company had a thirty-day option upon written notice of
F-48
<PAGE> 108
NEW ENGLAND OFFICE SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
terminating the lease, which was exercised effective March 1, 1997. Monthly
lease expense under this agreement was $7,809.
On February 3, 1997, the Company signed a five-year lease for 29,200 square
feet of office and warehouse space in Braintree, Massachusetts, effective March
1, 1997. Monthly lease expense is $13,383, with additional charges for real
estate taxes, insurance and common area maintenance. The Company has an option
to renew for an additional five years.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998...................................................... $ 160,600
1999...................................................... 160,600
2000...................................................... 160,600
2001...................................................... 160,600
2002...................................................... 13,383
----------
$ 655,783
==========
</TABLE>
Total rental expense for the year ended December 31, 1997 and the three
months ended March 31, 1997 and 1998 was $181,085, $32,165 and $49,640,
respectively.
Litigation
During 1997, the Company finalized its litigation with the principals of
Shawmut Printers, which they acquired in 1993. The resolution resulted in no
damages being paid by either party.
Presently, the Company is a plaintiff in litigation with a former owner of
an acquired company for violating the terms of his employment and noncompetition
agreement. In response, this defendant has filed for arbitration claiming that
the Company had not met the terms of the purchase and sales agreement between
New England Office Supply and his former company, Orr Business Products. In the
opinion of legal counsel, this claim is without merit, and no loss has been
recorded by the Company.
Concentrations
The Company is currently certified as a women or minority owned small
business in both Massachusetts and Rhode Island. One of the criteria used in the
selection of the Company as a vendor for state-related, municipal and other
governmental contracts may have been its certification as a women or minority
owned small business. During the year ended December 31, 1997 and the three
months ended March 31, 1997 and 1998, the Company's sales to state, state
related, municipal and governmental agencies represented approximately 16%, 3%,
and 21%, respectively, of the Company's revenues. The Company is required to
notify the respective state agencies of any changes in information supplied to
the state for certification, including any changes in ownership or control.
NOTE F -- COMMON STOCK
Authorized common stock is comprised of both voting (180,000 shares) and
nonvoting (20,000 shares) stock. At December 31, 1997 and March 31, 1998, no
nonvoting shares have been issued.
F-49
<PAGE> 109
NEW ENGLAND OFFICE SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE G -- DEFINED CONTRIBUTION RETIREMENT PLAN
The Company maintains a retirement plan adopted under Internal Revenue Code
Section 401(k). The plan covers all employees who meet certain age and service
requirements. The Company does not make contributions to the plan.
NOTE H -- SUBSEQUENT EVENT
In May 1998, the Company and its stockholder have entered into a definitive
agreement with Office Centre Corporation and Subsidiaries ("Office Centre")
whereby Office Centre will acquire, by merger, all of the issued and outstanding
stock of the Company, in exchange for cash and common stock of Office Centre
upon the consummation of the initial public offering of Office Centre.
F-50
<PAGE> 110
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
KING OFFICE SUPPLY, INC.
We have audited the accompanying consolidated balance sheets of King Office
Supply, Inc. (formerly The King Group, LLC) and Subsidiary (the "Company") as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the period June
30, 1996 (inception) through December 31, 1996 (for the King Group, LLC) and the
year ended December 31, 1997. We have also audited the statements of operations
and cash flows of King Office Supply Co., Inc. (the "Predecessor") for the
period January 1, 1996 through June 29, 1996. These financial statements are the
responsibility of the Company's and the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of King Office
Supply, Inc. and Subsidiary as of December 31, 1996 and 1997, and the
consolidated results of its operations and its consolidated cash flows for the
period June 30, 1996 (inception) to December 31, 1996 (for the King Group, LLC)
and the year ended December 31, 1997 and the results of operations and cash
flows of the Predecessor for the period January 1, 1996 through June 29, 1996 in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 9, 1998
F-51
<PAGE> 111
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................... $ 1,900 $ 5,730 $ 12,766
Accounts receivable, net of allowance for doubtful
accounts of $50,000 and $63,500 at December 31, 1996
and 1997 and $63,500 at March 31, 1998.............. 1,802,273 2,167,311 2,417,304
Inventories............................................ 285,742 426,633 473,000
Due from affiliate..................................... -- 91,946 120,130
Prepaid expenses and other current assets.............. 33,586 64,451 60,216
Deferred tax benefit................................... -- 58,494 58,494
---------- ---------- ----------
Total current assets................................ 2,123,501 2,814,565 3,141,910
PROPERTY AND EQUIPMENT -- NET............................ 147,857 229,536 232,538
OTHER ASSETS
Goodwill, net of accumulated amortization.............. 805,784 786,073 780,969
Deferred charges, net.................................. 85,746 129,070 121,070
Due from stockholder................................... 12,351 -- 3,108
Security deposits and other assets..................... 52,342 22,256 22,544
---------- ---------- ----------
956,223 937,399 927,691
---------- ---------- ----------
$3,227,581 $3,981,500 $4,302,139
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit......................................... $1,399,528 $1,756,567 $1,839,779
Notes payable, vendor.................................. 156,343 -- --
Notes payable -- current portion....................... 134,030 177,873 183,022
Accounts payable....................................... 910,697 1,255,307 1,442,847
Accrued expenses and other current liabilities......... 201,481 288,166 315,217
Income taxes payable................................... 17,000 44,607 44,905
Due to stockholders.................................... -- 77,708 77,708
---------- ---------- ----------
Total current liabilities........................... 2,819,079 3,600,228 3,903,478
NOTE PAYABLE -- LONG-TERM PORTION........................ 397,454 320,522 272,789
DEFERRED INCOME TAXES.................................... -- 16,610 19,510
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Members' capital....................................... 150,000 -- --
Common stock -- no par value; authorized, 1,000 shares;
issued and outstanding, 800 shares.................. -- -- --
Retained earnings (accumulated deficit)................ (23,702) 44,140 106,362
---------- ---------- ----------
126,298 44,140 106,362
Subscriptions receivable............................... (115,250) -- --
---------- ---------- ----------
11,048 44,140 106,362
---------- ---------- ----------
$3,227,581 $3,981,500 $4,302,139
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE> 112
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
--------------- PERIOD FROM
PERIOD FROM JUNE 30, 1996
JANUARY 1, 1996 (INCEPTION) THREE MONTHS ENDED
THROUGH THROUGH YEAR ENDED MARCH 31,
JUNE 29, DECEMBER 31, DECEMBER 31, -----------------------
1996 1996 1997 1997 1998
--------------- ------------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $6,236,542 $6,205,987 $13,892,846 $3,481,097 $3,869,784
Cost of goods sold........... 3,916,123 3,962,142 8,780,430 2,199,173 2,461,211
---------- ---------- ----------- ---------- ----------
Gross margin............... 2,320,419 2,243,845 5,112,416 1,281,924 1,408,573
Operating costs and
expenses................... 2,208,879 2,131,793 4,735,379 1,165,315 1,239,241
---------- ---------- ----------- ---------- ----------
Operating income........... 111,540 112,052 377,037 116,609 169,332
Other income (expenses)
Interest income............ 16,482 9,913 1,475 -- --
Interest expense........... (83,165) (123,170) (254,345) (57,750) (65,387)
Other income (expense)..... 40,442 (5,497) -- -- --
---------- ---------- ----------- ---------- ----------
Income (loss) before
income taxes.......... 85,299 (6,702) 124,167 58,859 103,945
Provision for income taxes... 6,911 17,000 15,367 7,576 41,723
---------- ---------- ----------- ---------- ----------
NET INCOME (LOSS)....... $ 78,388 $ (23,702) $ 108,800 $ 51,283 $ 62,222
========== ========== =========== ========== ==========
Unaudited Pro Forma
Information
Pro forma net income (loss)
before provision for
income taxes............ $ (6,702) $ 124,167 $ 58,859
Provision for income
taxes................... 748 58,957 27,115
---------- ----------- ----------
Pro forma income
(loss)................ $ (7,450) $ 65,210 $ 31,744
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE> 113
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
MEMBERS' COMMON (ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
CAPITAL STOCK DEFICIT) RECEIVABLE EQUITY
--------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996
(inception)..................... $ 150,000 $(150,000)
Contributed capital............. -- 34,750 $ 34,750
Net loss for the period June 30,
1996 (inception) through
December 31,1996............. -- $(23,702) -- (23,702)
--------- -------- --------- --------
Balance at December 31, 1996...... 150,000 (23,702) (115,250) 11,048
Contributed capital............. -- -- 2,000 2,000
Dissolution of the King Group
LLC and formation of King
Office Supply, Inc........... (150,000) $ -- (40,958) 113,250 (77,708)
Net income for the year ended
December 31, 1997............ -- -- 108,800 -- 108,800
--------- --------- -------- --------- --------
Balance at December 31, 1997...... -- -- 44,140 -- 44,140
Net income for the period
(unaudited).................. -- -- 62,222 -- 62,222
--------- --------- -------- --------- --------
Balance at March 31, 1998
(unaudited)..................... $ -- $ -- $106,362 $ -- $106,362
========= ========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-54
<PAGE> 114
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
--------------- PERIOD FROM
PERIOD FROM JUNE 30, 1996
JANUARY 1, 1996 (INCEPTION) THREE MONTHS ENDED
THROUGH THROUGH YEAR ENDED MARCH 31,
JUNE 29, DECEMBER 31, DECEMBER 31, ---------------------
1996 1996 1997 1997 1998
--------------- ------------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................... $ 78,388 $ (23,702) $ 108,800 $ 51,283 $ 62,222
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities
Depreciation and amortization... 29,147 33,695 103,615 19,959 29,742
Provision for bad debts......... 37,975 50,626 73,336 18,206 8,499
Deferred income taxes -- net.... -- -- (41,884) -- 2,900
Noncash compensation expense.... -- -- 85,000 -- --
Changes in operating assets and
liabilities, net of the
effects of acquisitions
Accounts receivable........ (173,186) 70,606 (375,100) (283,789) (258,492)
Inventories................ 46,621 37,279 (30,891) (5,396) (46,367)
Prepaid expenses and other
current assets........... 16,475 (5,543) (30,864) (1,228) 4,236
Due from affiliate......... -- -- (91,946) (10,667) (28,185)
Other assets............... -- (67,864) (62,530) 39,663 (288)
Accounts payable........... 23,341 (127,375) 309,876 182,997 187,540
Accrued expenses and other
current liabilities...... (106,690) 77,233 69,611 51,872 27,051
Income taxes payable....... (10,218) 17,000 35,494 9,433 298
--------- --------- ----------- --------- ---------
Net cash (used in) provided by
operating activities............ (58,147) 61,955 152,517 72,333 (10,844)
--------- --------- ----------- --------- ---------
Cash flows from investing activities
Acquisition of businesses........... -- (125,000) (75,000) -- --
Purchase of property and
equipment......................... -- (11,252) (81,856) -- (19,640)
Increase in due from stockholder.... (75,501) (12,351) (38,967) (9,349) (3,108)
--------- --------- ----------- --------- ---------
Net cash used in investing
activities...................... (75,501) (148,603) (195,823) (9,349) (22,748)
--------- --------- ----------- --------- ---------
Cash flows from financing activities
Principal payments on long-term
debt................................ -- (57,473) (155,560) (32,099) (42,584)
Increase (decrease) in line of
credit............................ 101,524 (48,228) 357,039 101,069 83,212
Proceeds from note payable,
vendor............................ -- 210,000 -- --
Principal payments on notes payable,
vendor............................ -- (53,657) (156,343) (41,338) --
Capital contributions............... -- 34,750 2,000 1,000 --
--------- --------- ----------- --------- ---------
Net cash provided by financing
activities...................... 101,524 85,392 47,136 28,632 40,628
--------- --------- ----------- --------- ---------
(DECREASE) INCREASE IN CASH....... (32,124) (1,256) 3,830 91,616 7,036
Cash at beginning of period........... 35,280 3,156 1,900 1,900 5,730
--------- --------- ----------- --------- ---------
Cash at end of period................. $ 3,156 $ 1,900 $ 5,730 $ 93,516 $ 12,766
========= ========= =========== ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for
Interest............................ $ 83,165 $ 122,753 $ 253,812 $ 58,066 $ 65,485
Income taxes........................ $ 17,200 $ -- $ 30,500 $ -- $ 38,525
</TABLE>
See Note B for noncash acquisition-related items.
The accompanying notes are an integral part of these statements.
F-55
<PAGE> 115
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
Accounting Policies
The King Group, LLC (the "LLC") was formed as a limited liability company
on June 26, 1996, and effective June 30, 1996, acquired King Office Supply Co.,
Inc. ("King" or "Predecessor") and certain of the assets of Carnegie Coffee Co.,
Inc. ("Carnegie") in business combinations (see Note B). King is a supplier of
office and stationery supplies to businesses in the New York metropolitan area
and also has a retail store located in New York City.
Effective May 8, 1997, the members of the LLC contributed the assets and
liabilities of the LLC to a newly formed C Corporation, King Office Supply, Inc.
(the "Company"), in exchange for stock of the Company. The LLC was then
subsequently dissolved in a tax-free transaction. The Company elected to
distribute all of the retained earnings and capital of the LLC, which was
recorded as a note payable to stockholders.
Effective as of March 1, 1997, King Office Supply Co., Inc., a Connecticut
corporation (wholly-owned by the Company) acquired certain assets and assumed
certain liabilities of Commercial -- Connecticut Office Supply Company, Inc.
("Commercial"). Commercial is a supplier of office and stationery supplies to
businesses in the Stamford, Connecticut area and also has a retail store located
in Stamford, Connecticut.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All material intercompany balances and
transactions have been eliminated in consolidation.
Interim Reporting
The accompanying financial information as of March 31, 1998 and the three
months ended March 31, 1997 and 1998, including such information in the notes to
financial statements, is unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results of any other
interim period or for an entire year.
Revenue Recognition
Revenue within the dealership operations is recognized at the time
merchandise is shipped to customers. Retail store revenues are recognized at the
time of sale.
Inventories
Inventories, which consist of printing supplies, stationery and office
supplies, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out ("FIFO") method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Machinery and equipment are depreciated using the double declining
balance method over their estimated useful lives of five
F-56
<PAGE> 116
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of the assets.
Repairs and maintenance are charged to expense as incurred.
Goodwill
Goodwill, principally from the acquisition of King and Carnegie, represents
the excess of the purchase price over the fair market value of the assets
acquired.
Goodwill is amortized on a straight-line basis over a forty-year period.
Accumulated amortization at December 31, 1996 and 1997 and March 31, 1998 was
approximately $9,800, $30,600 and $35,711, respectively.
Income Taxes
The Company and its wholly-owned subsidiary file a consolidated Federal
income tax return. Deferred income taxes reflect the net effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
As an LLC, Federal and state taxes for the periods of June 30, 1996 through
December 31, 1996 and January 1, 1997 through May 7, 1997 are payable personally
by the members. Accordingly, no provision was made for Federal and New York
State income taxes for the periods. Provision was made by the Company for New
York City unincorporated business tax. Therefore, the effective tax rate for the
year ended December 31, 1997, is less than the statutory Federal income tax
rate.
As an S Corporation, Federal taxes for the period of January 1, 1996
through June 29, 1996 are payable personally by the stockholders. Accordingly,
no provision was made by the Predecessor for Federal income taxes. Provision was
made by the Predecessor for New York City corporate income taxes and New York
State income taxes on S Corporations.
The unaudited pro forma income tax information included in the Consolidated
Statements of Operations is presented in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," as if the
LLC had been subject to federal and state income taxes for the periods
presented.
Valuation of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has determined that no provision is necessary for the
impairment of long-lived assets at December 31, 1996 and 1997 and March 31,
1998.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of a line of credit and
promissory notes classified as long-term debt. The carrying value of these
instruments approximates their fair value because of their short maturity and
their stipulated interest rates being based on current market rates.
F-57
<PAGE> 117
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE B -- ACQUISITIONS
The Company (formerly the LLC) acquired King and certain assets of Carnegie
for an aggregate purchase price of approximately $714,000. The Company paid
$125,000 at the time of the agreement and obtained two promissory notes due to
the sellers of King and Carnegie of approximately $472,000 and $42,000,
respectively. In addition, the Company also assumed a note for $75,000 due to an
officer of the Predecessor who was named the Chairman of the Company, after the
acquisition (Note F).
The acquisitions of King and Carnegie in 1996 were accounted for using the
purchase method of accounting and, accordingly, the total acquisition cost has
been allocated to the net assets acquired based on the fair value of the assets
and liabilities on the date of acquisition. The Predecessor ceased operations on
the date of acquisition.
The results of operations of the acquired companies are included in the
accompanying financial statements since the date of acquisition. The total cost
of the acquisition exceeded the fair value of the acquired net assets of King
and Carnegie by approximately $816,000.
In March 1997, the Company acquired certain assets and liabilities of
Commercial for an aggregate purchase price of $198,000. The Company paid $75,000
in April 1997 and obtained a promissory note for the balance of the purchase
price.
The acquisition of Commercial was also accounted for as a purchase. The
results of operations of Commercial are included in the accompanying financial
statements since the date of acquisition. The fair value of the acquired net
assets of $231,000 exceeded the total cost of the acquisition of $198,000, which
resulted in negative goodwill of $33,000. The Company reduced the fair value of
the long-term assets by this excess.
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31, ESTIMATED
1996 1997 1998 USEFUL LIVES
-------- -------- --------- ------------
<S> <C> <C> <C> <C>
Leasehold improvements............................. $106,445 $168,805 $168,805 5-10 years
Machinery and equipment............................ 57,278 134,579 154,219 5 years
-------- -------- --------
163,723 303,384 323,024
Less accumulated depreciation
and amortization................................. 15,866 73,848 90,486
-------- -------- --------
$147,857 $229,536 $232,538
======== ======== ========
</TABLE>
Depreciation expense amounted to $29,147, $15,866, $57,982, $10,615 and
$16,638 for the period ended June 29, 1996, the period ended December 31, 1996,
the year ended December 31, 1997 and the three months ended March 31, 1997 and
1998, respectively.
NOTE D -- LINE OF CREDIT
The Company has an available line of credit of up to $1,750,000, limited to
advances of up to 85% of eligible accounts receivable, and expires in August
1998. Interest is payable monthly at a rate of 2.5% over the prime rate (10.75%
and 11.00% at December 31, 1996 and 1997, respectively). The liability is
collateralized by the assets of the Company and there is a limited guarantee by
the majority shareholder. During November 1997, the Company arranged an
overadvance of $175,000 which is being repaid monthly at a rate not to exceed
$15,000 per month.
F-58
<PAGE> 118
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE E -- NOTE PAYABLE, VENDOR
The note payable, vendor was due in monthly installments of $14,879,
including interest at 9% per annum, and was paid in full in November 1997. The
note was collateralized by the assets of the Company.
NOTE F -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
(a) Note payable, seller -- King............................ $424,698 $318,375 $290,423
(a) Note payable, seller -- Carnegie........................ 35,843 22,523 19,005
(b) Note payable, seller -- Commercial...................... -- 103,691 97,052
(c) Note payable, officer................................... 70,943 53,806 49,331
-------- -------- --------
531,484 498,395 455,811
Less current portion..................................... 134,030 177,873 183,022
-------- -------- --------
$397,454 $320,522 $272,789
======== ======== ========
</TABLE>
- ---------------
(a) The notes payable to the sellers of King and Carnegie are due in monthly
installments of $12,433 and $1,389, including interest at 12% per annum, and
expire in June 2000 and June 1999, respectively. The King note requires a
mandatory prepayment each year of the lesser of $25,000 or 50% of the
preceding year's net profit of the Company. The Carnegie note requires a
mandatory prepayment each year of 10% of the prepayment amount of the King
note. Both notes require a limited guarantee by the majority shareholder of
the Company. Life insurance policies of approximately $350,000 on the
majority shareholder were assigned to the seller.
(b) The note payable to the sellers of Commercial is due in quarterly
installments of $9,750, including interest at 12% per annum, through March
2001. The note is guaranteed by the majority shareholder of the Company.
(c) The note payable, officer, assumed by the Company as part of the purchase
price for the acquisition of King, is due in quarterly installments of
$5,425, including interest at 7% per annum, through September 2000. Life
insurance policies of approximately $100,000 on the majority shareholder
were assigned to the officer.
All of the long-term debt is subordinated to the amounts owed under the
line of credit (Note D).
Minimum principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998...................................................... $177,873
1999...................................................... 190,596
2000...................................................... 120,459
2001...................................................... 9,467
--------
$498,395
========
</TABLE>
NOTE G -- DEFINED CONTRIBUTION PLAN
The Company has a 401(k) retirement plan covering all of its eligible
employees. The plan is funded by employee and discretionary employer
contributions. The employer contributed $3,111, $2,696, $6,568, $1,480 and
$1,955 for the periods of January 1, 1996 through June 29, 1996, June 30, 1996
through December 31, 1996, the year ended December 31, 1997 and the three months
ended March 31, 1997 and 1998, respectively.
F-59
<PAGE> 119
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE H -- COMMITMENTS AND CONTINGENCIES
Leases
On May 7, 1997, the Company entered into an agreement to lease office
space. The lease term is for ten years with an option by the Company to
terminate the agreement in 2004. The lease provides for annual rents ranging
from $77,000 per annum to $113,000 per annum plus escalation clauses relating to
operating expenses and real estate taxes.
The Company leases a retail store under an operating lease expiring in
2001. The lease contains a renewal option for a five-year period and escalation
clauses relating to operating expenses and real estate taxes.
The Company also leases a retail store and office space in Connecticut for
Commercial's operations, under an operating lease expiring in February 2000. The
lease contains a renewal option for a three-year period and a 3% escalation
clause for the renewal period.
Rent expense was $123,831, $125,308 and $312,320 for the periods of January
1, 1996 through June 29, 1996, June 30, 1996 through December 31, 1996 and the
year ended December 31, 1997, respectively, and $75,730 and $95,933 for the
three months ended March 31, 1997 and 1998, respectively.
Future minimum lease payments under all noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998...................................................... $ 283,850
1999...................................................... 290,238
2000...................................................... 246,464
2001...................................................... 204,384
2002...................................................... 95,808
Thereafter................................................ 135,364
----------
$1,256,108
==========
</TABLE>
Employment Contracts
The Company has employment agreements with certain employees expiring in
2001. Future annual payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998...................................................... $ 230,000
1999...................................................... 230,000
2000...................................................... 230,000
2001...................................................... 100,000
----------
$ 790,000
==========
</TABLE>
Concentration
During the periods of January 1, 1996 through June 29, 1996, June 30, 1996
through December 31, 1996, the year ended December 31, 1997 and the three months
ended March 31, 1997 and 1998, one vendor accounted for 57%, 56%, 60%, 58% and
60% of the Company's purchases, respectively.
F-60
<PAGE> 120
KING OFFICE SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE I -- INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
PREDECESSOR
--------------- PERIOD FROM
PERIOD FROM JUNE 30, 1996
JANUARY 1, 1996 (INCEPTION) THREE MONTHS ENDED
THROUGH THROUGH YEAR ENDED MARCH 31,
JUNE 29, DECEMBER 31, DECEMBER 31, ------------------
1996 1996 1997 1997 1998
--------------- ------------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Current
Federal.......................... $ -- $ -- $22,423 $ -- $22,400
State and local.................. 6,911 17,000 34,828 7,576 16,423
Deferred........................... -- -- (41,884) -- 2,900
------ ------- ------- ------ -------
$6,911 $17,000 $15,367 $7,576 $41,723
====== ======= ======= ====== =======
</TABLE>
As discussed in Note A, King was taxed as an S Corporation for Federal and
state tax purposes for the period of January 1, 1996 through June 29, 1996. The
King Group, LLC was taxed as a partnership for Federal and New York State tax
purposes for the periods of June 30, 1996 through May 7, 1997. The Company will
file a consolidated Federal income tax return for the period of May 8, 1997
through December 31, 1997. Had the Company filed a consolidated Federal income
tax return, the provision for income taxes for the periods of January 1, 1996
through June 29, 1996, June 30, 1996 through December 31, 1996 and for the year
ended December 31, 1997 would have been approximately $39,000, $0 and $95,000,
respectively.
Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Allowance for doubtful accounts........................... $ 21,590 $21,590
Deferred compensation..................................... 34,000 34,000
Capitalized inventory costs............................... 2,904 2,904
-------- -------
58,494 58,494
Amortization of goodwill.................................. (16,610) (19,510)
-------- -------
$ 41,884 $38,984
======== =======
</TABLE>
NOTE J -- AGREEMENT WITH OFFICE CENTRE CORPORATION
The Company and its stockholders have entered into a definitive agreement
with Office Centre Corporation and Subsidiaries ("Office Centre") whereby Office
Centre will acquire, by merger, all of the issued and outstanding stock of the
Company, in exchange for cash and common stock of Office Centre upon the
consummation of the initial public offering of Office Centre. The majority owner
of the Company is also the President, Chief Executive Officer and Chairman and,
upon consummation of the proposed transaction, will be a holder of approximately
10% of the outstanding common stock of Office Centre Corporation.
As of December 31, 1997, the amount due from affiliate is comprised of
payments made by (and owed from) the Company on behalf of Office Centre for the
purchase of certain equipment and various operating expenses and deferred
offering costs incurred by Office Centre during the year ended December 31,
1997.
F-61
<PAGE> 121
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
We have audited the accompanying balance sheet of Sierra Office Systems and
Products, Inc. (the "Company"), as of March 31, 1998, and the related statements
of operations and retained earnings and cash flows for the year then ended.
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 above present fairly,
in all material respects, the financial position of Sierra Office Systems and
Products, Inc., as of March 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
April 30, 1998
F-62
<PAGE> 122
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
BALANCE SHEET
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 28,782
Accounts receivable, net of allowance for doubtful
accounts of $54,048.................................... 1,657,334
Inventories............................................... 337,200
Prepaid expenses and other current assets................. 57,972
----------
Total current assets................................. 2,081,288
DUE FROM STOCKHOLDER........................................ 800,000
PROPERTY AND EQUIPMENT -- NET............................... 1,077,888
OTHER ASSETS
Deferred tax benefit...................................... 20,000
Security deposits and other assets........................ 9,559
----------
$3,988,735
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit............................................ $1,083,808
Current portion of long-term debt......................... 55,119
Current maturities of capital lease obligations........... 115,438
Note payable -- customer.................................. 80,000
Accounts payable -- trade................................. 1,105,570
Accrued expenses and other current liabilities............ 299,637
Income taxes payable...................................... 49,000
----------
Total current liabilities............................ 2,788,572
LONG-TERM DEBT, NET......................................... 109,782
CAPITAL LEASE OBLIGATIONS, NET.............................. 389,003
COMMITMENT AND CONTINGENCY
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000 shares authorized;
754 shares issued and outstanding...................... 329,463
Retained earnings......................................... 371,915
----------
701,378
----------
$3,988,735
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-63
<PAGE> 123
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Net sales................................................... $12,789,343
Cost of goods sold.......................................... 8,531,525
-----------
Gross margin......................................... 4,257,818
Operating costs and expenses................................ 3,897,177
Operating income.......................................... 360,641
Other income (expense)
Interest income -- related party.......................... 82,241
Interest expense.......................................... (311,493)
Other expense, net........................................ (8,771)
-----------
Income before provision for income taxes............. 122,618
Provision for income taxes.................................. 49,000
-----------
NET INCOME........................................... 73,618
Retained earnings at beginning of period.................... 298,297
-----------
Retained earnings at end of period.......................... $ 371,915
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-64
<PAGE> 124
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net income................................................ $ 73,618
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization.......................... 172,210
Changes in operating assets and liabilities
Accounts receivable.................................. (229,239)
Inventories.......................................... (89,667)
Prepaid expenses and other current assets............ 112,333
Other assets......................................... 52,338
Accounts payable -- trade............................ 140,454
Note payable -- customer............................. 80,000
Accrued expenses and other current liabilities....... 39,064
-----------
Net cash provided by operating activities......... 351,111
-----------
Cash flows from investing activities
Purchase of property, plant and equipment................. (192,118)
-----------
Cash flows from financing activities
Principal payments on long-term debt...................... (45,814)
Net increase in line of credit............................ 147,962
Capital lease payments.................................... (246,540)
-----------
Net cash used in financing activities............. (144,392)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS............. 14,601
Cash and cash equivalents at beginning of period............ 14,181
-----------
Cash and cash equivalents at end of period.................. $ 28,782
===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest............................................... $ 311,493
Income taxes........................................... 36,418
</TABLE>
The accompanying notes are an integral part of this statement.
F-65
<PAGE> 125
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Sierra Office Systems and Products, Inc. (the "Company") is primarily in
the business of selling office supplies, printing and office furniture to
commercial and retail enterprises located in the State of California and Pacific
region.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Accounting Period
The Company operates on a fiscal year beginning April 1 and ending March
31.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Inventories
Inventories, which consist of office supplies, office furniture and
equipment, printing supplies and stationery, are stated at the lower of cost or
market, determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line and accelerated methods over their estimated useful lives. Repairs
and maintenance are charged to expense as incurred.
Valuation of Long-Lived Assets
The Company reviews long-lived assets held and used for possible impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. The Company has determined no provision is
necessary for the impairment of long-lived assets at March 31, 1998.
Income Taxes
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Deferred taxes primarily
result from temporary differences related to the allowance for doubtful
accounts.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
F-66
<PAGE> 126
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1998
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents, due
from related party, capital lease obligations, line of credit and promissory
notes classified as long-term debt. The carrying value of these instruments
approximates their fair value because of their short maturity and their
stipulated interest rates being based on current market rates.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 1998:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Machinery and equipment.................................... $1,248,464 5 years
Vehicles................................................... 305,918 5 years
Leasehold improvements..................................... 126,621 7 - 10 years
Furniture and fixtures..................................... 103,658 7 years
----------
1,784,661
Less accumulated depreciation and Amortization............. (706,773)
----------
$1,077,888
==========
</TABLE>
Depreciation expense amounted to $172,210 for the year ended March 31,
1998.
NOTE C -- DUE FROM STOCKHOLDER
At March 31, 1998, the Company had an outstanding receivable from Sierra
Dental in the amount of $800,000. Sierra Dental was a company previously owned
by the President of the Company. The President is personally liable for
repayment of the loan. During the year ending March 31, 1998, interest was
charged on this receivable at an effective annual rate of approximately 10%. The
receivable is due no later than December 31, 2001.
NOTE D -- LINE OF CREDIT
The Company has an available revolving line of credit with San Jose
National Bank for up to $1,100,000, which bears interest at a rate of prime plus
7% for balances up to $1,000,000 and prime plus 10% for the balance in excess of
$1,000,000 (18.5% at March 31, 1998). Interest is payable monthly. The line of
credit is collateralized by the assets of the Company. The $1,100,000
line-of-credit agreement states that the maximum principal amount outstanding at
any time be equal to 80% of eligible receivables. In addition, the Company must
maintain certain financial requirements and quarterly ratios in connection with
the line-of-credit agreement. At March 31, 1998, the Company was in compliance
with the covenants. The remaining unused portion of the revolving line of credit
at March 31, 1998 was $16,192. The payment of the line is guaranteed by the
Company's stockholders.
F-67
<PAGE> 127
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1998
NOTE E -- LONG-TERM DEBT
Long-term debt at March 31, 1998 consists primarily of ten notes due to two
financial credit institutions which call for monthly payments ranging from $271
to $636 and bearing interest at rates which range from 5.9% to 12%. These notes
are all collateralized by property of the Company. The final installments of
these notes are due at various times from June 1999 through October 2002.
As of March 31, 1998, aggregate maturities of long-term debt are as
follows:
<TABLE>
<S> <C>
Year ending March 31,
1999...................................................... $ 55,119
2000...................................................... 41,695
2001...................................................... 30,295
2002...................................................... 27,457
2003...................................................... 10,335
--------
$164,901
========
</TABLE>
NOTE F -- CAPITAL LEASES
The Company has entered into capital leases for certain equipment that met
the criteria for capitalization. The assets were recorded at a cost of $914,656,
and the related obligations were recorded at the present value of future minimum
lease payments. Accumulated depreciation at March 31, 1998 was $399,577.
The following is a schedule of future minimum payments under the lease:
<TABLE>
<S> <C>
Year ending March 31,
1999...................................................... $ 215,015
2000...................................................... 183,738
2001...................................................... 178,544
2002...................................................... 63,459
2003...................................................... 7,932
---------
Total lease payments.............................. 648,688
Less portion representing interest.......................... (144,247)
---------
Present value of future lease payments...................... 504,441
Current maturities.......................................... 115,438
---------
$ 389,003
=========
</TABLE>
NOTE G -- COMMITMENT AND CONTINGENCY
Operating Leases
The Company leases its main business location. The lease began June 1,
1997, and expires July 1, 2007. Payments are currently $12,369 per month and
will escalate in increments of 4% annually until July 1, 1999. Payments at that
time will be reduced to $10,727 and will escalate in increments of 4% annually
until July 1, 2007.
F-68
<PAGE> 128
SIERRA OFFICE SYSTEMS AND PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1998
Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
Year ending March 31,
1999...................................................... $ 151,864
2000...................................................... 156,580
2001...................................................... 135,976
2002...................................................... 132,573
2003...................................................... 137,876
Thereafter................................................ 649,622
----------
$1,364,491
==========
</TABLE>
Total rental expense for the year ended March 31, 1998, was $136,553.
Concentration
During the year ended March 31, 1998, one vendor accounted for 48% of the
Company's purchases.
NOTE H -- INCOME TAXES
The provisions for income taxes consist of the following for the year ended
March 31, 1998:
<TABLE>
<S> <C>
Current
Federal................................................... $40,000
State..................................................... 9,000
-------
$49,000
=======
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements for the year ended
March 31, 1998:
<TABLE>
<S> <C>
Current "expected" provision for Federal income taxes....... 25.3%
Adjustments in income taxes resulting from
State income taxes, net of Federal income tax benefit..... 6.6
Permanent differences -- other miscellaneous.............. 8.1
----
Income tax expense.......................................... 40.0%
====
</TABLE>
NOTE I -- SUBSEQUENT EVENT
In April 1998, the Company and its stockholders have entered into a
definitive agreement with Office Centre Corporation and Subsidiaries ("Office
Centre") whereby Office Centre will acquire, by merger, all of the issued and
outstanding stock of the Company, in exchange for cash and common stock of
Office Centre upon the consummation of the initial public offering of Office
Centre.
F-69
<PAGE> 129
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC.
We have audited the accompanying balance sheet of Office Solutions Business
Products and Services, Inc. (the "Company"), as of September 30, 1997, and the
related statements of operations and retained earnings and cash flows for the
year then ended. 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 above present fairly,
in all material respects, the financial position of Office Solutions Business
Products and Services, Inc., as of September 30, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 13, 1998
F-70
<PAGE> 130
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 123,973 $ 244,498
Accounts receivable, less allowances of $25,000 at
September 30, 1997 and March 31, 1998.................. 1,151,921 1,335,026
Inventories............................................... 354,078 329,903
Prepaid expenses and other current assets................. 44,674 92,365
---------- ----------
Total current assets................................. 1,674,646 2,001,792
PROPERTY AND EQUIPMENT -- NET............................... 247,996 212,384
---------- ----------
$1,922,642 $2,214,176
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capital lease obligations........... $ 55,789 $ 47,611
Accounts payable and accrued expenses..................... 1,179,074 1,134,208
Income taxes payable...................................... 59,000 198,831
---------- ----------
Total current liabilities............................ 1,293,863 1,380,650
CAPITAL LEASE OBLIGATIONS, NET.............................. 88,742 68,770
COMMITMENTS AND CONTINGENCY
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized, 1,500 shares;
issued and outstanding, 1,000 shares as of September
30, 1997 and March 31, 1998, respectively.............. 434,642 434,642
Retained earnings......................................... 105,395 330,114
---------- ----------
540,037 764,756
---------- ----------
$1,922,642 $2,214,176
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 131
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ------------------------
SEPTEMBER 30, MARCH 31, MARCH 31,
1997 1997 1998
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................ $9,630,943 $4,160,569 $6,472,780
Cost of goods sold................................... 6,994,643 2,951,197 4,737,192
---------- ---------- ----------
Gross margin.................................. 2,636,300 1,209,372 1,735,588
Operating costs and expenses......................... 2,468,759 1,120,611 1,356,657
---------- ---------- ----------
Operating income.............................. 167,541 88,761 378,931
Other income (expense)
Interest income.................................... 10,473 4,231 4,024
Interest expense................................... (13,619) (7,151) (7,705)
---------- ---------- ----------
Income before provision for income taxes...... 164,395 85,841 375,250
Provision for income taxes........................... 59,000 30,000 150,531
---------- ---------- ----------
NET INCOME.................................... 105,395 55,841 224,719
Retained earnings at beginning of period............. -- -- 105,395
---------- ---------- ----------
Retained earnings at end of period................... $ 105,395 $ 55,841 $ 330,114
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE> 132
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ---------------------
SEPTEMBER 30, MARCH 31, MARCH 31,
1997 1997 1998
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $105,395 $ 55,841 $224,719
Adjustments to reconcile net income to net cash (used
in) provided by operating activities
Depreciation and amortization........................ 61,856 30,692 40,268
Changes in operating assets and liabilities
Accounts receivable................................ (273,157) (58,375) (183,105)
Inventories........................................ (145,412) (27,400) 24,175
Prepaid expenses and other current assets.......... (46,497) (18,048) (47,691)
Accounts payable and accrued expenses.............. 160,786 (79,213) (44,866)
Income taxes payable............................... 59,000 30,000 139,831
-------- -------- --------
Net cash (used in) provided by operating
activities......................................... (78,029) (66,503) 153,331
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment...................... (33,150) (3,075) (4,656)
-------- -------- --------
Cash flows from financing activities
Principal payments on capital lease obligations......... (41,708) (12,296) (28,150)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (152,887) (81,874) 120,525
Cash and cash equivalents at beginning of period.......... 276,860 276,860 123,973
-------- -------- --------
Cash and cash equivalents at end of period................ $123,973 $194,986 $244,498
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest............................................. $ 5,000 $ 6,000 $ 7,000
Income taxes......................................... -- -- 16,000
Noncash investing and financial activities:
Equipment purchased under capital leases............. 90,290 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE> 133
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Office Solutions Business Products and Services, Inc. (the "Company") is
primarily in the business of selling office supplies to commercial and retail
enterprises located in Southern California.
The Company was formed on October 1, 1996 when the stockholders exchanged
certain assets and liabilities of their wholly-owned business of the Company in
exchange for all of the Company's common stock. The assets and liabilities were
valued at their historical cost.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Inventories
Inventories, which consist of office supplies, printing supplies, and
stationery, are stated at the lower of cost or market, determined on a first-in,
first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line and accelerated methods over their estimated useful lives. Leased
property meeting certain criteria is capitalized and the present value of the
related lease payments is recorded as a liability. Amortization of capitalized
leased assets is computed on a straight-line method over the term of the lease.
Repairs and maintenance are charged to expense as incurred.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents and
capital lease obligations. The carrying value of these instruments approximates
their fair value because of their short maturity and their stipulated interest
rates being based on current market rates.
F-74
<PAGE> 134
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Interim Reporting
The accompanying financial information as of the six months ended March 31,
1997 and 1998, including such information in the notes to financial statements
is unaudited. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of the results of any other interim period or for an entire year.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31, ESTIMATED
1997 1998 USEFUL LIVES
------------- --------- ------------
<S> <C> <C> <C>
Vehicles...................................... $ 291,994 $ 291,994 5 years
Furniture and fixtures........................ 132,012 132,012 7 years
Data processing equipment..................... 13,740 18,396 5 years
Leasehold improvements........................ 26,518 26,518 7 - 15 years
--------- ---------
464,264 468,920
Accumulated depreciation and amortization..... (216,268) (256,536)
--------- ---------
$ 247,996 $ 212,384
========= =========
</TABLE>
Depreciation expense amounted to $61,856, $40,268 and $31,052 for the year
ended September 30, 1997, and the six months ended March 31, 1997 and 1998,
respectively.
NOTE C -- CAPITAL LEASES
The Company leases certain vehicles included in property and equipment that
meet the criteria for capitalization. The assets and obligations were recorded
at $241,337. Accumulated amortization was $101,437 and $130,182 as of September
30, 1997 and March 31, 1998, respectively.
The following is a schedule of future minimum payments under the leases:
<TABLE>
<S> <C>
Year ending September 30,
1998...................................................... $ 71,205
1999...................................................... 49,079
2000...................................................... 33,440
2001...................................................... 17,755
--------
Total lease payments.............................. 171,479
Less portion representing interest.......................... (26,948)
--------
Present value of future lease payments...................... 144,531
Current maturities.......................................... 55,789
--------
$ 88,742
========
</TABLE>
F-75
<PAGE> 135
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE D -- COMMITMENTS AND CONTINGENCY
Operating Lease -- Related Party
The Company leases its corporate office from the stockholders on a
month-to-month lease. Payments are currently $6,000 per month. The stockholders
have a $378,000 note payable related to the corporate office that is guaranteed
by the Company.
Total rental expense and payments to the stockholders was $49,148 for the
year ended September 30, 1997 and $45,949 for the six months ended March 31,
1998.
Operating Lease -- Other
The Company leases office space under an operating lease expiring October
31, 1999. Future rental obligations are $18,000 per year for the years ending
September 30, 1998 and 1999.
Concentration
During the year ended September 30, 1997 and the six months ended March 31,
1997 and 1998, two vendors accounted for approximately 70% of the Company's
purchases, respectively.
NOTE E -- DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a retirement savings and investment plan for substantially
all full-time employees, which allows participants to make contributions by
salary reduction pursuant to Section 401(k) of the Internal Revenue Code.
Matching employer contributions to the plan are limited to 6% of a participant's
compensation. Employer contributions to the plan for the year ended September
30, 1997 were $25,017 and $8,154 and $5,816 for the six months ended March 31,
1997 and 1998, respectively.
NOTE F -- INCOME TAXES
Income taxes currently payable are provided for on taxable income at the
statutory rates applicable to such income. Deferred taxes have not been provided
for as the tax basis amounts of the Company's assets and liabilities approximate
their reported amounts in the accompanying financial statements.
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, -------------------
1997 1997 1998
------------- ------- --------
<S> <C> <C> <C>
Current
Federal......................................... $49,000 $25,000 $128,531
State........................................... 10,000 5,000 22,000
------- ------- --------
$59,000 $30,000 $150,531
======= ======= ========
</TABLE>
F-76
<PAGE> 136
OFFICE SOLUTIONS BUSINESS PRODUCTS AND SERVICES, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ---------------------
1997 1997 1998
------------- -------- ---------
<S> <C> <C> <C>
Current "expected" provision for Federal income
taxes......................................... 30% 29% 34%
Adjustments in income taxes resulting from State
tax, net of Federal benefit................... 6 6 6
-- -- --
Income tax expense.............................. 36% 35% 40%
== == ==
</TABLE>
NOTE G -- SUBSEQUENT EVENT
In April 1998, the Company and its stockholders have entered into a
definitive agreement with Office Centre Corporation and Subsidiaries ("Office
Centre") whereby Office Centre will acquire, by merger, all of the issued and
outstanding stock of the Company, in exchange for cash and common stock of
Office Centre upon the consummation of the initial public offering of Office
Centre.
F-77
<PAGE> 137
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
GREENWOOD OUTFITTERS, INC.
We have audited the accompanying balance sheets of Greenwood Outfitters,
Inc. (the "Company") as of December 31, 1996 and 1997 and the related statements
of operations and retained earnings, and 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 financial statements based
on our audits.
We conducted our audits 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 audits provide 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 Greenwood Outfitters, Inc.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
January 30, 1998
F-78
<PAGE> 138
GREENWOOD OUTFITTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................. $ 130,941 $ 222,025 $ 347,668
Accounts receivable.................................. 674,635 977,622 1,086,158
Inventories.......................................... 236,762 129,248 166,136
Prepaid expenses and other current assets............ 6,687 11,819 16,604
---------- ---------- ----------
Total current assets......................... 1,049,025 1,340,714 1,616,566
PROPERTY AND EQUIPMENT -- NET.......................... 64,520 102,165 117,957
---------- ---------- ----------
$1,113,545 $1,442,879 $1,734,523
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- trade............................ $ 341,093 $ 473,926 $ 550,867
Accrued expenses and other current liabilities....... 42,012 118,734 125,171
---------- ---------- ----------
Total current liabilities.................... 383,105 592,660 676,038
COMMITMENT
STOCKHOLDERS' EQUITY
Common stock -- no par value; authorized, 1,000,000
shares; issued, 50,000 shares..................... 150,000 150,000 150,000
Retained earnings.................................... 710,440 830,219 1,038,485
---------- ---------- ----------
860,440 980,219 1,188,485
Less treasury stock -- 25,000 shares, at cost........ (130,000) (130,000) (130,000)
---------- ---------- ----------
730,440 850,219 1,058,485
---------- ---------- ----------
$1,113,545 $1,442,879 $1,734,523
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 139
GREENWOOD OUTFITTERS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................. $7,296,089 $8,920,139 $2,051,384 $2,718,212
Cost of goods sold........................ 4,805,822 5,885,430 1,328,731 1,737,804
---------- ---------- ---------- ----------
Gross margin.................... 2,490,267 3,034,709 722,653 980,408
Operating costs and expenses.............. 2,182,847 2,651,594 581,823 701,308
---------- ---------- ---------- ----------
Income before income taxes...... 307,420 383,115 140,830 279,100
State income tax expense.................. 13,330 3,336 333 834
---------- ---------- ---------- ----------
NET INCOME...................... 294,090 379,779 140,497 278,266
Retained earnings at beginning of
period.................................. 476,350 710,440 710,440 830,219
Distributions............................. (60,000) (260,000) (30,000) (70,000)
---------- ---------- ---------- ----------
Retained earnings at end of period........ $ 710,440 $ 830,219 $ 820,937 $1,038,485
========== ========== ========== ==========
Unaudited Pro Forma Information
Pro forma net income before provision
for income taxes..................... $ 307,420 $ 383,115 $ 140,830 $ 279,100
Provision for income taxes.............. 120,021 153,698 56,247 111,472
---------- ---------- ---------- ----------
Pro forma income................ $ 187,399 $ 229,417 $ 84,583 $ 167,628
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE> 140
GREENWOOD OUTFITTERS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ----------------------
1996 1997 1997 1998
--------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income.................................. $294,090 $ 379,779 $ 140,497 $ 278,266
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation........................... 45,249 53,726 9,765 9,592
Gain on disposal of property and
equipment........................... -- (1,421) -- --
Changes in operating assets and
liabilities
Accounts receivable................. (64,962) (302,987) (150,082) (108,536)
Inventories......................... (70,372) 107,514 160,111 (36,888)
Prepaid expenses and other current
assets............................ 6,486 (5,132) 792 (4,785)
Accounts payable -- trade........... (13,359) 132,833 33,080 76,941
Accrued expenses and other
liabilities....................... (9,762) 76,722 9,067 6,437
-------- --------- --------- ---------
Net cash provided by operating
activities.......................... 187,370 441,034 203,230 221,027
-------- --------- --------- ---------
Cash flows from investing activities
Purchase of property and equipment.......... (33,557) (93,525) (18,384) (25,384)
Proceeds from disposal of property and
equipment................................ -- 3,575 -- --
-------- --------- --------- ---------
Net cash used in investing activities.... (33,557) (89,950) (18,384) (25,384)
-------- --------- --------- ---------
Cash flows from financing activities
Distributions to shareholders............... (60,000) (260,000) (30,000) (70,000)
-------- --------- --------- ---------
INCREASE IN CASH......................... 93,813 91,084 154,846 125,643
Cash at beginning of period................... 37,128 130,941 130,941 222,025
-------- --------- --------- ---------
Cash at end of period......................... $130,941 $ 222,025 $ 285,787 $ 347,668
======== ========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for Income
taxes.................................... $ 13,330 $ 3,336 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 141
GREENWOOD OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Greenwood Outfitters, Inc. (the "Company") is an office supply dealer to
businesses in the Dallas/Fort Worth area.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Inventories
Inventories, which consist of merchandise held for sale, are stated at the
lower of cost or market. Cost is determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using accelerated methods over the
estimated useful lives of the assets ranging from five to seven years. Repairs
and maintenance are charged to expense as incurred.
Income Taxes
Federal income taxes are payable personally by the stockholders of the
Company pursuant to an election under Subchapter S of the Internal Revenue
Service Code not to have the Company taxed as a corporation. Accordingly,
federal income taxes are not reflected in the accompanying financial statements.
The unaudited pro forma income tax information included in the Statements
of Operations and Retained Earnings 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 and state income taxes for all periods
presented.
Interim Reporting
The accompanying financial information as of the three months ended March
31, 1997 and 1998, including such information in the notes to financial
statements, is unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for any interim period are
not necessarily indicative of the results of any other interim period or for an
entire year.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
F-82
<PAGE> 142
GREENWOOD OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31, ESTIMATED
1996 1997 1998 USEFUL LIVES
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Furniture and fixtures............... $ 14,029 $ 14,029 $ 14,029 5 - 7 years
Equipment............................ 242,304 321,403 346,787 5 - 7 years
Vehicles............................. 24,016 24,016 24,016 5 years
--------- --------- --------
280,349 359,448 384,832
Less accumulated depreciation........ (215,829) (257,283) 266,875
--------- --------- --------
$ 64,520 $ 102,165 $117,957
========= ========= ========
</TABLE>
NOTE C -- COMMITMENT
Leases
The Company leases office and warehouse space under a noncancellable
operating lease that expired in February 1998. Rent expense was approximately
$46,000, $47,000, $12,000 and $12,000 for the years ended December 31, 1996 and
1997 and the three-month periods ended March 31, 1997 and 1998, respectively.
NOTE D -- AGREEMENT WITH OFFICE CENTRE CORPORATION
The Company and its stockholders entered into a definitive agreement with
Office Centre Corporation and Subsidiaries ("Office Centre") in October 1997,
whereby Office Centre will acquire, by merger, all of the issued and outstanding
stock of the Company, in exchange for cash and common stock of Office Centre
upon the consummation of the initial public offering of Office Centre.
F-83
<PAGE> 143
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
GEORGIA IMPRESSION PRODUCTS, INC.
We have audited the accompanying balance sheet of Georgia Impression
Products, Inc. (the "Company"), as of June 30, 1997, and the related statements
of operations and retained earnings and cash flows for the year then ended.
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 above present fairly,
in all material respects, the financial position of Georgia Impression Products,
Inc., as of June 30, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
March 13, 1998
F-84
<PAGE> 144
GEORGIA IMPRESSION PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
-------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $180,082 $306,920
Accounts receivable....................................... 464,255 360,899
Inventories............................................... 48,970 54,483
Prepaid expenses and other current assets................. -- 3,441
-------- --------
Total current assets................................. 693,307 725,743
PROPERTY AND EQUIPMENT -- NET............................... 56,455 49,702
OTHER ASSETS
Security deposits......................................... 650 650
-------- --------
$750,412 $776,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 35,210 $ 23,967
Notes payable -- stockholders............................. 43,245 --
Accounts payable -- trade................................. 273,492 158,358
Accrued liabilities....................................... 14,625 8,815
Income taxes payable...................................... 49,101 125,000
-------- --------
Total current liabilities............................ 415,673 316,140
LONG-TERM DEBT, NET......................................... 23,538
COMMITMENT AND CONTINGENCY
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 100,000 shares authorized
shares; 48,000 shares issued; 16,000 shares outstanding
at June 30, 1997 and March 31, 1998.................... 48,000 48,000
Retained earnings......................................... 395,391 544,145
Treasury stock............................................ (132,190) (132,190)
-------- --------
311,201 459,955
-------- --------
$750,412 $776,095
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE> 145
GEORGIA IMPRESSION PRODUCTS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ---------------------------
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................ $3,390,319 $2,309,190 $ 2,644,626
Cost of goods sold................................... 2,477,472 1,725,087 1,923,868
---------- ---------- -------------
Gross margin.................................. 912,847 584,103 720,758
Operating costs and expenses......................... 745,488 439,722 499,311
---------- ---------- -------------
Operating income.............................. 167,359 144,381 221,447
Other income (expense)
Interest income.................................... 4,843 1,640 4,216
Interest expense................................... (1,271) (940) (3,010)
---------- ---------- -------------
Income before provision for income taxes...... 170,931 145,081 222,653
Provision for income taxes........................... 55,374 47,664 73,899
---------- ---------- -------------
NET INCOME.................................... 115,557 97,417 148,754
Retained earnings at beginning of period............. 279,834 279,834 395,391
---------- ---------- -------------
Retained earnings at end of period................... $ 395,391 $ 377,251 $ 544,145
========== ========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-86
<PAGE> 146
GEORGIA IMPRESSION PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ----------------------
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1998
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 115,557 $ 97,417 $148,754
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.................... 3,536 1,394 6,753
Provision for bad debts.......................... 8,542 -- --
Changes in operating assets and liabilities
Accounts receivable........................... (94,170) 13,722 103,356
Inventories................................... 1,620 (22,641) (5,513)
Prepaid expenses and other current assets..... 850 (4,665) (3,441)
Accounts payable -- trade..................... 25,039 (24,321) (115,134)
Accrued expenses and other current
liabilities................................. 4,210 (5,000) (5,810)
Income taxes payable.......................... 46,401 45,401 75,899
---------- -------- --------
Net cash provided by operating activities........ 111,585 101,307 204,864
---------- -------- --------
Cash flows from investing activities
Purchase of property and equipment.................... (22,604) (8,904) --
---------- -------- --------
Net cash used in investing activities............ (22,604) (8,904) --
---------- -------- --------
Cash flows from financing activities
Principal payments on long-term debt.................. (24,676) (18,507) (34,781)
Proceeds from note payable to shareholders............ 43,244 -- --
Payments on note payable to shareholders.............. (39,094) (31,734) (43,245)
---------- -------- --------
Net cash used in financing activities............ (20,526) (50,241) (78,026)
---------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS............ 68,455 42,162 126,838
Cash and cash equivalents at beginning of period........ 111,627 111,627 180,082
---------- -------- --------
Cash and cash equivalents at end of period.............. $ 180,082 $153,789 $306,920
========== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest........................................... $ 1,271 $ 940 $ 3,010
Income taxes....................................... 8,919 4,665 2,970
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE> 147
GEORGIA IMPRESSION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Georgia Impression Products, Inc. (the "Company") is primarily in the
business of selling office supplies and office equipment to commercial and
retail enterprises located in the Atlanta, Georgia region.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
Accounting Period
The Company elected to operate on a fiscal year beginning July 1.
Interim Reporting
The accompanying financial information as of the nine months ended March
31, 1997 and 1998, including such information in the notes to financial
statements, is unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for any interim period are
not necessarily indicative of the results of any other interim period or for an
entire year.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped to customers.
Inventories
Inventories, which consist of office supplies, printing supplies and
stationery, are stated at the lower of cost or market, determined on a first-in,
first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line method over their estimated useful lives. Repairs and maintenance
are charged to expense as incurred.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
F-88
<PAGE> 148
GEORGIA IMPRESSION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents,
notes payable to stockholders and promissory notes classified as long-term debt.
The carrying value of these instruments approximates their fair value because of
their short maturity and their stipulated interest rates approximate current
market rates.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, ESTIMATED
1997 1998 USEFUL LIVES
-------- --------- ------------
<S> <C> <C> <C>
Equipment and furniture................................. $144,310 $144,310 5 - 7 years
Leasehold improvements.................................. 4,713 4,713 7 - 15 years
-------- --------
149,023 149,023
Less accumulated depreciation and amortization.......... 92,568 99,321
-------- --------
$ 56,455 $ 49,702
======== ========
</TABLE>
Depreciation expense amounted to $3,500, $1,394 and $6,753 for the year
ended June 30, 1997, and the nine months ended March 31, 1997 and 1998,
respectively.
NOTE C -- NOTE PAYABLE -- STOCKHOLDERS
Note payable -- stockholders represents bonuses earned by stockholders
during the year ended June 30, 1997, and will be paid in equal monthly
installments of $1,880 to each stockholder through May 31, 1998. The notes bear
interest at 8.0%.
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
-------- ---------
<S> <C> <C>
Payable to former stockholder, principal of $2,056 paid
monthly, no interest, final installment due July 31, 1998
(see Note E).............................................. $26,732 $ 8,224
Installment loans to Nations Bank, collateralized by
vehicles, interest at 8.76%, $1,018 paid monthly, final
installment May 13, 2000.................................. 32,016 15,743
------- -------
$58,748 $23,967
======= =======
</TABLE>
As of June 30, 1997, aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998.................................................. $35,210
1999.................................................. 12,815
2000.................................................. 10,723
-------
$58,748
=======
</TABLE>
F-89
<PAGE> 149
GEORGIA IMPRESSION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
The Company expects to repay the debt during the next fiscal year;
therefore, the debt has been classified as a current liability, as of March 31,
1998.
NOTE E -- STOCK REDEMPTION
On December 29, 1995, the Company purchased 24,000 shares of stock in the
Company from one of its stockholders at a cost of $86,690. The repurchase
agreement provides for: (i) a $25,000 cash payment and (ii) a note payable in
the amount of $61,690 with no stated interest rate. The note payable is payable
in monthly installments of $2,056 through July 31, 1998.
NOTE F -- COMMITMENT AND CONTINGENCY
Operating Lease
The Company leases its main business location under a lease agreement that
expires November 30, 1998. Payments are currently $1,592 per month.
Total rental expense for the year ended June 30, 1997 and the nine-month
periods ended March 31, 1997 and 1998, was $18,430, $15,246 and $15,914,
respectively.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998.................................................. $19,104
1999.................................................. 7,962
-------
$27,066
=======
</TABLE>
Concentration
During the year ended June 30, 1997 and each of the nine-month periods
ended March 31, 1997 and 1998, one vendor accounted for 58%, 45% and 49% of the
Company's purchases, respectively.
NOTE G -- DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a retirement savings and investment plan for substantially
all full-time employees, which allows participants to make contributions by
salary reduction pursuant to Section 401(k) of the Internal Revenue Code.
Matching employer contributions to the plan are limited to 35% of a
participant's contribution. Employer contributions to the plan for the year
ended June 30, 1997 were $8,670 and $5,108 for the nine months ended March 31,
1998.
F-90
<PAGE> 150
GEORGIA IMPRESSION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1997
(Information relating to March 31, 1997 and 1998 is unaudited)
NOTE H -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ----------------------
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Current
Federal........................................... $45,220 $38,959 $60,540
State............................................. 10,154 8,705 13,359
------- ------- -------
$55,374 $47,664 $73,899
======= ======= =======
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ----------------------
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Current "expected" provision for Federal income
taxes............................................. 28.0% 28.6% 28.9%
Adjustments in income taxes resulting from
State income taxes, net of Federal income tax
benefit........................................ 4.0 4.3 4.3
Permanent differences -- other miscellaneous...... .4 -- --
---- ---- ----
Income tax expense.................................. 32.4% 32.9% 33.2%
==== ==== ====
</TABLE>
NOTE I -- SUBSEQUENT EVENT
In May 1998, the Company and its stockholders have entered into a
definitive agreement with Office Centre Corporation and Subsidiaries ("Office
Centre") whereby Office Centre will acquire, by merger, all of the issued and
outstanding stock of the Company, in exchange for cash and common stock of
Office Centre upon the consummation of the initial public offering of Office
Centre.
F-91
<PAGE> 151
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MEGA OFFICE FURNITURE, L.L.C.
We have audited the accompanying balance sheets of MEGA Office Furniture,
L.L.C. (the "Company"), (formerly known as U.S. Office Furniture, L.L.C.), as of
December 28, 1996 and January 3, 1998, and the related statements of operations,
changes in members' capital and cash flows for the four-month period from
September 1, 1996 (inception of operations) to December 28, 1996 and the year
ended January 3, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits 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 audits provide 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 MEGA Office Furniture,
L.L.C. as of December 28, 1996 and January 3, 1998, and the results of its
operations, changes in members' equity and its cash flows for the four-month
period from September 1, 1996 (inception of operations) to December 28, 1996 and
the year ended January 3, 1998 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
February 25, 1998
F-92
<PAGE> 152
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 208,459 $ 218,415
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and $15,000, respectively.......... 461,248 755,647
Other receivables......................................... 129,964 129,389
Inventories............................................... 1,037,107 1,498,602
Other assets.............................................. 5,909 62,368
---------- -----------
Total current assets.............................. 1,842,687 2,664,421
PROPERTY AND EQUIPMENT, NET................................. 207,687 424,049
INTANGIBLES AND OTHER ASSETS, NET........................... 1,892,991 1,668,999
---------- -----------
$3,943,365 $ 4,757,469
========== ===========
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 40,763 $ 25,238
Notes payable -- demand................................... -- 715,228
Due to related parties -- current portion................. 964,000 432,588
Accounts payable.......................................... 593,652 773,766
Accrued liabilities....................................... 127,814 124,459
Customer deposits and other liabilities................... 116,701 201,174
---------- -----------
Total current liabilities......................... 1,842,930 2,272,453
LONG-TERM DEBT, net......................................... 201,287 183,454
COMMITMENTS AND CONTINGENCIES
MEMBERS' CAPITAL
Contributed capital, 295,294 and 367,977 Class A Units,
respectively........................................... 2,510,000 4,010,000
Accumulated deficit....................................... (240,852) (1,529,696)
---------- -----------
2,269,148 2,480,304
Subscriptions and notes receivable issued for Class A
Units.................................................. (370,000) (178,742)
---------- -----------
1,899,148 2,301,562
---------- -----------
$3,943,365 $ 4,757,469
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-93
<PAGE> 153
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 1,
1996 (INCEPTION)
THROUGH YEAR ENDED
DECEMBER 28, JANUARY 3,
1996 1998
---------------- -----------
<S> <C> <C>
Net sales................................................... $2,727,645 $10,322,689
Cost of sales............................................... 1,844,771 7,146,105
---------- -----------
Gross margin...................................... 882,874 3,176,584
---------- -----------
Store operating expenses.................................... 785,142 3,205,577
General and administrative expenses......................... 344,839 1,181,202
---------- -----------
Loss from operations.............................. (247,107) (1,210,195)
Interest income............................................. 2,703 6,026
Interest expense............................................ (34,318) (145,563)
Other income, net........................................... 37,870 60,888
---------- -----------
NET LOSS.......................................... $ (240,852) $(1,288,844)
========== ===========
Unaudited Pro Forma Information
Pro forma net loss before benefit for income taxes........ $ (240,852) $(1,288,844)
Benefit for income taxes.................................. 66,184 396,973
---------- -----------
Pro forma loss.................................... $ (174,668) $ (891,871)
========== ===========
</TABLE>
The accompanying notes are integral part of these statements.
F-94
<PAGE> 154
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
<TABLE>
<CAPTION>
SUBSCRIPTIONS
CONTRIBUTED ACCUMULATED AND NOTES
CAPITAL DEFICIT RECEIVABLE TOTAL
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Members' initial capital
contributions......................... $2,510,000 $ -- $ -- $ 2,510,000
Subscriptions and notes receivable
issued for Class A Units........... -- -- (370,000) (370,000)
Net loss.............................. -- (240,852) -- (240,852)
---------- ----------- --------- -----------
Members' capital at December 28, 1996... 2,510,000 (240,852) (370,000) 1,899,148
Members' capital contributions........ 1,500,000 -- -- 1,500,000
Collections of subscriptions and notes
receivable issued for Class A
Units.............................. -- -- 191,258 191,258
Net loss.............................. -- (1,288,844) -- (1,288,844)
---------- ----------- --------- -----------
Members' capital at January 3, 1998..... $4,010,000 $(1,529,696) $(178,742) $ 2,301,562
========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-95
<PAGE> 155
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 1,
1996 (INCEPTION)
THROUGH YEAR ENDED
DECEMBER 28, JANUARY 3,
1996 1998
---------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $ (240,852) $(1,288,844)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation........................................... 18,892 120,127
Amortization of intangible assets...................... 75,392 296,412
Loss on disposal of assets............................. -- 233
Changes in operating assets and liabilities, net of the
effects of acquisition
Increase in receivables.............................. (11,768) (294,399)
Decrease in other assets............................. (80,606) (54,532)
Increase in inventory................................ (10,467) (461,495)
Increase in accounts payable and other liabilities... 21,523 261,232
---------- -----------
Net cash used in operating activities............. (227,886) (1,421,266)
---------- -----------
Cash flows from investing activities
Purchase of assets of OFP................................. (800,000) --
Purchase of assets of MacThrift........................... -- (34,833)
Proceeds from sale of property and equipment.............. 15,500 500
Additions to property and equipment....................... (43,866) (324,786)
---------- -----------
Net cash used in investing activities............. (828,366) (359,119)
---------- -----------
Cash flows from financing activities
Members' contributed capital.............................. 2,140,000 1,691,258
Repayment of debt and other obligations................... (582,158) (1,827,206)
Organization, acquisition and financing costs............. (293,131) (38,939)
Proceeds from notes payable............................... -- 1,250,000
Proceeds from bank borrowings............................. -- 715,228
---------- -----------
Net cash provided by financing activities......... 1,264,711 1,790,341
---------- -----------
NET INCREASE IN CASH.............................. 208,459 9,956
Cash at beginning of period................................. -- 208,459
---------- -----------
Cash at end of period....................................... $ 208,459 $ 218,415
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest............................................... $ 34,318 $ 145,563
Noncash transactions
Notes and subscriptions receivable for issuance of Class A
Units.................................................. 370,000 --
Issuance of note in connection with acquisition of
business............................................... 534,000 --
Execution of noncompetition and employment agreements in
connection with acquisition of business................ 530,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-96
<PAGE> 156
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS
December 28, 1996 and January 3, 1998
NOTE A -- ORGANIZATION AND ACQUISITIONS
MEGA Office Furniture, L.L.C. (the "Company"), formerly known as U.S.
Office Furniture, L.L.C., was organized on May 9, 1996 as a Virginia limited
liability company for the purpose of establishing and operating a chain of
retail office furniture superstores. The Company began operations effective
September 1, 1996, when it purchased substantially all of the assets and assumed
specified liabilities of Office Furniture Plus, Inc. ("OFP"), an office
furniture retailer with operations in Richmond and Chesapeake, Virginia, for an
initial cash payment of $800,000 and a total consideration of approximately $2
million. The Company financed the OFP acquisition and its initial working
capital requirements by the receipt of equity capital of $2,140,000 pursuant to
the terms of a confidential memorandum dated August 16, 1996 for the private
placement of equity units and the assumption of certain other obligations
related to the purchase of OFP totaling $1 million. The OFP transaction was
accounted for as a purchase and the purchase price and the related acquisition
costs were allocated to the assets acquired and liabilities assumed based on
their fair values at the date of acquisition.
Effective April 25, 1997, the Company purchased, for a nominal price,
certain assets of Southern Office Furniture Distributors, Inc. related to the
operations of MacThrift Office Furniture of Richmond. These assets consisted
primarily of customer lists, open orders and outstanding bids and proposals.
This transaction was also accounted for as a purchase.
On September 11, 1997, the Company received an equity contribution, from an
affiliate of the Company's Chairman, to purchase a 19% interest in the Company
for a cash consideration of $1.5 million. These proceeds were used to reduce
certain obligations associated with the purchase of OFP and for general working
capital requirements.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Period
The Company's fiscal year comprises the 52 or 53 weeks ending on the last
Saturday closest to the end of the calendar year. The accompanying financial
statements are for the 17-week period ended December 28, 1996 and the 53-week
period ended January 3, 1998.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method.
Property and Equipment
Additions to property and equipment, other than capital leases, are
recorded at cost. Capital leases are recorded at the lesser or fair value or the
discounted present value of the minimum lease payments. Depreciation is computed
by the straight-line method over the estimated useful lives of the assets.
Capital leases are amortized by the straight-line method over the estimated
useful lives of the leased assets. Leasehold improvements are amortized by the
straight-line method over the shorter of the estimated useful life of the asset
or the term of the lease.
F-97
<PAGE> 157
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
Intangibles
Goodwill and other intangibles related to the acquisition of OFP are being
amortized over a period of 15 years using the straight-line method. Organization
costs and customer lists are being amortized over periods of 10 years and 5
years, respectively, using the straight-line method. Deferred employment costs
and similar intangibles are being amortized over the terms of the related
contracts, which are generally 2 years. Accumulated amortization at December 28,
1996 and January 3, 1998 was $75,392 and $371,804, respectively.
Revenue Recognition and Customer Deposits
Revenue is recognized at the time merchandise is shipped to the customer.
The Company generally offers extended payment terms to customers other than
individuals and requires deposits from customers for initial purchases and
special order transactions. Customer deposits are applied against a customer's
account receivable balance upon delivery of merchandise.
Valuation of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company has determined no provision is necessary for the impairment of
long-lived assets at December 28, 1996 and January 3, 1998.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Income Taxes
Income taxes are not reflected in the accompanying financial statements
because the Company is treated as a partnership for income tax purposes, and the
responsibility for income taxes is that of the members and not that of the
Company.
The unaudited pro forma income tax information included in the Statements
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 and state income taxes for all periods presented.
Fair Value of Financial Instruments
Financial instruments consist principally of cash, promissory notes due
from related parties, capital lease obligations, line of credit and promissory
notes classified as long-term debt. The carrying value of these instruments
approximates their fair value because of their short maturity and their
stipulated interest rates being based on current market rates.
NOTE C -- FINANCING ARRANGEMENTS AND LIQUIDITY ISSUES
The Company reported a cumulative net loss of $1,529,696 since beginning
operations on September 1, 1996 and is continuing to require cash on a monthly
basis as it develops and refines its business model. However, management has
prepared a business plan for the current operations to include a financial
forecast through
F-98
<PAGE> 158
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
March 1999 which indicates that the working capital at January 3, 1998 together
with the line of credit facility finalized in November 1997 (see Note E) will
adequately fund the Company's cash requirements for this period. To fully
execute its expansion strategy and open superstores in other markets, additional
equity capital will be required and management is continuing to explore these
opportunities.
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 28, JANUARY 3, USEFUL
1996 1998 LIVES
------------ ---------- ---------
<S> <C> <C> <C>
Leasehold improvements................................. $ 61,003 $302,611 2-5 years
Fixtures and equipment................................. 145,949 231,273 3-5 years
Transportation equipment............................... 19,122 28,412 3-5 years
--------- --------
226,074 562,296
Less accumulated depreciation.......................... 18,387 138,247
--------- --------
$ 207,687 $424,049
========= ========
</TABLE>
Depreciation expense for the periods ended December 28, 1996 and January 3,
1998 was $18,892 and $120,127, respectively.
NOTE E -- NOTES PAYABLE AND LONG-TERM DEBT
Balances outstanding comprise:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
Demand notes payable to commercial bank (a)................. $ -- $ --
Line of credit demand borrowings with a financial services
company (b)............................................... -- 715,228
10% subordinated convertible note payable to OFP (payable
within one year)(c)....................................... 534,000 267,588
Employment and noncompete contracts (payable within one
year) (d)................................................. 430,000 165,000
11.5% subordinated convertible note, due August 31, 1999
(e)....................................................... 150,000 150,000
Capital lease obligations ($26,763 and $25,238 payable
within one year, respectively) (Note G)................... 78,050 58,692
Installment purchase (payable within one year).............. 14,000 --
----------- -----------
1,206,050 1,356,508
Less amount due within one year............................. (1,004,763) (1,173,054)
----------- -----------
$ 201,287 $ 183,454
=========== ===========
</TABLE>
- ---------------
(a) In December 1996, the Company established, with a commercial bank, a
$600,000 line of credit (the "Line"). As of December 28, 1996, the line
remained unused. The Company's line of credit was subsequently increased by
additional borrowings under demand notes of $400,000 in April and $250,000
in June 1997. All assets of the Company, and all accounts receivable and
inventory of an affiliate of the Company's Chairman, The Supply Room
Companies, Inc. ("TSRC"), were pledged as collateral for borrowings under
these arrangements. Advances under these facilities were also guaranteed by
the
F-99
<PAGE> 159
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
Company's Chairman. All borrowings under these arrangements were repaid as
of January 3, 1998 and these credit facilities were closed at year-end.
(b) In November 1997, the Company obtained a revolving line of credit with a
commercial finance company providing for maximum borrowings of $1,500,000 at
an interest rate of prime plus 1.5%. Borrowings under this facility are
subject to advance rates of 80% of eligible accounts receivable and 50% of
qualifying inventories and are secured by effectively all of the Company's
assets. The Company's Chairman has a deficiency guarantee limited to
$100,000.
(c) In connection with the acquisition of certain assets of OFP, the Company
issued a $570,000 subordinated convertible note to OFP. The principal
balance of the note was subsequently adjusted to $532,588 and certain terms
of this agreement were renegotiated in September 1997. A payment of $265,000
was made on September 30, 1997 and the balance is due on or before March 31,
1998. The principal balance of this note bears interest at 10%, payable
monthly, and is convertible in increments of at least $50,000, at the option
of OFP, at any time prior to maturity into membership units in the Company
at the rate of $15 per unit.
(d) The Company also entered into agreements with certain key personnel of OFP
to provide payments to such employees in exchange for continued employment
and noncompete agreements. The terms of these arrangements were renegotiated
in September 1997. A payment of $265,000 under these obligations was made in
September 1997 and the remaining $165,000 due under such arrangements is now
payable on March 31, 1998.
(e) In connection with the August 1996 acquisition of OFP, the Company assumed a
$150,000 promissory note from a former stockholder of OFP. The principal
balance of this note is due on August 31, 1999, bears interest at the rate
of 11.5%, payable monthly, and is convertible in increments of at least
$50,000, at the option of the holder, at any time prior to maturity into
membership units in the Company at a rate of $15 per unit.
NOTE F -- OPERATING AGREEMENT AND MEMBER'S CAPITAL
As a limited liability company, the Company is comprised of members holding
units in the Company pursuant to the applicable sections of the operating
agreement of the Company (the "Operating Agreement"). Each member has voting
rights based upon the number of units owned. At January 3, 1998, there were
367,977 Class A Units outstanding. Originally, 214,000 units were issued to
management and other members pursuant to the terms of a confidential memorandum
(the "Confidential Memorandum") dated August 16, 1996 for a cash consideration
of $10 per unit. Additionally, pursuant to the terms of the Confidential
Memorandum, two former stockholders of OFP were issued 16,500 units in exchange
for noninterest-bearing notes due August 31, 1997 (these notes are payable on
March 31, 1998), 18,500 units were issued to five members whose subscription
agreements were accepted (and subsequently collected) by the Company, and 2,000
units were issued to an officer of the Company in exchange for a promissory note
payable in equal biweekly installments over three years at an interest rate of
10%. In September 1997, 69,266 units representing a 19% interest in the Company
were issued to TSRC for a total consideration of $1,500,000.
Pursuant to the terms of the Confidential Memorandum, the Company issued
44,294 Class A Units to the Chairman to effect an ownership interest of 15%
("Founder's Interest") with respect to the number of units of members' capital
outstanding. The Founder's Interest was granted in recognition of the Chairman's
effort in organizing the Company and his guarantees of certain financing
arrangements received by the Company. The Operating Agreement also provides that
the Founder's Interest will not be reduced below 12.5% on a fully diluted basis
with respect to the Company's first $7.5 million in capital contributions. Class
B Units Options at an exercise price of $5.30 per unit will be automatically
granted to the Chairman upon the issuance of any
F-100
<PAGE> 160
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
subsequent units by the Company in an amount sufficient to maintain his
Founder's Interest at 12.5%. In September 1997, 10,924 options were issued to
the Founder to maintain his Founder's Interest at 12.5% as a result of the $1.5
million investment by TSRC. All units issued relating to the Founder's Interest
only entitle the holder to share, on a pro rata basis, in the profits of the
Company. These units do not receive a capital account or a priority in the
return of the Chairman's investment.
The Operating Agreement also establishes an Incentive Plan which provides
for the issuance of restricted awards of Class A Units ("Restricted Class A
Units") and options to acquire Class B Units to management of the Company. The
aggregate of such awards under the Incentive Plan may not at any time exceed 15%
of the total units outstanding, including units authorized and relating to the
Incentive Plan. As of January 3, 1998, the Company had awarded 10,250 Restricted
Class A Units and 29,250 options to acquire Class B Units at an exercise price
of $10.00 per unit to management and other key employees, with such awards
vesting ratably as future services are performed over a three-year period. The
exercise price of all options awarded under the Incentive Plan shall be equal to
the fair market value of a unit in the Company on the date of grant, and options
will be granted for 10-year terms. The Restricted Class A Units only entitle the
holder to share in a pro rata basis in the profits of the Company relating back
to the date of grant. These units do not receive a capital account or a priority
in the return of the holder's investment. At January 3, 1998, 3,417 restricted
Class A Units and 26,751 options to purchase Class B Units were vested.
Profits and losses are allocated in accordance with the Operating
Agreement, in proportion to each Member's pro rata interest in the Company. The
Operating Agreement provides each holder of Class A Units with preemptive rights
to purchase additional units in the event of future issuance of units by the
Company. Exercise of such preemptive rights would be at the same per unit price
being received by the Company from other investors. In addition, the Operating
Agreement provides that any member wishing to sell units must first offer such
units to existing members before selling such units to persons or entities not
holding a membership interest in the Company. Such offers must be at the same
terms and provisions for all parties.
The Company recognizes compensation cost in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." Had compensation cost for the
Company's stock option plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the impact on the Company's net loss
for either period would have been immaterial.
The following summarizes stock option transactions for the respective
periods:
<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
UNEXERCISED AVERAGE UNEXERCISED AVERAGE
OPTIONS OPTION PRICE OPTIONS OPTION PRICE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Options at beginning of year....................... -- $ -- 39,250 $10.00
Granted............................................ 39,250 10.00 11,424 5.51
Exercised.......................................... -- --
Cancelled.......................................... -- 10,500 10.00
Options at end of year............................. 39,250 10.00 40,174 8.72
Options exercisable at year-end.................... 35,750 10.00 37,675 8.64
</TABLE>
F-101
<PAGE> 161
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
NOTE G -- COMMITMENTS AND CONTINGENCIES
Leases
The Company has entered into lease agreements with initial terms ranging from 1
to 5 years for certain stores, warehouses and equipment. The lease terms
generally provide that the Company pay the related taxes, insurance and
maintenance costs. The following capital leases are included in the balance
sheet at January 3, 1998:
<TABLE>
<S> <C>
Fixtures and equipment...................................... $95,850
Less accumulated amortization............................... 29,044
-------
$66,806
=======
</TABLE>
Capitalized lease amortization is included in depreciation expense.
Future minimum lease payments under capital leases and operating leases
having lease terms in excess of one year at January 3, 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1998.................................................. $30,902 $ 467,671
1999.................................................. 29,126 460,812
2000.................................................. 8,060 467,720
2001.................................................. -- 350,545
2002.................................................. -- 56,807
------- ----------
Total minimum lease payments.......................... 68,088 $1,803,555
==========
Less imputed interest and executory costs............. 9,396
-------
Present value of minimum lease payments (included in
long-term debt)..................................... $58,692
=======
</TABLE>
The Company recorded rent expense for the years ended December 28, 1996 and
January 3, 1998 of $155,206 and $578,306, respectively.
Employment Contracts
The Company has employment contracts with certain key employees covering
such matters as base compensation, incentive plans, benefits, termination and
noncompetition. These agreements are for initial periods of two years or less
and are automatically renewable for additional one-year terms. Annual base
compensation pursuant to the terms of these contracts is approximately $370,000
and the agreements may be terminated by the Company with sixty-days' notice
prior to the end of an initial or any renewal term.
Concentrations
As of December 28, 1996 and January 3, 1998, one vendor represented
approximately 40% of total purchases for both years. The vendor's balance
represented less than 1% of trade payables at both December 28, 1996 and January
3, 1998. No customer represented more than 5% of total revenues in either
period.
F-102
<PAGE> 162
MEGA OFFICE FURNITURE, L.L.C.
(FORMERLY KNOWN AS U.S. OFFICE FURNITURE, L.L.C.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and January 3, 1998
NOTE H -- RELATED PARTY TRANSACTIONS
The Company leases retail sales and warehouse space from an affiliate of
certain stockholders of MEGA who are currently employed by the Company. The
related rents for the four-month period ended December 28, 1996 and twelve-month
period ended January 3, 1998 were $92,083 and $242,917, respectively. The
Company's future obligations under such lease agreements total approximately
$646,250 over the remaining lease terms.
At January 3, 1998, the Company had two letters of credit outstanding
totalling $185,000 with a commercial bank. The accounts receivable and
inventories of TSRC have been pledged as collateral for these facilities and the
letters of credit have been additionally guaranteed by the Company's Chairman.
NOTE I -- SUBSEQUENT EVENTS (UNAUDITED)
The property which the Company has been leasing for its retail operations
in Chesapeake, Virginia was sold effective October 28, 1997 and, pursuant to the
terms of the lease for this space, notice was received from the new landlord
that the lease would terminate at the end of February 1998. Effective March 1,
1998, this lease was amended such that the Company would occupy 30% of the
demised premises through May 31, 1998. On March 3, 1998, the Company entered
into a lease agreement for a property in Norfolk, Virginia for an initial term
of five years and plans to relocate the operations from Chesapeake, Virginia at
the end of April 1998. Management has recognized the relocation of its
operations in Tidewater, Virginia in the business plan discussed in Note C and
believes that these changes will not adversely impact the Company.
On March 24, 1998, the Board of Directors approved a resolution to amend
the operating agreement with respect to the allocation of profits and losses and
to revalue the Company's assets as of September 11, 1997 for capital account
purposes only, as permitted by the Internal Revenue Code, such that the value of
the capital accounts is equal to the aggregate of the capital contributions
received. The amendments to the operating agreement provide that: (1) if the
capital account balances are less than the capital initially contributed,
profits and losses are to be allocated based on the percentage of capital
contributed by each member and (2) if the capital account balances are in excess
of the capital contributions of all members, profits and losses will be
distributed on a per unit basis. Member consent to the amendments to the
operating agreement was subsequently received by the Company.
The balance due to OFP of $265,588 pursuant to the terms of the
subordinated promissory note (see Note E(c)) was paid on March 31, 1998. Also on
March 31, 1998, the subscription receivables due from two shareholders of OFP
for the combined amount of $165,000 (see Note F) and the payments due to these
same individuals relating to employment and noncompetition agreements totalling
$165,000 (see Note E(d)) were deemed to have been paid in full.
F-103
<PAGE> 163
- ------------------------------------------------------------
- ------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD 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
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 10
Use of Proceeds............................ 17
Dividend Policy............................ 18
Capitalization............................. 18
Dilution................................... 19
Selected Combined Pro Forma Financial
Data..................................... 20
Selected Financial Data of Office Centre
Corporation.............................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Industry Overview.......................... 29
Business................................... 30
Management................................. 43
Principal and Selling Stockholders......... 49
Certain Transactions....................... 51
Description of Capital Stock............... 53
Shares Eligible for Future Sale............ 55
Underwriting............................... 56
Legal Matters.............................. 57
Experts.................................... 57
Additional Information..................... 57
Index to Financial Statements.............. F-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
4,000,000 SHARES
[OFFICE CENTRE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MORGAN KEEGAN & COMPANY, INC.
MCDONALD & COMPANY SECURITIES, INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered hereby, other
than underwriting discounts and commissions. The Company is paying all of these
expenses in connection with the issuance and distribution of the securities
except for the incremental costs associated with the shares being sold by the
Selling Stockholders (i.e., the additional SEC registration fee, NASD filing fee
and the Nasdaq Stock Market's National Market listing fee attributable to such
shares).
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,284
NASD filing fee............................................. 5,300
Nasdaq Stock Market's National Market listing fee........... 77,000
Accountant's fees and expenses.............................. 2,700,000
Legal fees and expenses..................................... 1,300,000
Printing expenses........................................... 250,000
Transfer Agent and Registrar fees........................... 10,000
Financial advisers and offering consultants................. 1,115,000
Miscellaneous............................................... 476,416
----------
Total.................................................. $5,950,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Office Centre Corporation's Amended and Restated Certificate of
Incorporation provides that Office Centre Corporation shall, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), as amended from time to time, indemnify its officers and directors.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fine 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 the case of a derivative suit,
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 interest 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.
Reference is hereby made to Article V of the Company's Amended and Restated
By-Laws, filed as Exhibit 3.02 hereto, which provides for indemnification of
directors and officers.
Reference is hereby made to the Indemnification Agreement, the form of
which is filed as Exhibit 10.17 hereto, which Office Centre Corporation has
entered into with its directors and certain key officers. Pursuant to such
Agreement, Office Centre Corporation generally is obligated to indemnify its
directors and such officers to the full extent permitted by the DGCL as
described above. In addition, Office Centre Corporation maintains directors' and
officers' liability insurance in the amount of $5 million.
Reference is hereby made to the Underwriting Agreement, the form of which
is filed as Exhibit 1.01 hereto, in which Office Centre Corporation agrees to
indemnify the underwriters and certain other persons against certain civil
liabilities.
II-1
<PAGE> 165
Office Centre Corporation's Amended and Restated Certificate of
Incorporation also contains provisions eliminating a director's personal
liability to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation in October 1996, Office Centre Corporation has
issued the following securities. The number of shares listed in paragraphs (a)
through (c) and in paragraph (e) do not give effect to the Reverse Split:
(a) On March 21, 1997, Office Centre Corporation issued shares of Common
Stock to the following founders in the amounts and for the consideration
indicated:
<TABLE>
<S> <C>
Clifford M. Davie: 1 share for a consideration of $.001
Walter H. Gordenstein: 1 share for a consideration of $.001
</TABLE>
(b) On May 2, 1997, Office Centre Corporation issued shares of Common Stock
to the following founders in the amounts and for the consideration indicated:
<TABLE>
<S> <C>
Clifford M. Davie: 2,520,727 shares for a consideration of $2,520.73
Walter H. Gordenstein: 1,757,444 shares for a consideration of $1,757.44
John D. Kaweske: 164,229 shares for a consideration of $164.23
</TABLE>
(c) On May 23, 1997, Office Centre Corporation issued shares of Common
Stock to the following parties in the amounts and for the consideration
indicated:
<TABLE>
<S> <C>
Clifford M. Davie Trust: (i) 78,492 shares in exchange for Mr. Davie's
ownership interest in UDI Corp.
(ii) 51,116 shares in exchange for Mr. Davie's
ownership interests in UDI II Corp.
Walter H. Gordenstein: (i) 39,246 shares in exchange for Mr. Gordenstein's
ownership interest in UDI Corp.
(ii) 51,116 shares in exchange for Mr.
Gordenstein's ownership interest in UDI II Corp.
</TABLE>
(d) On August 22, 1997, Office Centre Corporation issued 50,000 shares of
Common Stock to Joseph Hajjar for a consideration of $5,000 pursuant to an
employment agreement between Office Centre Corporation and Mr. Hajjar.
(e) On January 9, 1998, Office Centre Corporation issued 100,000 shares of
Common Stock to John Davie in exchange for a license to use the "Smart Consumer"
concept developed by Mr. Davie.
(f) Simultaneously with the closing of the Offering, Office Centre
Corporation will issue an aggregate principal amount of $325,000 of shares of
Common Stock calculated at the initial public offering price per share to
Benchmark Associates, Inc. in exchange for consulting services rendered.
(g) Simultaneously with the closing of the Offering, Office Centre
Corporation will issue an aggregate principal amount of $1,175,000 of shares of
Common Stock calculated at the initial public offering price per share to R.K.
Grace & Company in exchange for consulting services rendered.
(h) Simultaneously with the Offering, the Company will issue an aggregate
principal amount of $36,899,000 of shares of Common Stock calculated at the
initial public offering price per share in connection with the acquisition of
twelve businesses. Pursuant to the definitive merger agreements, as amended,
between the Company and each of TSR, New England, and Greenwood, respectively,
Office Centre Corporation, in its sole discretion, may substitute cash in the
amount of $1 million with respect to each such transaction as consideration in
lieu of $1 million of Common Stock otherwise deliverable under each such
agreement. If such options are
II-2
<PAGE> 166
exercised, the number of shares of Common Stock issued in connection with such
acquisitions will be reduced accordingly.
(i) Simultaneously with the Offering, Office Centre Corporation will grant
options to purchase 524,600 shares of Common Stock to certain employees of the
Founding Companies who will become employees of the Company after consummation
of the Acquisitions.
(j) At various times between September 1, 1997 and the closing of the
Offering, Office Centre Corporation will have granted options to purchase
600,000 shares of Common Stock to various consultants, employees, directors and
officers of Office Centre Corporation and UDI.
The transactions set forth above were undertaken in reliance upon the
exemptions from the registration requirements of the Securities Act afforded by
(i) Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales
not involving a public offering, and/or (ii) Rule 701 promulgated thereunder, as
sales by an issuer to employees, directors, officers, consultants or advisors
pursuant to written compensatory benefits plans or written contracts relating to
the compensation of such persons. The purchasers of the securities described
above acquired them for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the shares may not be offered, sold or transferred
other than pursuant to an effective registration statement under the Securities
Act or an exemption from such registration requirements. Office Centre
Corporation will place stop transfer instructions with its transfer agent with
respect to all such securities.
ITEM 16. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits (see exhibit index immediately preceding the exhibits for the
page number where each exhibit can be found)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
*1.01 Underwriting Agreement, dated as of , 1998, by
and among Office Centre Corporation, Morgan Keegan, Credit
Lyonnais Securities Inc. and McDonald & Company Securities,
Inc.
**2.01 Merger Agreement, dated as of May 18, 1998, among Office
Centre Corporation, OCC New York, Inc., King Office Supply,
Inc. and the persons listed on Schedule A
**2.02 Merger Agreement, dated as of October 31, 1997, by and among
Office Centre Corporation, Office Centre Grand Rapids, Inc.,
"SOS" Office Supply, Inc. and the shareholders named therein
**2.03 First Amendment to Merger Agreement, dated May 15, 1998, by
and among Office Centre Corporation, Office Centre Grand
Rapids, Inc., "SOS" Office Supply, Inc. and the shareholders
named therein
**2.04 Merger Agreement, dated as of October 24, 1997, by and among
Office Centre Corporation, Office Centre Fort Worth,
Greenwood Outfitters, Inc. and the shareholders named
therein
**2.05 First Amendment to Merger Agreement, dated October 24, 1997,
by and among Office Centre Corporation, Office Centre Fort
Worth, Greenwood Outfitters, Inc. and the shareholders named
therein
**2.06 Second Amendment to Merger Agreement, dated April 24, 1998,
by and among Office Centre Corporation, Office Centre Fort
Worth, Greenwood Outfitters, Inc. and the shareholders named
therein
**2.07 Amendment No. 3 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Fort Worth, Greenwood Outfitters, Inc. and the shareholders
named therein
**2.08 Amended and Restated Merger Agreement, dated May 20, 1998,
by and among Office Centre Corporation, Office Centre
Richmond, Office Centre Richmond, The Supply Room Companies
Inc. and the shareholders named therein
</TABLE>
II-3
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
**2.09 Amendment No. 1 to Amended and Restated Merger Agreement,
dated as of May 20, 1998, by and among Office Centre
Corporation, Office Centre Richmond, Office Centre Richmond,
The Supply Room Companies, Inc. and the shareholders named
therein
**2.10 Merger Agreement, dated as of April 20, 1998, by and among
Office Centre Corporation, Office Centre Montgomery, Office
Express, Inc. and the shareholders named therein
**2.11 Merger Agreement, dated as of April 10, 1998, by and among
Office Centre Corporation, Office Centre Yorba Linda, Office
Solutions Business Products and Services, Inc. and the
shareholders named therein
**2.12 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Yorba Linda, Office Solutions Business Products and
Services, Inc. and the shareholders named therein
**2.13 Merger Agreement, dated as of May 15, 1998, by and among
Office Centre Corporation, Office Centre New England, New
England Office Supply Company, Inc. and the shareholder
named therein
**2.14 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
New England, New England Office Supply Company, Inc. and the
shareholder named therein
**2.15 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Sacramento, Sierra
Office Systems and Products, Inc. and the shareholders named
therein
**2.16 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Sacramento, Sierra Office Systems and Products, Inc. and the
shareholders named therein
**2.17 Merger Agreement, dated as of April 8, 1998, by and among
Office Centre Corporation, Office Centre Georgia, Southern
Office Centre, Inc. and the shareholders named therein
**2.18 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Georgia, Georgia
Impressions, Inc. and the shareholders named therein
**2.19 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Georgia, Georgia Impressions, Inc. and the shareholders
named therein
**2.20 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Fort Worth, Inc.,
Metro Data Supply, Inc. and the shareholders named therein
**2.21 Merger Agreement, dated as of April 21, 1998, by and among
Office Centre Corporation, Office Centre Fort Worth, Inc.,
BCB Office Products Company, BCB Specialties, Inc. and the
shareholders named therein
**2.22 Stock Purchase Agreement, dated as of May 23, 1997, among
Walter Gordenstein, Dean Witter Reynolds, Inc., Custodian
for the IRA Rollover of Clifford M. Davie DTD 12/15/94,
Clifford M. Davie and Office Centre Corporation relating to
UDI Corp.
**2.23 Stock Purchase Agreement, dated as of May 23, 1997, among
Walter Gordenstein, Dean Witter Reynolds, Inc., Custodian
for the IRA Rollover of Clifford M. Davie DTD 12/15/94,
Clifford M. Davie and Office Centre Corporation relating to
UDI II Corp.
**2.24 Agreement and Plan of Merger, dated as of April 15, 1998,
between UDI Corp. and UDI II Corp.
**3.01 Amended and Restated Certificate of Incorporation of Office
Centre Corporation
**3.02 Amended and Restated By-Laws of Office Centre Corporation
**4.01 Specimen of Common Stock Certificate of Office Centre
Corporation
*5.01 Opinion of Richards & O'Neil, LLP
**10.01 Employment/Consulting Agreement, dated July 20, 1995, by and
between UDI Corp., UDI II Corp, Clifford M. Davie and/or
Buying Group Services, Inc.
</TABLE>
II-4
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
**10.02 Employment Agreement, dated as of May 1, 1997 by and between
Office Centre Corporation and Robert J. Gillon, Jr.
**10.03 Amendment to Employment Agreement, dated as of August 8,
1997, between Office Centre Corporation and Robert J.
Gillon, Jr.
**10.04 Reformation of Employment Agreement, dated as of March 12,
1998, between Office Centre Corporation and Robert J.
Gillon, Jr.
**10.05 Amendment No. 2 to Employment Agreement, dated as of May 14,
1998, between Office Centre Corporation and Robert J.
Gillon, Jr.
**10.06 Employment Agreement, dated as of August 22, 1997, between
Office Centre Corporation and Joseph Hajjar
**10.07 Amendment No. 1 to Employment Agreement, dated as of May 14,
1998, between Office Centre Corporation and Joseph Hajjar
**10.08 Employment Agreement, dated as of April 15, 1998, between
Office Centre Corporation and Walter Gordenstein
**10.09 Employment Agreement, dated as of April 8, 1998, between
Office Centre Corporation and Thomas F. Mooney
**10.10 Employment Agreement, dated as of February 20, 1998, by and
between Office Centre Corporation and Richard Case
**10.11 Consulting Agreement, dated February 1, 1997, between Office
Centre Corporation and Benchmark Associates, Inc.
**10.12 Agreement, dated January 9, 1998, by and between Office
Centre Corporation and John Davie
**10.13 Agreement, dated as of April 15, 1998, between Office Centre
Corporation and Walter Gordenstein
**10.14 Amendment No. 1 to Agreement, dated as of May 14, 1998, by
and between Office Centre Corporation and Walter Gordenstein
**10.15 Agreement, dated as of May 13, 1998, between Office Centre
Corporation, Dean Witter Reynolds, Inc., Custodian for the
IRA Rollover DTD 12/15/94, and Clifford M. Davie
**10.16 Financial Advisory Agreement, dated as of February 1, 1997,
by and between Office Centre Corporation and R.K. Grace &
Company
**10.17 Form of Indemnification Agreement entered into by Office
Centre Corporation with each of the following persons:
Robert J. Gillon, Jr., John D. Kaweske, Joseph Hajjar,
Clifford M. Davie, Edward A. Schefer, Thomas F. Mooney,
Charles J. Murphy and Yancey Jones
**10.18 Office Centre Corporation 1998 Stock Option Plan
**10.19 Form of Stock Option Agreement
***10.20 Loan and Security Agreement, dated as of July 9, 1998, by
and among Office Centre Corporation and First Union National
Bank, as Agent, and the financial institutions now or
hereafter parties thereto
***10.21 Revolving Credit Note, dated July 9, 1998, issued by Office
Centre Corporation in favor of First Union National Bank
**10.22 Buying Group Agreement, dated December 1, 1997, between UDI
Corp. and S.P. Richards Co. (Previously filed as Exhibit
10.27)
**10.23 Buying Group Agreement, dated December 1, 1997, between UDI
Corp. and United Stationers (Previously filed as Exhibit
10.28)
**10.24 Form of Employment Agreement by and between Office Centre
Corporation and Yancey S. Jones (Previously filed as Exhibit
10.29)
**21.01 Subsidiaries of Office Centre Corporation
***23.01 Consent of Grant Thornton LLP
</TABLE>
II-5
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
*23.02 Consent of Richards & O'Neil, LLP (incorporated into Exhibit
5.01)
**27.01 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
*** Filed herewith
(b) Financial Statement Schedules
Schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company 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 Company 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 Securities Act of 1933 and will be
governed by the final adjudication of such issues.
(b) The Company hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as are required by the underwriters
to permit prompt delivery to each purchaser.
(c) The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on July 21, 1998.
OFFICE CENTRE CORPORATION
By: /s/ ROBERT J. GILLON, JR.
------------------------------------
Name: Robert J. Gillon, Jr.
Title: Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. GILLON, JR. Chairman of the Board, President and July 21, 1998
- ------------------------------------------------ Chief Executive Officer (Principal
Robert J. Gillon, Jr. Executive Officer)
/s/ JOSEPH E. HAJJAR Chief Financial Officer, Senior Vice July 21, 1998
- ------------------------------------------------ President, Treasurer and Secretary
Joseph E. Hajjar (Principal Financial Officer and
Principal Accounting Officer)
/s/ YANCEY S. JONES Director July 21, 1998
- ------------------------------------------------
Yancey S. Jones
/s/ CHARLES J. MURPHY Director July 21, 1998
- ------------------------------------------------
Charles J. Murphy
/s/ EDWARD A. SCHEFER Director July 21, 1998
- ------------------------------------------------
Edward A. Schefer
</TABLE>
II-7
<PAGE> 171
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- ------------------- ----
<C> <S> <C>
*1.01 Underwriting Agreement, dated as of , 1998, by
and among Office Centre Corporation, Morgan Keegan, Credit
Lyonnais Securities Inc. and McDonald & Company Securities,
Inc.........................................................
**2.01 Merger Agreement, dated as of May 18, 1998, among Office
Centre Corporation, OCC New York, Inc., King Office Supply,
Inc. and the persons listed on Schedule A...................
**2.02 Merger Agreement, dated as of October 31, 1997, by and among
Office Centre Corporation, Office Centre Grand Rapids, Inc.,
"SOS" Office Supply, Inc. and the shareholders named
therein.....................................................
**2.03 First Amendment to Merger Agreement, dated May 15, 1998, by
and among Office Centre Corporation, Office Centre Grand
Rapids, Inc., "SOS" Office Supply, Inc. and the shareholders
named therein...............................................
**2.04 Merger Agreement, dated as of October 24, 1997, by and among
Office Centre Corporation, Office Centre Fort Worth,
Greenwood Outfitters, Inc. and the shareholders named
therein.....................................................
**2.05 First Amendment to Merger Agreement, dated October 24, 1997,
by and among Office Centre Corporation, Office Centre Fort
Worth, Greenwood Outfitters, Inc. and the shareholders named
therein.....................................................
**2.06 Second Amendment to Merger Agreement, dated April 24, 1998,
by and among Office Centre Corporation, Office Centre Fort
Worth, Greenwood Outfitters, Inc. and the shareholders named
therein.....................................................
**2.07 Amendment No. 3 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Fort Worth, Greenwood Outfitters, Inc. and the shareholders
named therein...............................................
**2.08 Amended and Restated Merger Agreement, dated May 20, 1998,
by and among Office Centre Corporation, Office Centre
Richmond, Office Centre Richmond, The Supply Room Companies
Inc. and the shareholders named therein.....................
**2.09 Amendment No. 1 to Amended and Restated Merger Agreement,
dated as of May 20, 1998, by and among Office Centre
Corporation, Office Centre Richmond, Office Centre Richmond,
The Supply Room Companies, Inc. and the shareholders named
therein.....................................................
**2.10 Merger Agreement, dated as of April 20, 1998, by and among
Office Centre Corporation, Office Centre Montgomery Office
Express, Inc. and the shareholders named therein............
**2.11 Merger Agreement, dated as of April 10, 1998, by and among
Office Centre Corporation, Office Centre Yorba Linda, Office
Solutions Business Products and Services, Inc. and the
shareholders named therein..................................
**2.12 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Yorba Linda, Office Solutions Business Products and
Services, Inc. and the shareholders named therein...........
**2.13 Merger Agreement, dated as of May 15, 1998, by and among
Office Centre Corporation, Office Centre New England, New
England Office Supply Company, Inc. and the shareholder
named therein...............................................
**2.14 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
New England, New England Office Supply Company, Inc. and the
shareholder named therein...................................
**2.15 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Sacramento, Sierra
Office Systems and Products, Inc. and the shareholders named
therein.....................................................
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- ------------------- ----
<C> <S> <C>
**2.16 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Sacramento, Sierra Office Systems and Products, Inc. and the
shareholders named therein..................................
**2.17 Merger Agreement, dated as of April 8, 1998, by and among
Office Centre Corporation, Office Centre Georgia, Southern
Office Centre, Inc. and the shareholders named therein......
**2.18 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Georgia, Georgia
Impressions, Inc. and the shareholders named therein........
**2.19 Amendment No. 1 to Merger Agreement, dated as of May 20,
1998, by and among Office Centre Corporation, Office Centre
Georgia, Georgia Impressions, Inc. and the shareholders
named therein...............................................
**2.20 Merger Agreement, dated as of April 23, 1998, by and among
Office Centre Corporation, Office Centre Fort Worth, Inc.,
Metro Data Supply, Inc. and the shareholders named therein..
**2.21 Merger Agreement, dated as of April 21, 1998, by and among
Office Centre Corporation, Office Centre Fort Worth, Inc.,
BCB Office Products Company, BCB Specialties, Inc. and the
shareholders named therein..................................
**2.22 Stock Purchase Agreement, dated as of May 23, 1997, among
Walter Gordenstein, Dean Witter Reynolds, Inc., Custodian
for the IRA Rollover of Clifford M. Davie DTD 12/15/94,
Clifford M. Davie and Office Centre Corporation relating to
UDI Corp....................................................
**2.23 Stock Purchase Agreement, dated as of May 23, 1997, among
Walter Gordenstein, Dean Witter Reynolds, Inc., Custodian
for the IRA Rollover of Clifford M. Davie DTD 12/15/94,
Clifford M. Davie and Office Centre Corporation relating to
UDI II Corp.................................................
**2.24 Agreement and Plan of Merger, dated as of April 15, 1998,
between UDI Corp. and UDI II Corp...........................
**3.01 Amended and Restated Certificate of Incorporation of Office
Centre Corporation..........................................
**3.02 Amended and Restated By-Laws of Office Centre Corporation...
**4.01 Specimen of Common Stock Certificate of Office Centre
Corporation.................................................
*5.01 Opinion of Richards & O'Neil, LLP...........................
**10.01 Employment/Consulting Agreement, dated July 20, 1995, by and
between UDI Corp., UDI II Corp, Clifford M. Davie and/or
Buying Group Services, Inc..................................
**10.02 Employment Agreement, dated as of May 1, 1997 by and between
Office Centre Corporation and Robert J. Gillon, Jr.
**10.03 Amendment to Employment Agreement, dated as of August 8,
1997, between Office Centre Corporation and Robert J.
Gillon, Jr.
**10.04 Reformation of Employment Agreement, dated as of March 12,
1998, between Office Centre Corporation and Robert J.
Gillon, Jr..................................................
**10.05 Amendment No. 2 to Employment Agreement, dated as of May 14,
1998, between Office Centre Corporation and Robert J.
Gillon, Jr..................................................
**10.06 Employment Agreement, dated as of August 22, 1997, between
Office Centre Corporation and Joseph Hajjar.................
**10.07 Amendment No. 1 to Employment Agreement, dated as of May 14,
1998, between Office Centre Corporation and Joseph Hajjar...
**10.08 Employment Agreement, dated as of April 15, 1998, between
Office Centre Corporation and Walter Gordenstein............
**10.09 Employment Agreement, dated as of April 8, 1998, between
Office Centre Corporation and Thomas F. Mooney..............
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- ------------------- ----
<C> <S> <C>
**10.10 Employment Agreement, dated as of February 20, 1998, by and
between Office Centre Corporation and Richard Case..........
**10.11 Consulting Agreement, dated February 1, 1997, between Office
Centre Corporation and Benchmark Associates, Inc............
**10.10 Employment Agreement, dated as of February 20, 1998, by and
between Office Centre Corporation and Richard Case..........
**10.11 Consulting Agreement, dated February 1, 1997, between Office
Centre Corporation and Benchmark Associates, Inc............
**10.12 Agreement, dated January 9, 1998, by and between Office
Centre Corporation and John Davie...........................
**10.13 Agreement, dated as of April 15, 1998, between Office Centre
Corporation and Walter Gordenstein..........................
**10.14 Amendment No. 1 to Agreement, dated as of May 14, 1998, by
and between Office Centre Corporation and Walter
Gordenstein.................................................
**10.15 Agreement, dated as of May 13, 1998, between Office Centre
Corporation, Dean Witter Reynolds, Inc., Custodian for the
IRA Rollover DTD 12/15/94, and Clifford M. Davie............
**10.16 Financial Advisory Agreement, dated as of February 1, 1997,
by and between Office Centre Corporation and R.K. Grace &
Company.....................................................
**10.17 Form of Indemnification Agreement entered into by Office
Centre Corporation with each of the following persons:
Robert J. Gillon, Jr., John D. Kaweske, Joseph Hajjar,
Clifford M. Davie, Edward A. Schefer, Thomas F. Mooney,
Charles J. Murphy and Yancey Jones..........................
**10.18 Office Centre Corporation 1998 Stock Option Plan............
**10.19 Form of Stock Option Agreement..............................
***10.20 Loan and Security Agreement, dated as of July 9, 1998, by
and among Office Centre Corporation and First Union National
Bank, as Agent, and the financial institutions now or
hereafter parties thereto...................................
***10.21 Revolving Credit Note, dated July 9, 1998, issued by Office
Centre Corporation in favor of First Union National Bank....
**10.22 Buying Group Agreement, dated December 1, 1997, between UDI
Corp. and S.P. Richards Co. (Previously filed as Exhibit
10.27)......................................................
**10.23 Buying Group Agreement, dated December 1, 1997, between UDI
Corp. and United Stationers (Previously filed as Exhibit
10.28)......................................................
**10.24 Form of Employment Agreement by and between Office Centre
Corporation and Yancey S. Jones (Previously filed as Exhibit
10.29)......................................................
**21.01 Subsidiaries of Office Centre Corporation...................
***23.01 Consent of Grant Thornton LLP...............................
*23.02 Consent of Richards & O'Neil, LLP (incorporated into Exhibit
5.01).......................................................
**27.01 Financial Data Schedule.....................................
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
*** Filed herewith
<PAGE> 1
Exhibit 10.20
LOAN AND SECURITY AGREEMENT
Office Centre Corporation
with
First Union National Bank, as Agent
and
the Financial Institutions
Now or Hereafter Parties Hereto, as Lenders
Dated as of July 9, 1998
<PAGE> 2
TABLE OF CONTENTS
PAGE
SECTION 1. DEFINITIONS AND INTERPRETATION...................................1
1.1 TERMS DEFINED....................................................1
1.2 ACCOUNTING PRINCIPLES...........................................14
SECTION 2. THE LOANS.......................................................15
2.1 REVOLVING CREDIT - DESCRIPTION..................................15
2.2 ADVANCES, CONVERSIONS, RENEWALS AND PAYMENTS....................16
2.3 REVOLVING CREDIT INTEREST.......................................20
2.4 ADDITIONAL INTEREST PROVISIONS..................................23
2.5 FEES............................................................24
2.6 LIBOR BASED RATE LOAN PREPAYMENTS...............................25
2.7 USE OF PROCEEDS.................................................25
2.8 INDEMNITY.......................................................25
2.9 CAPITAL ADEQUACY................................................25
SECTION 3. COLLATERAL......................................................25
3.1 DESCRIPTION.....................................................25
3.2 LIEN DOCUMENTS..................................................26
3.3 OTHER ACTIONS...................................................27
3.4 SEARCHES AND CERTIFICATES.......................................27
3.5 LANDLORD'S AND WAREHOUSEMAN'S WAIVERS...........................28
3.6 FILING SECURITY AGREEMENT.......................................28
3.7 POWER OF ATTORNEY...............................................28
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES....................28
4.1 RESOLUTIONS, OPINIONS, AND OTHER DOCUMENTS......................28
4.2 ABSENCE OF CERTAIN EVENTS.......................................29
4.3 WARRANTIES AND REPRESENTATIONS AT CLOSING.......................29
4.4 COMPLIANCE WITH THIS AGREEMENT..................................30
4.5 OFFICERS' CERTIFICATE...........................................30
4.6 CLOSING.........................................................30
4.7 WAIVER OF RIGHTS................................................30
SECTION 5. REPRESENTATIONS AND WARRANTIES..................................31
5.1 CORPORATE ORGANIZATION AND VALIDITY.............................31
5.2 PLACES OF BUSINESS..............................................32
5.3 PENDING LITIGATION..............................................32
5.4 TITLE TO PROPERTIES.............................................32
5.5 GOVERNMENTAL CONSENT............................................32
5.6 TAXES...........................................................32
5.7 FINANCIAL STATEMENTS............................................32
5.8 FULL DISCLOSURE.................................................33
i
<PAGE> 3
5.9 SUBSIDIARIES......................................................33
5.10 GUARANTEES, CONTRACTS, ETC........................................33
5.11 GOVERNMENT REGULATIONS, ETC.......................................33
5.12 BUSINESS INTERRUPTIONS............................................34
5.13 NAMES.............................................................35
5.14 OTHER ASSOCIATIONS................................................35
5.15 ENVIRONMENTAL MATTERS.............................................35
5.16 REGULATION O......................................................36
5.17 CAPITAL STOCK.....................................................36
5.18 SOLVENCY..........................................................37
5.19 INTERRELATEDNESS OF BORROWER AND OBLIGORS.........................37
5.20 INVESTMENT COMPANY................................................37
5.21 YEAR 2000 ISSUE...................................................37
SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS..................................37
6.1 PAYMENT OF TAXES AND CLAIMS.......................................37
6.2 MAINTENANCE OF PROPERTIES AND CORPORATE EXISTENCE.................38
6.3 BUSINESS CONDUCTED................................................39
6.4 LITIGATION........................................................39
6.5 ISSUE TAXES.......................................................40
6.6 BANK ACCOUNTS.....................................................40
6.7 EMPLOYEE BENEFIT PLANS............................................40
6.8 FINANCIAL COVENANTS...............................................40
6.9 FINANCIAL AND BUSINESS INFORMATION................................41
6.10 OFFICERS' CERTIFICATES............................................43
6.11 AUDITS AND INSPECTION.............................................43
6.12 TAX RETURNS AND REPORTS...........................................44
6.13 INFORMATION CONCERNING BORROWER AND CONSOLIDATED ENTITIES.........44
6.14 MATERIAL ADVERSE DEVELOPMENTS.....................................44
6.15 PLACES OF BUSINESS................................................44
6.16 ACCOUNT VERIFICATION..............................................45
6.17 YEAR 2000 UNDERTAKING.............................................45
SECTION 7. BORROWER'S NEGATIVE COVENANTS:....................................45
7.1 ASSET SALE, MERGER, CONSOLIDATION, DISSOLUTION OR LIQUIDATION.....45
7.2 ACQUISITIONS......................................................45
7.3 LIENS AND ENCUMBRANCES............................................45
7.4 TRANSACTIONS WITH AFFILIATES OR SUBSIDIARIES......................47
7.5 GUARANTEES........................................................47
7.6 DISTRIBUTIONS, REDEMPTIONS AND OTHER INDEBTEDNESS.................47
7.7 LOANS AND INVESTMENTS.............................................48
7.8 USE OF LENDER'S NAME..............................................48
7.9 MISCELLANEOUS COVENANTS...........................................48
SECTION 8. DEFAULT...........................................................49
8.1 EVENTS OF DEFAULT.................................................49
ii
<PAGE> 4
8.2 CURE..............................................................51
8.3 RIGHTS AND REMEDIES ON DEFAULT....................................51
8.4 NATURE OF REMEDIES................................................53
8.5 SET-OFF...........................................................53
SECTION 9. AGENT.............................................................53
9.1 APPOINTMENT AND AUTHORIZATION.....................................53
9.2 GENERAL IMMUNITY..................................................53
9.3 CONSULTATION WITH COUNSEL.........................................54
9.4 DOCUMENTS.........................................................54
9.5 RIGHTS AS A LENDER................................................54
9.6 RESPONSIBILITY OF AGENT...........................................54
9.7 COLLECTIONS AND DISBURSEMENTS.....................................54
9.8 INDEMNIFICATION...................................................55
9.9 EXPENSES..........................................................56
9.10 NO RELIANCE.......................................................56
9.11 REPORTING.........................................................56
9.12 REMOVAL OF AGENT..................................................56
9.13 ACTION ON INSTRUCTIONS OF LENDERS.................................57
9.14 SEVERAL OBLIGATIONS...............................................57
9.15 CONSENT OF LENDERS TO AGENT'S RIGHTS..............................57
9.16 PARTICIPATIONS AND ASSIGNMENTS....................................59
SECTION 10. MISCELLANEOUS.....................................................60
10.1 GOVERNING LAW.....................................................60
10.2 INTEGRATED AGREEMENT..............................................60
10.3 WAIVER............................................................60
10.4 INDEMNITY.........................................................60
10.5 TIME..............................................................61
10.6 EXPENSES OF AGENT.................................................61
10.7 BROKERAGE.........................................................61
10.8 NOTICES...........................................................62
10.9 HEADINGS..........................................................62
10.10 SURVIVAL..........................................................63
10.11 SUCCESSORS AND ASSIGNS............................................63
10.12 DUPLICATE ORIGINALS...............................................63
10.13 MODIFICATION......................................................63
10.14 SIGNATORIES.......................................................63
10.15 THIRD PARTIES.....................................................63
10.16 DISCHARGE OF TAXES, BORROWER'S OBLIGATIONS, ETC...................63
10.17 WITHHOLDING AND OTHER TAX LIABILITIES.............................64
10.18 CONSENT TO JURISDICTION...........................................64
10.19 WAIVER OF JURY TRIAL..............................................64
iii
<PAGE> 5
EXHIBIT LIST
------------
Exhibit A -- Form of Blocked Account Notice
Exhibit B -- Form of Borrowing Base Certificate
Exhibit C -- Form of Security Agreement
Exhibit D -- Form of Surety Agreement
Exhibit E -- Form of Revolving Credit Note
Exhibit F -- Form of Advanced Request Form
Exhibit G -- Form of Compliance Certificate
SCHEDULES
---------
Schedule A -- Blocked Accounts
Schedule 5.1 -- States of Qualifications
Schedule 5.2 -- Places of Business
Schedule 5.3 -- Judgments, Proceedings, Litigation and Orders
Schedule 5.4 -- Existing Liens and Claims
Schedule 5.7 -- Borrower's Federal Tax Identification Numbers
Schedule 5.9 -- Subsidiaries and Affiliates
Schedule 5.10 -- Existing Guaranties, Investments, Leases and
Employment Agreements
Schedule 5.11(c) -- Employee Benefit Plans
Schedule 5.13(a) -- Schedule of Names
Schedule 5.13(b) -- Trademarks, Patents and Copyrights
Schedule 5.14 -- Other Associations
Schedule 5.15 -- Environmental Matters
Schedule 5.17 -- Capital Stock
Schedule 7.6 -- Indebtedness
Schedule 10.8 -- Addresses of Lenders
iv
<PAGE> 6
LOAN AND SECURITY AGREEMENT
---------------------------
This Loan and Security Agreement ("Agreement") is dated this 9th day of
July, 1998, by and among Office Centre Corporation, a Delaware corporation
("Borrower") and First Union National Bank, a national banking association, as
Agent ("Agent") and the financial institutions now or hereafter parties hereto,
as Lenders (collectively, the "Lenders" and severally each a "Lender").
BACKGROUND
----------
A. Borrower desires to establish financing arrangements with Lenders
and Lenders are willing to make loans and extensions of credit to Borrower under
the terms and provisions hereinafter set forth.
B. The parties desire to define the terms and conditions of their
relationship in writing.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. DEFINITIONS AND INTERPRETATION
1.1 TERMS DEFINED: As used in this Agreement, the following terms have
the following respective meanings:
ACCOUNT - All of the "accounts" (as that term as defined in Section
9106 of the UCC) of Borrower or any other Obligor, whether now existing or
hereafter existing.
ACCOUNT DEBTOR - Any Person obligated on any Account owing to an
Obligor.
ACQUIRED ENTITY - Any Person acquired by Borrower or any other Obligor
pursuant to, or formed or created by Borrower or any other Obligor for the
purpose of making, a Permitted Acquisition.
ADDITIONAL GUARANTOR - Each Acquired Entity and any other Person that
executes and delivers Surety Documents to Lender.
ADJUSTED BASE RATE MARGIN - Section 2.3(b).
ADJUSTED LIBOR RATE - For any LIBOR Interest Period, as applied to a
LIBOR Based Rate Loan, the rate per annum (rounded upwards, if necessary to the
next 1/16 of 1%) determined pursuant to the following formula:
1
<PAGE> 7
Adjusted Libor Rate = Libor Rate
---------------------------
(1 - Reserve Percentage)
For purposes hereof, "Libor Rate" shall mean the arithmetic average of the rates
of interest per annum (rounded upwards, if necessary to the next 1/16 of 1%)
reported on Telerate display page 3750 (or if not so reported, then as
determined by Agent from a comparable replacement) at which Agent is offered
deposits of United States Dollars in the London interbank market on or about
eleven o'clock (11:00) a.m. London time, two (2) London Business Days prior to
the commencement of such LIBOR Interest Period on amounts substantially equal to
such LIBOR Based Rate Loan as to which Borrower may elect the Adjusted LIBOR
Rate to be applicable with a maturity of comparable duration to the LIBOR
Interest Period selected by Borrower for such LIBOR Based Rate Loan.
ADJUSTED LIBOR RATE MARGIN - Section 2.3(d).
ADVANCE(S) - Any monies advanced or credit extended to Borrower by
Lenders (or by Agent or the Initial Lender on their behalf pursuant to the terms
hereof) under the Revolving Credit.
AFFILIATE - As to any Person, (i) any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such Person or (ii) any other Person who is a
director or executive officer (A) of such Person, (B) of any Subsidiary of such
Person or (C) of any Person described in clause (i) above. For purposes of this
definition, "control" of a Person means the power, directly or indirectly,
either to (a) vote 5% or more of the Capital Stock having ordinary voting power
for the election of directors of such Person or (b) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.
AGREEMENT - This Loan and Security Agreement, as it may be amended,
supplemented, modified or replaced from time to time.
ASSET SALE - The sale, transfer, lease, license or other disposition by
any Consolidated Entity to any Person (other than to another Consolidated Entity
to the extent not prohibited hereby) of any Property (including without
limitation stock of other Persons), now owned or hereafter acquired, of any kind
or nature whatsoever in any transaction or series of related transactions.
AUTHORIZED OFFICER - Any officer of Borrower authorized by specific
resolution of Borrower to request Advances as set forth in the incumbency
certificate referred to in Section 4.1(e) of this Agreement.
BANK AFFILIATE - Any bank that is controlled by a Lender. A bank shall
be deemed controlled by a Lender if (i) such Lender, directly or indirectly, or
acting through one or more other Persons owns, controls or has power to vote
twenty five percent (25%) or more of any class of voting securities of the bank;
or (ii) such Lender controls in any manner the election of a majority of the
directors or trustees of the bank.
BASE RATE - The Prime Rate of Agent.
BASE RATE LOANS - Loans under the Revolving Credit subject to interest
calculated under
2
<PAGE> 8
the terms hereof based on the Base Rate.
BLOCKED ACCOUNTS - Collectively, all of the deposit accounts of each
Obligor (other than UDI Canada) for the receipt of proceeds or collections of
Collateral as listed on Schedule "A" attached hereto and made part hereof (as
amended or supplemented from time to time).
BLOCKED ACCOUNT NOTICE - Those certain notices, a form of which is
attached hereto as Exhibit "A," to be sent by Borrower (or, as the case may be,
by the Obligor in whose name a Blocked Account is at any time opened) to the
depository institution at which a Blocked Account is at any time opened.
BORROWING BASE - The sum of sixty percent (60%) of Eligible Inventory
PLUS eighty- five percent (85%) of Eligible Wholesaler Rebates PLUS eighty-five
percent (85%) of Eligible Accounts; provided that, if the IPO is not consummated
prior to December 31, 1998, then the maximum amount of the outstanding Advances
attributable to Eligible Accounts and Eligible Wholesaler Rebates of the
Obligors shall not exceed the following amounts during the following periods:
(i) April 1, 1999 through June 30, 1999, - $6,000,000; (ii) July 1, 1999 through
September 30, 1999, - $5,000,000; (iii) October 1, 1999 through December 31,
1999, - $4,000,000; and (iv) January 1, 2000 and thereafter - $3,000,000.
BORROWING BASE CERTIFICATE - A certificate reflecting the then current
status of the Borrowing Base in the form of Exhibit "B" attached hereto.
BUSINESS DAY - A day other than Saturday or Sunday when Agent is open
for business in Philadelphia, Pennsylvania.
CAPITAL STOCK - Any and all shares, interests, participations or other
equivalents, (however designated) of capital stock of a corporation, any and all
other ownership interests in a Person (other than a corporation) and any and all
warrants or options to purchase any of the foregoing.
CAPITALIZED LEASE OBLIGATIONS - Any Indebtedness represented by
obligations under a lease that is now or will be capitalized for financial
reporting purposes in accordance with GAAP.
CASH COLLATERAL ACCOUNT - Section 2.2(b).
CHANGE OF CONTROL - With respect to Borrower, the result (i) prior to
the consummation of the IPO if Clifford Davie and/or Walter Gordenstein do not
own (legally and beneficially) more than 50% of the Capital Stock of Borrower
and (ii) as of and at any time after the IPO (a) if any Person other than
Clifford Davie, Walter Gordenstein and Robert Gillon owns (legally and
beneficially) 25% or more of the Capital Stock of Borrower and (b) with respect
to any Consolidated Entity, if Borrower does not own 100% of the Capital Stock
of such entity (other than director's qualifying shares).
CLOSING - Section 4.6.
CLOSING DATE - Section 4.6.
COLLATERAL - All of the Property and interests in Property described in
Section 3.1 of this
3
<PAGE> 9
Agreement and all other Property and interests in Property (including, without
limitation, such Property and interests in Property described in each Security
Agreement), that now or hereafter secure payment of the Obligations and
satisfaction of Obligors of all covenants and undertakings contained in this
Agreement and the other Loan Documents.
COMPLIANCE CERTIFICATE - Section 6.10.
CONSOLIDATED AMORTIZATION EXPENSE - For any period, the aggregate
consolidated amount of amortization expenses of Borrower and each Consolidated
Entity, as determined in accordance with GAAP.
CONSOLIDATED CAPITAL EXPENDITURES - For any period, the aggregate of
all expenditures made by Borrower and each Consolidated Entity during such
period (including that portion of Capitalized Lease Obligations incurred during
that period) for the purchase, construction or other acquisition of fixed or
capital assets determined in accordance with GAAP.
CONSOLIDATED CURRENT ASSETS - At any date, the aggregate consolidated
amount of the current assets of Borrower and each Consolidated Entity as would
be shown on a consolidated balance sheet of Borrower prepared in accordance with
GAAP.
CONSOLIDATED CURRENT LIABILITIES - At any date, the aggregate
consolidated amount of the current liabilities of Borrower and each Consolidated
Entity as would be shown on a consolidated balance sheet of Borrower prepared in
accordance with GAAP (including for such purposes Indebtedness under the
Revolving Credit as a current liability).
CONSOLIDATED DEPRECIATION EXPENSE - For any period, the aggregate
consolidated amount of depreciation expenses of Borrower and each Consolidated
Entity, as determined in accordance with GAAP.
CONSOLIDATED EBITDA - For any period, Consolidated Net Income (or
deficit) PLUS (i) Consolidated Interest Expense, PLUS (ii) Consolidated Tax
Expense, PLUS (iii) Consolidated Depreciation Expense, plus (iv) Consolidated
Amortization Expense, minus (v) extraordinary gains and PLUS (vi) extraordinary
losses, all as determined in accordance with GAAP.
CONSOLIDATED FUNDED DEBT - For any date, without duplication, the
aggregate consolidated principal amount of Indebtedness of Borrower and each
Consolidated Entity (except for the item described in clause (vi) of the
definition of Indebtedness), as determined in accordance with GAAP.
CONSOLIDATED ENTITY - Each Obligor (other than Borrower) and any other
Person whose financial status and performance is reported, in accordance with
GAAP, with that of Borrower on a consolidated basis, after eliminating
intercompany items.
CONSOLIDATED INTEREST EXPENSE - For any period, the aggregate
consolidated amount of interest expense required to be paid or accrued (without
duplication) during such period on all Indebtedness of Borrower and each
Consolidated Entity outstanding during all or any part of such
4
<PAGE> 10
period, as determined in accordance with GAAP.
CONSOLIDATED LIABILITIES - At any date, the aggregate consolidated
amount of all liabilities of every kind of Borrower and each Consolidated Entity
as would be shown on a consolidated balance sheet of Borrower, prepared in
accordance with GAAP.
CONSOLIDATED NET INCOME - For any period, the consolidated net income
after taxes of Borrower and each Consolidated Entity as such would appear on a
consolidated statement of income of Borrower, prepared in accordance with GAAP.
CONSOLIDATED NET WORTH - At any date, the amount by which the
consolidated assets of Borrower and each Consolidated Entity exceed Consolidated
Liabilities as would be shown on a consolidated balance sheet of Borrower
prepared in accordance with GAAP.
CONSOLIDATED TANGIBLE NET WORTH - At any date, the amount by which the
consolidated assets of Borrower and each Consolidated Entity (excluding
trademarks, goodwill, covenants not to compete, deferred closing costs and all
other assets which would be determined to be intangible assets under GAAP)
exceed Consolidated Liabilities as would be shown on a consolidated balance
sheet of Borrower prepared in accordance with GAAP.
CONSOLIDATED TAX EXPENSE - For any period, the aggregate consolidated
amount of income and other tax expense of Borrower and each Consolidated Entity,
as determined in accordance with GAAP.
CURRENT RATIO - At any date, the ratio of (i) Consolidated Current
Assets to (ii) Consolidated Current Liabilities.
DEFAULT - Any event, act, condition or occurrence which with notice, or
lapse of time or both, would constitute an Event of Default hereunder.
DISTRIBUTION -
(1) Dividends or other distributions on any now or hereafter
outstanding Capital Stock of Borrower or any Consolidated Entity;
(2) The redemption, repurchase, defeasance (other than defeasance by
virtue of the non-exercise of employee stock options) or acquisition of such
Capital Stock or of warrants, rights or other options to purchase such Capital
Stock; and
(3) Any loans or advances to any shareholder(s) of Borrower or any
Consolidated Entity.
DOMESTIC OBLIGORS - All Obligors other than UDI Canada.
EBITDA - For any period, Net Income (or deficit) PLUS (i) Interest
Expense, PLUS (ii) Tax Expense, PLUS (iii) Depreciation Expense, plus (iv)
Amortization Expense, minus (v) extraordinary
5
<PAGE> 11
gains and PLUS (vi) extraordinary losses, all as determined in accordance with
GAAP.
ELIGIBLE ACCOUNTS - All Accounts of any Obligor meeting all of the
following specifications: (i) the Account is lawfully, unconditionally and
exclusively owned by such Obligor and subject to a first priority perfected Lien
in favor of Agent and to no other Lien and such Obligor has the right of
assignment thereof and the power to grant a security interest therein; (ii) the
Account is valid and enforceable representing the undisputed indebtedness of an
Account Debtor for the purchase of Inventory; (iii) the Account is outstanding
and has been for not more than the earlier of (A) one hundred twenty (120) days
past its original invoice date and (B) sixty (60) days past the original due
date; (iv) not more than fifty percent (50%) of the aggregate balance of all
Accounts owing from an Account Debtor obligated on the Accounts are outstanding
more than the earlier of (A) one hundred twenty (120) days past its original
invoice date and (B) sixty (60) days past the original due date; (v) the Account
is net of any defense, set-off, counterclaim, deduction, discount, credit,
chargeback, contra claim, freight claim, allowance or adjustment; (vi) there
shall be excluded from the Account any portion thereof attributable to the sale
of goods that have been returned, rejected, lost or damaged; (vii) if the
Account arises from the sale of goods by such Obligor, such sale was an absolute
sale and not on consignment or on approval or on a sale-or-return basis nor
subject to any other repurchase or return agreement, and such goods have been
shipped to the Account Debtor or its designee (no sooner than the date of the
invoice); (viii) if the Account arises from the performance of services, such
services have actually been performed; (ix) the Account arose in the ordinary
course of such Obligor's business; (x) no notice of the bankruptcy,
receivership, reorganization, liquidation, dissolution, or insolvency of the
Account Debtor has been received by Agent, any Lender or any Obligor (provided
that post-petition obligations, if otherwise eligible, from an Account Debtor
who is a debtor in a Chapter 11 case under the Bankruptcy Code may be included
by Agent on a case by case basis after Agent's review of the Account Debtor's
creditworthiness following Borrower's request); (xi) the Account Debtor is not a
Subsidiary or Affiliate of any Obligor; (xii) the Account is not an Account of
an Account Debtor having its principal place of business or executive office
outside the United States or Canada, unless the payment of such Account is
guaranteed by an irrevocable letter of credit satisfactory to Agent; (xiii) the
Account does not represent a sale to the government of the United States or any
subdivision thereof unless such Obligor has complied, for the benefit of Agent
with the Federal Assignment of Claims Act; (xiv) the Account is not an Account
on which the Account Debtor is obligated to such Obligor under any instrument;
(xv) the transaction which gave rise to the Account complies in all respects
with all applicable laws, rules and regulations of any Governmental Authority;
and (xvi) the Account meets such other specifications and requirements which may
from time to time be reasonably established by Agent. Eligible Accounts shall
not include that portion of an Account representing a rebilling of an existing
Account, interest charges for past due balances or debit memos.
ELIGIBLE INVENTORY - All finished goods Inventory lawfully,
unconditionally and exclusively owned by any Obligor located at such Obligor's
place or places of business shown on Schedule "5.2." Eligible Inventory shall
not include (i) Inventory stored at a leased facility or warehouse for which
Agent has not received a landlord waiver or warehouseman waiver (as
appropriate), in form and substance satisfactory to Agent, or (ii) Inventory
determined by Agent, in its reasonable discretion, to be ineligible, including,
without limitation, work-in-process, supplies and packaging material.
ELIGIBLE WHOLESALER REBATES - Wholesaler Rebates earned by and owed to
an Obligor net of rebate obligations owed by such Obligor to customers of such
Obligor meeting the following
6
<PAGE> 12
specifications: (i) the Wholesaler Rebate is lawfully and exclusively owned by
such Obligor and subject to a first priority perfected Lien in favor of Agent
and to no other Lien and such Obligor has the right of assignment thereof and
the power to grant a security interest therein; (ii) the Wholesaler Rebate is
valid and enforceable representing the undisputed obligation of the named
Wholesaler to pay the rebate to the named Obligor; (iii) the Wholesaler Rebate
is not more than sixty (60) days past its due date; (iv) no notice of the
bankruptcy, receivership, reorganization, liquidation, dissolution, or
insolvency of the Wholesaler owing the rebate has been received by Agent, any
Lender or an Obligor (provided that post-petition obligations, if otherwise
eligible, from an Account Debtor who is a debtor in a Chapter 11 case under the
Bankruptcy Code may be included by Agent on a case by case basis after Agent's
review of the Account Debtor's creditworthiness following Borrower's request);
(v) the Wholesaler owing the rebate is not a Subsidiary or Affiliate of any
Obligor; (vi) the Wholesaler owing the rebate does not have its principal place
of business or executive office outside the United States or Canada; (vii) the
obligation is not subject to any defense, offset, counterclaim, deduction,
discount, credit, chargeback, contra claim, allowance or adjustment; and (viii)
the rebate meets such other specifications and requirements which may from time
to time be reasonably established by Agent.
ENVIRONMENTAL LAWS - Any and all Federal, foreign, state, provincial,
local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees and any and all common law requirements, rules and bases of
liability regulating, relating to or imposing liability or standards of conduct
concerning pollution, protection of the environment, or the impact of
pollutants, contaminants or toxic or hazardous substances on human health or the
environment, as now or may at any time hereafter be in effect.
ERISA - The Employee Retirement Income Security Act of 1974, as the
same may be amended, from time to time.
EVENT OF DEFAULT - Section 8.1.
EXCESS BORROWING AVAILABILITY - The difference (if a positive number)
between (i) the Borrowing Base and (ii) the sum of (A) reserves established by
Lender, (B) Advances outstanding and being requested as of the date such
calculation is made, (C) liabilities of the Obligors delinquent or outstanding
past their due date, and (D) expenses owed by Obligors with respect to the
transactions described herein.
EXPENSES - Section 9.6.
FEDERAL FUNDS RATE - The daily rate of interest announced from time to
time by the Board of Governors of the Federal Reserve System in publication H.15
as the "Federal Funds Rate."
FUNDED DEBT TO TANGIBLE NET WORTH RATIO - At any date, the ratio of (i)
Consolidated Funded Debt to (ii) Consolidated Tangible Net Worth.
GAAP - Generally accepted accounting principles as in effect on the
Closing Date applied in a manner consistent with the most recent audited
financial statements of Borrower furnished to Agent under Section 6.9 herein.
GUARANTORS - Collectively, the Original Guarantor and each Additional
Guarantor.
7
<PAGE> 13
GOVERNMENTAL AUTHORITY - Any government or political subdivision, or
any agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury, or arbitration
(to the extent having jurisdiction over Borrower or any Consolidated Entity or
any Subsidiary of any Consolidated Entity, in each case whether foreign or
domestic).
HAZARDOUS SUBSTANCE - Any substance defined or designated as hazardous
or toxic waste, hazardous or toxic material, hazardous or toxic substance or
similar term, under any Environmental Law.
INDEBTEDNESS - Of any Person at any date, without duplication, (i) all
indebtedness of such Person for borrowed money (including, with respect to
Obligors, the Obligations) or for the deferred purchase price of property or
services (other than current trade liabilities incurred in the ordinary course
of business and payable in accordance with customary practices), (ii) any other
indebtedness of such Person which is evidenced by a note, bond, debenture or
similar instrument, (iii) all Capitalized Lease Obligations of such Person, (iv)
the face amount of all letters of credit issued for the account of such Person
and all drafts drawn thereunder, (v) all obligations of other Persons which such
Person has guaranteed, and (vi) all liabilities secured by any Lien on any
Property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof but only to the extent of the
value of the property as determined by either the acquisition price of such
property or as otherwise determined by an independent appraisal.
INITIAL BASE RATE MARGIN - Seventy-five (75) basis points.
INITIAL FEES - Those fees owing by Borrower to Agent and the Initial
Lender as set forth in a fee letter among such parties of even date herewith.
INITIAL LENDER - First Union National Bank.
INITIAL LIBOR RATE MARGIN - Three hundred twenty-five (325) basis
points.
INTEREST COVERAGE RATIO - For any period, the ratio of (i) Consolidated
EBITDA to (ii) Consolidated Interest Expense.
INVENTORY - All of the "inventory" (as that term is defined in Section
9109 of the UCC) of Borrower or any other Obligor whether now existing or
hereafter acquired or created.
IPO - An initial public offering of Borrower's Capital Stock occurring
on or prior to December 31, 1998 generating no less than Twenty Million Dollars
($20,000,000) of gross cash proceeds for Borrower.
IRS - The United States Internal Revenue Service.
LIBOR BASED RATE - The Adjusted LIBOR Rate PLUS (as determined in
accordance with the terms hereof) the Initial LIBOR Rate Margin or Adjusted
LIBOR Rate Margin.
LIBOR BASED RATE LOANS - Loans under the Revolving Credit subject to
interest
8
<PAGE> 14
calculated under the terms hereof based on the LIBOR Based Rate.
LIBOR INTEREST PERIOD - A period of one (1), two (2), three (3) or six
(6) months during which the LIBOR Based Rate is applicable.
LIEN - Any interest of any kind or nature in property securing an
obligation owed to, or a claim of any kind or nature in property by, a Person
other than the owner of the Property, whether such interest is based on the
common law, statute, regulation or contract, and including, but not limited to,
a security interest or lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt, a lease, consignment or bailment for security
purposes, a trust, or an assignment. The term "Lien" shall include without
limitation, reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property other than those which would not materially
interfere with Borrower's use of the Property and would not materially detract
from the value of the Property. For the purposes of this Agreement, a Person
shall be deemed to be the owner of any Property which it has acquired or holds
subject to a conditional sale agreement or other arrangement pursuant to which
title to the Property has been retained by or vested in some other Person for
security purposes.
LOANS - The unpaid balance of Advances under the Revolving Credit.
LOAN DOCUMENTS - This Agreement, the Revolving Credit Note, the
Trademark Agreements, the Lock Box Agreements, the Surety Documents, and all
agreements, instruments and documents executed and/or delivered in connection
therewith, all as may be supplemented, restated, superseded, amended or replaced
from time to time.
LOCK BOX AGREEMENT - Those certain Lock Box Agreements between an
Obligor and Agent executed and delivered by such Obligor to Agent as it may be
supplemented, restated, superseded, amended, or replaced from time to time.
LOCK BOX - Section 2.2.
LONDON BUSINESS DAY - Any Business Day on which banks in London,
England are open for business.
MAJORITY LENDERS - At any time, Lenders holding Pro Rata Percentages
aggregating at least sixty-six and two-thirds (66-2/3%) percent of the total Pro
Rata Shares at such time.
MATERIAL ADVERSE EFFECT - (a) Any effect (both before and after giving
effect to the transactions contemplated by this Agreement and the other Loan
Documents) which, with respect to the business, assets, properties, financial
condition, prospects or results of operations of Borrower or any Consolidated
Entity materially and adversely affects either Borrower or all Obligors taken as
a whole, or (b) any fact, event, condition or circumstance that, singly or in
the aggregate with any other fact, event, condition or circumstance, has a
reasonable likelihood of resulting in or leading to (i) a material adverse
effect described in clause (a), (ii) the inability of any Obligor to perform in
any material respect its obligations hereunder or under any other Loan Document
or the inability of Agent or Lenders to enforce in any material respect the
rights purported to be granted hereunder or under any
9
<PAGE> 15
other Loan Document, or (iii) a material adverse effect on the ability of any
Obligor to effect (including hindering or unduly delaying) the transactions
contemplated by this Agreement and the other Loan Documents on the terms
contemplated hereby and thereby.
MAXIMUM LOAN AMOUNT - The sum of Thirty-Five Million Dollars
($35,000,000.00) (subject to any applicable borrowing limitations set forth in
Section 2.1(a) or any other provision hereof).
MOODY'S - Section 7.7.
OBLIGATIONS - All existing and future debts, liabilities and
obligations of every kind or nature at any time owing by Obligors, or any
Obligor, to Lenders and/or Agent if incurred hereunder or under the Loan
Documents, whether joint or several, related or unrelated, primary or secondary,
matured or contingent, due or to become due, and whether principal, interest,
fees or Expenses, including, without limitation, debts, liabilities and
obligations in respect of the Revolving Credit and any extensions,
modifications, substitutions, increases and renewals thereof; the payment of all
amounts advanced by Agent to preserve, protect and enforce rights hereunder and
in the Collateral; and all Expenses incurred by Agent.
OBLIGORS - Collectively, Borrower and all Guarantors.
OVERADVANCE - Section 2.1(a)(i).
ORIGINAL GUARANTORS - Collectively, UDI and UDI Canada.
PBGC - Pension Benefit Guaranty Corporation.
PERMITTED ACQUISITION - The acquisition by Borrower or any other
Obligor of all or substantially all of the Capital Stock, securities or assets
of any Person in any transaction or series of related transactions, provided
that (as of the date of closing on the proposed acquisition, unless otherwise
expressly stated below) (i) no Default or Event of Default has occurred or would
occur after giving effect to such acquisition(including without limitation the
applicable provisions of Section 6.8 of this Agreement) and Agent receives a
written certification to such effect from the chief financial officer of
Borrower; (ii) such Person engages in an industry substantially similar to the
industry in which Obligors engage on the date hereof; (iii) the Acquired Entity
becomes an Additional Guarantor and executes and delivers to Agent, for the pro
rata benefit of Lenders, all Surety Documents as Lenders may require and Agent,
for the pro rata benefit of Lenders, shall have a first priority Lien in all
existing and future Accounts and Inventory, and such priority Lien as Agent may
then approve in all other Property, of such Acquired Entity; (iv) all searches
(performed at Borrower's cost), corporate resolutions, corporate documents and
opinions required by Agent are delivered to Agent, (v) revised or supplemented
Schedules to this Agreement reflecting the addition of the new Obligor(s) are
delivered to Agent, (vi) as to any acquisition as to which the conditions of
clause (vii) or (viii) below are applicable, Borrower shall have provided to
Agent, prior to the consummation of the acquisition, such financial statements
concerning the Acquired Entity as Agent may request; (vii) if the book value of
the Accounts and Inventory of the Acquired Entity exceed $7,500,000 Agent shall
have performed an audit, at Obligors' expense, of the books of such Person with
the results being acceptable to Agent; (viii) for
10
<PAGE> 16
each of (1) any such acquisition with cash consideration in excess of
$7,500,000, (2) any acquisition with total consideration but not more than
$10,000,000 and as part of which stock of Borrower is less than 25% of such
consideration, (3) any acquisition with total consideration exceeding
$10,000,000 but not more than $20,000,0000 and as part of which stock of
Borrower is less than 50% of such consideration, and (4) any such acquisition
with total consideration in excess of $20,000,000, the Majority Lenders shall
have given their prior written approval; (ix) for any acquisition covered by
clause (viii) above, Borrower shall have supplied Agent with pro forma
projections demonstrating covenant and Borrower Base compliance for at least one
year following the proposed acquisition; and (x) Borrower shall have given Agent
ten (10) days written notice prior to consummation of any such acquisition.
PERMITTED LIENS - Section 7.3.
PERSON - An individual, partnership, corporation, trust, limited
liability company, limited liability partnership, unincorporated association or
organization, joint venture or any other entity.
PRE IPO LOAN LIMIT - Ten Million Dollars ($10,000,000).
PRIME RATE - That rate publicly designated by Agent at its principal
office from time to time as its prime rate of interest, which is not necessarily
the lowest or best rate of interest charged by Agent.
PRO RATA PERCENTAGE(S) - Section 2.1(a)(ii).
PRO RATA SHARE(S) - Section 2.1(a)(ii).
PROPERTY - Any interest of the applicable Person in any kind of
property or asset, whether real, personal or mixed, or tangible or intangible.
REGULATION D - Regulation D of the Board of Governors of the Federal
Reserve System, comprising Part 204 of Title 12, Code of Federal Regulations, as
amended, and any successor thereto.
RESERVE PERCENTAGE - For Agent on any day, that percentage (expressed
as a decimal) which is in effect on such day, prescribed by the Board of
Governors of the Federal Reserve System (or any successor) or any other banking
authority to which Agent (or any Bank Affiliate of Agent) is subject, including
any board or governmental or administrative agency of the United States or any
other jurisdiction to which Agent is subject, for determining the maximum
reserve requirement (including without limitation any basic, supplemental,
marginal or emergency reserves) for (i) deposits of United States Dollars or
(ii) Eurocurrency liabilities as defined in Regulation D, in each case used to
fund a LIBOR Based Rate Loan subject to an Adjusted LIBOR Rate. The Adjusted
LIBOR Rate shall be adjusted automatically on and as of the effective day of any
change in the Reserve Percentage.
REVOLVING CREDIT - Section 2.1(a).
REVOLVING CREDIT BASE RATE - The Base Rate PLUS (as determined in
accordance with the terms hereof) the Initial Base Rate Margin or Adjusted Base
Rate Margin.
11
<PAGE> 17
REVOLVING CREDIT LOAN BALANCE - The actual outstanding principal amount
of Loans owing to any Lender at any particular time or from time to time.
REVOLVING CREDIT MATURITY DATE - July 9, 2001.
REVOLVING CREDIT NOTE - Section 2.1(b).
S&P - Section 7.7.
SECURITY AGREEMENT - A security agreement in the form of Exhibit "C"
attached hereto and made a part hereof.
SENIOR DEBT - The principal amount of Indebtedness of Obligors to
Lenders and Indebtedness permitted under this Agreement which is not
Subordinated Debt.
SENIOR DEBT TO EBITDA RATIO - At any date, the ratio of (i) Senior Debt
to (ii) Consolidated EBITDA.
SUBORDINATED DEBT - Indebtedness of Borrower subject to payment terms
and subordination provisions acceptable to Agent, in its sole discretion.
SUBSIDIARY - With respect to any Person at any time, (i) any
corporation more than fifty percent (50%) of whose voting stock is legally and
beneficially owned by such Person or owned by a corporation more than fifty
percent (50%) of whose voting stock is legally and beneficially owned by such
Person; (ii) any trust of which a majority of the beneficial interest is at such
time owned directly or indirectly, beneficially or of record, by such Person or
one or more Subsidiaries of such Person; and (iii) any partnership, joint
venture or other entity of which ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions are at such time owned directly or indirectly, beneficially or
of record, by, or which is otherwise controlled directly, indirectly or through
one or more intermediaries by, such Person or one or more Subsidiaries of such
Person.
SURETY AGREEMENT - A surety agreement in the form of Exhibit "D"
attached hereto and made a part hereof.
SURETY DOCUMENTS - A Surety Agreement, Security Agreement, financing
statements, Mortgage (if the Additional Guarantor owns real Property), and such
other instruments, documents or agreements as Agent may require from time to
time, and in form and substance acceptable to Agent, following the Closing Date
that are necessary, in Agent's judgment, to make such Acquired Entity or Person
an Additional Guarantor hereunder.
TRADEMARK AGREEMENTS - Collectively, the Trademark Security Agreement
and related instruments, documents and agreements dated the date hereof pursuant
to which an Obligor grants Agent a lien on, and security interest in, all of
such Obligor's existing or after-acquired trademarks, tradenames and service
marks.
12
<PAGE> 18
UCC - The Uniform Commercial Code as adopted in the Commonwealth of
Pennsylvania at 13 Pa.C.S.A. ss.1101 ET SEQ.
UDI - UDI Corp., a Massachusetts corporation.
UDI CANADA - UDI Office Centre Canada Ltd., an Ontario corporation.
UDI OBLIGORS - UDI and UDI Canada, jointly and severally.
UNFINANCED CAPITAL EXPENDITURES - Capital Expenditures that are not
financed through interest bearing Indebtedness within sixty (60) days of the
acquisition of the asset.
USAGE FEE - Section 2.5(b).
WHOLESALER REBATES - Wholesaler rebates granted to one of the Obligors
as a result of a sale or sales of merchandise by a wholesaler to such Obligor
(regardless of whether delivery is made to such Obligor or directly to a
customer of a such Obligor).
1.2 ACCOUNTING PRINCIPLES: Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with GAAP, to the
extent applicable, except as otherwise expressly provided in this Agreement.
SECTION 2. THE LOANS
2.1 REVOLVING CREDIT - DESCRIPTION:
(a) REVOLVING CREDIT:
(i) Subject to the terms and conditions of this Agreement,
each Lender hereby establishes for the benefit of Borrower a revolving credit
facility (the "Revolving Credit") which shall include Advances extended by each
Lender to or for the benefit of Borrower from time to time hereunder. The
aggregate principal amount of unpaid cash Advances shall not, at any time,
exceed the lesser of the Maximum Loan Amount or the Borrowing Base minus such
reserves as Agent may from time to time reasonably establish, in such amounts
and with respect to such matters as Agent may deem appropriate in its reasonable
discretion. Subject to such limitation, the outstanding balance of Advances
under the Revolving Credit may fluctuate from time to time, to be reduced by
repayments made by Borrower, to be increased by future Advances which may be
made by Lenders, to or for the benefit of Borrower, and, subject to the
provisions of Section 8 below, shall be due and payable on the Revolving Credit
Maturity Date. If the aggregate principal amount of unpaid cash Advances at any
time exceed the lesser of the Maximum Loan Amount or the Borrowing Base minus
such reserves established by Agent hereunder (such excess referred to as
"Overadvance"), Borrower shall immediately repay the Overadvance in full.
Notwithstanding anything set forth in this Agreement to the contrary (A) the
aggregate outstanding Advances prior to the consummation of the IPO shall not
exceed the Pre-IPO Loan Limit without prior written approval by the Majority
Lenders, (B) following consummation of the IPO in which proceeds thereof
received by Borrower (which by definition must exceed $20,000,000 of
13
<PAGE> 19
gross proceeds) are less than $25,000,000 net of expenses, the aggregate
outstanding Advances shall not exceed $25,000,000, and (C) subject to clause (A)
above and any other applicable limit set forth herein, as of and after July 1,
1999, outstanding Advances against assets of the UDI Obligors shall not in any
event exceed $12,000,000. Outstanding loans under the existing credit facility
previously established by the Initial Lender for UDI, presently evidenced by a
Master Demand Note issued in December, 1997 and having a present principal
balance of $7,418,322, shall be deemed, as of the date hereof, to be Advances
under the Revolving Credit.
(ii) Subject to the terms of this Agreement, each Lender
agrees to lend to Borrower an amount equal to such Lender's respective
percentage (as to each Lender, the percentage of the Revolving Credit set forth
opposite its name on Schedule "A" attached hereto and made a part hereof and
referred to as its "Pro Rata Percentage") of the Advance requested by Borrower.
The outstanding Loans of each Lender shall not exceed the respective maximum
amount (the "Pro Rata Shares") set forth opposite its name on Schedule "A."
Neither Agent nor any Lender shall at any time, for any reason, have any
obligation to advance any portion of any Pro Rata Share of any other Lender.
(iii) Notwithstanding anything contained in this Agreement to
the contrary, (A) Property of UDI Canada shall not be included in the Borrowing
Base unless and until Agent completes a field examination of the Accounts of UDI
Canada with the results being acceptable to Agent, (B) aggregate Advances
against Property of UDI Canada in the Borrowing Base shall not at any time
exceed $1,250,000, and (C) Property of UDI Canada shall noty of UDI Canada is
removed from the Borrowing Base pursuant to subparagraph (C) above, and so long
as no Overadvance or Event of Default is then outstanding, Agent (on behalf of
Lenders) shall terminate the Surety Agreement of UDI Canada and terminate its
Liens on all Property of UDI Canada.
(b) REVOLVING CREDIT NOTE: At Closing (and thereafter, to the extent
provided in Section 9.16(b) below), Borrower shall execute and deliver a
promissory note to each Lender in the amount of each Lender's Pro Rata Share of
the Maximum Loan Amount. Each Revolving Credit Note shall evidence Borrower's
absolute and unconditional obligation to repay such Lender for all Advances made
under the Revolving Credit, with interest as herein and therein provided. Each
Advance under the Revolving Credit shall be deemed evidenced by the Revolving
Credit Notes, which are deemed incorporated herein by reference and made part
hereof. Each Revolving Credit Note shall be substantially in the form of Exhibit
"E" attached hereto and made a part hereof.
(c) TERM: The Revolving Credit shall expire on the Revolving Credit
Maturity Date. On such date, unless having been sooner accelerated by Agent
pursuant to the terms hereof, all sums owing under the Revolving Credit shall be
due and payable in full, and on and after the Revolving Credit Maturity Date,
Lenders shall not make any additional Advances.
(d) COMMITMENT REDUCTION: Borrower shall have the right at any time and
from time to time, upon at least one(1) Business Day's prior written notice to
Agent, to permanently reduce, without premium or penalty (but subject to Section
2.8 of this Agreement), the Maximum Loan Amount in the minimum amount of One
Million Dollars ($1,000,000) and integral multiples of One Million Dollars
($1,000,000) in excess thereof. Any notice to reduce the Maximum Loan Amount
pursuant to this Section 2.1(d) shall be permanent and may not be revoked. In
the event of any such reduction, outstanding Advances in an amount in excess of
the Maximum Loan Amount, as so reduced, shall be
14
<PAGE> 20
paid on the effective date of such reduction, with interest accrued on the
amount so paid (subject to Section 2.8 of this Agreement) to the date of
reduction.
2.2 ADVANCES, CONVERSIONS, RENEWALS AND PAYMENTS:
(a) PAYMENTS: Except to the extent otherwise set forth in this
Agreement, all payments of principal and of interest on the Revolving Credit,
the Usage Fee, the Expenses, and all other fees, charges and any other
Obligations of Borrower hereunder, shall be made to Agent at its main
Philadelphia banking office, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, in United States dollars, in immediately available funds. Agent
shall have the unconditional right and discretion to charge the Revolving Credit
or the operating account of Borrower or any other Obligor for the Obligations as
they become due from time to time under this Agreement including, without
limitation, interest, principal, fees and reimbursement of Expenses. All
payments made by or received from UDI Canada shall be applied first to
principal, then to unpaid fees, then to interest. If no Event of Default is
outstanding, Agent shall charge the account of Borrower or the other Domestic
Obligors for all fees and interest before seeking payment thereof from UDI
Canada.
(b) APPLICATION OF FUNDS: Borrower shall maintain and shall
cause each Obligor (other than UDI Canada) to maintain a lockbox account(s)
("Lockbox") with Agent and a depository account(s) ("Cash Collateral Account")
with Agent subject to the provisions of this Section 2.2(b). All collections of
Accounts with respect to such Obligors will be paid directly from Account
Debtors into the Lockbox. In lieu thereof for and only for the first year
following the date hereof (or as to any Additional Guarantor, for a period
expiring on the later of (x) the end of the first three (3) months following a
Permitted Acquisition, or (y) the end of the first year following the date
hereof), such Obligors shall be entitled to have collections of Accounts
directed to a lockbox and deposit account ("Blocked Account") with a financial
institution to whom a Blocked Account Notice has been sent by the applicable
ObligoAgent). Borrower shall notify Agent in writing promptly upon creation of
each Blocked Account whereupon each new Blocked Account shall be deemed added to
and made part of Exhibit A hereto. Borrower shall then cause or shall instruct
such Obligors to cause (and Agent is also hereby irrevocably authorized to
cause) the transfer of such collections from the Lockbox or Blocked Accounts, as
applicable, to the Cash Collateral Account. All funds transferred to or
deposited in the Cash Collateral Account, shall be applied by Agent daily,
subject to Agent's standard clearing procedures and clearing periods for
deposited funds, to reduce the outstanding indebtedness under the Revolving
Credit, with future Advances to be made pursuant to the terms of this Agreement.
All collections of Accounts and proceeds of other Collateral received by
Borrower or any other Obligor (other than UDI Canada) shall be held in trust for
the benefit of Agent and remitted, IN SPECIE, to Agent for deposit in the Cash
Collateral Account immediately upon receipt by Borrower or any such Obligor for
application to the outstanding indebtedness under the Revolving Credit. Neither
Borrower nor any Obligor shall have any right of access to or withdrawal from
the Lockbox, Blocked Account or the Cash Collateral Account; provided that if
there are no outstanding cash Advances and no Event of Default has occurred and
is continuing, then all collections of Accounts shall, subject to Agent's
standard clearing procedures and clearing periods for deposited funds, be
transferred from the Cash Collateral Account to Borrower's operating accounts
with Agent or to the operating account of any Obligor as directed by Borrower in
writing. As to UDI Canada, all collections and proceeds shall, if no Event of
Default is outstanding, be collected by UDI Canada and deposited in UDI Canada's
deposit account for use by UDI Canada as working capital. If an Event of Default
is outstanding, Agent shall have the option to take such
15
<PAGE> 21
acecurity agreement given by UDI Canada to Agent or under applicable law to
enforce its rights in the assets of UDI Canada.
(c) SETTLEMENT PROCEDURES:
(i) A. Between each Settlement Date, Agent shall have the
discretion to request the Initial Lender make all Advances hereunder subject to
the Base Rate Option for the account and on behalf of the Lenders. The Initial
Lender may, in its sole discretion, make such Advances. The making of such
Advances at any time or from time to time by the Initial Lender shall not create
any obligation or establish any course of conduct requiring Initial Lender to
continue to do so. Agent shall make a determination of each Lender's Revolving
Credit Loan Balance (by applying each Lender's Pro Rata Percentage to the total
outstanding Loans) periodically but not less frequently than once every week on
the same day of each week, unless such day is not a Business Day, in which event
such determination shall be made the next Business Day ("Settlement Date"),
which outstanding amount shall be calculated as of the close of the Business Day
immediately preceding each respective Settlement Date. A Settlement Date shall
occur notwithstanding any intervening Event of Default or other occurrence,
event or circumstance, including without limitation the commencement of a
bankruptcy or reorganization case. Amounts of principal paid to Agent by
Borrower from time to time shall, between Settlement Dates, be applied to the
Initial Lender's Revolving Credit Loan Balance, with each Lender's respective
Revolving Credit Loan Balance to be adjusted on the next Settlement Date.
Interest shall accrue and each Lender shall be entitled to receive interest from
Borrower at the applicable rate on the actual outstanding funded dollar amount
of its Revolving Credit Loan Balance. Agent shall then promptly issue to each
Lender a settlement schedule containing information with respect to the status
of the Loans and the relevant net positions of the Lenders and their outstanding
Revolving Credit Loan Balances as of the close of the if any, due from each
Lender to Agent (for its own account or on behalf of the Initial Lender) or from
Agent to each Lender, which amount shall be paid by federal funds, via wire
transfer to the party entitled thereto to be received on or before 3:00 p.m.
Philadelphia time on the Settlement Date (provided such settlement schedule has
been delivered prior to 12:00 p.m. Philadelphia time on the Settlement Date).
The obligations of Lenders under this Section are absolute and unconditional,
not subject to setoff, and irrevocable and may not be terminated at any time.
B. Each Lender is absolutely and unconditionally
obligated, without setoff or deduction of any kind, to remit to Agent on the
Settlement Date any amount showing to be owing to Agent or the Initial Lender by
such Lender on the settlement schedule for such date. Agent and/or the Initial
Lender shall also be entitled to recover any and all actual losses and damages
either may incur (including without limitation, reasonable attorneys' fees) from
any Lender failing to remit payment on the Settlement Date in accordance with
this Agreement. Agent may set off the obligations of such Lender under this
paragraph against any distributions or payments of the Obligations to which such
Lender would otherwise be entitled at any time or Agent may withhold such
distributions or payments of such Obligations to which such Lender would
otherwise be entitled and make such distributions or payments to the Initial
Lender in an amount equal to, and as a repayment of, such Lender's Pro Rata
Percentage of the Advance made by the Initial Lender on such Lender's behalf.
(ii) A. With respect to all LIBOR Based Rate Loans, Agent
shall, and in lieu of the procedure set forth in the preceding subparagraph (i)
above with respect to Base Rate Loans, Agent may, in its sole discretion
(regardless of any prior practice), provide the Lenders with
16
<PAGE> 22
notice that Borrower has requested a cash Advance (whether subject to the Base
Rate or the LIBOR Based Rate), on the same Business Day as such request, and
request each Lender to provide Agent with such Lender's Pro Rata Percentage of
such requested cash Advance prior to Agent's making such cash Advance. Upon
receipt of such notice from Agent prior to 12:00 p.m., Philadelphia time, on the
day the Advance is requested, each Lender shall remit to Agent its respective
Pro Rata Percentage of such requested cash Advance, prior to 1:00 p.m.
Philadelphia time, on the Business Day Agent is scheduled to make such cash
Advance in accordance with Section 2.3(d) below. Agent shall not be required to
make the full amount of the requested cash Advance unless and until it receives
funds representing each other Lender's Pro Rata Percentage of such requested
cash Advance, but Agent shall advance to Borrower that portion of the requested
cash Advance equal to the Pro Rata Percentages of such requested cash Advance
which it has received from the Lenders.
B. If Agent does not receive each other Lender's Pro Rata
Percentage of such requested cash Advance, and Agent elects, in its sole
discretion, without any obligation at any time to do so, to make the requested
cash Advance on behalf of Lenders or any of them, Agent shall be entitled to
recover each Lender's Pro Rata Percentage of each cash Advance together with
interest at a per annum rate equal to the Federal Funds Rate during the period
commencing on the date such cash Advance is made and ending on (but excluding)
the date Agent recovers such amount. Each Lender is absolutely and
unconditionally obligated,sh Advance made pursuant to the terms of this
Agreement. To the extent Agent is not reimbursed by such Lender, Borrower shall
repay Agent immediately such amount on demand. Agent shall also be entitled to
recover any and all actual losses and damages (including, without limitation,
reasonable attorneys' fees) from any Lender failing to so advance upon demand of
Agent. Agent may set off the obligations of a Lender under this paragraph
against any distributions or payments of the Obligations which Agent would
otherwise make available to such Lender at any time. Notwithstanding the
foregoing, Agent shall have no duty or obligation at any time for any reason to
make any Advance on behalf of any Lender.
(d) ADVANCES:
(i) Advances which may be made by Lenders from time to time
under the Revolving Credit shall be made available by crediting such proceeds to
Borrower's operating account with Agent to be disbursed by Borrower to such
Obligor(s) as Borrower may determine.
(ii) All Advances requested by Borrower under the Revolving
Credit must be in the minimum amount of (A) Fifty Thousand Dollars ($50,000) and
integral multiples of One Thousand Dollars ($1,000) in excess thereof for Base
Rate Loans and (B) One Million Dollars ($1,000,000) and integral multiples of
Two Hundred Fifty Thousand Dollars ($250,000) in excess thereof for LIBOR Based
Rate Loans and must be requested:
(A) by 11:00 A.M., Philadelphia time, on the date such
Advance is to be made if a Base Rate Loan, and
(B) by 11:00 A.M. London time at least three (3)
Business Days in advance if a LIBOR Based Rate Loan.
(iii) All requests for an Advance are to be in writing by
submission to Agent of an advance request form ("Advance Request Form") in the
form of Exhibit "F" attached hereto
17
<PAGE> 23
and made a part he effective unless confirmed via telephone with Agent.
2.3 REVOLVING CREDIT INTEREST:
(a) REVOLVING CREDIT BASE RATE - Subject to Sections
2.3 (b) and (d), the unpaid principal balance of cash Advances under the
Revolving Credit shall bear interest, subject to the terms hereof, at the per
annum rate equal to the Base Rate PLUS the Initial Base Rate Margin. Interest on
Base Rate Loans under the Revolving Credit shall be payable monthly, in arrears,
on the first day of each calendar month, beginning on the first day of the first
full calendar month after the Closing Date and on the Revolving Credit Maturity
Date.
(b) As of each fiscal quarter end beginning with the
first full fiscal quarter after consummation of the IPO, the interest rate
applicable to Base Rate Loans under the Revolving Credit may be adjusted and
interest shall in any event thereafter accrue (subject to Borrower's right to
elect a LIBOR Based Rate Loan pursuant to Section 2.3(d)) at the per annum rate
equal to the Base Rate PLUS the applicable Adjusted Base Rate Margin set forth
below. In no event, however, may a downward adjustment occur if a Default or
Event of Default has occurred and is continuing. Any such adjustment shall be
effective on the later of (i) five (5) days after, or (ii) the first day of the
calendar month after, Agent's receipt of the Compliance Certificate
demonstrating which tier of the performance ratio is applicable. The Adjusted
Base Rate Margin shall be determined in accordance with the chart set forth
below:
<TABLE>
<CAPTION>
Consolidated Senior Debt To
---------------------------
Consolidated EBITDA Adjusted Base Rate Margin
------------------- -------------------------
<S> <C>
1. Greater than 2.50 to 1.0 75 basis points
2. Less than or equal to 2.50 to 1.0 50 basis points
but greater than 1.75 to 1.0
3. Less than or equal to 1.75 to 1.0 25 basis points
but greater than 1.0 to 1.0
4. Less than or equal to 1.0 0 basis points
</TABLE>
(c) CHANGES IN BASE RATE: Changes in the Revolving
Credit Base Rate shall become effective on the same day that Agent announces a
change in its Prime Rate.
(d) LIBOR RATE OPTION:
(i) So long as no Event of Default has occurred and is
continuing, Borrower may, subject to the requirements of Section 2.2, choose to
have all or a portion of the Revolving Credit accrue interest at the Adjusted
LIBOR Rate plus the Initial LIBOR Rate Margin.
(ii) As of each fiscal quarter end beginning with the first
full fiscal quarter after consummation of the IPO, the interest rate applicable
to LIBOR Based Rate Loans under the Revolving Credit may be adjusted and
interest shall thereafter in any event accrue at the per annum rate equal to the
Adjusted LIBOR Rate PLUS the applicable Adjusted LIBOR Rate Margin set forth
below. In no
18
<PAGE> 24
event, however, may a downward adjustment occur if an Event of Default has
occurred and is continuing. Any such adjustment shall be effective on the later
of (i) five (5) days after, or (ii) the first day of the calendar month after,
Agent's receipt of the Compliance Certificate demonstrating which tier of the
performance ratio is applicable. The Adjusted LIBOR Rate Margin shall be
determined in accordance with the chart set forth below:
<TABLE>
<CAPTION>
Consolidated Senior Debt
------------------------
To Consolidated EBITDA Adjusted LIBOR Rate Margin
---------------------- --------------------------
<S> <C>
1. Greater than 2.50 to 1.0 250 basis points
2. Less than or equal to 2.50 to 1.0 225 basis points
but greater than 1.75 to 1.0
3. Less than or equal to 1.75 to 1.0 200 basis points
but greater than 1.0 to 1.0
4. Less than or equal to 1.0 to 1.0 175 basis points
</TABLE>
(iii) Borrower shall select a LIBOR Interest Period during
which the LIBOR Based Rate is applicable; provided, however, that if the LIBOR
Interest Period would otherwise end on a day which shall not be a London
Business Day, such LIBOR Interest Period shall be extended to the next preceding
or succeeding London Business Day as is Agent's custom in the market in which
such LIBOR Based Rate Loan relates. Interest shall accrue from and including the
first day of each LIBOR Interest Period to, but excluding the day on which any
LIBOR Interest Period expires. For any LIBOR Interest Period which begins on the
last London Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such LIBOR
Interest Period), the LIBOR Interest Period shall end on the last London
Business Day of a calendar month. All accrued and unpaid interest on a LIBOR
Based Rate Loan must be paid in full on the last day of the applicable LIBOR
Interest Period. Interest shall also be due and payable for a LIBOR Interest
Period in excess of three (3) months on the day of such LIBOR Interest Period
that would have been the last day of such LIBOR Interest Period if such LIBOR
Interest Period were a three (3) month LIBOR Interest Period. No LIBOR Interest
Period may end after the Revolving Credit Maturity Date. Subject to all of the
terms and conditions applicable to a request for a LIBOR Based Rate Loan,
Borrower may convert an existing LIBOR Based Rate Loan as of the last day of the
LIBOR Interest Period to a new LIBOR Based Rate Loan provided all interest
accrued under the expiring LIBOR Interest Period has been paid. If Borrower
fails to notify Lender of the LIBOR Interest Period for such a subsequent LIBOR
Based Rate Loan at least two (2) Business Days prior to the last day of the then
current LIBOR Interest Period of such an outstanding LIBOR Based Rate Loan, then
such outstanding LIBOR Based Rate Loan shall become a Base Rate Loan Interest
Period and shall accrue interest at the Revolving Credit Base Rate in accordance
with Sections 2.3(a) or (b) above.
(iv) The Adjusted LIBOR Rate may be automatically adjusted by
Agent on a prospective basis to take into account the additional or increased
cost of maintaining any necessary reserves for Eurodollar deposits or increased
costs due to changes in applicable law or regulation or the interpretation
thereof occurring subsequent to the commencement of the then applicable LIBOR
Interest Period, including but not limited to changes in tax laws (except
changes of general applicability in corporate income tax laws) and changes in
the reserve requirements imposed by the Board of
19
<PAGE> 25
Governors of the Federal Reserve System (or any successor), that increase the
cost to Lender of funding the LIBOR Based Rate Loan. Agent shall promptly give
Borrower notice of such a determination and adjustment setting forth the basis
and calculations therefor, which determination shall be, except for manifest
error, and absent written notice from Borrower to Agent within ten (10) days
from submission, final, conclusive and binding for all purposes.
(v) If Borrower has requested the rate based on the Adjusted
LIBOR Rate in accordance with Section 2.3(d) and Agent shall have reasonably
determined that Eurodollar deposits equal to the amount of the principal of the
requested LIBOR Based Rate Loan and for the LIBOR Interest Period specified are
unavailable, or that the rate based on the Adjusted LIBOR Rate will not
adequately and fairly reflect the cost of the Adjusted LIBOR Rate applicable to
the specified LIBOR Interest Period, of making or maintaining the principal
amount of the requested LIBOR Based Rate Loan specified by Borrower during the
LIBOR Interest Period specified, or that by reason of circumstances affecting
Eurodollar markets, adequate and reasonable means do not exist for ascertaining
the rate based on the Adjusted LIBOR Rate applicable to the specified LIBOR
Interest Period, Agent shall promptly give notice of such determination to
Borrower that thvailable. A determination by Agent hereunder shall be prima
facie evidence of the correctness of the fact and amount of such additional
costs or unavailability. Upon such a determination, (A) the obligation to
establish, convert to, or maintain a LIBOR Based Rate Loan at the rate based on
the Adjusted LIBOR Rate shall be suspended until Agent shall have notified
Borrower that such conditions shall have ceased to exist, and (B) the applicable
Revolving Credit portion subject to the requested conversion shall continue to
accrue interest at the Revolving Credit Base Rate in accordance with Sections
2.3(a) or (b) above.
(vi) If, as a result of any changes in applicable law or
regulation or the interpretation thereof, it becomes unlawful for a Lender to
maintain Eurodollar liabilities sufficient to fund any LIBOR Based Rate Loan
subject to the rate based on the Adjusted LIBOR Rate, then such Lender shall
immediately notify Borrower and Agent thereof and such Lender's obligations
hereunder to convert to, or maintain a LIBOR Based Rate Loan at the rate based
on the Adjusted LIBOR Rate shall be suspended until such time as such Lender may
again cause the rate based on the Adjusted LIBOR Rate to be applicable to the
LIBOR Based Rate Loan and the Revolving Credit subject to the LIBOR Based Rate
shall continue to accrue interest at the Revolving Credit Base Rate in
accordance with Sections 2.3(a) or (b) above. Promptly after becoming aware that
it is no longer unlawful for such Lender to maintain such Eurodollar
liabilities, such Lender shall notify Borrower thereof and such suspension shall
cease to exist.
2.4 ADDITIONAL INTEREST PROVISIONS.
(a) CALCULATION OF INTEREST: Interest on the Loans, regardless
of the rate option, shall be charged on the basis of a year of three hundred
sixty (360) days but charged for the actual number of days elapsed.
(b) LIMITATION ON LIBOR BASED RATE LOANS: All Loans not
specifically designated by Borrower, pursuant to the terms hereof or not
requested in conformity with the terms hereof, shall be Base Rate Loans. No
LIBOR Based Rate Loans shall be requested by Borrower or made available by
Lender if a Default or an Event of Default has occurred and is continuing
hereunder. No more than five (5) LIBOR Based Rate Loans may be outstanding at
any one time.
20
<PAGE> 26
(c) DEFAULT RATE: After the occurrence and during the
continuance of an Event of Default hereunder, the per annum effective rate of
interest on all outstanding Loans shall be increased by two hundred (200) basis
points retroactively to the date of the occurrence of the Event of Default,
provided, however that the Default Rate shall be applicable only if Obligors
have failed to cure the Event of Default in a manner acceptable to Agent within
ten (10) Business Days following the occurrence thereof. Agent will give
Borrower written notice of such increase within five (5) Business Days after
implementation of such increase.
(d) TERMINATION OF LIBOR BASED RATE LOANS: All LIBOR Based
Rate Loans shall automatically convert to Base Rate Loans at the end of the
current Interest Period therefor, upon the occurrence and during the continuance
of an Event of Default, subject to Agent's rights under Section 2.4(c).
(e) CONTINUATION OF INTEREST CHARGES: All contractual rates of
interest chargeable on outstanding principal under the Loans, regardless of the
rate option, shall continue to accrue and be paid even after the occurrence of a
Default, an Event of Default, maturity, acceleration, judgm: In no contingency
or event whatsoever shall the aggregate of all amounts deemed interest hereunder
and charged or collected pursuant to the terms of this Agreement exceed the
highest rate permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto. In the event that such
court determines Lenders have charged or received interest hereunder in excess
of the highest applicable rate, Lenders shall apply, in its sole discretion, and
set off such excess interest received by Lenders against other Obligations due
or to become due and such rate shall automatically be reduced to the maximum
rate permitted by such law.
2.5 FEES:
(a) INITIAL FEES: Borrower shall unconditionally pay to Agent,
for its own account and the account of the Initial Lender (as they may agree),
the Initial Fees in the amounts and at the times set forth in a fee letter
between Borrower and such parties.
(b) USAGE FEE: So long as the Revolving Credit is outstanding
and has not been terminated, Borrower shall unconditionally pay to Agent for the
pro rata benefit of each Lender, a non-refundable fee ("Usage Fee") equal to
three eighths of one percent (.375%) per annum of the daily unused portion of
the Revolving Credit (which shall be calculated as the Maximum Loan Amount (or
$10,000,000 prior to the IPO) minus the average daily outstanding principal
balance of Advances). The Usage Fee shall be computed and paid on a quarterly
basis, in arrears, on the first day of each calendar quarter, beginning on the
first day of the first calendar quarter after the Closing Date and also on the
Revolving Credit Maturity Date. The Usage Fee shall be calculated on the basis
of a year of three hundred sixty (360) days but charged for the actual number of
days elapsed.
(c) AGENT'S FEE: Borrower shall unconditionally pay to Agent
an annual Agent's fee of $20,000, payable annually in advance on a nonrefundable
basis, such fee to accrue as of (and the first annual payment to be made on) the
date the Initial Lender is no longer the only Lender hereunder.
2.6 LIBOR BASED RATE LOAN PREPAYMENTS: No portion of the LIBOR Based
Rate Loans may be prepaid at any time unless Borrower first satisfies in full
its obligation under Section 2.8 below
21
<PAGE> 27
arising from such prepayment.
2.7 USE OF PROCEEDS: The extensions of credit under and proceeds of the
Revolving Credit shall be used to (i) provide working capital to Obligors; (ii)
finance Permitted Acquisitions by Obligors; and (iii) provide funding for fees
and expenses associated with the IPO; and (iv) fund other corporate purposes not
prohibited hereby.
2.8 INDEMNITY: Borrower shall and shall cause Obligors to indemnify,
defend and hold harmless Agent and Lenders against (or guaranty Borrower's
indemnity obligation with respect to)any and all loss, liability, cost or
expense which Agent or any one or more Lenders may sustain or incur (including,
without limitation, loss of the Initial LIBOR Applicable Margin or Adjusted
LIBOR Applicable Margin) as a consequence of (a) any failure of Borrower to
convert or extend any LIBOR Based Rate Loan after notice thereof has been given
to Agent or (b) any payment, prepayment or conversion of a LIBOR Based Rate Loan
by Borrower made for any reason on a date other than the last day of the
applicable LIBOR Interest Period. Borrower shall pay the full amount thereof to
Agent on demand by Agent.
2.9 CAPITAL ADEQUACY: If after the date hereof any present or future
law, governmental rule, regulation, policy, guideline, directive or similar
requirement (whether or not having the force of law) imposes, modifies, or deems
applicable any capital adequacy, capital maintenance or similar requirement
which affects the manner in which any Lender allocates capital resources to its
commitments (including any commitments hereunder), and as a result thereof, in
the opinion of such Lender, the rate of return on such Lender's capital with
regard to the Loans is reduced to a level below that which such Lender could
have achieved but for such circumstances, then in such case and upon notice from
such Lender to Borrower, from time to time, Borrower shall pay such Lender such
additional amount or amounts as shall compensate such Lender for such reduction
in such Lender's rate of return. Such notice shall contain the statement of such
Lender with regard to any such amount or amounts, shall set forth the basis and
calculation therefor, and which shall, in the absence of manifest error, be
binding upon Borrower. In determining such amount, such Lender may use any
reasonable method of averaging and attribution that it deems applicable.
SECTION 3. COLLATERAL
3.1 DESCRIPTION: As security for the payment of the Obligations, and
satisfaction by Borrower and each other Obligor of all covenants and
undertakings contained in this Agreement and the other Loan Documents, Borrower
hereby assigns and grants to Agent for the pro rata benefit of all Lenders a
continuing first lien on and security interest in, upon and to the following
Property:
(i) ACCOUNTS, ETC. - All of Borrower's now owned and hereafter
acquired, created, or arising Accounts, accounts receivable, notes receivable,
contract rights, chattel paper, documents (including documents of title),
instruments and letters of credit;
(ii) INVENTORY - All of Borrower's now owned or hereafter
acquired Inventory of every nature and kind, wherever located;
(iii) GENERAL INTANGIBLES - All of Borrower's now owned and
hereafter
22
<PAGE> 28
acquired, created or arising general intangibles of every kind and description,
including, without limitation, Wholesaler Rebates, indemnification rights,
customer lists, chooses in action, claims, books, records, patents and patent
applications, copyrights, trademarks, tradenames, service marks, tradestyles,
trademark applications, blueprints, drawings, designs and plans, trade secrets,
contracts, contract rights, licenses, license agreements, formulae, tax and any
other types of refunds, returned and unearned insurance premiums, rights and
claims under insurance policies including without limitation, credit insurance
and key man life insurance policies, and computer information, software, records
and data;
(iv) EQUIPMENT - All of Borrower's now owned and hereafter
acquired equipment, including, without limitation, machinery, vehicles,
furniture and fixtures, wherever located, and all replacements, parts,
accessories, substitutions and additions thereto;
(v) DEPOSIT ACCOUNTS - All of Borrower's now existing and
hereafter acquired or arising deposit accounts of every nature, wherever
located, and all documents and records associated therewith;
(vi) PROPERTY IN LENDER'S POSSESSION - All Property of
Borrower, now or hereafter in the possession of Agent or any Lender;
(vii) INVESTMENT PROPERTY - All of Borrower's now owned or
hereafter acquired investment property of every kind (excluding capital stock of
Subsidiaries other than UDI Canada to the extent set forth in Section 4.1(l)
below); and
(viii) PROCEEDS - The proceeds (including, without limitation,
insurance proceeds), whether cash or non-cash, of all of the foregoing Property
and interests in Property described in clauses (i) through (vii).
Notwithstanding the foregoing, the Lien granted herein shall not attach to any
equipment lease permitted herein and the equipment covered thereby to the extent
such lease prohibits the granting of other Liens and if a consent is requested
by Agent no consent is obtained from the lessor.
3.2 LIEN DOCUMENTS: At Closing and thereafter as Agent deems necessary,
Borrower shall execute and deliver and cause each Obligor to execute and deliver
to Agent, or have executed and delivered (all in form and substance reasonably
satisfactory to Agent):
(a) FINANCING STATEMENTS - Financing statements pursuant to the UCC or
(as to UDI Canada, the Personal Property Security Act of Ontario), which Agent
may file in any jurisdiction where any Collateral is or may be located and in
any other jurisdiction that Agent deems appropriate; and
(b) MORTGAGES/TITLE INSURANCE - As to each Obligor owning real
Property, Mortgages pursuant to applicable state law in the proper form for
recording in any jurisdiction where any real Property of any Obligor is or may
be located together with title insurance policies from a title insurance company
reasonably acceptable to Agent, in an amount and in form and substance
reasonably satisfactory to Agent.
(c) OTHER AGREEMENTS - Any other agreements, documents, instruments and
23
<PAGE> 29
writings, including, without limitation, trademark security agreements,
reasonably required by Agent to evidence, perfect or protect Agent's Liens and
security interests in the Collateral or as Agent may reasonably request from
time to time.
3.3 OTHER ACTIONS: In addition to the foregoing, Borrower shall, and
shall cause each Obligor to do anything further that may be lawfully and
reasonably required by Agent to secure Agent and Lenders and effectuate the
intentions and objects of this Agreement, including, but not limited to, the
execution and delivery of Lockbox Agreements, continuation statements, amend-
ments to financing statements, security agreements, contracts and any other
documents required hereunder. At Agent's request, Borrower shall, and shall
cause each Obligor to immediately deliver (with execution by Borrower or such
Obligor of all necessary documents or forms to reflect, implement or enforce all
Liens described herein thereon) to Agent all items for which Agent must receive
possession to obtain and/or maintain perfected security interests, including
without limitation, all notes, letters of credit, certificates and documents of
title, chattel paper, warehouse receipts, instruments, and any other similar
instruments constituting Collateral.
3.4 SEARCHES AND CERTIFICATES: (a) Borrower shall, prior to or at
Closing, and thereafter as Agent may determine from time to time (including
searches to be conducted by Borrower as to each Additional Guarantor which are
conducted not more than thirty (30) days prior to the consummation of any
Permitted Acquisition), at Borrower's expense, obtain (and Agent may also do so,
at its option, from time to time) the following searches (the results of which
are to be consistent with the warranties made by Borrower in this Agreement and
each Obligor in any other Loan Document):
(i) UCC (or in the case of UDI Canada, equivalent) searches
with the Secretary of State and local filing office of each state or other
jurisdiction where each Obligor maintains its executive office, a place of
business, or assets;
(ii) Judgment, federal tax lien and state tax lien searches,
in all applicable filing offices of each jurisdiction searched under
subparagraph (a) above.
(b) Borrower shall, prior to or at Closing and at consummation of
any Permitted Acquisition and at its expense, obtain and deliver to Agent good
standing certificates showing each Obligor to be in good standing in its
respective jurisdiction of incorporation and in each other state, province or
foreign country in which it is doing and presently intends to do business for
which qualification is required.
3.5 LANDLORD'S AND WAREHOUSEMAN'S WAIVERS: Borrower will use all
reasonable efforts to cause each owner of any premises occupied by Borrower and
any other Obligor or to be occupied by Borrower and any other Obligor, and each
warehouseman of any warehouse, where, in either event, Collateral is held, to
execute and deliver to Agent an instrument, in form and substance satisfactory
to Agent, under which such owner(s) or warehouseman subordinates its/his/their
interests in and waives its/his/their right to distrain on or foreclose against
the Collateral and agrees to allow Agent to remain on such premises to dispose
of or deal with any Collateral located thereon.
3.6 FILING SECURITY AGREEMENT: A carbon, photographic or other
reproduction or other copy of this Agreement or of a financing statement is
sufficient as and may be filed in lieu of a financing
24
<PAGE> 30
statement.
3.7 POWER OF ATTORNEY: Each of the officers of Agent is hereby
irrevocably made, constituted and appointed the true and lawful attorney for
Borrower (without requiring any of them to act as such) with full power of
substitution to do the following: (a) endorse the name of Borrower upon any and
all checks, drafts, money orders and other instruments for the payment of monies
that are payable to Borrower and constitute collections on Borrower's Accounts;
(b) execute in the name of Borrower any financing statements, schedules,
assignments, instruments, documents and statements that Borrower is obligated to
give Agent hereunder or is necessary to perfect (or continue or evidence the
perfection of such security interest or Lien) Agent's security interest or Lien
in the Collateral; and (c) do such other and further acts and deeds in the name
of Borrower that Agent may reasonably deem necessary or desirable to enforce any
Account or other Collateral.
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES
Closing under this Agreement is subject to the following conditions
precedent (all documents to be in form and substance satisfactory to Agent and
Agent's counsel):
4.1 RESOLUTIONS, OPINIONS, AND OTHER DOCUMENTS: Borrower shall have
delivered, or caused to be delivered to Agent, the following:
(a) this Agreement and the Revolving Credit Note properly
executed;
(b) financing statements, and each of the other Loan Documents
to be executed by Borrower or any other Person pursuant to the terms hereof
including, without limitation, Surety Documents executed by each Original
Guarantor;
(c) certified copies of (i) resolutions of Borrower's board of
directors authorizing the execution of this Agreement, the Revolving Credit Note
to be issued hereunder and each document required to be delivered by any Section
hereof and (ii) Borrower's Articles or Certificate of Incorporation and By-laws;
(d) certified copies of (i) resolutions of each Original
Guarantor's board of directors authorizing the execution of each Loan Document
to which such Original Guarantor is a party and (ii) each Original Guarantor's
Articles or Certificate of Incorporation and By-laws;
(e) an incumbency certificate for Borrower and each Original
Guarantor identifying all Authorized Officers, with specimen signatures;
(f) a written opinion of Borrower's and each Original
Guarantor's independent counsel addressed to Agent (on behalf of Lenders)
covering such matters as Agent deems necessary;
(g) such financial statements, reports, certifications and
other operational information as Agent may require including without limitation,
consolidated financial projections of profit and loss statements for the
remainder of the current fiscal year;
25
<PAGE> 31
(h) certification by the chief financial officer of Borrower
and each Original Guarantor that there has not occurred any material adverse
change in the operations and condition (financial or otherwise) of Borrower and
each such Obligor since March 31, 1998;
(i) payment by Borrower of all fees including, without
limitation, the balance of the Closing Fee and Expenses associated with the
Loans;
(j) the searches and certificates required under Section 3.4;
(k) landlord or warehouseman waivers required under Section
3.5; and
(l) pledge agreement under which Borrower pledges sixty-five
(65%) percent of the capital stock of UDI Canada (accompanied by delivery of the
original share certificate(s) for such stock and stock power(s) endorsed in
blank therefor).
4.2 ABSENCE OF CERTAIN EVENTS: At the Closing Date, no Default or Event
of Default hereunder shall have occurred and be continuing.
4.3 WARRANTIES AND REPRESENTATIONS AT CLOSING: The warranties and
representations contained in Section 5 as well as any other Section of this
Agreement shall be true and correct in all material respects on the Closing Date
with the same effect as though made on and as of that date. Borrower and each
Original Guarantor shall not have taken any action or permitted any condition to
exist which would have been prohibited by any Section hereof.
4.4 COMPLIANCE WITH THIS AGREEMENT: Borrower and each Original
Guarantor shall have performed and complied with all agreements, covenants and
conditions contained herein and in the Loan Documents including, without
limitation, the provisions of Sections 6 and 7 hereof, which are required to be
performed or complied with by Borrower or any Original Guarantor before or at
the Closing Date.
4.5 OFFICERS' CERTIFICATE: Agent shall have received a certificate
dated the Closing Date and signed by the chief financial officer of Borrower
certifying that all of the conditions specified in this Section have been
fulfilled.
4.6 CLOSING: Subject to the conditions of this Section, the Revolving
Credit shall be made available on such date (the "Closing Date") and at such
time as may be mutually agreeable to the parties contemporaneously with the
execution hereof ("Closing") at Philadelphia, Pennsylvania.
4.7 WAIVER OF RIGHTS: By completing the Closing hereunder, or by making
Advances hereunder, neither Agent nor Lenders thereby waive a breach of any
warranty or representation made by Borrower or any Original Guarantor hereunder
or any agreement, document, or instrument delivered to Agent or any Lender or
otherwise referred to herein, and any claims and rights of Agent and Lenders,
resulting from any breach or misrepresentation by Borrower or any Original
Guarantor are specifically reserved by Agent.
4.8 CONDITIONS FOR FUTURE ADVANCES: The making of Advances under the
Revolving Credit in
26
<PAGE> 32
any form following the Closing Date is subject to the following conditions
precedent (all instruments, documents and agreements to be in form and substance
satisfactory to Agent and Agent's counsel):
(a) This Agreement and each of the other Loan Documents shall
be effective;
(b) No event or condition shall have occurred or become known
to any Obligor, or would result from the making of any requested Advance, which
could be reasonably expected to have a Material Adverse Effect;
(c) No Event of Default then exists;
(d) Each Advance is within and complies with the terms and
conditions of this Agreement including, without limitation, the notice
provisions (including a Borrowing Base Certificate) contained in Section 2.2
hereof; and
(e) Each representation and warranty set forth in Section 5 of
this Agreement or in any other Loan Document is then true and correct in all
respects (except to the extent of changes resulting from transactions permitted
by this Agreement, or to the extent such representations and warranties
expressly relate to an earlier date).
SECTION 5. REPRESENTATIONS AND WARRANTIES
To induce Lenders to complete the Closing and make the initial Advances
under the Revolving Credit to Borrower, Borrower warrants and represents to
Lenders that:
5.1 CORPORATE ORGANIZATION AND VALIDITY:
(a) Borrower and each Consolidated Entity are corporations
duly organized and validly existing under the laws of its respective state (or
in the case of UDI Canada, its province) of incorporation, are duly qualified,
validly existing and in good standing and have lawful power and authority to
engage in the business each conducts in each state and each foreign country
where the nature and extent of its business requires qualification except where
failure to so qualify and be in good standing could not be reasonably expected
to have a Material Adverse Effect. A list of all states and other jurisdictions
where Borrower and each other Obligor is qualified to do business is attached
hereto as Schedule "5.1" and made a part hereof.
(b) The making and performance of this Agreement and related
agreements, and each Loan Document required by any Section hereof will not
violate any law, government rule or regulation, or the charter, minutes or
by-law provisions of Borrower or any other Obligor or violate or result in a
default (immediately or with the passage of time) under any contract, agreement
or instrument to which Borrower or such other Obligor is a party, or by which
any is bound. Neither Borrower nor any other Consolidated Entity is in violation
of any term of any agreement or instrument to which it is a party or by which it
may be bound except, as to any non-monetary obligation thereunder, where a
violation thereof could not be expected to have a Material Adverse Effect or of
its charter, minutes or its bylaws.
27
<PAGE> 33
(c) Borrower and each other Obligor has all requisite
corporate power and authority to enter into and perform this Agreement and the
applicable Loan Documents and to incur the obligations herein or therein
provided for, and has taken all proper and necessary corporate action to
authorize the execution, delivery and performance of this Agreement or the
applicable Loan Documents, and the documents and related agreements required
hereby.
(d) This Agreement, the Revolving Credit Note(s) to be issued
hereunder, and all related Loan Documents required to be executed and delivered
by Borrower and each other Obligor hereunder, when delivered, will be valid and
binding upon Borrower and each such other Obligor and enforceable in accordance
with their respective terms subject to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general equity principles.
5.2 PLACES OF BUSINESS: The only places of business of Borrower and
each other Obligor, and the places where each keeps and intends to keep its
Property, are at the addresses shown on Schedule "5.2" attached hereto and made
part hereof.
5.3 PENDING LITIGATION: There are no judgments or judicial or
administrative orders, decrees, injunctions, litigation, proceedings or
investigations (civil or criminal) pending, or to the knowledge of Borrower,
threatened, against Borrower or any Consolidated Entity in any court or before
any Governmental Authority except as shown on Schedule "5.3" attached hereto and
made part hereof. No matter listed on Schedule 5.3 has caused or, if adversely
determined, is reasonably likely to have a Material Adverse Effect. Neither
Borrower nor any Consolidated Entity is in default with respect to any order or
decree of any Governmental Authority. Neither Borrower nor any Consolidated
Entity has been indicted in connection with or convicted or engaged in any
criminal conduct, or is currently subject to any lawsuit or proceeding or under
investigation in connection with any anti-racketeering or other conduct or
activity which may result in the forfeiture of any property to any Governmental
Authority.
5.4 TITLE TO PROPERTIES: Borrower and each Consolidated Entity has good
and marketable title in fee simple (or its equivalent under applicable law) to
all the Property it respectively purports to own, free from Liens and free from
the claims of any other Person, except for those Permitted Liens.
5.5 GOVERNMENTAL CONSENT: Neither the nature of Borrower nor any other
Obligor or of their business or Property, nor any relationship between Borrower
or any other Obligor and any other Person, nor any circumstance affecting
Borrower or any other Obligor in connection with the issuance or delivery of
this Agreement or other Loan Documents is such as to require a consent, approval
or authorization of, or filing, registration or qualification with, any
Governmental Authority on the part of Borrower or any other Obligor in
connection with the execution and delivery of this Agreement or the issuance or
delivery of this Agreement or the other Loan Documents.
5.6 TAXES: All tax returns required to be filed by Borrower and any
Consolidated Entity in any jurisdiction have in fact been filed except where
such failure to file would not be expected to have a Material Adverse Effect,
and all taxes, assessments, fees and other governmental charges upon Borrower
and any Consolidated Entity, or upon any of their respective Property, income or
franchises, which are shown to be due and payable on such returns have been
paid, except for those taxes being
28
<PAGE> 34
contested in good faith with due diligence by appropriate proceedings for which
appropriate reserves have been maintained under GAAP. Borrower is not aware of
any proposed additional tax assessment or material tax to be assessed against or
applicable to Borrower or any Consolidated Entity.
5.7 FINANCIAL STATEMENTS: The annual audited consolidated balance sheet
of Borrower as of December 31, 1997, and the related statements of profit and
loss, stockholder's equity and cash flows, each as of such date, all accompanied
by reports thereon from Borrower's independent certified public accountants,
(complete copies of which have been delivered to Lender), and the quarterly
consolidated financial statements of Borrower as of March 31, 1998, have been
prepared in accordance with GAAP and present fairly the financial position of
the Borrower as of such date and the results of its operations for such period.
The fiscal year for Borrower and each Consolidated Entity currently ends on
December 31. Borrower's and each Original Guarantor's federal tax identification
number are shown on Schedule "5.7" attached hereto and made part hereof.
5.8 FULL DISCLOSURE: Neither the financial statements referred to in
Section 5.7, nor this Agreement or related agreements and documents or any
written statement furnished by Borrower or any Consolidated Entity or any of
them to Agent or Lenders in connection with the negotiation of the Revolving
Credit and contained in any financial statements or documents relating to
Borrower or any Consolidated Entity contain any untrue statement of a material
fact or omit a material fact necessary to make the statements contained therein
or herein not misleading.
5.9 SUBSIDIARIES: Neither Borrower nor any Consolidated Entity has any
Subsidiaries or Affiliates, except as shown on Schedule "5.9" attached hereto
and made a part hereof.
5.10 GUARANTEES, CONTRACTS, ETC.
(a) Neither Borrower nor any Consolidated Entity owns or holds
equity or long term debt investments in, has any outstanding advances to, or
serves as guarantor, surety or accommodation maker for the obligations of, any
Person, or has entered into any leases for real or personal Property (whether as
landlord or tenant), except the Surety Documents and as shown on Schedule
"5.10," attached hereto and made part hereof.
(b) Neither Borrower nor any Consolidated Entity is a party to
any contract or agreement, or subject to any charter or other corporate
restriction, which has or is reasonably likely to have a Material Adverse
Effect.
(c) Neither Borrower nor any Consolidated Entity has agreed or
consented to cause or permit any of its Property whether now owned or hereafter
acquired to be subject in the future (upon the happening of a contingency or
otherwise), to a Lien other than a Permitted Lien.
5.11 GOVERNMENT REGULATIONS, ETC.:
(a) The use of the proceeds of and Borrower's issuance of the
Revolving Credit Note will not directly or indirectly violate or result in a
violation of Section 7 of the Securities Exchange Act of 1934, as amended, or
any regulations issued pursuant thereto, including, without limitation,
Regulations U, T and X of the Board of Governors of the Federal Reserve System,
12 C.F.R.,
29
<PAGE> 35
Chapter II. Borrower does not own or intend to carry or purchase any "margin
stock" within the meaning of said Regulation U with any proceeds of any Advance,
excluding (assuming no breach of the first sentence of this paragraph) any
margin stock of, or which may be owned by, an Acquired Entity acquired through a
Permitted Acquisition.
(b) Borrower and each Consolidated Entity have obtained all
licenses, permits, franchises or other governmental authorizations necessary for
the ownership of its Property and for the conduct of its business, except for
those which, if not obtained, would not cause a Material Adverse Effect.
(c) As of the date hereof, no employee benefit plan , as
defined in Section 3(3) of ERISA, (other than a multi employer plan described in
Section 3(37) of ERISA) maintained by Borrower or any Consolidated Entity or
under which Borrower or any Consolidated Entity could have any liability under
ERISA ("Pension Plan")(i) has failed to meet the minimum funding standards
established in Section 302 of ERISA, (ii) has failed to comply in a material
respect with all applicable requirements of ERISA and of the Internal Revenue
Code, including all applicable rulings and regulations thereunder, except as
shown on Schedule "5.11(c)" attached hereto and made part hereof, (iii) has
engaged in or been involved in a prohibited transaction under Section 406 of
ERISA or Section 4975 of the Internal Revenue Code which would subject Borrower
or any Consolidated Entity to any material liability, or (iv) has been
terminated if such termination would subject Borrower or any Consolidated Entity
to any material liability. Neither Borrower nor any Consolidated Entity has
assumed, or received notice of a claim asserted against Borrower or such
Consolidated Entity for, withdrawal liability (as defined in Section 4207 of
ERISA) with respect to any multi employer pension plan. Borrower and each
Consolidated Entity has timely made all contributions when due with respect to
any multi employer pension plan in which it participates and no event has
occurred triggering a claim against Borrower or such Consolidated Entity for
withdrawal liability with respect to any multi employer pension plan in which
Borrower or such Consolidated Entity participates. All Pension Plans and multi
employer pension plans in which Borrower and each Consolidated Entity
participates are shown on Schedule "5.11(c)".
(d) Neither Borrower nor any Consolidated Entity is in
violation of or has received written notice that it is in violation of any
applicable statute, regulation or ordinance of the United States of America, or
of any state, province, city, town, municipality, county or of any other
jurisdiction, or of any agency, or department thereof, (including without
limitation, Environmental Laws).
(e) Borrower and each Consolidated Entity is current with all
reports and documents required to be filed with any state or federal securities
commission or similar agency and is in full compliance in all material respects
with all applicable rules and regulations of such commissions.
5.12 BUSINESS INTERRUPTIONS: Within five (5) years prior to the date of
this Agreement, none of the business, Property or operations of Borrower or any
Consolidated Entity has been materially and adversely affected in any way by any
casualty, strike, lockout, combination of workers, order of the United States of
America, or any state, province or local government, or any political
subdivision or agency thereof, directed against Borrower or such Consolidated
Entity. There are no pending or threatened labor disputes, strikes, lockouts or
similar occurrences or grievances affecting the business being operated by
Borrower or any Consolidated Entity.
30
<PAGE> 36
5.13 NAMES:
(a) Within five (5) years prior to the Closing Date, neither
Borrower nor any other Obligor has conducted business under or used any other
name (whether corporate or assumed) except for the names shown on Schedule
"5.13(a)", attached hereto and made part hereof. Except as shown on Schedule
"5.13(a)", Borrower and each other Obligor is the sole owner of all names shown
on Schedule "5.13(a)" and any and all business done and all invoices issued in
such trade names are Borrower's or such other Obligor's sales, business and
invoices. Each trade name of Borrower and each other Obligor represents a
division or trading style of Borrower and such other Obligor and not a separate
corporate subsidiary or affiliate or independent entity.
(b) All trademarks, service marks, patents or copyrights which
Borrower and each other Obligor uses or plans to use and any license necessary
for such use are shown on Schedule "5.13(b) attached hereto and made part
hereof. The Borrower or such other Obligor identified on Schedule "5.13(b)" is
the sole owner of such Property except to the extent any other Person has claims
or rights in such Property, as such claims and rights are shown on such Schedule
"5.13(b)." Neither Borrower nor any other Obligor is in violation of any rights
of any other Person with respect to such Property.
5.14 OTHER ASSOCIATIONS: Neither Borrower nor any Consolidated Entity
is engaged or has an interest in any joint venture or partnership with any other
Person except as shown on Schedule "5.14" hereto and made part hereof.
5.15 ENVIRONMENTAL MATTERS: Except as shown on Schedule "5.15" attached
hereto and made part hereof:
(a) No Property presently owned, leased, controlled or
operated by Borrower or any Consolidated Entity contains, or has previously
contained, and, no property formerly owned, leased or operated by Borrower or
any Consolidated Entity during the period of such ownership, lease of operation,
contained, any Hazardous Substances in amounts or concentrations which (i)
constitute or constituted a violation of, or (ii) is reasonably likely to give
rise to liability to Borrower or to Obligors taken as a whole under, any
Environmental Law which could be reasonable expected to have a Material Adverse
Effect.
(b) Borrower and each Consolidated Entity is in compliance,
and, for the duration of all applicable statutes of limitations periods, have
been in compliance in all material respects with all applicable Environmental
Laws, and there is no violation of any Environmental Law with respect to such
properties which is reasonably likely to interfere with any of their continued
operations or to impair the fair saleable value thereof.
(c) Neither Borrower nor any Consolidated Entity has received
any notice of violation, alleged violation, non-compliance, liability or
potential liability regarding environmental matters or compliance with
Environmental Laws and Borrower has no knowledge that any such notice will be
received or is being threatened.
(d) Neither Borrower nor any Consolidated Entity has
transported or disposed of
31
<PAGE> 37
Hazardous Substances in a manner or to a location which are reasonably likely to
give rise to liability of Borrower or any Consolidated Entity under any
Environmental Law.
(e) No judicial proceeding or governmental or administrative
action is pending or, to the knowledge of Borrower, threatened, under any
Environmental Law to which Borrower and any Consolidated Entity is or, to
Borrower's knowledge, will be named as a party, nor are there any consent
decrees or other decrees, consent orders, administrative orders or other orders,
or other administrative or judicial requirements outstanding, the implementation
of which is reasonably likely to have a Material Adverse Effect under any
Environmental Law.
5.16 REGULATION O: No director, executive officer or principal
shareholder of Borrower or any Consolidated Entity is a director, executive
officer or principal shareholder of Agent or any Lender. For the purposes hereof
the terms "director" (when used with reference to a Lender), "executive officer"
and "principal shareholder" have the respective meanings assigned thereto in
Regulation O issued by the Board of Governors of the Federal Reserve System.
5.17 CAPITAL STOCK: The authorized and outstanding Capital Stock of
Borrower and each Consolidated Entity (and the owners thereof as of the date of
this Agreement) is as shown on Schedule "5.17" attached hereto and made part
hereof. All of the Capital Stock of Borrower and each Consolidated Entity has
been duly and validly authorized and issued and is fully paid and non-assessable
and has been sold and delivered to the holders thereof in compliance with, or
under valid exemption from, all Federal and state laws and the rules and
regulations of all regulatory bodies thereof governing the sale and delivery of
securities. Except for the rights and obligations shown on Schedule "5.17",
there are no subscriptions, warrants, options, calls, commitments, rights or
agreements by which Borrower or any Consolidated Entity or any of the
shareholders of Borrower or any Consolidated Entity is bound relating to the
issuance, transfer, voting or redemption of shares of its Capital Stock or any
pre-emptive rights held by any Person with respect to the shares of Capital
Stock of Borrower or any Consolidated Entity. Except as shown on Schedule
"5.17," neither Borrower nor any Consolidated Entity has issued any securities
convertible into or exchangeable for shares of its capital stock or any options,
warrants or other rights to acquire such shares or securities convertible into
or exchangeable for such shares. The representations in this Section 5.17 shall
not be made as to Borrower following consummation of the IPO.
5.18 SOLVENCY: Borrower and each Consolidated Entity is solvent, is
able to pay its respective debts as they become due, and has capital sufficient
to carry on its respective business and all businesses in which each is about to
engage, and now owns Property having a value both at fair valuation and at
present fair salable value greater than the amount required to pay such entity's
debts. Neither Borrower nor any Consolidated Entity will be rendered insolvent
by the execution and delivery of this Agreement or any of the other documents
executed in connection with this Agreement or by the transactions contemplated
hereunder or thereunder.
5.19 INTERRELATEDNESS OF BORROWER AND OBLIGORS: The business operations
of Borrower and each other Obligor are interrelated and complement one another,
and such companies have a common business purpose, with inter-company
bookkeeping and accounting adjustments used to separate their respective
Properties, Liabilities, and transactions. To permit their uninterrupted and
continuous operations, such companies now require and will from time to time
hereafter require funds for general
32
<PAGE> 38
business purposes. The proceeds of Advances under the Revolving Credit will
directly or indirectly benefit Borrower and each Obligor hereunder severally and
jointly.
5.20 INVESTMENT COMPANY: Neither Borrower nor any other Obligor is an
"investment company" registered or required to be registered under the
Investment Company Act of 1940, as amended, nor is Borrower or any other Obligor
controlled by such a company.
5.21 YEAR 2000 ISSUE: Borrower has reviewed the business and operations
of Borrower and the Consolidated Entities to determine whether their business or
operations could be affected by any risk that certain computer hardware,
software or other equipment used by any such entity may be unable to recognize,
interpret or process data or perform date sensitive functions by reason of the
advent of the year 2000 ("Year 2000 Issue"). The Year 2000 Issue is not
reasonably likely to have any Material Adverse Effect.
SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS
Borrower covenants that until all Obligations are paid and satisfied in
full and the Revolving Credit has been terminated:
6.1 PAYMENT OF TAXES AND CLAIMS: Borrower shall pay and shall cause
each Consolidated Entity to pay, before they become delinquent,
(a) all taxes (including without limitation withholding
taxes), assessments and governmental charges or levies imposed upon Borrower or
any Consolidated Entity or any of their Property, and
(b) all claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other Persons entitled to the benefit of statutory
or common law Liens, which, if unpaid, would result in the imposition of a Lien
upon its Property; provided, however, that neither Borrower nor any Consolidated
Entity shall be required to pay any such tax, assessment, charge, levy, claim or
demand if the amount, applicability or validity thereof shall at the time be
contested in good faith and by appropriate proceedings, and if Borrower or such
Consolidated Entity shall have set aside on its books adequate reserves in
respect thereof, if so required in accordance with GAAP; which deferment of
payment is permissible so long as no Lien other than a Permitted Lien has been
entered and Borrower's or such Consolidated Entity's title to, and its right to
use, its Property are not materially adversely affected thereby.
6.2 MAINTENANCE OF PROPERTIES AND CORPORATE EXISTENCE:
(a) PROPERTY - Borrower shall maintain and shall cause each
Consolidated Entity to maintain its Property in good condition and make all
necessary renewals, replacements, additions, betterments and improvements
thereto and will pay and discharge when due the cost of repairs and maintenance
to its Property, all as in the judgment of Borrower or such Consolidated Entity
may be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times. Borrower and each
Consolidated Entity shall pay all rentals when due for all real estate leased by
such Borrower and each Consolidated Entity except as may be contested by such
entity
33
<PAGE> 39
in good faith by appropriate proceedings with notice thereof timely provided to
Agent.
(b) PROPERTY INSURANCE, PUBLIC AND PRODUCTS LIABILITY INSURANCE - Borrower shall
maintain and shall cause each Consolidated Entity to maintain insurance (i) on
all insurable tangible Property against fire, flood, casualty and such other
hazards (including, without limitation, extended coverage, workmen's
compensation, boiler and machinery, with inflation coverage by endorsement) and
(ii) against public liability, products liability and business interruption
insurance in each case in such amounts, with such deductibles and with such
insurers as are customarily used by companies operating in the same industry as
Borrower and each Consolidated Entity. At or prior to Closing, Borrower shall
furnish Agent with duplicate original policies of insurance or such other
evidence of insurance as Agent may require. In the event Borrower or any
Consolidated Entity fails to procure or cause to be procured any such insurance
or to timely pay or cause to be paid the premium(s) on any such insurance, Agent
may do so for Borrower or such Obligor, but Borrower or such Obligor shall
continue to be liable for the same. The policies of all such casualty insurance
as to Obligors shall contain standard Agent's Loss Payable Clauses issued in
favor of Agent under which all losses thereunder shall be paid to Agent (for the
pro rata benefit of Lenders) as Agent's interest may appear. Such policies shall
expressly provide that the requisite insurance cannot be altered or canceled
without thirty (30) days prior written notice to Agent and shall insure Agent
notwithstanding the act or neglect of Borrower or any other Obligor. Borrower
hereby appoints and shall cause each other Obligor to appoint Agent as such
Obligor's attorney-in-fact, exercisable at Agent's option to endorse any check
(but only a check in excess of $50,000 if no Event of Default is outstanding)
which may be payable to Borrower or any other Obligor in order to collect the
proceeds of such insurance and any amount or amounts collected by Agent pursuant
to the provisions of this Section may be applied by Agent, in its sole
discretion, to any Obligations (if an Event of Default is outstanding) or to
repair, reconstruct or replace the loss of or damage to Collateral under such
procedures as Agent in its judgment may from time to time determine. Borrower
further covenants that all insurance premiums owing under its and any other
Obligor's current casualty policy have been paid. Borrower shall notify and
shall cause each other Obligor to notify Agent, promptly, upon Borrower's or
such Obligor's receipt of a notice of termination, cancellation, or non-renewal
from its insurance company of any such policy.
(c) FINANCIAL RECORDS - Borrower shall keep and shall cause each
Consolidated Entity to keep current and accurate books of records and accounts
in which full and correct entries will be made of all of its business
transactions, and will reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP. Borrower shall not
change and shall not permit any Consolidated Entity to change its respective
fiscal year end date without the prior written consent of Agent.
(d) CORPORATE EXISTENCE AND RIGHTS - Borrower shall do and shall cause each
Consolidated Entity to do (or cause to be done) all things necessary to preserve
and keep in full force and effect its existence, good standing, rights and
franchises, except for any merger permitted under Section 7.1 below.
(e) COMPLIANCE WITH LAWS - Borrower shall be and shall cause each
Consolidated Entity to be in compliance with any and all laws, ordinances,
governmental rules and regulations, and court or administrative orders or
decrees to which it is subject, whether federal, state or local, (including,
without limitation, securities laws and regulations and Environmental Laws), and
shall obtain any and
34
<PAGE> 40
all licenses, permits, franchises or other govern- mental authorizations
necessary to the ownership of its Property or to the conduct of its busi-
nesses, which violation or failure to obtain causes or is reasonably likely to
cause a Material Adverse Effect. Borrower shall timely satisfy and shall cause
each Consolidated Entity to timely satisfy all assessments, fines, costs and
penalties imposed by any governmental body against such Consolidated Entity or
any Property of such Consolidated Entity.
6.3 BUSINESS CONDUCTED: Borrower shall continue and shall
cause each other Obligor to continue in the business presently operated by it
using its best efforts to maintain its customers and goodwill. Borrower shall
not engage and shall not permit any other Obligor to engage, directly or
indirectly, in any material respect in any line of business substantially
different from the businesses conducted by Borrower or such Obligor immediately
prior to the Closing Date, unless such line of business is reasonably related to
such business so conducted prior to the Closing Date.
6.4 LITIGATION: Borrower shall give and shall cause each other
Obligor to give prompt notice to Agent of any litigation claiming in excess of
$250,000 from Borrower or such Obligor, or which may otherwise have a Material
Adverse Effect.
6.5 ISSUE TAXES: Borrower shall pay and shall cause each
Consolidated Entity to pay all taxes (other than taxes based upon or measured by
any Lender's income or revenues or any personal property tax), if any, in
connection with the issuance of the Revolving Credit Note(s) and the recording
of any Lien documents. The obligations of Borrower hereunder shall survive the
payment of the Obligations and the termination of this Agreement.
6.6 BANK ACCOUNTS: Borrower shall maintain and shall cause
each other Obligor other than UDI Canada to maintain its major depository and
disbursement account(s) with Agent.
6.7 EMPLOYEE BENEFIT PLANS: Borrower shall and shall cause
each Consolidated Entity to (a) fund each Pension Plan in a manner that will
satisfy the minimum funding standards of Section 302 of ERISA or of the IRS, or
will promptly satisfy any accumulated funding deficiency that arises under
Section 302 of ERISA or of the IRS, (b) furnish Agent, promptly upon Agent's
request of the same, with copies of all reports or other statements filed with
the United States Department of Labor, the PBGC or the IRS with respect to any
such Pension Plan, or which Borrower or such Consolidated Entity may receive
from the United States Department of Labor, the IRS or the PBGC, with respect to
any such Pension Plan, and (c) advise Agent within 30 days of learning of the
occurrence of any Reportable Event (as defined in Section 4043 of ERISA, other
than a Reportable Event for which the thirty (30) day notice requirement has
been waived by the PBGC) or any non-exempt prohibited transaction (under Section
406 of ERISA or Section 4975 of the Internal Revenue Code) with respect to any
such Pension Plan and the action which Borrower or such Consolidated Entity
proposes to take with respect thereto. Borrower shall make and shall cause each
Consolidated Entity to make all contributions when due with respect to any
multi-employer pension plan in which it participates and will promptly advise
Agent (x) upon its receipt of notice of the assertion against Borrower or such
Consolidated Entity of a claim for withdrawal liability, and (y) upon the
occurrence of any event which, to the best of Borrower's knowledge, would
trigger the assertion of a claim for withdrawal liability against Borrower or
such Consolidated Entity or may give rise to any lien against Property of
Borrower or such Consolidated Entity.
35
<PAGE> 41
6.8 FINANCIAL COVENANTS:
(a) Borrower shall maintain and comply with the following financial
covenants prior to the consummation of the IPO:
(i) CONSOLIDATED TANGIBLE NET WORTH: Borrower shall have a
Consolidated Tangible Net Worth of not less than $(500,000) as of September 30,
1998, $(750,000) as of December 31, 1998 and at all times through March 30,
1999, and $500,000.00 as of March 31, 1999 and at all times thereafter.
(ii) FUNDED DEBT TO TANGIBLE NET WORTH RATIO: Borrower shall have a
Funded Debt to Tangible Net Worth Ratio of not more than 8 to 1 as of March 31,
1999 and at all times through March 30, 2000 and 6 to 1 as of March 31, 2000 and
at all times thereafter.
(iii) CURRENT RATIO: Borrower shall have a Current Ratio of at least
.6 to 1 at all times through December 30, 1999, .75 to 1 as of December 31, 1999
and at all times through December 30, 2000 and .8 to 1 as of December 31, 2000
and at all times thereafter.
(iv) INTEREST COVERAGE RATIO: Borrower shall have an Interest
Coverage Ratio of at least 1.75 to 1 as of March 31 and June 30, 1999, 2.0 to 1
as of September 30, 1999, 2.25 to 1 as of December 31, 1999 and 2.5 to 1 as of
the last day of each fiscal quarter thereafter.
(v) CONSOLIDATED CAPITAL EXPENDITURES: Borrower shall not expend for
Consolidated Capital Expenditures more than $750,000 in any fiscal year.
(vi) UDI EBITDA: UDI shall achieve an EBITDA of at least $300,000 for
the quarter ending September 30, 1998 and $300,000 for the quarter ending
December 31, 1998.
(b) Borrower shall maintain and comply with the following financial
covenants at all times following consummation of the IPO:
(i) CONSOLIDATED NET WORTH: As of the last day of the fiscal quarter
in which the IPO is consummated, Borrower shall have a Consolidated Net Worth of
not less than the Consolidated Net Worth as of the date the IPO is consummated
plus 50% of Consolidated Net Income in such quarter (without reduction for
losses) minus $5,000,000. As of the last day of each subsequent fiscal quarter,
Borrower shall have a Consolidated Net Worth of not less than the minimum
required Consolidated Net Worth as of the last day of the preceding fiscal
quarter plus 100% of all equity securities issued in such quarter plus 100% of
all increases in equity attributable to the pooling of interests accounting
measurement plus 50% of all Consolidated Net Income in such quarter (without
reduction for losses).
(ii) ND AS OF THE END OF EACH FISCAL QUARTER THEREAFTER.
(iii) SENIOR DEBT TO EBITDA RATIO: Borrower shall have a Senior Debt
to EBITDA Ratio of not more than 5.0 to 1 as of the end of each fiscal quarter
through March 31, 1999, 4.0 to 1 as of June 30, September 30 and December 31,
1999 and 3.0 to 1 as of March 31, 2000 and as
36
<PAGE> 42
of the end of each fiscal quarter thereafter.
6.9 FINANCIAL AND BUSINESS INFORMATION: Borrower shall deliver, or cause to
be delivered, to Agent the following:
(a) FINANCIAL STATEMENTS AND COLLATERAL REPORTS: such data, reports,
statements and information, financial or otherwise, as Agent may reasonably
request, including, without limitation:
(i) a Borrowing Base Certificate on a weekly basis (or such more
frequent basis as Agent may request if either (x) an Event of Default is
outstanding or (y) Excess Borrowing Availability is less than 10% of the Maximum
Loan Amount);
(ii) within forty-five (45) days after the end of each calendar
quarter in each fiscal year of Borrower, the consolidated and consolidating
earnings, cash flow and retained earnings statement of Borrower and each
Consolidated Entity for such quarter and for the expired portion of the fiscal
year ending with the end of such month, setting forth in comparative form the
corresponding figures for the corresponding periods of the previous fiscal year,
and the consolidated and consolidating balance sheet of Borrower and each other
Consolidated Entity as at the end of such quarter, setting forth in comparative
form the corresponding figures as at the end of the corresponding period of the
previous fiscal year, all in reasonable detail and certified by the chief
financial officer of Borrower to have been prepared from the books and records
of Borrower;
(iii) within ninety (90) days after the end of each fiscal year of
Borrower, the consolidated earnings, cash flow and retained earnings statements
of Borrower and each Consolidated Entity for such year, the consolidated balance
sheet of Borrower and each Consolidated Entity as at the end of such fiscal year
and a statement of cash flows for such fiscal year, setting forth in each case
in comparative form the corresponding figures as at the end of and for the
previous fiscal year, all in reasonable detail, including all supporting
schedules, and audited and certified, without qualification, by independent
public accountants of recognized standing, selected by Borrower and reasonably
satisfactory to Agent, to have been prepared in accordance with GAAP, and such
independent public accountants shall also certify, without qualification, that
in making the examinations necessary to their certification mentioned above they
have reviewed the terms of this Agreement and the accounts and conditions of
Borrower during the accounting period covered by the certificate and that such
review did not disclose the existence of any condition or event which
constitutes a Default or an Event of Default (or that such conditions or events
existed, describing them) together with copies of any management letters
provided by such accountants to management of Borrower; and
(iv) within fifteen (15) days of the end of each calendar month, an
accounts receivable aging report, accounts payable aging report, inventory
certificates, and account status reports, for Borrower and each other Obligor, a
profit and loss statement for Borrower and each Consolidated Entity, and such
other reports as to Borrower and/or any Consolidated Ent officer as true and
correct, all in form and substance reasonably satisfactory to Agent;
(b) NOTICE OF EVENT OF DEFAULT - promptly upon becoming aware of the
existence of any condition or event which constitutes a Default or an Event of
Default under this Agreement, a written notice specifying the nature and period
of existence thereof and what action the Obligors are
37
<PAGE> 43
taking (and propose to take) with respect thereto;
(c) NOTICE OF CLAIMED DEFAULT - promptly upon receipt by Borrower or any
other Consolidated Entity, notice of default, oral or written, given to Borrower
or such Obligor by any creditor for borrowed money, or holding long term
Indebtedness of such Obligor in excess of Two Hundred, Fifty Thousand Dollars
($250,000); and
(d) SECURITIES AND OTHER REPORTS - if Borrower or any Consolidated
Entity shall be required to file reports with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, promptly upon its becoming avail- able, one copy of each
financial statement, report, notice or proxy statement sent by Borrower or such
Consolidated Entity to stockholders generally, and, a copy of each regular or
periodic report, and any registration statement, or prospectus in respect
thereof, filed by Borrower or such Consolidated Entity with any securities
exchange or with federal or state securities and exchange commissions or any
successor agency.
6.10 OFFICERS' CERTIFICATES: Along with the set of financial statements
delivered to Agent the end of each calendar quarter and fiscal year pursuant to
Section 6.9(a) hereof, and within thirty (30) days of the consummation of any
Permitted Acquisition, Borrower shall deliver to Lender a certificate
("Compliance Certificate") (in the form of Exhibit "G" attached hereto and made
a part hereof) from the chief financial officer of Borrower (and as to
certificates accompanying the annual statements of Borrower, also certified by
Borrower's independent certified public accountant) setting forth:
(a) COVENANT COMPLIANCE - the information (including detailed
calculations) required in order to establish whether Borrower is in compliance
with the requirements of Sections 6.8 as of the end of the period covered by the
financial statements then being furnished (and any exhibits appended thereto)
under Section 6.9 and after giving effect to any Permitted Acquisition; and
(b) EVENT OF DEFAULT - that the signer has reviewed the relevant terms
of this Agreement, and has made (or caused to be made under his or her
supervision) a review of the transactions and conditions of Borrower and each
other Obligor from the beginning of the accounting period covered by the
earnings statements being delivered therewith to the date of the certificate,
and that such review has not disclosed the existence during such period of any
condition or event which constitutes a Default or an Event of Default or if any
such condition or event existed or exists, specifying the nature and period of
existence thereof and what action Borrower has taken or proposes to take with
respect thereto.
6.11 AUDITS AND INSPECTION: Borrower shall permit and shall cause each
other Obligor to permit any of Agent's officers, agents or other representatives
to visit and inspect any of the locations of Borrower or such other Obligor, to
examine and audit Borrower's or such Obligor's books of account, records,
reports and other papers, to make copies and extracts therefrom and to discuss
its affairs, finances and accounts with its officers, employees and independent
certified public accountants. If no Event of Default is outstanding, there shall
not be more than four (4) audits per year and Obligors shall be obligated to pay
for the first two (2) audits at the standard rates charged by Agent for such
activity (plus Agent's out-of-pocket expenses). If an Event of Default is
outstanding, there shall be no limit on the number of audits and all audits
shall be at Obligors' expense.
38
<PAGE> 44
6.12 TAX RETURNS AND REPORTS: At Agent's request from time to time,
Borrower shall furnish and shall cause each Consolidated Entity to promptly
furnish Agent with copies of the annual federal, state or provincial income tax
returns of Borrower and such Consolidated Entity. If requested by Agent,
Borrower shall furnish and shall cause each Consolidated Entity to promptly
furnish Agent with copies of all reports filed with any federal, state or local
govern-mental authority or agency, board or commission.
6.13 INFORMATION CONCERNING BORROWER AND CONSOLIDATED ENTITIES:
(a) Any Lender may divulge to any participant, co-lender or assignee or
prospective participant, co-lender or assignee it may obtain in the Loans or any
portion thereof all information, and furnish to such Person copies of any
reports, financial statements, certificates, and documents obtained under any
provision of this Agreement, or related agreements and documents,
(b) All non-public information provided by or on behalf of Borrower or
any Consolidated Entity pursuant to or in connection with this Agreement shall
be treated as confidential; provided, however that nothing shall prevent Agent
or any Lender from disclosing such information (i)to its employees, attorneys,
accountants, advisors and agents; (ii) upon request or demand of any
governmental or regulatory body; (iii) in response to any court order decree or
other requirements of law; (iv) in the exercise of any remedy hereunder or in
connection herewith; (v) to any party referenced in clause (a) above who agrees
to be bound by the provisions hereof; or (vi) which has been publicly disclosed.
6.14 MATERIAL ADVERSE DEVELOPMENTS: Borrower agrees that immediately upon
becoming aware of any development or other information outside the ordinary
course of business and excluding matters of a general economic, financial or
political nature which would reasonably be expected to have a Material Adverse
Effect, it shall give to Agent telephonic or telegraphic notice specifying the
nature of such development or information and such anticipated effect. In
addition, such verbal communication shall be confirmed by written notice thereof
to Agent on the same day such verbal communication is made on the next business
day thereafter.
6.15 PLACES OF BUSINESS: Borrower shall give and shall cause each other
Obligor to give ten(10) days prior written notice to Agent of any changes in the
location of any of its respective places of business, of the places where
records concerning its Accounts are kept, or the establishment of any new, or
the discontinuance of any existing place of business.
6.16 ACCOUNT VERIFICATION: Whether or not a Default or an Event of Default
has occurred, any of Agent's officers, employees or agents shall have the right
at any time, upon reasonable notice during business hours, in the name of Agent
or Borrower or any other Obligor, to verify the validity, amount or any other
matter relating to Accounts by mail, telephone or otherwise. Borrower shall
cooperate and shall cause each other Obligor to cooperate fully with Agent, its
officers, employees or agents in such process.
6.17 YEAR 2000 UNDERTAKING: Borrower shall take and cause each Consolidated
Entity to take all material actions necessary to assure that at all times the
computer based systems utilized by Borrower and each Consolidated Entity are
able to effectively recognize, interpret and process data by reason of
39
<PAGE> 45
the Year 2000 Issue such that no Material Adverse Effect will result from the
Year 2000 Issue. At Agent's request, Borrower shall provide and cause each
Consolidated Entity to provide to Agent assurances reasonably acceptable to
Agent that the computer based systems utilized by Borrower and each Consolidated
Entity are able to recognize, process and perform functions involving dates on
or after December 31, 1999 in compliance with this Section 6.17.
SECTION 7. BORROWER'S NEGATIVE COVENANTS:
Borrower covenants that until all of Obligations are paid and satisfied in
full and the Revolving Credit has been terminated, that:
7.1 ASSET SALE, MERGER, CONSOLIDATION, DISSOLUTION OR LIQUIDATION:
(a) Neither Borrower nor any Consolidated Entity shall engage in any
Asset Sale other than (i) Inventory sold in the ordinary course of such Person's
business, (ii) equipment that is replaced by other equipment of comparable or
superior quality and value within ninety (90) days of such disposition, and
(iii) obsolete or surplus equipment sold or otherwise disposed of from time to
time.
(b) Neither Borrower nor any Consolidated Entity shall merge or
consolidate with any other Person except among themselves or to effectuate a
Permitted Acquisition or commence a dissolution or liquidation.
7.2 ACQUISITIONS: Except for a Permitted Acquisition, neither Borrower nor
any Consolidated Entity shall acquire all or a material portion of the Capital
Stock, securities or assets of any Person in any transaction or in any series of
related transactions or enter into any sale and leaseback transaction.
7.3 LIENS AND ENCUMBRANCES: Neither Borrower nor any Consolidated Entity
shall: (i) execute a negative pledge agreement with any Person covering any of
its Property which may prohibit Liens in favor of Agent or any successors,
assignees or replacement lender(s) from time to time (regardless of the amount
or terms thereof), or (ii) cause or permit or agree or consent to cause or
permit in the future (upon the happening of a contingency or otherwise), its
Property (including, without limitation, the Collateral), whether now owned or
hereafter acquired, to be subject to a Lien or be subject to any claim except
for Permitted Liens. As used herein, "Permitted Liens" means:
(a) Liens securing taxes, assessments or governmental charges or levies
or the claims or demands of materialmen, mechanics, carriers, warehousemen,
landlords, and other like persons, provided the payment thereof is not at the
time required by Section 6.1;
(b) Liens incurred or deposits or pledges made in the ordinary course of
business in connection with workers' compensation, unemployment insurance,
social security and other like laws;
(c) Existing Liens shown on Schedule "7.3" attached hereto and made part
hereof;
(d) Liens constituting purchase money security interests hereafter
created by Borrower or a Consolidated Entity to Persons providing financing for
Capital Expenditures permitted
40
<PAGE> 46
under this Agreement so long as each obligation secured by a Lien permitted by
this subparagraph (d) does not exceed 100% of the lower of the cost or fair
market value of the Property acquired with such financing;
(e) Deposits to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(f) All easements, zoning restrictions, flowage rights, rights-of-way,
covenants, conditions, restrictions, licenses, agreements and other similar
matters effecting real Property and/or buildings and improvements, including the
unrecorded easements and similar agreements, which in the aggregate, are not
substantial in amount and which do not in any case materially detract from the
use of the Property subject thereto or materially interfere with the ordinary
conduct of the business of the Borrower or any Consolidated Entity;
(g) All building codes and zoning ordinances and other laws, ordinances,
regulations, rules, orders or determinations of any Federal, state, county,
municipal or other governmental authority now or hereafter enacted;
(h) Liens created pursuant to the Security Documents;
(i) Liens on the equipment and/or real Property of a Person which
becomes an Obligor after the Closing Date securing term Indebtedness; PROVIDED
that (i) such Liens existed at the time such Person became an Obligor and were
not created in anticipation thereof and (ii) any such Lien is not spread to
cover any other Property of such Person; and
(j) Liens on Property of a Consolidated Entity which is not an Obligor
securing Indebtedness described in Section 7.6(b)(vi).
7.4 TRANSACTIONS WITH AFFILIATES OR SUBSIDIARIES:
(a) Neither Borrower nor any Consolidated Entity shall enter into any
transaction with any other Consolidated Entity, Subsidiary or other Affiliate
including, without limitation, the purchase, sale, or exchange of Property, or
the loaning or giving of funds to any Affiliate or any Subsidiary unless such
transaction (i) represents an unsecured loan from an Obligor to another Obligor
for working capital needs of such Obligor in the ordinary course of its business
or is a repayment thereof, (ii) represents a sale of inventory among Obligors in
the ordinary course of each entity's business or a payment therefor, (iii) is
intended for incidental administrative purposes, (iv) is permitted under Section
7.1(b) above, or (v) represents an arms' length transaction among Obligors for
consideration and on terms substantially similar to that which would be
available to a party which is not affiliated with such Person.
(b) Neither Borrower nor any Consolidated Entity shall create any
Subsidiary unless such Subsidiary (i) is formed for the purpose of making a
Permitted Acquisition, (ii) is in the same line of business as the Obligors, and
(iii) becomes an Obligor immediately upon creation thereof.
41
<PAGE> 47
7.5 GUARANTEES: Neither Borrower nor any Consolidated Entity shall become
or be liable, directly or indirectly, primary or secondary, matured or
contingent, in any manner, whether as guarantor, surety, accommodation maker, or
otherwise, for the existing or future indebtedness of any kind of any other
Person, except for (a) the endorsement in the ordinary course of business of
negotiable instruments for deposit or collection, (b) guaranty obligations
created pursuant to a Surety Agreement, and (c) guarantees by an Obligor of
Indebtedness of another Obligor permitted under this Agreement to be outstanding
so long as the aggregate Indebtedness guaranteed by all such guarantees does not
at any time exceed $500,000.
7.6 DISTRIBUTIONS, REDEMPTIONS AND OTHER INDEBTEDNESS: Neither Borrower nor
any Consolidated Entity shall: (a) declare or pay or make any forms of
Distribution to its share-holders, other than (i) dividends or distributions
made solely with capital stock of Borrower and (iii) dividends by a Consolidated
Entity to Borrower; or (b) hereafter incur or be liable for any Indebtedness
other than from Lenders except (i) Indebtedness giving rise to a Permitted Lien
under Section 7.3(d); (ii) Indebtedness existing as of the date hereof and shown
on Schedule "7.6" attached hereto and made part hereof; (iii) inter-company
Indebtedness permitted under Section 7.4 above; (iv) unsecured Indebtedness
outstanding from time to time in an aggregate amount not exceeding $500,000; (v)
Indebtedness of an Acquired Entity assumed as part of a Permitted Acquisition
which is (A) term Indebtedness and (B) either (1) unsecured or (2) secured by
equipment or real Property of such Acquired Entity subject to the conditions set
forth in Section 7.3(i) and (ii); (vi) Indebtedness of a Consolidated Entity
which is not an Obligor for borrowed money for use by such Consolidated Entity
for working capital; and (vii) Indebtedness arising from the honoring by a bank
or other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business, provided that such
Indebtedness is extinguished within five (5) Business Days after Borrower
becomes aware of its existence.
7.7 LOANS AND INVESTMENTS: Neither Borrower nor any Consolidated Entity
shall make or have outstanding loans, advances, extensions of credit or capital
contributions to, or investments in, any Person, other than (a) investments in
(i) commercial paper maturing in one (1) year or less from the date of issuance
rated either A-1 by Standard & Poor's Corporation ("S&P"), P-1 by Moody's
Investors Service, Inc. ("Moody's") or other similar nationally recognized
credit rating agency of similar standing; (ii) direct obligations of, or
obligations the principal of and interest on which are unconditionally
guaranteed by, the United States of America, or any agency or instrumentality
thereof, maturing in twelve (12) months or less from the date of acquisition
thereof; (iii) certificates of deposit maturing within ninety (90) days from the
date of origin issued by, or money market funds held by, a Federal Reserve Bank
or a commercial bank with capital, surplus and undivided profits of not less
than Two Hundred Fifty Million Dollars ($250,000,000.00), (iv) Repurchase
Agreements secured by direct obligations of the United States of America, or any
agency thereof, maturing in twelve (12) months or less and having a market value
at the time such repurchase agreement is entered into at least equal to the
amount of the repurchase obligations thereunder, entered into with a Federal
Reserve Bank or a commercial bank with capital, surplus and undivided profits of
not less than Two Hundred and Fifty Million Dollars ($250,000,000), or (v)
equity investments by Borrower or a Consolidated Entity in and to another
Consolidated Entity (which, as to any Consolidated Entity which is not an
Obligor, shall be limited to the investment existing as of the date of this
Agreement), including investment in a corporation which, after giving effect to
such investment will become, by a Permitted Acquisition, an Obligor, and (b)
loans (i) to employees up to an aggregate amount of $100,000 outstanding at any
one
42
<PAGE> 48
time from all Consolidated Entities, and (ii) inter-company loans permitted
under Section 7.4.
7.8 USE OF LENDER'S NAME: Neither Borrower nor any Consolidated Entity
shall use Agent's or any Lender's name (or the name of any of any Lender's
Affiliates) in connection with any of its business operations other than to
identify Agent as agent hereunder and Lenders as the lenders hereunder and
depository bank and in such other capacity as any Lender or Agent may agree to
serve. Nothing herein contained is intended to permit or authorize Borrower or
any Consolidated Entity to make any contract on behalf of Agent or any Lender.
7.9 MISCELLANEOUS COVENANTS:
(a) Neither Borrower nor any Consolidated Entity shall become or be a
party to any contract or agreement which at the time of becoming a party to such
contract or agreement materially impairs its ability to perform under this
Agreement.
(b) Neither Borrower nor any other Obligor shall carry or purchase any
"margin stock" within the meaning of Regulations U, T or X of the Board of
Governors of the Federal Reserve System, 12 C.F.R., Chapter II with any proceeds
of any Advance hereunder or in violation of such regulations. Excluded therefrom
(assuming no violation of such regulations) shall be any margin stock of, or
which may be owned by, an Acquired Entity acquired through a Permitted
Acquisition.
SECTION 8. DEFAULT
8.1 EVENTS OF DEFAULT: Each of the following events shall constitute an
event of default ("Event of Default"):
(a) PAYMENTS - if Borrower fails to make any payment of principal or
interest, including any Overadvance, under the Revolving Credit on the due date
of such payment or within five (5) days thereafter (subject, however, to Agent's
ongoing rights contained in the last sentence of Section 2.2 (a) above); or
(b) OTHER CHARGES - if Borrower or any other Obligor fails to pay any
other charges, fees, Expenses or other monetary obligations owing to Agent or
Lenders arising out of or incurred in connection with this Agreement within five
(5) days after notice the date such payment is due and payable or if no date is
specified then within five (5) days after demand is made for such payment; or
(c) PARTICULAR COVENANT DEFAULTS - if Borrower fails to perform, comply
with or observe any covenant or undertaking contained in this Agreement and
(other than with respect to the covenants contained in Section 6.8 and Section 7
for which no cure period shall exist) such failure continues for more than
twenty (20) days after notice from Agent to Borrower of the occurrence thereof;
or
(d) FINANCIAL INFORMATION - if any statement, report, financial
statement, or certificate made or delivered by Borrower or any Obligor or any of
its officers, employees or agents, to Agent or any Lender is not true and
correct, in all material respects, when made; or
43
<PAGE> 49
(e) WARRANTIES OR REPRESENTATIONS - if any warranty, representation or
other statement by or on behalf of Borrower or any other Obligor contained in or
pursuant to this Agreement, any of the Loan Documents or in any document,
agreement or instrument furnished in compliance with, relating to, or in
reference to this Agreement, is false, erroneous, or misleading in any material
respect when made; or
(f) AGREEMENTS WITH OTHERS - if Borrower or any other Obligor shall
default beyond any grace period under any agreement with any third party
creditor for the payment of Indebtedness if (i) such default consists of the
failure to pay any principal, premium or interest with respect to such
Indebtedness or (ii) such default consists of the failure to perform any
covenant or agreement with respect to Indebtedness in excess of Five Hundred
Thousand Dollars ($500,000), if the effect of such default under clause (ii) is
to cause Borrower's or such Obligor's obligations which are the subject thereof
to become due prior to its maturity date or prior to its regularly scheduled
date of payment; or
(g) OTHER AGREEMENTS WITH AGENT OR LENDERS - if Borrower or any other
Obligor breaches or defaults beyond any grace period, or if an event of default
occurs under, (i) the Loan Documents, or (ii) any other existing or future
agreement (related or unrelated) between Borrower and such Obligor and Agent or
any Lender if as to a default covered by this clause (ii) (A) such default
consists of the failure to pay any principal, premium or interest with respect
to Indebtedness or (B) such default consists of the failure to perform any
covenant or agreement with respect to Indebtedness in excess of Two Hundred
Fifty Thousand Dollars ($250,000), if the effect of such default under this
clause (B) is to cause Borrower's or such Obligor's obligations which are the
subject thereof to become due prior to its maturity date or prior to its
regularly scheduled date of payment; or
(h) JUDGMENTS - if any final judgment for the payment of money in excess
of One Million Dollars ($1,000,000) (a) which is not fully and unconditionally
covered by insurance or (b) for which Borrower or such Obligor has not
established a segregated cash or cash equivalent reserve (to Agent's
satisfaction) in the amount of such judgment shall be rendered by a court of
record against Borrower or any Obligor and such judgment shall continue
unsatisfied and in effect for a period of twenty (20) consecutive days without
being vacated, discharged, satisfied or bonded pending appeal; or
(i) ASSIGNMENT FOR BENEFIT OF CREDITORS, ETC. - if Borrower or any
Obligor makes or proposes an assignment for the benefit of creditors generally,
or offers a composition or extension to creditors; or
(j) BANKRUPTCY, DISSOLUTION, ETC. - upon the commencement of any action
for the dissolution or liquidation of Borrower or any Obligor, or the
commencement of any case or proceeding for reorganization or liquidation of
Borrower's or any Obligor's debts under the Bankruptcy Code or any other state
or federal law, now or hereafter enacted for the relief of debtors, whether
instituted by or against Borrower or such Obligor (or in the case of UDI Canada
so long as it is an Obligor, files any proposal under the Bankruptcy and
Insolvency Act of Canada); PROVIDED, HOWEVER, that Borrower or such Obligor
shall have sixty (60) days to obtain the dismissal or discharge of involuntary
proceedings filed against it, it being understood that during such sixty (60)
day period, Lenders shall not be obligated to make Advances hereunder, and Agent
(on behalf of Lenders) may seek adequate protection in any bankruptcy
proceeding; or
44
<PAGE> 50
(k) RECEIVER - upon the appointment of a receiver, liquidator,
custodian, trustee, administrator or similar official or fiduciary for Borrower
or any Obligor or for any of Borrower's or any Obligor's Property; or
(l) EXECUTION PROCESS, ETC. - the issuance of any execution or distraint
process against any Property of Borrower or any Obligor; or
(m) TERMINATION OF BUSINESS - if Borrower or any Obligor ceases any
portion of its business operations that is material to the business operations
of the Obligors taken as a whole; or
(n) PENSION BENEFITS, ETC. - if Borrower or any Obligor fails to comply
with ERISA, so that proceedings are commenced to appoint a trustee under ERISA
to administer Borrower's or such Obligor's Pension Plans or the PBGC institutes
proceedings to appoint a trustee to administer such plan(s), or a Lien is
entered to secure any deficiency or claim with respect to any such Pension Plan,
or a "Reportable Event" as defined under ERISA occurs with respect to any such
Pension Plan which Agent reasonably determines is likely to result in the
termination of such plan(s) under Title IV of ERISA and the imposition of
liability upon Borrower or any Obligors in excess of $1,000,000; or
(o) INVESTIGATIONS - any indication or evidence received by Agent or any
Lender that reasonably leads it to believe Borrower or any Obligor may have
directly or indirectly been engaged in any type of activity which, would be
reasonably likely to result in the forfeiture of any material property of
Borrower or such Obligor considered as a whole to any governmental entity,
federal, state or local.
(p) CHANGE OF CONTROL - if there shall occur a Change of Control.
(q) INDICTMENT - if Borrower or any Obligor is criminally indicted.
(r) SURETY DOCUMENTS - if any breach or default occurs under any Surety
Document (subject, as to non-monetary breaches thereunder, to the same grace
period as may be applicable under clause (c) above) or any obligation to perform
thereunder is terminated.
(s) PROCEEDINGS AGAINST LENDERS - If any legal or equitable action or
proceeding is commenced by Borrower or any other Obligor against Agent or any
Lender to avoid or invalidate any obligation of any Obligor to Agent or any
Lender, any Lien granted by an Obligor to Agent, or any payment made by an
Obligor to Agent or any Lender.
8.2 CURE - Nothing contained in this Agreement or the other Loan Documents
shall be deemed to compel Agent or Lenders at any time to accept a cure of any
Event of Default hereunder.
8.3 RIGHTS AND REMEDIES ON DEFAULT:
(a) In addition to all other rights, options and remedies granted or
available to Agent or Lenders under this Agreement or the Loan Documents, or
otherwise available at law or in equity, upon or at any time after the
occurrence and during the continuance of a Default or an Event of Default, Agent
may, in its discretion, and shall, at the discretion and upon the written
direction of the Majority Lenders, withhold or cease and instruct Lenders to
withhold or cease making Advances under
45
<PAGE> 51
the Revolving Credit.
(b) In addition to all other rights, options and remedies granted or
available to Agent or Lenders under this Agreement or the Loan Documents, or
otherwise available at law or in equity, Agent may, in its discretion, and
shall, at the discretion and upon the written direction of the Majority Lenders,
upon or at any time after the occurrence and during the continuance of any Event
of Default, elect to terminate the Revolving Credit and to declare the
Obligations immediately due and payable, all without demand, notice, presentment
or protest or further action of any kind (it also being understood that the
occurrence of any of the events or conditions set forth in Sections 8.1(j), (k)
or (1) shall automatically cause an acceleration of the Obligations).
(c) In addition to all other rights, options and remedies granted or
available to Agent or Lenders under this Agreement or the Loan Documents, Agent
may, upon or at any time after the acceleration of the Obligations following the
occurrence of an Event of Default (other than the rights with respect to clause
(iv) below which Agent may exercise at any time after the occurrence and during
the continuance and during the continuance of an Event of Default), exercise all
rights under the UCC and any other applicable law or in equity, and under all
Loan Documents permitted to be exercised after the occurrence of an Event of
Default, including the follist of all such rights and remedies):
(i) The right to take possession of, send notices regarding and
collect directly the Collateral, with or without judicial process (including,
without limitation, the right to notify the United States postal authorities to
redirect mail addressed to Borrower or to an address designated by Agent); or
(ii) By its own means or with judicial assistance, enter Borrower's
premises and take possession of the Collateral, or render it unusable, or
dispose of the Collateral on such premises in compliance with subsection (e)
below, without any liability for rent, storage, utilities or other sums, and
Borrower shall not resist or interfere with such action; or
(iii) Require Borrower at Borrower's expense to assemble all or any
part of the Collateral (other than real estate or fixtures) and make it
available to Agent at any place designated by Agent; or
(iv) The right to reduce the Maximum Loan Amount, modify the
Borrowing Base or any portion thereof or the advance rates or to modify the
terms and conditions upon which Lenders may be willing to consider making
Advances under the Revolving Credit or to take additional reserves in the
Borrowing Base for any reason; or
(d) Borrower agrees that a notice received by it at least seven (7) days
before the time of any intended public sale or of the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If permitted
by applicable law, any perishable Inventory or Collateral which threatens to
speedily decline in value or which is sold on a recognized market may be sold
immediately by Agent without prior notice to Borrower. Borrower covenants and
agrees not to interfere with or impose any obstacle to Agent's exercise of its
rights and remedies with respect to the Collateral, after the occurrence and
during the continuance of an Event of Default hereunder.
46
<PAGE> 52
8.4 NATURE OF REMEDIES: All rights and remedies granted Agent and/or
Lenders hereunder and under the Loan Documents, or otherwise available at law or
in equity, shall be deemed concurrent and cumulative, and not alternative
remedies, and Agent may proceed with any number of remedies at the same time
until all Obligations are satisfied in full. The exercise of any one right or
remedy shall not be deemed a waiver or release of any other right or remedy, and
Agent, upon or at any time after the occurrence of an Event of Default, may
proceed against Borrower, any Obligor, or their Property at any time, under any
agreement, with any available remedy and in any order.
8.5 SET-OFF: If any bank account of any Obligor with Agent or any Lender is
attached or otherwise liened or levied upon by any third party, such Person
shall have and be deemed to have, without notice to Borrower or any other
Obligor, the immediate right of set-off for the pro rata benefit of all Lenders
and may apply the funds or amount thus set-off against any of the Obligations
hereunder.
SECTION 9. AGENT
9.1 APPOINTMENT AND AUTHORIZATION. Each Lender, and each subsequent holder
of any of the Revolving Credit Notes by its acceptance thereof, hereby
irrevocably appoints and authorizes the Agent to take such action on its behalf
and to exercise such powers under this Agreement as are delegated to the Agent
by the terms hereof, together with such powers as are reasonably incidental
thereto. Except as may be otherwise expressly provided herein, Borrower is
hereby authorized by the Lenders to deal solely with the Agent in all
transactions which affect the Lenders under this Agreement and the Loan
Documents. The rights, privileges and remedies accorded to the Agent hereunder
shall be exercised by the Agent on behalf of all of the Lenders.
9.2 GENERAL IMMUNITY. Subject to the provisions of this Agreement, the
Agent will handle all transactions relating to the Loans and all other
Obligations, this Agreement, the Loan Documents and all related documents in
accordance with its usual banking practices. In performing its duties as Agent
hereunder, the Agent will take the same care as it takes in connection with
loans in which it alone is interested. However, neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them hereunder or in connection herewith except for
its or their own gross negligence or willful misconduct.
9.3 CONSULTATION WITH COUNSEL. The Agent may consult with legal counsel and
any other professional advisors or consultants deemed necessary or appropriate
and selected by Agent and shall not be liable for any action taken or suffered
in good faith by it in accordance with the advice of such counsel.
9.4 DOCUMENTS. The Agent shall not be under a duty to examine into or pass
upon the effectiveness, genuineness or validity of this Agreement or any of the
Revolving Credit Notes or any other instrument or document furnished pursuant
hereto or in connection herewith, and the Agent shall be entitled to assume that
the same are valid, effective and genuine and what they purport to be. In
addition, the Agent shall not be liable for failing to make any inquiry
concerning the accuracy, performance or observance of any of the terms,
provisions or conditions of such instrument or document.
9.5 RIGHTS AS A LENDER. With respect to its applicable Pro Rata Percentage
of the Revolving
47
<PAGE> 53
Credit, the Agent shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, unless the context otherwise indicates, include the
Agent in its individual capacity. Subject to the provisions of this Agreement,
the Agent may accept deposits from, lend money to and generally engage in any
kind of banking or trust business with Borrower and the other Obligors as if it
were not the Agent.
9.6 RESPONSIBILITY OF AGENT. It is expressly understood and agreed that the
obligations of the Agent hereunder are only those expressly set forth in this
Agreement and that the Agent shall be entitled to assume that no Event of
Default, and no event which with the passage of time, or the giving of notice,
would constitute an Event of Default, has occurred and is continuing, unless the
Agent has actual knowledge of such fact. Except to the extent Agent is required
by the Lenders pursuant to the express terms hereof to take, or refrain from
taking, a specific action, the Agent shall be entitled to use its discretion
with respect to exercising or refraining from exercising any rights which may be
vested in it by, or with respect to taking or refraining from taking any action
or actions that it may be able to take under or in respect of, this Agreement
and the Loan Documents. The Agent shall incur no liability under or in respect
of this Agreement and the Loan Documents by acting upon any notice, consent,
certificate, warranty or other paper or instrument believed by it to be genuine
or authentic or to be signed by the proper party or parties, or with respect to
anything that it may do or refrain from doing in the reasonable exercise of its
judgment, or that may seem to it to be necessary or desirable under the
circumstances. The relationship between the Agent and each Lender is and shall
be that of agent and principal only and nothing herein shall be construed to
constitute the Agent a joint venturer with any Lender, a trustee or fiduciary
for any of the Lenders or for the holder of a participation therein nor impose
on the Agent duties and obligations other than those set forth herein.
9.7 COLLECTIONS AND DISBURSEMENTS.
(a) The Agent will have the right to collect and receive all payments of
the Obligations.
(b) Agent shall pay to each Lender, following receipt by Agent, from the
interest actually received by Agent from Borrower, a sum equal to the interest
calculated for the actual number of days elapsed on the basis of a year of 360
days, on each Lender's actual Revolving Credit Loan Balance at the rate equal to
the applicable rate of interest chosen by Borrower with respect to the
outstanding Advances or otherwise in effect under this Agreement. If Agent
should for any reason receive less than the full amount of the interest or other
compensation due under the Loan Documents, each Lender's share of such interest
or compensation shall proportionately decrease.
(c) If any such payment received by the Agent is rescinded, determined
to be unenforceable or invalid or is otherwise required to be returned for any
reason at any time, whether before or after termination of this Agreement and
the Loan Documents, each Lender will, upon written notice from the Agent,
promptly pay over to the Agent its Pro Rata Percentage of the amount so
rescinded, held unenforceable or invalid or required to be returned, together
with interest and other fees thereon if also required to be rescinded or
returned.
(d) All payments by the Agent and the Lenders to each other hereunder
shall be in immediately available funds. The Agent will at all times maintain
proper books of account and records reflecting the interest of each Lender in
the Revolving Credit, in a manner customary to the Agent's
48
<PAGE> 54
keeping of such records, which books and records shall be available for
inspection by each Lender at reasonable times during normal business hours, at
such Lender's sole expense. In the event that any Lender shall receive any
payments in reduction of the Obligations in an amount greater than its
applicable Pro Rata Percentage in respect of indebteds), such Lender shall hold
such excess IN TRUST (to the extent such Lender is lawfully able to do so) for
Agent (on behalf of all other Lenders) and shall promptly remit to the Agent
such excess amount so that the amounts received by each Lender hereunder shall
at all times be in accordance with its applicable Pro Rata Percentage. To the
extent necessary for each Lender's actual percentage of all outstanding Loans to
equal its applicable Pro Rata Percentage, the Lender having a greater share of
any payment(s) than its applicable Pro Rata Percentage shall acquire a
participation in the applicable outstanding balances of the Pro Rata Shares of
the other Lenders as determined by Agent.
(e) The proceeds from the sale or disposition of any Collateral shall be
applied first to Expenses incurred by Agent, then to accrued but unpaid
interest, then to accrued but unpaid fees, then to the principal balance of
Loans in accordance with each Lender's Revolving Credit Loan Balance and then to
Expenses, if any, incurred by Lenders (to the extent subject to reimbursement by
Borrower hereunder) in accordance with their Pro Rata Percentages.
9.8 INDEMNIFICATION. To the extent not promptly paid by Borrower, the
Lenders hereby each indemnify the Agent ratably according to their respective
Pro Rata Percentages, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by or asserted against the Agent in any way relating to or arising out of this
Agreement or any other Loan Document or any action taken or omitted by the Agent
under or related to this Agreement or the other Loan Documents or the Loans,
provided that no Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting solely from the Agent's gross negligence or
wilful misconduct. Agent shall have the right to deduct, from any amounts to be
paid by Agent to any Lender hereunder, any amounts owing to Agent by such Lender
by virtue of this paragraph.
9.9 EXPENSES.
(a) All reasonable out-of-pocket costs and out-of-pocket expenses
incurred by Agent and not reimbursed on demand by Borrower, in connection with
the creation, amendment, administration, termination and enforcement of the
Loans (including, without limitation, audit expenses, and counsel fees) and
expenditures to protect, preserve and defend Agent's and each Lender's rights
and interest under the Loan Documents shall be shared and paid on demand by
Lenders pro rata based on their applicable Pro Rata Percentage.
(b) Agent may deduct from payments or distributions to be made to
Lenders such funds as may be necessary to pay or reimburse Agent for such costs
or expenses.
9.10 NO RELIANCE. By execution of or joining in this Agreement, each Lender
acknowledges that it has entered into this Agreement and the Loan Documents
solely upon its own independent investigation and is not relying upon any
information supplied by or any representations made by Agent. Each Lender shall
continue to make its own analysis and evaluation of Borrower. Agent makes no
49
<PAGE> 55
representation or warranty and assumes no responsibility with respect to the
financial condition or Property of Borrower, any obligor or any account debtor
of Borrower; the accuracy, sufficiency or currency of any information concerning
the financial condition, prospects or results of operations of Borrower; or for
sufficiency, authenticity, legal effect, validity or enforceability of the Loan
Documents. Agent assumes no responsibility or liability with respect to the
collectibility of the Obligations or the performance by Borrower of any
obligation under the Loan Documents.
9.11 REPORTING. During the term of this Agreement, Agent will promptly
furnish each Lender with a Borrowing Base Certificate as delivered by the
Borrower, field examination reports and weekly settlement sheets, and Agent will
furnish or make available to each Lender at Agent's office in Philadelphia,
Pennsylvania, such other reports and materials actually received by Agent, as
any Lender may reasonably request. Agent will notify Lenders within a reasonable
period of time (not to exceed ten (10) Business Days) after it receives actual
knowledge of any Event of Default under the Loan Documents.
9.12 REMOVAL OF AGENT. The Agent may resign at any time upon giving thirty
(30) days prior written notice thereof to Lenders and Borrower. The Agent may be
removed as Agent hereunder upon the written direction of the Majority Lenders
upon the following: (i) gross negligence or wilful misconduct in the performance
of Agent's duties or responsibilities under this Agreement; or (ii) if a
receiver, trustee or conservator is appointed for Agent or any state or federal
regulatory authority assumes management or control of Agent or if, under
applicable law, the administrative or discretionary duties and responsibilities
of Agent hereunder become controlled by or subject to the approval of any state
or federal regulatory authority. Upon any resignation or permitted removal of
Agent, the Lenders shall have the right to appoint a successor Agent by majority
vote of the other Lenders (based upon the percentages of the total Pro Rata
Shares of the Lenders other than the Lender which is the Agent). Upon the
acceptance of the appointment as a successor Agent hereunder by such successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all rights, powers, obligations and duties of the retiring Agent and the
retiring Agent shall be discharged from its duties and obligations hereunder,
except that Agent shall execute UCC-3 statements of assignment and execute and
deliver such further documents and take such other actions as are reasonably
requested by Lenders in connection with the appointment of a successor Agent or
to protect the interests of Lenders hereunder.
9.13 ACTION ON INSTRUCTIONS OF LENDERS. With respect to any provision of
this Agreement, or any issue arising thereunder, concerning which the Agent is
authorized to act or withhold action by direction of Lenders (or as the case may
be under this Agreement, the Majority Lenders), the Agent shall in all cases be
fully protected in so acting, or in so refraining from acting, hereunder in
accordance with written instructions signed by the requisite Lenders. Such
instructions and any action taken or failure to act pursuant thereto shall be
binding on all Lenders and on all holders of the Revolving Credit Notes.
9.14 SEVERAL OBLIGATIONS. The obligation of each Lender is several, and
neither the Agent nor any other Lender shall be responsible for any obligation
or commitment hereunder of any other Lender.
9.15 CONSENT OF LENDERS TO AGENT'S RIGHTS.
(a) Subject to the provisions of this Section 9.15, Agent shall have the
sole and exclusive right to service, administer and monitor the Loans and the
Loan Documents, including
50
<PAGE> 56
without limitation, the right to exercise all rights, remedies, privileges and
options under the Loan Documents, including without limitation the determination
as to whether Advances should be made under the Agreement and the determination
as to the basis on which and extent to which Advances may be made.
(b) Notwithstanding anything to the contrary contained in subparagraph
(a) above, Agent shall not, without the prior written consent of all Lenders:
(i) extend the Revolving Credit Maturity Date or any scheduled payment due date
under the Revolving Credit, (ii) decrease any interest rate on the Revolving
Credit or any fee or other amount payable for the benefit of the Lenders
hereunder, (iii) compromise or settle all or a portion of the Obligations, (iv)
release any Obligor from the Obligations except (A) in connection with
termination of the Revolving Credit and full payment and satisfaction of all
Obligations, (B) release of UDI Canada pursuant to Section 2.1(a)(iii) hereof
and (C) any release approved by the Majority Lenders in connection with an Asset
Sale which may be approved by the Majority Lenders, (v) increase the advance
rates above those rates initially set forth herein for purposes of determining
the Borrowing Base, (vi) modify Section 9.15(b) or (c) or any other provision of
this Agreement or any other Loan Document expressly providing for consent of all
Lenders, or the definition of Majority Lenders, (vii) release or subordinate
Agent's interest (except with respect to Permitted Liens, to the extent
applicable) in any Collateral except in connection with (A) a sale in the
ordinary course or other permitted disposition or (B) the enforcement of the
Agent's rights and interests in Collateral after the occurrence of an Event of
Default, or (viii) increase the Maximum Loan Limit.
(c) Notwithstanding anything to the contrary contained in subparagraph
(a) abr into any written amendment of, or waive Borrower's noncompliance with,
any Event of Default resulting from Borrower's noncompliance with, any provision
of this Agreement (other than those referred to in Section 9.15(b)) or of the
Loan Documents (which in the case of an amendment to this Section 9, shall also
require Agent's written consent) without the prior written consent of the
Majority Lenders.
(d) After an acceleration of the Obligations, Agent shall have the sole
and exclusive right, with communication (to the extent reasonably practicable
under the circumstances) with all Lenders, to exercise or refrain from
exercising any and all rights, remedies, privileges and options under the Loan
Documents and available at law or in equity to protect and enforce the rights of
the Lenders and collect the Obligations, including, without limitation,
instituting and pursuing all legal actions against Borrower or to collect the
Obligations, or defending any and all actions brought by Borrower or other
Person; or incurring Expenses or otherwise making expenditures to protect the
Loans, the Collateral or Lenders' rights or remedies.
(e) To the extent Agent is required to obtain or otherwise elects to
seek the consent of Lenders to an action Agent desires to take, if any Lender
fails to notify Agent, in writing, of its consent or dissent to any request of
Agent hereunder within ten (10) Business Days of such Lender's receipt of such
written request, such Lender shall be deemed to have given its consent thereto.
(f) Notwithstanding any other provision of this Section 9.15 and without
impairing Agent's discretionary rights under Section 8, to the extent that there
occurs any redetermination of which Accounts constitute Eligible Accounts or
which Inventory constitutes Eligible Inventory which redetermination results in
the creation of an Overadvance and to the extent such Overadvances
51
<PAGE> 57
outstanding at any time as permitted underhout right of disapproval by Lenders
or any of them, be entitled to permit Borrower a period not to exceed thirty
(30) days to repay or remove such Overadvance. During such thirty (30) day
period, the amount of Loans constituting such Overadvance shall be excluded in
the determination of whether availability exists within the Borrowing Base for
future Advances.
(g) The provisions of Section 9 of this Agreement are intended solely
for the benefit of Agent and Lenders and not for the benefit of any third party,
including without limitation, any Borrower or any other Obligor and any
amendment to Section 9 of this Agreement shall not require Borrower's consent.
(h) Notwithstanding any other provision hereof, no Lender's Pro Rata
Share shall be increased without such Lender's written consent and the
modification of any Lender's Pro Rata Share shall not be subject to the consent
of any other Lender.
9.16 PARTICIPATIONS AND ASSIGNMENTS:
(a) Each Lender may at any time grant participations in its Pro Rata
Share under this Agreement (collectively, "Participations") to any other bank,
lending institution or other entity which the granting Lender reasonably
determines has the requisite sophistication to evaluate the merits and risks of
investments in Participations ("Participants"); provided however that: (i) all
amounts payable by the Borrower to each Lender hereunder and voting rights of
each Lender hereunder shall be determined as if such Lender had not granted such
Participation; (ii) any agreement pursuant to which any Lender may grant a
Participation (A) shall provide that such Lender is not delegating and therefore
shall retain the sole right and responsibility to exercise all of its rights and
privileges under this Agreement, including, without limitation, the right to
approve any amendment, modification or waiver of any provisions of this
Agreement and (B) shall not release or discharge such Lender from its duties and
obligations, which shall remain absolute, hereunder, including its obligation to
make Advances hereunder; and (iii) upon entering into any such Participation,
the Lender granting such participation shall give written notice thereof to
Agent.
(b) Each Lender may at any time assign all or any portion of its Pro
Rata Share (together with its rights and obligations with respect thereto) and
its right, title and interest therein or in and to this Agreement and the other
Loan Documents to a Lender or any affiliate of a Lender, or to any other bank or
financial institution, in each case with thirty (30) days prior written notice
to Agent and subject to the prior written consent of the Agent and (if no Event
of Default is then outstanding) Borrower, which, in each such case, shall not be
unreasonably withheld; provided however that (i) such assignment shall not
result in either the assigning or acquiring Lender having a Pro Rata Share of
less than $5,000,000; or other documents reasonably requested by Agent; (iii)
Borrower shall execute such replacement Revolving Credit Note(s) as may be
requested by Agent; (iv) the parties to the assignment shall pay Agent a
processing fee of $3,500 at the time of providing such assignment to Agent; and
(v) promptly following receipt of written notice of an assignment, Agent shall
prepare and circulate replacement Schedules "A" and 10.8 reflecting the Lender
interests immediately following such assignment.
(c) Notwithstanding anything to the contrary contained herein, each
Lender may
52
<PAGE> 58
at any time collaterally assign all or any portion of its rights under this
Agreement and its Revolving Credit Note to any Federal Reserve Bank to secure
overnight deposits, provided that no such assignment shall release the assigning
Lender from its obligations hereunder.
SECTION 10. MISCELLANEOUS
10.1 GOVERNING LAW: THIS AGREEMENT, AND ALL RELATED AGREEMENTS
AND DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. THE PROVISIONS OF THIS
AGREEMENT AND ALL OTHER AGREEMENTS AND DOCUMENTS REFERRED TO HEREIN ARE TO BE
DEEMED SEVERABLE, AND THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION SHALL
NOT AFFECT OR IMPAIR THE REMAINING PROVISIONS WHICH SHALL CONTINUE IN FULL FORCE
AND EFFECT.
10.2 INTEGRATED AGREEMENT: The Revolving Credit Notes, the
other Loan Documents, all related agreements and this Agreement shall be
construed as integrated and complementary of each other, and as augmenting and
not restricting Agent and each Lender's rights and remedies. If, after applying
the foregoing, an inconsistency still exists, the provisions of this Agreement
shall constitute an amendment thereto and shall control.
10.3 WAIVER: No omission or delay by Agent or any Lender in
exercising any right or power under this Agreement or any related agreements and
documents will impair such right or power or be construed to be a waiver of any
Default or Event of Default or an acquiescence therein, and any single or
partial exercise of any such right or power will not preclude other or further
exercise thereof or the exercise of any other right, and as to Borrower or any
other Obligor, no waiver will be valid unless in writing and signed by requisite
Lenders (or Agent on their behalf) and then only to the extent specified.
10.4 INDEMNITY:
(a) Borrower releases and shall indemnify, defend and hold harmless
Agent and Lenders, and its and their respective officers, employees and agents,
of and from any claims, demands, liabilities, obligations, judgments, injuries,
losses, damages and costs and expenses (including, without limitation, legal
fees) resulting from (i) acts or conduct of Borrower or any other Obligor under,
pursuant or related to this Agreement and the other Loan Documents, (ii)
Borrower's or any other Obligor's breach or violation of any representation,
warranty, covenant or undertaking contained in this Agreement or the other Loan
Documents, (iii) Borrower's or any Obligor's failure to comply with any or all
laws, statutes, ordinances, governmental rules, regulations or standards,
whether federal, state or local, or court or administrative orders or decrees,
(including without limitation Environmental Laws, etc.), and (iv) any claim by
any creditor, Governmental Authority or shareholder of Borrower or any other
Obligor arising out of any transaction whether hereunder or in any related to
the Loan Documents, and all costs, expenses, fines, penalties or other damages
resulting therefrom, unless resulting from acts or conduct of Agent or any such
Lender or other indemnified person, constituting wilful misconduct or gross
negligence. This indemnity shall survive the termination of this Agreement.
(b) Promptly after receipt by an indemnified party under subsection (a)
above of notice of the commencement of any action or claim by a third party,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof. The omission so to notify the
indemnifying party shall relieve the indemnifying party from any liability which
it may have to any indemnified party under such subsection if the indemnifying
party is unable to defend such actions as a resbe brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent
53
<PAGE> 59
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. Any indemnifying party hereunder shall not be liable for any
settlement effected without its written consent, which consent shall not be
unreasonably withheld or delayed.
10.5 TIME: Whenever Borrower or any Obligor shall be required to make any
payment, or perform any act, on a day which is not a Business Day, such payment
may be made, or such act may be performed, on the next succeeding Business Day.
Time is of the essence in Borrower's or any other Obligor's performance under
all provisions of this Agreement and all related agreements and documents.
10.6 EXPENSES OF AGENT: At Closing and from time to time thereafter,
Borrower will pay promptly upon demand of Agent all reasonable costs, fees and
expenses of Agent in connection with the (a) analysis, negotiation, preparation,
execution, administration and delivery of this Agreement and other Loan
Documents and the documents and instruments referred to herein and therein and
any amendment, restatement, supplement, waiver or consent relating hereto or
thereto, whether or not any such amendment, amendment and restatement,
supplement, waiver or consent is executed or becomes effective (including,
without limitation, search costs, the reasonable fees, expenses and
disbursements of counsel for Agent and reasonable charges of any expert
consultant to Agent) and (b) the enforcement of any Obligations of, or the
collection of any payments owing from, Borrower or any other Obligor under this
Agreement and/or the other Loan Documents or protection or defense of the rights
of Agent under this Agreement or the Loan Documents, or in connection with any
refinancing or restructuring of the credit arrangements provided under this
Agreement and other Loan Documents in the nature of a "work-out" or of any
insolvency or bankruptcy proceedings, or otherwise (including the reasonable
fees, expenses and disbursements of counsel and any consultant or expert for
Agent and reasonable allocated costs of internal counsel) (collectively, the
"Expenses");
10.7 BROKERAGE: This transaction was brought about and entered into by
Agent, Lenders, Borrower and each other Obligor acting as principals and without
any brokers, agents or finders being the effective procuring cause hereof.
Borrower represents that it has not committed Agent or any Lender to the payment
of any brokerage fee, commission or charge in connection with this transaction.
If any such claim is made by Agent or any Lender by any broker, finder or agent
or other person, Borrower hereby indemnify, defend and save such party harmless
against such claim and further will defend, with counsel satisfactory to Agent,
any action or actions to recover on such claim, at Borrower's own cost and
expense, including such party's reasonable counsel fees. Borrower further agrees
that until any such claim or demand is adjudicated in such party's favor, the
amount demanded shall be deemed a liability of Borrower under this Agreement.
This indemnity shall survive a termination of this Agreement.
10.8 NOTICES:
(a) Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed given if delivered in person or if sent
by telecopy or by nationally recognized overnight courier, as follows, unless
such address is changed by written notice hereunder:
54
<PAGE> 60
If to Agent to: First Union National Bank
Broad and Chestnut Streets
Philadelphia, PA 19107
Attn: Marcus F. Brown
F.C. 1-8-4-18
If to Lenders to: Each financial
institution listed on Schedule "10.8"
attached hereto at the address shown
therein.
With copies to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn: Harvey I. Forman, Esquire
Telecopy: (215) 569-5522
If to Borrower to: Office Centre Corporation
38 East 32nd Street
New York, NY 10016
Attn: Joseph E. Hajjar
Chief Financial Officer
(b) Any notice sent by Agent or any Obligor by any of the above methods
shall be deemed to be given when so received.
(c) Agent and each Lender shall be fully entitled to rely upon any
facsimile transmission or other writing purported to be sent by any Authorized
Officer (whether requesting an Advance or otherwise) as being genuine and
authorized.
10.9 HEADINGS: The headings of any paragraph or Section of this Agreement
are for convenience only and shall not be used to interpret any provision of
this Agreement.
10.10 SURVIVAL: All warranties, representations, and covenants made by
Borrower or any Obligor herein, or in any agreement referred to herein or on any
certificate, document or other instrument delivered by it or on its behalf under
this Agreement, shall be considered to have been relied upon by Agent and
Lenders, and shall survive the delivery to Lenders of the Revolving Credit
Notes, regardless of any investigation made by Agent or any Lender. All
statements in any such certificate or other instrument prepared and/or delivered
for the benefit of Agent shall constitute warranties and representations by
Borrower and each other Obligor hereunder. Except as otherwise expressly
provided herein, all covenants made by Borrower and any Obligor hereunder or
under any other Loan Document shall be deemed continuing until all Obligations
are satisfied in full.
10.11 SUCCESSORS AND ASSIGNS: This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties. Borrower
shall not and shall not permit any Obligor to transfer, assign or delegate any
of its duties or obligations hereunder.
10.12 DUPLICATE ORIGINALS: Two or more duplicate originals of this
Agreement may be signed by the parties, each of which shall be an original but
all of which together shall constitute one and the same instrument. This
Agreement may be executed in counterpart, all of which counterparts taken
55
<PAGE> 61
together shall constitute one completed fully executed document.
10.13 MODIFICATION: No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed by, as
applicable, Borrower, such other Obligor, and Lender.
10.14 SIGNATORIES: Each individual signatory hereto represents and warrants
that to the best of his or her knowledge he or she is duly authorized to execute
this Agreement on behalf of his or her principal and that he or she executes the
Agreement in such capacity and not as a principal.
10.15 THIRD PARTIES: No rights are intended to be created hereunder, or
under any related agreements or documents for the benefit of any third party
donee, creditor or incidental beneficiary of Borrower or any other Obligor.
Nothing contained in this Agreement shall be construed as a delegation to Agent
or any Lender of Borrower's or any other Obligor's duty of performance,
including, without limitation, Borrower's duties under any account or contract
with any other Person.
10.16 DISCHARGE OF TAXES, BORROWER'S OBLIGATIONS, ETC.: Agent, in its sole
discretion, shall have the right at any time, and from time to time, with prior
notice to Borrower if Borrower fails to do so five (5) Business Days after
requested in writing to do so by Agent, to: (a) pay for the performance of any
of Borrower's obligations hereunder, and (b) discharge taxes or Liens, at any
time levied or placed on any of Borrower's or any other Obligor's Property in
viola-tion of this Agreement unless Borrower or such other Obligor is in good
faith with due diligence by appropriate proceedings contesting such taxes or
Liens and maintaining proper reserves therefor in accordance with GAAP. Expenses
and advances shall be added to the Revolving Credit, bear interest at the same
rate applied to the Revolving Credit, until reimbursed to Agent. Such payments
shall not be construed as a waiver by Agent of an Event of Default under this
Agreement.
10.17 WITHHOLDING AND OTHER TAX LIABILITIES: Lenders shall have the right
to refuse to make any Advances from time to time unless Borrower shall, at
Agent's request, have given to Agent evidence, reasonably satisfactory to Agent,
that Borrower and each other Obligor have properly deposited or paid, as
required by law, all withholding taxes and all federal, state, province, city,
county or other taxes due up to and including the date of the requested Advance
except for any tax contested in good faith and by appropriate proceedings with
notice thereof timely provided to Lender. Copies of deposit slips showing
payment shall likewise constitute satisfactory evidence for such purpose. In the
event that any lien, assessment or tax liability against any Obligor shall arise
in favor of any taxing authority, whether or not notice thereof shall be filed
or recorded as may be required by law, Agent shall have the right (but shall not
be obligated, nor shall Agent or any Lender hereby assume the duty) to pay any
such lien, assessment or tax liability by virtue of which such charge shall have
arisen; provided, however, that Agent shall not pay any such tax, assessment or
lien (a) if the amount, applicability or validity thereof is being contested in
good faith and by appropriate proceedings by an Obligor or (b) without ten (10)
days prior written notice to Borrower if no Event of Default is then
outstanding. In order to pay any such lien, assessment or tax liability, Agent
shall not be obliged to wait until said lien, assessment or tax liability is
filed before taking such action as hereinabove set forth. Any sum or sums which
Agent shall have paid for the discharge of any such lien shall be added to the
Revolving Credit and shall be paid by Obligors to Agent with interest thereon,
upon demand, and Agent shall be subrogated to all rights of such taxing
authority against Obligors.
56
<PAGE> 62
10.18 CONSENT TO JURISDICTION: Borrower and Agent hereby irrevocably
consent to the jurisdiction of the Courts of Common Pleas of the Commonwealth of
Pennsylvania or the United States District Court for the Eastern District of
Pennsylvania in any and all actions and proceedings whether arising hereunder or
under any other agreement or undertaking and irrevocably agree to service of
process by certified mail, return receipt requested to the address of the
appropriate party set forth herein.
10.19 WAIVER OF JURY TRIAL: BORROWER, AGENT AND EACH LENDER EACH HEREBY
WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY
LITIGATION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING WITH RESPECT TO RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO OR UNDER THE LOAN DOCUMENTS.
- --------------------------
57
<PAGE> 63
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement the day and year first above written.
OFFICE CENTRE CORPORATION
<TABLE>
<S> <C>
Attest: /s/ Robert J. Gillon, Jr. By: /s/ Joseph E. Hajjar
------------------------- ---------------------------------------
Name: Joseph E. Hajjar
--------------------------------------
Title: CFO, SVP, Secretary and Treasurer
-------------------------------------
FIRST UNION NATIONAL BANK, as Agent
By: /s/ Marcus F. Brown
---------------------------------------
Name: /s/ Marcus F. Brown
--------------------------------------
Title: Vice President
-------------------------------------
FIRST UNION NATIONAL BANK
By: /s/ Marcus F. Brown
---------------------------------------
Name: /s/ Marcus F. Brown
--------------------------------------
Title: Vice President
-------------------------------------
</TABLE>
58
<PAGE> 1
Exhibit 10.21
REVOLVING CREDIT NOTE
---------------------
$35,000,000 July 9, 1998
FOR VALUE RECEIVED and intending to be legally bound, the undersigned,
Office Centre Corporation ("Borrower"), a Delaware corporation, promises to pay,
in lawful money of the United States, to the order of First Union National Bank
("Lender"), at the offices of Agent at Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19107 (or at such other address as Agent may designate from time
to time to Borrower), on the Revolving Credit Maturity Date the principal sum of
Thirty-Five Million ($35,000,000) Dollars or such lesser sum which represents
the outstanding principal unpaid balance of unpaid Loans under that certain Loan
and Security Agreement dated the date hereof by and among Borrower, Agent and
the Lenders now or hereafter parties thereto (as it may hereafter be
supplemented, amended, extended or replaced from time to time, the "Loan
Agreement"). The actual amount due and owing from time to time hereunder shall
be evidenced by Lender's records of receipts and disbursements with respect to
Advances and payments with respect to the Revolving Credit, which shall be
conclusive evidence of such amount, absent manifest error. All capitalized terms
not otherwise defined herein shall have the respective meanings as set forth in
the Loan Agreement.
Borrower further agrees to pay interest on the outstanding principal
balance hereunder from time to time at the applicable per annum rates set forth
in Sections 2.3 and 2.4 of the Loan Agreement. Interest shall be calculated in
the manner described in and shall be due and payable on the dates set forth in
the Loan Agreement. In no contingency or event whatsoever shall the aggregate of
all amounts deemed interest hereunder and charged or collected pursuant to the
terms hereof or of the Loan Agreement exceed the highest rate permissible under
any law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that such court determines Lender has
charged or received interest hereunder in excess of the highest applicable rate,
Lender shall apply, in its sole discretion, and set off such excess interest
received by Lender against other Obligations due or to become due and such rate
shall automatically be reduced to the maximum rate permitted by such law.
This Revolving Credit Note ("Note") is a Revolving Credit Note referred
to in the Loan Agreement and shall evidence Borrower's unconditional obligation
to repay the balance of Loans owing to Lender outstanding from time to time
under the Revolving Credit, with interest thereon and Expenses in connection
therewith. If Borrower fails to make any payment required hereunder or if an
Event of Default occurs under the Loan Agreement, Agent shall thereupon have the
option at any time and from time to time, to declare the unpaid principal
balance of this Note along with accrued and unpaid interest and Expenses to be
immediately due and payable and to exercise all rights and remedies set forth
herein and in the other Loan Documents, as well as all rights and remedies
otherwise available to Agent at law or in equity, to collect the unpaid
indebtedness hereunder and thereunder on behalf of Lender. This Note is secured
by the Collateral described in the Loan Agreement. All rights and remedies of
Agent shall be cumulative not alternative.
This Note may be prepaid only in accordance with the terms and
conditions of the Loan Agreement.
Borrower hereby waives presentment for payment, protest, demand, notice
of nonpayment or dishonor and all other notices in connection with the delivery,
acceptance, performance or enforcement of this Note. Any failure or delay of
Lender or Agent to exercise any right hereunder shall not be
<PAGE> 2
construed as a waiver of the right to exercise the same or any other right at
any other time or times. The waiver by Lender or Agent of a breach or default of
any provision of this Note shall not operate or be construed as a waiver of any
subsequent breach or default thereof. Borrower agrees to reimburse Agent for all
Expenses, including, without limitation, attorneys' fees, reasonably incurred by
Agent to enforce the provisions of this Note, to protect, preserve and defend
Agent and/or Lender's rights under the Loan Documents, and collect Borrower's
Obligations hereunder as described in the Loan Agreement.
Notwithstanding the entry of any judgment under this Note, the unpaid
principal balance under this Note shall continue to bear interest at the
applicable rate set forth in the Loan Agreement.
The provisions of this Note are severable and the invalidity or
unenforceability of any provision shall not alter or impair the remaining
provisions of this Note. No modification hereof shall be binding upon Lender
unless accepted in writing by Lender. This Note shall bind and benefit Borrower
and Lender, and their respective successors and assigns.
IN ANY LITIGATION ARISING OUT OF OR RELATING TO ANY OF THE MATTERS
CONTAINED IN THIS NOTE OR ANY OF THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH
IN WHICH LENDER (OR AGENT ON LENDER'S BEHALF) AND BORROWER ARE ADVERSE PARTIES,
LENDER AND BORROWER WAIVE TRIAL BY JURY.
This Note shall be governed by, and construed and enforced in
accordance with, the laws of the Commonwealth of Pennsylvania.
This Note has been executed and delivered by Borrower by a duly
authorized officer of Borrower on the date first set forth above.
IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower
has executed these presents the day and year first above written.
OFFICE CENTRE CORPORATION
Witness: /s/ Leigh M. Meaders By: /s/ Joseph E. Hajjar
----------------------- ---------------------------
Name: Leigh M. Meaders Name: Joseph E. Hajjar
Title: CFO, SVP, Secretary
and Treasurer
-2-
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports accompanying the financial statements of the
companies and for the dates as indicated in the accompanying table; such reports
are contained in the Registration Statement and Prospectus.
<TABLE>
<CAPTION>
COMPANY REPORT DATE
- ------- -----------
<S> <C>
Office Centre Corporation and Subsidiaries February 6, 1998
(except for Note C, as to which the date
is July 10, 1998)
The Supply Room Companies, Inc. February 19, 1998
New England Office Supply, Inc. February 9, 1998
(except for Notes C and D, as to which the
date is April 9, 1998)
King Office Supply, Inc. and Subsidiary February 9, 1998
Sierra Office Systems and Products, Inc. April 30, 1998
Office Solutions Business Products and February 13, 1998
Services, Inc.
Greenwood Outfitters, Inc. January 30, 1998
Georgia Impression Products, Inc. March 13, 1998
Mega Office Furniture, L.L.C February 25, 1998
</TABLE>
We consent to the use of the aforementioned reports in the Registration
Statement and Prospectus, and to the use of our name as it appears under the
caption "Experts."
/s/ GRANT THORNTON LLP
--------------------------------------
Grant Thornton LLP
New York, New York
July 21, 1998
