<PAGE>
Rules 424(b)(3) and 424(c)
Registration No. 333-13133
PROSPECTUS SUPPLEMENT
- ---------------------
TO PROSPECTUS DATED OCTOBER 9, 1996
AND PROSPECTUS SUPPLEMENT DATED
NOVEMBER 6, 1996
[US OFFICE PRODUCTS ART]
U.S. Office Products Company (the "Company") has prepared this Prospectus
Supplement to update certain information included in the Company's Prospectus
dated October 9, 1996, as supplemented by a Prospectus Supplement dated
November 6, 1996, covering 37,651,948 shares of the Company's common stock,
$.001 par value (the "Common Stock").
Since its inception through December 11, 1996, the Company acquired 124
office and educational product and equipment companies. Attached hereto (and
made a part hereof) are: (i) the Company's pro forma financial information as
of July 27, 1996 and for the three months ended July 27, 1996 and July 31,
1995 and for the years ended April 30, 1996, 1995 and 1994 and (ii) the
Company's interim financial statements as of October 26, 1996 and for the
three and six month periods ended October 26, 1996 and October 31, 1995 and
the Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended October 26, 1996 included in the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October
26, 1996. In addition, the historical financial statements of the following
companies recently acquired by the Company are included herein:
(a) The financial statements of Fortran Corp. as of March 31, 1996 and for
the year then ended and as of June 30, 1996 and 1995 (unaudited) and
for the three months ended June 30, 1996 and 1995 (unaudited);
(b) The financial statements of PC Direct Limited as of March 31, 1996 and
for the year then ended; and
(c) The financial statements of Bay State Computer Group, Inc. as of March
31, 1996 and 1995 and for the years then ended and as of June 30, 1996
and 1995 and for the three months then ended (unaudited).
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 12, 1996
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
October 26, April 30,
1996 1996
----------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 51,442 $175,386
Accounts receivable, less allowance for doubtful
accounts of $5,872 and $3,366, respectively 294,175 170,111
Inventory 225,616 113,503
Lease receivables 29,865 24,807
Prepaid expenses and other current assets 38,730 25,446
---------- --------
Total current assets 639,828 509,253
Property and equipment, net 182,222 75,011
Intangible assets, net 541,422 142,240
Lease receivables 46,379 47,005
Other assets 34,380 18,720
---------- --------
Total assets $1,444,231 $792,229
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 227,571 $120,488
Accounts payable 159,632 98,010
Accrued compensation 33,302 16,126
Other accrued liabilities 98,517 26,711
---------- --------
Total current liabilities 519,022 261,335
Long-term debt 383,367 181,592
Deferred income taxes 7,824 7,056
Other long-term liabilities 3,123 1,704
---------- --------
Total liabilities 913,336 451,687
---------- --------
Commitments and contingencies
Minority interest 4,672 6,024
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares
authorized, 45,698,248 and 39,393,480 shares issued
and outstanding, respectively 46 39
Additional paid-in capital 467,687 298,120
Cumulative translation adjustment 4,988 358
Retained earnings 53,502 36,001
---------- --------
Total stockholders' equity 526,223 334,518
---------- --------
Total liabilities and stockholders' equity $1,444,231 $792,229
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $587,887 $271,066 $996,414 $485,546
Cost of revenues 420,355 202,033 716,849 361,534
-------- -------- -------- --------
Gross profit 167,532 69,033 279,565 124,012
Selling, general and
administrative expenses 135,485 58,622 227,245 106,852
Nonrecurring acquisition
costs 3,940 521 5,727 5,192
-------- -------- -------- --------
Operating income 28,107 9,890 46,593 11,968
Other (income) expense:
Interest expense 11,477 2,418 18,643 4,639
Interest income (1,119) (416) (5,382) (662)
Foreign currency gain (3,420) (3,420)
Other (393) (460) (476) (718)
-------- -------- -------- --------
Income before provision
for income taxes and
extraordinary item 21,562 8,348 37,228 8,709
Provision for income taxes 8,503 1,770 13,948 494
-------- -------- -------- --------
Income before
extraordinary item 13,059 6,578 23,280 8,215
Extraordinary item - loss
on early termination
of credit facility, net
of income tax benefit 612 612
-------- -------- -------- --------
Net income $ 12,447 $ 6,578 $ 22,668 $ 8,215
======== ======== ======== ========
Earnings per share:
Income before
extraordinary item $ .29 $ .21 $ .53 $ .29
Extraordinary item .01 .01
-------- -------- -------- --------
Net income $ .28 $ .21 $ .52 $ .29
======== ======== ======== ========
Pro forma net income (see
Note 3) $ 11,339 $ 4,446 $ 20.251 $ 4,767
======== ======== ======== ========
Pro forma earnings per
share:
Pro forma income before
extraordinary item $ .26 $ .14 $ .47 $ .17
Extraordinary item .01 .01
-------- -------- -------- --------
Pro forma net income $ .25 $ .14 $ .46 $ .17
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
October 26, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,668 $ 8,215
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,974 5,184
Deferred income taxes 3,553 156
Write-off of deferred compensation (1,501)
Foreign currency gain (3,420)
Changes in assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations):
Accounts receivable (56,018) (12,510)
Lease receivables (1,394)
Inventory (2,876) (4,675)
Prepaid expenses and other current assets 1,647 (4,999)
Accounts payable (10,582) 10,295
Accrued liabilities (8,490) (584)
--------- --------
Net cash provided by (used in)
operating activities (42,439) 1,082
--------- --------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals (10,277) (3,503)
Cash used in acquisitions (273,704) (43,406)
Deposits (9,007) (3,239)
Other 1,309 216
--------- --------
Net cash used in investing activities (291,679) (49,932)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 225,098 2,158
Payments of long-term debt (145,306) (6,546)
Increases in short-term debt 90,285 6,952
Proceeds from issuance of common stock 38,113 53,454
Proceeds from exercise of stock options and
warrants 2,937
Proceeds from issuance of common stock in
employee stock purchase plan 1,728
Contributions of capital by stockholders of
Pooled Companies 1,802 1,848
Adjustment to conform fiscal year-ends of
certain Pooled Companies 184 (72)
Payment of dividends (5,316) (8,286)
--------- --------
Net cash provided by financing
activities 209,525 49,508
========= ========
Effect of exchange rates on cash and cash
equivalents 649 (11)
Net increase (decrease) in cash and cash
equivalents (123,944) 647
Cash and cash equivalents at beginning of period 175,386 19,408
--------- --------
Cash and cash equivalents at end of period $ 51,442 $ 20,055
========= ========
</TABLE>
(Continued)
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
October 26, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid $11,895 $3,091
Income taxes paid $ 9,924 $1,857
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations for the six months ended October 26, 1996 and October 31, 1995.
The fair values of the assets and liabilities at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
Six Months Ended
------------------------
October 26, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Accounts receivable $ 66,509 $ 23,576
Inventory 107,086 17,309
Lease receivables 870
Prepaid expenses and other current
assets 12,111 3,845
Property and equipment 102,244 17,105
Intangible assets 398,932 45,451
Other assets 3,732 872
Short-term debt (8,783) (16,425)
Accounts payable (73,042) (14,384)
Accrued liabilities (99,158) (3,485)
Long-term debt (114,649) (7,708)
Other long-term liabilities (1,942) (825)
--------- --------
Net assets acquired $ 393,910 $ 65,331
========= ========
The acquisitions were funded as follows:
Common stock $ 120,206 $ 21,925
Cash 273,704 43,406
--------- --------
$ 393,910 $65,331
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "U.S. Office Products"), the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates and give retroactive effect
to the results of the companies acquired in business combinations accounted for
under the pooling-of-interests method (the "Pooled Companies") for all periods
presented.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results which may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended April 30, 1996.
On August 20, 1996, the Company's Board of Directors approved a change in the
Company's fiscal year-end, effective for the 1997 fiscal year, from April 30 to
the last Saturday of April.
NOTE 2 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended October 26, 1996
were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 30, 1996 $ 334,518
Issuance of common stock in connection
with business combinations 120,206
Sale of common stock 38,113
Issuance of common stock for employee
stock purchase plan, net of expenses 1,728
Issuance of common stock for stock options
exercised, including tax benefits 1,633
Issuance of common stock for stock options and
warrants at Pooled Companies 1,980
Contributions of capital at Pooled Companies 5,878
Dividends at Pooled Companies (5,316)
Adjustments to conform fiscal year-ends
of certain Pooled Companies 184
Cumulative translation adjustment 4,631
Net income 22,668
---------
Stockholders' equity balance at October 26, 1996 $ 526,223
=========
</TABLE>
<PAGE>
NOTE 3 - UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," as if certain Pooled Companies, which were subchapter S
corporations prior to their business combinations with the Company, had been
subject to federal income taxes throughout the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -----------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income before pro forma
adjustment, per the
consolidated statement
of operations $12,447 $6,578 $22,668 $8,215
Provision for income taxes 1,108 2,132 2,417 3,448
------- ------ ------- ------
Pro forma net income $11,339 $4,446 $20,251 $4,767
======= ====== ======= ======
</TABLE>
NOTE 4 - BUSINESS COMBINATIONS
In fiscal 1996, the Company completed a total of 40 business combinations, 14
accounted for under the pooling-of-interests method and 26 accounted for under
the purchase method. During the first six months of fiscal 1997, the Company
completed a total of 66 business combinations, 21 accounted for under the
pooling-of-interests method and 45 accounted for under the purchase method. In
the second quarter of fiscal 1997, the Company completed a total of 38 business
combinations, 11 accounted for under the pooling-of-interests method and 27
accounted for under the purchase method.
As the Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented, the
following presents the separate results of U.S. Office Products and the Pooled
Companies for periods prior to the completion of each of the business
combinations accounted for under the pooling-of-interests method:
<TABLE>
<CAPTION>
U.S. Office
Products Pooled
Company Companies Combined
----------- --------- --------
<S> <C> <C> <C>
THREE MONTHS ENDED
OCTOBER 26, 1996:
Revenues $ 541,742 $ 46,145 $ 87,887
Net income $ 9,468 $ 2,979 $ 12,447
THREE MONTHS ENDED
OCTOBER 31, 1995:
Revenues $ 94,599 $ 176,467 $ 71,066
Net income $ 1,754 $ 4,824 $ 6,578
SIX MONTHS ENDED
OCTOBER 26, 1996:
Revenues $ 858,093 $ 138,321 $ 96,414
Net income $ 15,500 $ 7,168 $ 22,668
SIX MONTHS ENDED
OCTOBER 31, 1995:
Revenues $ 146,491 $ 339,055 $ 85,546
Net income $ 3,734 $ 4,481 $ 8,215
</TABLE>
<PAGE>
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 26, 1996 and October
31, 1995 as if all 71 of the companies acquired in business combinations
accounted for under the purchase method, completed since the beginning of fiscal
1996, had been consummated at the beginning of fiscal 1996. The pro forma
results of operations include certain pro forma adjustments including the
amortization of intangible assets and reductions in executive compensation:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $611,495 $574,223 $1,184,488 $1,120,277
Net income 12,912 5,279 24,105 6,090
Net income per share .29 .12 .53 .13
</TABLE>
The pro forma results of operations are prepared for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of fiscal 1996 or the results which may
occur in the future.
NOTE 5 - SUBSEQUENT EVENTS
Subsequent to October 26, 1996, the Company has completed eight business
combinations for an aggregate purchase price of $70.4 million, consisting of
approximately $60.8 million of cash and 303,134 shares of the Company's
common stock with an aggregate market value on the dates of acquisition of
approximately $9.6 million. This includes the acquisition of a 49% equity
interest in Dudley Stationery Limited ("Dudley"), the largest independent
office products dealer in the United Kingdom. Under the terms of the
agreement, the Company agreed to invest approximately $80 million of working
capital into Dudley over a two-year period. In addition, Dudley plans to
raise approximately an additional $80 million in debt financing. The Company
has currently invested approximately $41.3 million of the total $80 million
in Dudley.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 26, 1996 COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1995
Historical revenues increased 116.9%, from $271.1 million for the three
months ended October 31, 1995 to $587.9 million for the three months ended
October 26, 1996. This increase was primarily due to the inclusion in the
revenues for the three months ended October 26, 1996 of revenues from 63
companies that were acquired in business combinations accounted for under the
purchase method during the last two quarters of fiscal 1996 and the first two
quarters of fiscal 1997 (the "Purchased Companies").
Gross profit increased 142.7%, from $69.0 million, or 25.5% of revenues, for the
three months ended October 31, 1995, to $167.5 million, or 28.5% of revenues,
for the three months ended October 26, 1996. The increase in gross profit as a
percentage of revenues was due primarily to a shift in revenue mix resulting in
a higher proportion of revenues in traditionally higher margin products, such as
office coffee services, school supplies and school furniture and products sold
in Australia and New Zealand.
Selling, general and administrative expenses increased 131.1%, from $58.6
million, or 21.6% of revenues, for the three months ended October 31, 1995 to
$135.5 million, or 23.0% of revenues, for the three months ended October 26,
1996. The increase in selling, general and administrative expenses is due
primarily to the inclusion of the Purchased Companies in the results for the
three months ended October 26, 1996. The increase in selling, general and
administrative expenses as a percentage of revenues is due primarily to the
inclusion of the Purchased Companies, which had higher selling, general and
administrative expenses as a percentage of revenues.
The Company incurred nonrecurring acquisition costs of approximately $3.9
million and $521,000 during the three months ended October 26, 1996 and October
31, 1995, respectively, in conjunction with business combinations that were
accounted for under the pooling-of-interests method. These nonrecurring
acquisition costs included accounting and legal fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs. Generally accepted accounting principles require the Company to
expense all acquisition costs related to the business combinations accounted for
under the pooling-of-interests method. The increase in such nonrecurring
acquisition costs reflects the larger number of business combinations accounted
for under the pooling-of-interest method during the three months ended October
26, 1996 as compared to the three months ended October 31, 1995. The Company
expects to incur similar costs in the future as the Company anticipates
additional acquisitions accounted for under the pooling-of-interests method.
Interest expense, net of interest income, increased 417.6%, from $2.0 million
for the three months ended October 31, 1995 to $10.4 million for the three
months ended October 26, 1996. This increase was due primarily to the
increase in the Company's borrowings through the issuance of an aggregate of
$373.75 million of 5 1/2% Convertible Subordinated Notes (the "Notes") during
the fourth quarter of fiscal 1996 and the first quarter of fiscal 1997 and an
increase in the outstanding balance on the Company's credit facility. The
proceeds from the issuance of the Notes and the additional borrowings from
the credit facility were used to fund the cash portion of the consideration
in business combinations and the refinancing of indebtedness assumed in such
business combinations.
Foreign currency gain of $3.4 million represents the effect of the change in
the exchange rate between the New Zealand and U.S. dollars during the three
months ended October 26, 1996 on short-term loans between the Company and
Blue Star Group Limited ("Blue Star"), its wholly owned subsidiary in New
Zealand. At October 26, 1996, the Company had advanced Blue Star
approximately $255.9 million. While the Company continues to evaluate the
alternative financing options for its international operations, management
currently intends to have Blue Star repay the advances in the near future.
The Company does not have any currency hedges in place to limit the impact of
currency rate fluctuations on such advances, but is currently investigating
strategies which would minimize such effect on future periods.
<PAGE>
Provision for income taxes increased from $1.8 million for the three months
ended October 31, 1995 to $8.5 million for the three months ended October 26,
1996, reflecting effective tax rates of 21.2% and 39.4% for the three month
periods ended October 31, 1995 and October 26, 1996, respectively. The low
effective rate for the three months ended October 31, 1995, compared to the
federal statutory rate of 34.0% plus state, local and foreign taxes, is
primarily due to the fact that several companies included in the results of such
three month period, which companies were acquired by the Company in business
combinations accounted for under the pooling-of-interests method, were not
subject to federal income taxes on a corporate level as they had elected to be
treated as subchapter S corporations prior to being acquired by the Company.
The Company incurred an extraordinary item of $612,000 which represents the
aggregate expenses, net of the expected tax benefit, associated with the
early termination of the Company's $50 million credit facility with First
Bank National Association due to the Company entering into a new $500 million
credit facility in August 1996 with a syndicate of banks led by Bankers Trust
Company (the "Credit Facility"). The expenses consisted of the write-off of
certain capitalized debt issue costs, which were being amortized over the
life of the credit facility, and the direct costs of terminating the facility.
SIX MONTHS ENDED OCTOBER 26, 1996 COMPARED TO SIX MONTHS ENDED
OCTOBER 31, 1995
Historical revenues increased 105.2%, from $485.5 million for the six months
ended October 31, 1995 to $996.4 million for the six months ended October 26,
1996. This increase was primarily due to the inclusion in the revenues for
the six months ended October 26, 1996 of revenues from the Purchased
Companies.
Gross profit increased 125.4%, from $124.0 million, or 25.5% of revenues, for
the six months ended October 31, 1995, to $279.6 million, or 28.1% of revenues,
for the six months ended October 26, 1996. The increase in gross profit as a
percentage of revenues was due primarily to a shift in revenue mix resulting in
a higher proportion of revenues in traditionally higher margin products, such as
office coffee services, school supplies and school furniture and products sold
in Australia and New Zealand.
Selling, general and administrative expenses increased 112.7%, from $106.9
million, or 22.0% of revenues, for the six months ended October 31, 1995 to
$227.2 million, or 22.8% of revenues for the six months ended October 26, 1996.
The increase in selling, general and administrative expenses is due primarily to
the inclusion of the Purchased Companies in the six months ended October 26,
1996. The increase in selling, general and administrative expenses as a
percentage of revenues is due primarily to the inclusion of the Purchased
Companies, which had higher selling, general and administrative expenses as a
percentage of revenues.
The Company incurred nonrecurring acquisition costs of approximately $5.7
million and $5.2 million during the six months ended October 26, 1996 and
October 31, 1995, respectively, in conjunction with business combinations that
were accounted for under the pooling-of-interests method. The nonrecurring
acquisition costs for the six months ended October 26, 1996 represented costs
associated with 21 business combinations accounted for under the
pooling-of-interests method compared to four such business combinations during
the six month period ended October 31, 1995. The nonrecurring acquisition costs
for the six months ended October 31, 1995 included a charge of approximately
$4.7 million related to one business combination which included the payment of
significant transaction related compensation obligations.
Interest expense, net of interest income, increased 233.5% from $4.0 million
for the six months ended October 31, 1995 to $13.3 million for the six months
ended October 26, 1996. This increase was due primarily to the increase in
the Company's borrowings through the issuance of an aggregate of $373.75
million of Notes during the fourth quarter of fiscal 1996 and the first
quarter of fiscal 1997 and an increase in the outstanding balance on the
Company's Credit Facility. The proceeds from the issuance of the Notes and
the additional borrowings from the Credit Facility were used to fund the cash
portion of the consideration in business combinations and the refinancing of
indebtedness assumed in such business combinations.
<PAGE>
Provision for income taxes increased from $494,000 for the six months ended
October 31, 1995 to $13.9 million for the six months ended October 26, 1996,
reflecting effective tax rates of 5.7% and 37.5% for the six month periods ended
October 31, 1995 and October 26, 1996, respectively. The low effective rate for
the six months ended October 31, 1995, compared to the federal statutory rate of
34.0% plus state, local and foreign taxes, is primarily due to the fact that
several companies included in the results of such six month period, which
companies were acquired by the Company in business combinations accounted for
under the pooling-of-interests method, were not subject to federal income taxes
on a corporate level as they had elected to be treated as subchapter S
corporations prior to being acquired by the Company.
LIQUIDITY AND CAPITAL RESOURCES
At October 26, 1996, the Company had cash of $51.4 million and working capital
of $120.8 million. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity, at October 26, 1996 was $909.6 million.
In May and June 1996, the Company completed the sales, in an offshore offering
and in a concurrent private placement in the United States, of 5 1/2%
Convertible Subordinated Notes due 2003 (the "May Notes") in the principal
amount of $230 million, including the manager's over-allotment option of $30
million principal amount of May Notes (the "May Notes Offering"). The net
proceeds from the May Notes Offering, after deducting the manager's discounts
and commissions and offering expenses, were approximately $223.1 million and
were used for working capital and acquisition purposes, including the repayment
of higher interest rate debt assumed in business combinations.
In August 1996, the Company entered into an agreement under which a syndicate
of financial institutions, led by Bankers Trust Company, as Agent (the
"Bank"), is providing the Company with the $500 million Credit Facility
bearing interest, at the Company's option, at the Bank's base rate plus an
applicable margin of up to 1.25%, or a eurodollar rate plus an applicable
margin of up to 2.5%. The availability under the Credit Facility is subject
to certain sublimits including $100 million for working capital loans and
$400 million for acquisition loans, with $180 million of the acquisition loan
sublimit available solely to refinance certain outstanding indebtedness of
the Company in Australia and New Zealand. The Credit Facility is secured by
a majority of the assets of the Company and its subsidiaries and contains
customary covenants, including financial covenants with respect to the
Company's consolidated leverage and interest coverage ratios, capital
expenditures, payment of dividends and purchases and sales of assets, and
customary default provisions, including provisions related to non-payment of
principal and interest, default under other debt agreements and bankruptcy.
In October 1996, the Company refinanced $180 million in high interest rate debt
outstanding in New Zealand and Australia with the $180 million that was
available under the Credit Facility solely for purposes of such refinancing.
The average annual interest rate on such debt prior to such refinancing was
approximately 11.0%. At October 26, 1996, the Company had $215 million
outstanding on the Credit Facility at an annual interest rate of approximately
7.2%.
In September 1996, the Company sold 1,250,000 shares of common stock in a direct
equity investment to Quantum Partners LDC. The Company received proceeds of
approximately $38.1 million as a result of the sale. The proceeds were used to
repay a portion of the then outstanding balance on the Credit Facility.
During the six months ended October 26, 1996, net cash used in operating
activities was $42.4 million which resulted primarily from the increase in
accounts receivable in the Company's school supply and school furniture
business and a decrease in accounts payable due to the Company's aggressive
policy of taking recently negotiated cash discounts. Accounts receivable
increased in the Company's school supply and school furniture business due
primarily to the seasonality of such business. Net cash used in investing
activities was $291.7 million, including $273.7 million used for
acquisitions, $10.3 million used for additions to property and equipment and
deposits of $9.0 million. Net borrowings increased $170.1 million during the
six months ended October 26, 1996 primarily to fund acquisitions, including
the repayment of higher interest rate debt assumed in business combinations.
The Company also received $38.1 million in cash as a result of the sale of
common stock during the period.
<PAGE>
During the six months ended October 31, 1995, net cash provided by operating
activities was $1.1 million. Net cash used in investing activities was $49.9
million, including $43.4 million used for acquisitions, $3.5 million used for
additions to property and equipment and deposits of $3.2 million. Net
borrowings increased $2.6 million during the six months ended October 31, 1995.
The Company also received $53.5 million in cash as a result of the sale of
common stock during the period.
Subsequent to October 26, 1996, the Company has completed eight business
combinations for an aggregate purchase price of $70.4 million, consisting of
approximately $60.8 million of cash and 303,134 shares of the Company's
common stock with an aggregate market value on the dates of acquisition of
approximately $9.6 million. This includes the acquisition of a 49% equity
interest in Dudley Stationery Limited ("Dudley"), the largest independent
office products dealer in the United Kingdom. Under the terms of the
agreement, the Company agreed to invest approximately $80 million of working
capital into Dudley over a two-year period. In addition, Dudley plans to
raise approximately an additional $80 million in debt financing. The Company
has currently invested approximately $41.3 million of the total $80 million
in Dudley.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will
be sufficient to meet the Company's liquidity requirements for its operations
through the end of fiscal 1997. However, the Company is currently, and
intends to continue, pursuing additional acquisitions, which are expected to
be funded through a combination of cash and common stock. There can be no
assurances that additional sources of financing will not be required during
the next twelve months or thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business
have been lower in the first two quarters of its fiscal year, primarily due
to the lower level of business activity in North America during the summer
months. The seasonality of the core office products business, however, is
expected to be impacted by the seasonality of the Company's other operations,
which have expanded through acquisitions. For example, the revenues and
profitability of the Company's school supplies and school furniture business
have been higher during the Company's first and second quarters and
significantly lower in its third and fourth quarters, and the revenues and
profitability of the Company's operations in New Zealand and Australia have
generally been higher in the Company's third quarter. As the Company's mix
of businesses evolves through future acquisitions, these seasonal
fluctuations may continue to change. In addition, quarterly results also may
be materially affected by the timing of acquisitions, the timing and
magnitude of costs related to such acquisitions, variations in the prices
paid by the Company for the products it sells, the mix of products sold and
general economic conditions. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1996 or the first two quarters of fiscal
1997.
FACTORS AFFECTING THE COMPANY'S BUSINESS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
<PAGE>
The Company has an aggressive acquisition strategy that has involved, and is
expected to continue to involve, the acquisition of a significant number of
additional companies in related lines of businesses. From its inception
through October 26 , 1996, the Company made 114 acquisitions. In addition to
completing additional acquisitions since that date, the Company currently
has, and from time to time expects to enter into, letters of intent and
agreements in principle with respect to the acquisition of additional office
and educational products and equipment businesses, both in the United States
and internationally, consistent with its strategy of pursuing an aggressive
acquisition program.
There can be no assurance, however, that acquisitions will occur at the
same pace or be available to the Company on favorable terms, if at all. For
example, if the price of a share of common stock declines for a prolonged
period, the owners of potential acquisition targets may not be willing to
receive shares of common stock in exchange for their businesses, thereby
adversely affecting the pace of the Company's acquisition program. Such an
effect on the pace of the Company's acquisition program could further reduce
the price of a share of common stock, to the further detriment of the Company's
acquisition strategy. In addition, the consolidation of the U.S. contract
stationer industry has reduced the number of larger companies available for
sale in the Company's core contract stationer business, which could lead to
higher prices being paid to acquire such companies in such market. The failure
to acquire additional businesses and to acquire such businesses on favorable
terms in accordance with the Company's growth strategy could have a material
adverse impact on future sales and profitability.
The Company's acquisition strategy has resulted in a significant increase
in sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management and administration. These various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. In addition, there can be no assurance that the pace of the
Company's acquisitions, or the diversification of its business outside of its
core contract stationer operations, will not adversely affect the Company's
efforts to implement its cost-savings and integration strategies and to manage
its acquisitions profitability.
The Company operates in a highly competitive environment. Some of the
Company's current and potential competitors are larger than the Company and have
greater financial resources. No assurances can be given that competition will
not have an adverse effect on the Company's business.
The Company expects to continue to focus significant attention and resources
on future international expansion. In addition to the factors described above
that may impact the Company's domestic operations, the Company's operations in
foreign markets are subject to a number of inherent risks, including currency
exchange rates, new and different legal and regulatory requirements,
difficulties in staffing and managing foreign operations, risks specific to
different business lines that the Company may enter, and other factors.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma financial statements set forth below reflect acquisitions
made by the Company that were completed as of November 21, 1996.
The unaudited pro forma combined balance sheet gives effect to the 43
businesses acquired by the Company after July 27, 1996 (the "Fiscal 1997
Post 1st Quarter Acquisitions"), as if all such acquisitions had occurred as
of the Company's most recent balance sheet date, July 27, 1996. The unaudited
pro forma combined balance sheet also gives effect to the sale by the Company in
September 1996 (the "September Stock Sale") of 1,250,000 shares of the Company's
common stock (the "Common Stock") as if such sale had been made on July 27,
1996.
The pro forma combined statement of income for the year ended April 30,
1996 gives effect to (i) the 26 acquisitions completed during fiscal 1996 in
business combinations accounted for under the purchase method of accounting (the
"Fiscal 1996 Purchased Companies") as if all such acquisitions had been made on
May 1, 1995; (ii) the 50 acquisitions completed during fiscal 1997 in business
combinations accounted for under the purchase method of accounting (the "Fiscal
1997 Purchased Companies") as if all such acquisitions had been made on May 1,
1995; (iii) the 11 acquisitions completed after July 27, 1996 in combinations
accounted for under the pooling-of-interests method of accounting as if all such
acquisitions had been made on May 1, 1995 (the "Fiscal 1997 Post 1st Quarter
Pooled Companies", which together with the Fiscal 1997 Purchased Companies
are referred to as the "Fiscal 1997 Completed Acquisitions"); (iv) the sales
completed by the Company in August 1995 of 4,025,000 shares of Common Stock (the
"Second Offering") as if such sales had been made on May 1, 1995; (v) the sales
by the Company in February and March 1996 (the "February Offerings") of
5,543,045 shares of Common Stock and 5-1/2% Convertible Subordinated Notes due
2001 (the "February Notes") in the principal amount of $143.75 million as if
such sales had been made on May 1, 1995; (vi) the sales by the Company of 5-1/2%
Convertible Subordinated Notes due 2003 in May and June 1996 (the "May Notes")
in the principal amount of $230 million as if such sales had been made on May 1,
1995; and (vii) the September Stock Sale as if such sale had been made on May 1,
1995.
The historical financial statements of the Company give retroactive effect
to the results of the 28 companies acquired by the Company during the first
quarter of fiscal 1997 and the 14 companies acquired during fiscal 1996 in
business combinations accounted for under the pooling-of-interests method of
accounting.
The pro forma combined statement of income for the year ended April 30,
1996 includes (i) the audited financial statements of the Company for the year
ended April 30, 1996; (ii) the unaudited financial information of the Fiscal
1996 Purchased Companies for the period from May 1, 1995 to the consummation
date; (iii) the unaudited financial information of the Fiscal 1997 Purchased
Companies for the most recently completed fiscal year, except that unaudited
financial information for the year ended April 30, 1996 is included for each
such acquisition where the entity's fiscal year end is not within 93 days of the
Company's year end; and (iv) the unaudited financial information of the Fiscal
1997 Post 1st Quarter Pooled Companies for the most recently completed fiscal
year.
The pro forma combined statement of income for the three months ended July
27, 1996 includes the unaudited financial information of the Company and gives
effect to (i) the 18 acquisitions completed during the first quarter of Fiscal
1997 accounted for under the purchase method of accounting for the period May 1,
1996 to the consummation date and (ii) the 38 acquisitions completed after
July 27, 1996 as if all such acquisitions had been made on May 1, 1996.
The pro forma combined statement of income for the three months ended July
31, 1995 includes the unaudited financial information of the Company and gives
effect to the Fiscal 1996 Purchased Companies and the Fiscal 1997 Completed
Acquisitions as if all such acquisitions had been made on May 1, 1995.
The pro forma combined statement of income for the years ended April 30,
1995 and 1994 includes the audited financial information of the Company and
gives effect to the Fiscal 1997 Post 1st Quarter Pooled Companies.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
period, as assumed, or the future results of the Company. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this report and in other
reports filed by the Company.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JULY 27, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal
U.S. Office 1997
Products Post 1st Quarter Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
----------- ---------------- ----------- ------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 98,947 $ 9,269 $ (94,911) (b) $ -
38,125 (a)
(10,160) (b)
(41,270) (b)
Accounts receivable 230,385 57,662 288,047
Lease receivable 29,561 29,561
Inventory 190,665 37,650 - 228,315
Prepaid and other current assets 28,407 4,280 - 32,687
------------ ------------ ------------ ------------
Total current assets 577,965 108,861 (108,216) 578,610
Property and equipment, net 145,687 28,006 - 173,693
Intangible assets, net 396,835 10,208 172,414 (b) 579,457
Investment in affiliate 41,270 (b) 41,270
Lease receivables 46,232 46,232
Other assets 25,117 5,630 - 30,747
------------ ------------ ------------ ------------
Total assets $ 1,191,836 $ 152,705 $ 105,468 $ 1,450,009
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 155,838 $ 14,434 $ 46,238 (b) $ 216,510
Accounts payable 142,493 47,813 - 190,306
Accrued compensation 16,983 1,717 - 18,700
Other accrued liabilities 49,029 17,985 - 67,014
------------ ------------ ------------ ------------
Total current liabilities 364,343 81,949 46,238 492,530
Long-term debt 427,138 21,398 (21,398) (b) 427,138
Notes payable to related parties - -
Deferred income taxes 6,427 1,234 - 7,661
Other long-term liabilities 3,199 805 - 4,004
------------ ------------ ------------ ------------
Total liabilities 801,107 105,386 24,840 931,333
Minority interest 2,557 112 - 2,669
Stockholders' equity
Common stock 39 2,078 (2,071) (b) 47
1 (a)
Additional paid-in capital 356,423 2,489 71,159 (b) 468,195
38,124 (a)
Cumulative translation adjustment 2,626 - 2,626
Retained earnings 29,084 16,055 - 45,139
Equity of purchased companies 26,585 (26,585) (b) -
------------ ------------ ------------ ------------
Total stockholders' equity 388,172 47,207 80,628 516,007
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 1,191,836 $ 152,705 $ 105,468 $ 1,450,009
============ ============ ============ ============
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Fiscal
U.S. Office 1996 1997
Products Purchased Completed Pro Forma Pro Forma
Company Companies Acquisitions Adjustments Combined
----------- --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $968,008 $307,954 $1,091,280 $ - $2,367,242
Cost of revenues 709,871 214,072 761,150 - 1,685,093
----------- ------------ ------------- ----------- ------------
Gross profit 258,137 93,882 330,130 - 682,149
Selling, general and administrative expenses 224,454 84,070 267,940 8,190 (c) 571,998
(10,124) (d)
(2,532) (e)
Nonrecurring acquisition costs 8,057 - - (8,057) (e) -
Nonrecurring restructuring costs 8,092 - - 8,092
Discontinuation of printing division at subsidiary 682 - - - 682
----------- ------------ ------------- ---------- ------------
Operating income 24,944 1,720 62,190 12,523 101,377
Other (income) expense:
Interest expense 12,404 2,761 9,842 14,759 (f) 39,766
Interest income (3,272) - (772) 4,044 (f) -
Other (1,065) (24) (918) (2,007)
Minority interest in Subsidiary 671 - 69 (671) (g) 69
Equity in net income of affiliated company 1,322 (h) 1,322
----------- ------------ ------------- ---------- ------------
Income (loss) before provision for income taxes 16,206 (1,017) 53,969 (4,287) 64,871
Provision for income taxes 5,414 45 13,645 8,888 (i) 27,992
----------- ------------ ------------- ---------- ------------
Net income (loss) $ 10,792 $ (1,062) $ 40,324 $(13,175) $ 36,879
=========== ============ ============= ========== ============
Weighted average shares outstanding 46,326 (j)
Net income per share $ 0.80
============
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Fiscal
U.S. Office 1996 1997
Products Purchased Completed Pro Forma Pro Forma
Company Companies Acquisitions Adjustments Combined
----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $166,742 $125,549 $266,216 $ - $558,507
Cost of revenues 124,785 89,904 192,522 - 407,211
-------- -------- -------- --------- --------
Gross profit 41,957 35,645 73,694 - 151,296
Selling, general and administrative expenses 41,033 30,067 62,441 2,331 (c) 134,569
(1,303) (d)
Nonrecurring acquisition costs 4,671 - - (4,671) (e) -
Nonrecurring restructuring costs - - - - -
Discontinuation of printing division at subsidiary - - - - -
-------- -------- -------- --------- --------
Operating income (3,747) 5,578 11,253 3,643 16,727
Other (income) expense:
Interest expense 2,082 1,170 2,712 4,727 (f) 10,691
Interest income (142) (5) (240) 387 (f) -
Other (99) 1,164 (360) - 705
Minority interest in subsidiary - - (2) - (2)
Equity in net income of affiliated company - - - 78 (h) 78
-------- -------- -------- --------- --------
Income (loss) before provision for income taxes (5,588) 3,249 9,143 (1,393) 5,411
Provision for income taxes (1,469) 1,032 1,849 934 (i) 2,346
-------- -------- -------- --------- --------
Net income (loss) $ (4,119) $ 2,217 $ 7,294 $(2,327) $ 3,065
======== ======== ======== ========= ========
Weighted average shares outstanding 45,976 (j)
Net income per share $ 0.07
========
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 27, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal
U.S. Office 1997
Products Completed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $352,638 $248,063 $ - $600,701
Cost of revenues 253,017 172,619 425,636
-------- -------- --------- --------
Gross profit 99,621 75,444 175,065
Selling, general and administrative expenses 82,561 62,334 1,655 (c) 145,235
(1,315) (d)
Nonrecurring acquisition costs 1,657 - (1,657) (e) -
Nonrecurring restructuring costs - -
Discontinuation of printing division at subsidiary - -
-------- -------- --------- --------
Operating income 15,403 13,110 1,317 29,830
Other (income) expense:
Interest expense 6,949 2,267 1,475 (f) 10,691
Interest income (4,185) (135) 4,320 (f)
Other 206 (304) (98)
Minority interest in subsidiary (222) - (222)
Equity in net income of affiliated company 86 (h) 86
-------- -------- --------- --------
Income (loss) before provision for income taxes 12,655 11,282 (4,392) 19,545
Provision for income taxes 5,151 2,914 399 (i) 8,464
-------- -------- --------- --------
Net income (loss) $ 7,504 $ 8,368 $(4,791) $ 11,081
======== ======== ========= ========
Weighted average shares outstanding 47,014 (j)
Net income per share $ 0.24
========
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal
1997
U.S. Office Post 1st Quarter Pro-Forma
Products Pooled Companies Adjustments Total
----------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $579,539 $143,007 $ - $722,546
Cost of revenues 426,426 106,329 532,755
----------- ------------ ----------- ----------
Gross profit 153,113 36,678 189,791
Selling, general and administrative expenses 134,652 28,484 163,136
----------- ------------ ----------- ----------
Operating income 18,461 8,194 - 26,655
Other (income) expense:
Interest expense 5,639 309 5,948
Interest income (506) (102) (608)
Other (251) (414) (665)
Minority interest in subsidiaries (124) (124)
----------- ------------ ----------- ----------
Income before provision for income taxes 13,703 8,401 - 22,104
Provision for income taxes 2,171 781 6,719 (k) 9,671
----------- ------------ ----------- ----------
Net income $ 11,532 $ 7,620 $(6,719) $ 12,433
=========== ============ =========== ==========
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1994
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal
1997
U.S. Office Post 1st Quarter Pro-Forma
Products Pooled Companies Adjustments Total
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues $436,480 $109,945 $ - $546,425
Cost of revenues 310,051 81,225 391,276
------------- ------------- ------------- -----------
Gross profit 126,429 28,720 - 155,149
Selling, general and administrative expenses 114,661 25,161 139,822
------------- ------------- ------------- -----------
Operating income 11,768 3,559 - 15,327
Other (income) expense:
Interest expense 3,683 186 3,869
Interest income (266) (72) (338)
Other (855) 88 (767)
Minority interest in subsidiaries (109) (109)
------------- ------------- ------------- -----------
Income before provision for income taxes 9,315 3,357 - 12,672
Provision for income taxes 1,618 796 3,114 (k) 5,528
------------- ------------- ------------- -----------
Net income $ 7,697 $ 2,561 $(3,114) $ 7,144
============= ============= ============= ===========
</TABLE>
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect $38,125 of proceeds from the sale of 1,250
shares of Common Stock in the September Stock Sale.
(b)(i) Adjustment to reflect purchase price adjustments and repayment of
certain long-term debt associated with the Fiscal 1997 Purchased
Companies noted below. The portion of the consideration assigned to
goodwill in transactions accounted for as purchases represents the
excess of the cost over the fair value of the net assets acquired. The
Company amortizes goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an
ongoing basis by comparing anticipated undiscounted future cash flows
from operations to net book value.
<TABLE>
<CAPTION>
STOCK
------------------------
COMPANY CONSIDERATION CASH SHARES VALUE GOODWILL
- -------------------------------------- ------------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1997 Purchased Companies
Significant ........................ $ 39,430 $ 7,886 1,106,807 $ 31,544 $ 31,074
Other .............................. 228,706 87,025 4,877,650 141,681 141,340
------------- --------- ------------ --------- ----------
Total ............................ $ 268,136 $ 94,911 5,984,457 $ 173,225 $ 172,414
</TABLE>
------------------
(ii) Adjustment to reflect the investment of $41,270 representing a 49%
equity interest in Dudley Stationery Limited.
(iii) Utilization of excess cash to repay indebtedness of acquired
companies.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Adjustment to reflect the increase in amortization expense relating to
the goodwill recorded in purchase accounting related to the Fiscal
1996 Purchased Companies and the Fiscal 1997 Purchased Companies. The
goodwill is being amortized over an estimated life of 40 years.
<TABLE>
<CAPTION>
YEAR ENDED FOR THE THREE MONTHS ENDED
APRIL 30, JULY 27, JULY 31,
1996 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Fiscal 1996 Purchased Companies $1,570 $ -- $ 668
Fiscal 1997 Purchased Companies 6,620 1,655 1,663
---------- ---------- ----------
$8,190 $1,655 $2,331
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(d) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the
renegotiation of executive compensation arrangements.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
(e) Adjustment to reflect the reduction of (i) nonrecurring acquisition costs
related to pooling-of-interests business combinations of $8,057 for the
year ended April 30, 1996, $1,657 and $4,571 for the three months ended
July 27, 1996 and July 31, 1995, respectively, and (ii) certain other
restructuring charges from certain acquisitions of $2,532 for the year
ended April 30, 1996.
(f) Adjustment to reflect an increase in interest expense resulting from the
utilization of the proceeds from the sales of the February Notes and the
May Notes to effect acquisitions as if such debt had been outstanding for
the entire period. In addition, the adjustment reflects an increase in
interest expense resulting from the amortization of debt issue costs over
the terms of the February Notes and the May Notes. The increase is offset
by a reduction of interest expense resulting from refinancing of existing
debt of the Fiscal 1997 Purchased Companies. Adjustment also reflects a
decrease in interest income resulting from the utilization of a portion of
the proceeds from the issuance of the Common Stock and the February Notes
in the February Offerings to effect certain transactions and refinance
existing debt.
(g) Adjustment to reflect the elimination of the minority interest representing
49% of the net income of Blue Star for the year ended April 30, 1996.
(h) Adjustment to reflect the 49% equity interest in the net income of Dudley
Stationery Limited.
(i) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 43%. The
difference between the effective tax rate of 43% and the statutory tax rate
of 35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based on 46,326, 47,014, and 45,976 shares of Common
Stock and Common Stock equivalents outstanding for the year ended April 30,
1996 and the three months ended July 27, 1996 and July 31, 1996,
respectively. The amounts are comprised of 38,614 shares outstanding for
each of the periods, 5,984 shares issued for acquisitions completed during
the 1997 fiscal year, 1,250 shares issued in the September Stock Sale and
478, 1,166, and 128 common stock equivalents considered to be outstanding
related to stock options, for the year ended April 30, 1996, and the three
month periods ended July 27, 1996 and July 31, 1996, respectively.
(k) Adjustment to reflect the income taxes for certain acquisitions accounted
for under the poolings-of-interests method which were taxed as subchapter S
corporations as if these companies had been subject to taxation as C
corporations. As a result of being subchapter S corporations, any tax
liabilities prior to acquisition were the responsibility of the individual
company stockholders.
<PAGE>
FORTRAN CORP.
FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
<PAGE>
FORTRAN CORP.
TABLE OF CONTENTS
Page
----
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report on the Financial Statements 1
Financial Statements:
Balance Sheet 2-3
Statement of Earnings 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6-7
Notes to Financial Statements 8-12
</TABLE>
<PAGE>
[LETTERHEAD OF RUBIN, KOEHMSTEDT & NADLER, PLC]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March 31,
1996, and the related statements of earnings, changes in stockholders' equity,
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 Fortran Corp. as of March 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
/s/ Rubin, Koehmstedt & Nadler
June 7, 1996, except for Note 9,
as to which the date is October 24, 1996
<PAGE>
(This page is left blank intentionally)
<PAGE>
FORTRAN CORP.
BALANCE SHEET
MARCH 31, 1996
ASSETS
------
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1996 1996 1995
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,547,870 $ 936,593 $ 4,599,000
Trade accounts receivable, less allowances for
doubtful accounts of $20,000 3,220,218 1,895,439 2,422,372
Retentions receivable - - 2,308,342
Unbilled receivables 248,877 243,140 214,696
Employee loans receivable 57,912 39,614 95,041
Other receivables 116,461 93,288 20,000
Inventory 1,205,068 1,245,458 1,200,000
Prepaid state income taxes 17,280 - -
Other prepaid expenses 103,743 150,251 38,923
----------- ---------- -----------
Total current assets 9,517,429 4,603,783 10,898,374
----------- ---------- -----------
Property and equipment, at cost (Note 3):
Transportation equipment 107,461 107,461 73,754
Furniture and office equipment 604,813 625,461 641,024
Tools and equipment 38,260 38,260 38,260
Equipment held under capital leases 68,148 68,148 96,370
Leasehold improvements 73,414 73,414 25,537
----------- ---------- -----------
892,096 912,744 874,945
Less accumulated depreciation and amortization 335,212 363,532 (398,764)
----------- ---------- -----------
556,884 549,212 476,181
----------- ---------- -----------
Other assets:
Deposits (Note 4) 510,757 1,756,729 550,678
Cash surrender value - insurance 44,256 44,256 40,095
Note receivable - - -
----------- ---------- -----------
555,013 1,800,985 590,773
----------- ---------- -----------
$10,629,326 $6,953,980 $11,965,328
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1996 1996 1995
---------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Trade accounts payable $ 942,441 $ 565,076 $1,447,822
Unearned service contract revenue 142,105 210,349 478,752
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5) 702,500 702,500 2,387,000
Accrued salaries and vacation payable 303,007 179,691 555,797
Other accrued expenses payable 68,620 57,250 88,189
State income taxes payable - - 17,130
Sales tax payable 48,861 9,246 5,592
Line of credit - 99,210 232,369
Current portion of obligations under capital
leases - - 11,383
---------- ---------- ----------
Total current liabilities 2,207,534 1,823,322 5,224,034
---------- ---------- ----------
Long-term liabilities:
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5) 1,179,500 1,085,136 1,882,000
---------- ---------- ----------
Commitments and contingent liabilities (Note 6) - - -
---------- ---------- ----------
Stockholders' equity:
Common stock, no par value
Authorized - 1,000 shares
Issued and outstanding - 200 shares 15,864 15,864 15,864
Retained earnings 7,226,428 4,029,658 4,843,430
----------- ---------- -----------
7,242,292 4,045,522 4,859,294
----------- ---------- -----------
$10,629,326 $6,953,980 $11,965,328
=========== ========== ===========
</TABLE>
-3-
<PAGE>
FORTRAN CORP.
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year ended Quarter ended Quarter ended
March 31, June 30, June 30,
1996 1996 1995
----------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Sales $20,780,385 $2,912,953 $10,048,123
Cost of sales 9,144,095 930,901 4,763,066
----------- ---------- -----------
Gross profit 11,636,290 1,982,052 5,285,057
----------- ---------- -----------
Costs and expenses:
Operating 3,623,056 899,205 768,769
Depreciation and amortization 105,115 28,320 20,000
Interest 17,839 820 1,984
----------- ---------- -----------
3,746,010 928,345 790,753
----------- ---------- -----------
Earnings from operations 7,890,280 1,053,707 4,494,304
----------- ---------- -----------
Other income:
Interest and finance charges 212,617 22,197 56,984
Miscellaneous - 19,506 856
Gain on disposal of equipment 7,377 - -
----------- ---------- -----------
219,994 41,703 57,840
----------- ---------- -----------
Earnings before provision for state income taxes 8,110,274 1,095,410 4,552,144
Provision for state income taxes 25,429 - -
----------- ---------- -----------
Net earnings $ 8,084,845 $1,095,410 $ 4,552,144
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
-4-
<PAGE>
FORTRAN CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1996 AND QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
-------- ------------ ------------
<S> <C> <C> <C>
Balance at March 31, 1995 $15,864 $ 5,729,202 $ 5,745,066
Net earnings for the year - 8,084,845 8,084,845
Dividends paid - (6,587,619) (6,587,619)
-------- ----------- -----------
Balance at March 31, 1996 15,864 7,226,428 7,242,292
Net earnings for the quarter
ended June 30, 1996 (unaudited) - 1,095,410 1,095,410
Dividends paid (unaudited) - (4,292,180) (4,292,180)
-------- ----------- -----------
Balance at June 30, 1996 (unaudited) $15,864 $ 4,029,658 $ 4,045,522
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
-5-
<PAGE>
FORTRAN CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Quarter ended Quarter ended
March 31, June 30, June 30,
1996 1996 1995
------------ -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,084,845 $ 1,095,410 $ 4,552,144
Noncash items included in net earnings:
Depreciation and amortization 105,115 28,320 20,000
Gain on disposal of equipment (7,377) - -
(Increase) decrease in:
Trade accounts receivable (1,231,244) 1,324,779 (433,398)
Retentions receivable 1,179,323 - (1,129,019)
Unbilled receivables (101,427) 5,737 (67,246)
Other receivables (91,278) 23,173 6,194
Inventory 1,654,392 (40,390) 1,659,460
Prepaid state income tax (17,280) 17,280 -
Other prepaid expenses (82,564) (46,508) (17,744)
Deposits (397,228) (1,245,972) (437,149)
Increase (decrease) in:
Trade accounts payable (1,461,904) (377,365) (956,523)
Unearned service contract revenue (114,780) 68,244 221,867
Billings in excess of costs and estimated
earnings on uncompleted contracts 995,000 (94,364) 3,382,000
Sales tax payable 36,060 (39,615) (7,209)
Accrued expenses payable (347,219) (134,686) (74,860)
State income taxes payable (17,130) - -
----------- ----------- -----------
Net cash provided (used) by operating activities 8,185,304 584,043 6,718,517
----------- ----------- -----------
Cash flows from investing activities:
Net collection from notes receivable 5,000 - 5,000
Disposal of equipment 11,300 - -
Purchase of equipment (316,881) (20,648) (147,141)
Net decrease in loans receivable
from stockholders and employees 38,140 18,298 -
Change in cash surrender
value - insurance (4,161) - -
----------- ----------- -----------
Net cash provided (used) by investing activities (266,602) (2,350) (142,141)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
-6-
<PAGE>
FORTRAN CORP.
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year ended Quarter ended Quarter ended
March 31, June 30, June 30,
1996 1996 1995
------------ -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from financing activities:
Net line of credit borrowings (repayments) - 99,210 232,369
Payments on notes and leases payable (16,785) - (5,402)
Dividends paid (6,587,619) (4,292,180) (5,437,915)
----------- ----------- -----------
Net cash provided (used) by financing activities (6,604,404) (4,192,970) (5,210,948)
----------- ----------- -----------
Net increase (decrease) in cash 1,314,298 (3,611,277) 1,365,428
Cash and cash equivalents at beginning of year 3,233,572 4,547,870 3,233,572
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,547,870 $ 936,593 $ 4,599,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 17,839 $ 820 $ 1,984
=========== =========== ===========
Taxes paid $ 59,749 $ 0 $ 0
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
-7-
<PAGE>
FORTRAN CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. Summary of significant accounting policies
------------------------------------------
General - Fortran Corp. was incorporated under the laws of the State of
-------
Maryland. The primary business of the company is the sale, installation and
service of telephone systems and related equipment.
Cash and cash equivalents - The Company considers all highly liquid
-------------------------
investments with a maturity of three months or less, when purchased, to be
"cash equivalents".
Accounts receivable - Accounts receivable represents amounts due to the
-------------------
Company on product sales, U.S. Government receivables, various state
government receivables, completed contracts, progress billings on contracts
in process, and service and repair billings.
Inventory - Inventory is stated at lower of cost or market value. Cost is
---------
determined using the first-in, first-out (FIFO) method.
Property and equipment - Depreciation and amortization of property and
----------------------
equipment is provided on the straight-line and declining balance methods.
Income taxes - Fortran Corp. has elected to be treated as an S corporation
------------
for income tax reporting purposes. This election provides that, in lieu of
corporate income taxes, the taxable income and credits are reported directly
by the stockholders of the Corporation. Accordingly, the financial statements
do not include any provision for Federal income taxes. Some states in which
the Company does business do not recognize this S Corporation status.
Accordingly, provision has been made for corporate income taxes payable in
those states.
Revenues and cost recognition - Revenues from long-term fixed-price
------------------------------
installation contracts are recognized on the percentage-of-completion method.
The percentage of completion is determined by the ratio of costs incurred to
estimates of total costs to be incurred. Losses on contracts are provided for
in their entirety when estimates indicate that a loss will be incurred.
Contract costs are included in cost of sales. These contract costs include
all direct material, labor and subcontract costs and those indirect costs
related to contract performance, such as payroll taxes and insurance. General
and administrative costs are charged to expense as incurred. Changes in job
performance, job conditions, estimated profitability, and final contract
settlements may result in revisions to costs and income that are recognized
in the period in which the revisions are determined.
The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
Unearned service contract revenue - Revenues from the sale of maintenance
---------------------------------
service contracts are deferred and recognized ratably over the life of the
contract. With the exception of one contract, the service contracts do not
extend beyond twelve months.
-8-
<PAGE>
FORTRAN CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. Summary of significant accounting policies - continued
------------------------------------------------------
Concentration of credit risk - Financial instruments that potentially subject
----------------------------
the Company to credit risk include cash and cash equivalents and accounts
receivable. The Company places its cash and temporary cash investments with
high quality institutions. Such investments may not be covered by, or may be
in excess of FDIC insurance limits. The Company operates and grants credit
primarily to customers in the Washington, D.C. metropolitan area.
Management estimates - The preparation of financial statements in conformity
--------------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Disclosures about fair value of financial instruments
-----------------------------------------------------
Current assets and current liabilities - SFAS No.107, "Disclosures about Fair
--------------------------------------
Values of Financial Instruments," requires the disclosure of financial
instruments for which it is practical to estimate the value and the methods
and significant assumptions used to estimate that value. The carrying amount
approximates fair value due to the short maturity of those instruments.
3. Property and equipment
----------------------
Estimated useful lives used in the computation of depreciation and
amortization of property and equipment are as follows:
<TABLE>
<S> <C>
Transportation equipment 5-7 years
Furniture and office equipment 5-15 years
Tools and equipment 5-10 years
Equipment held under capital leases 5-10 years
Leasehold improvements 10-12 years
</TABLE>
4. Required deposits under federal income tax laws
-----------------------------------------------
Deposits include amounts of "required payments" under federal income tax laws
in the amount of $495,170. S Corporations that file tax returns on a fiscal
year basis must make "required payments" in order to retain their fiscal
year. The amount of this payment is computed based on the Corporation's net
income that is deemed to be deferred for income tax purposes. If the
Company's net income decreases, a refund of this "required payment" can be
claimed.
-9-
<PAGE>
FORTRAN CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
4. Required deposits under federal income tax laws - continued
-----------------------------------------------------------
The Company made a payment of $1,232,274 during May 1996 to increase the
balance of its "required payment" to $1,727,444. Based on income for the
current year, a payment of approximately $735,000 will be required by May 15,
1997 to increase the balance of its "required payment" to approximately
$2,462,444 to maintain the Company's S corporation status and fiscal year.
Management is evaluating a possible change in the Company's fiscal year to a
calendar year ending December 31, 1996. If such a change in accounting
periods is made, the balance in the "required payment" account of $1,727,444
will be refunded to the Company and a "short year" income tax return will be
filed for the nine month period ending December 31, 1996.
5. Long-term contract in process
-----------------------------
The Company is providing services under a long-term contract with a federal
government agency for the installation, maintenance and support of telephone,
voice mail, and computer network systems. The contract provides for full
payment upon installation and acceptance by the government. However, the
Company is obligated to provide support and maintenance services for a period
of five years after acceptance of the system.
Costs, estimated earnings and billings on the uncompleted contract as of March
31, are as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Costs and estimated earnings $21,491,453
Billings 23,373,453
-----------
$ 1,882,000
===========
</TABLE>
The above amounts are included in the balance sheet under the caption "Costs and
estimated earnings in excess of billings on uncompleted contracts," as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Current $ 702,500
Long-term 1,179,500
-----------
$ 1,882,000
===========
</TABLE>
6. Commitments and contingent liabilities
--------------------------------------
Line of credit - The Company has a line of credit with Crestar Bank for
--------------
$2,000,000, secured by corporate assets and personally guaranteed by the
Company's two stockholders. The financing agreement contains requirements for
maintaining certain financial ratios and the bank reserves the right to
review each request over $1,000,000 and to use its discretion to advance
funds over that amount. The line of credit is payable on demand, with
interest at prime plus one-half percent (.50%), payable monthly. There was no
outstanding balance on the line of credit as of March 31, 1996.
-10-
<PAGE>
FORTRAN CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
6. Commitments and contingent liabilities (continued)
--------------------------------------------------
Leases - The Company leases office and warehouse space in Newington, Virginia
------
and Baltimore, Cumberland and Cambridge, Maryland. The ten year lease on the
Newington office provides for annual increases based on consumer price index
increases beginning the fifth year, limited to 3% of the previous year's base
rent. In addition, the Company has four renewal options of five years each at
escalating rental amounts and an option to terminate the lease at any time
after six years by giving six months notice and paying a termination fee of
varying amounts ranging from $10,000 to $44,525, depending on the date of
termination. As an inducement to enter into the lease, Fortran Corp. received
twelve months at half rent. The total base rent, net of the reduced rental
period, has been charged to operations ratably over the life of the lease.
All other office leases do not extend past twelve months. The Company also
leases vehicles under non-cancelable operating leases extending to March
1998. Vehicle leases entered into during 1996 have been prepaid. Rent expense
for offices and vehicles in 1996 was $308,019.
The future minimum annual rental commitments are as follows:
<TABLE>
<CAPTION>
Total
Year ended Office Minimum
March 31, Space Vehicles rent
- ------------- -------- -------- --------
<S> <C> <C> <C>
1997 $146,054 $ 67,081 $213,135
1998 143,229 4,318 147,547
Thereafter - - -
-------- -------- --------
$289,283 $ 71,399 $360,682
======== ======== ========
</TABLE>
Product warranty costs - The Company generally provides customers with
----------------------
warranties ranging from 90 days to two years covering the costs of materials
and labor. Product warranty costs in excess of those covered by the
manufacturers warranty are expensed as incurred. A provision for product
warranty costs has not been made because management believes the amount is
not subject to reasonable estimation, with the exception of one contract
which specifically obligates the Company to maintain a service technician on
site for a period of five years, which expires in 1997.
7. Profit sharing plan
-------------------
The Company has a contributory profit sharing plan covering substantially all
employees. The plan allows employees to make voluntary contributions, subject
to certain limitations. The Company's contributions to the plan are at the
discretion of the Board of Directors. During the current year the Company
elected to match 20% contributed by each employee, limited to 5% of the
employee's salary. The total pension expense was $17,301 for the year ending
March 31, 1996.
-11-
<PAGE>
FORTRAN CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
8. Significant customer
--------------------
Revenue earned from one contract with a federal government agency amounted to
$10,735,328 for the year ended March 31, 1996, which represents approximately
51% of total sales. The total amount due from this customer at March 31, 1996
was $2,056,632 which represents approximately 63% of accounts receivable,
including retentions.
9. Subsequent events
-----------------
On August 21, 1996, the Company entered into a letter of intent with U.S.
Office Products Company (U.S. Office Products) whereby the Company agreed to
merge with U.S. Office Products. Pursuant to the letter of intent, the
Company's stockholders will exchange all of the outstanding shares of the
Company's common stock for 1,100,000 shares of U.S. Office Products' Common
Stock.
12
<PAGE>
PC DIRECT LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 1996
Page 1
<PAGE>
PC DIRECT LIMITED
- -----------------
DIRECTORS' REPORT
- -----------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
The Board of Directors present this report and accompanying financial statements
with the auditor's report thereon for the year ended 31 March 1996.
ACTIVITIES
There have been no changes in the principal activities of the company during the
year.
<TABLE>
<CAPTION>
Consolidated Parent
$ $
<S> <C> <C>
RESULTS AND DISTRIBUTIONS
Net profit after tax 1,119,031 1,095,904
Add: retained earnings brought forward from 1 April 1995 2,439,867 2,486,874
--------- ---------
3,558,898 3,582,778
Deduct: taxable bonus share issue from retained earnings 1,937,500 1,937,500
transfer to foreign currency translation reserve 14,383 -
--------- ---------
Retained earnings carried forward 31 March 1996 1,607,015 1,645,278
========= =========
</TABLE>
STATE OF AFFAIRS
The profit earned for the year is consistent with the Directors' expectations,
and the state of the company's affairs is considered to be satisfactory. No
transfers to reserves are proposed.
DIVIDEND
No dividends be proposed for the year ended 31 March 1996.
AUDITORS
The auditors, KPMG, continue in office in accordance with section 163(3) of the
Companies Act 1955.
SHARE DEALINGS
On 1 April 1995 the issued share capital was increased to $2,000,000 fully paid
$1 ordinary A shares by means of a taxable bonus issued from retained earnings.
On 3 May 1995 a further 312,288 fully paid ordinary A shares were issued and PCD
Investments Ltd., a wholly owned subsidiary of Direct Capital Management Ltd.,
a New Zealand publicly listed company, purchased 25% of the ordinary A shares of
the company.
For and behalf of the Board
Director Director
- ------------------------- -------------------------
Date Date
- ------------------------- -------------------------
Page 2
<PAGE>
PC DIRECT LIMITED
- -----------------
STATEMENT OF FINANCIAL POSITION
- -------------------------------
AS AT 31 MARCH 1996
- -------------------
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EQUITY
Issued share capital 3 2,312,288 62,500 2,312,288 62,500
Share premium 3 1,846,712 - 1,846,712 -
Foreign currency translation reserve 14,383 - - -
Retained earnings 1,607,015 2,439,867 1,645,278 2,486,874
--------- --------- --------- ---------
5,780,398 2,502,367 5,804,278 2,549,374
========= ========= ========= =========
REPRESENTED BY:
NON CURRENT ASSETS
Fixed assets 4 4,066,170 931,850 4,053,354 917,440
Investment in subsidiary companies - - 306,191 122,231
Deferred tax 6 25,586 389,371 25,586 389,371
Goodwill 15 122,550 - - -
--------- --------- --------- ---------
4,214,306 1,321,221 4,385,131 1,429,042
CURRENT ASSETS
Cash and bank 492,918 489,326 313,936 382,139
Accounts receivable 7 3,450,915 1,702,397 3,378,572 1,688,006
Tax receivable 52,685 - 65,559 -
Inventories 8 4,932,349 5,421,630 4,897,462 5,389,687
Due from directors 990 - 990 -
--------- --------- --------- ---------
8,929,857 7,613,353 8,656,519 7,459,832
CURRENT LIABILITIES
Accounts payable 9 5,689,356 5,954,401 5,588,741 5,616,210
GST payable 125,760 147,417 122,944 147,417
Due to directors - 50,519 - 50,519
Tax payable - 128,139 - 128,139
Current portion of finance leases 11 31,138 - 31,138 -
Due to related companies - - 140,683 397,215
--------- --------- --------- ---------
5,846,254 6,280,476 5,883,506 6,339,500
MINORITY INTEREST 163,645 151,731 - -
TERM LIABILITIES
Finance leases 11 113,866 - 113,866 -
BNZ mortgage 14 1,240,000 - 1,240,000 -
--------- --------- --------- ---------
1,353,866 - 1,353,866 -
NET ASSETS 5,780,398 2,502,367 5,804,278 2,549,374
========= ========= ========= =========
</TABLE>
The accompanying notes form part of and are to be read in conjunction with these
financial statements.
On behalf of the board.
_________________________ Director __________________________ Director
_________________________ Director __________________________ Director
Page 3
<PAGE>
PC DIRECT LIMITED
- -----------------
STATEMENT OF FINANCIAL PERFORMANCE
- ----------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
SALES 55,070,234 45,624,759 54,876,339 45,624,759
========== ========== ========== ==========
NET PROFIT FROM OPERATIONS 1,704,548 2,544,136 1,668,050 2,602,895
After including:
Forgiveness of management fees 13 529,362 - 529,362 -
Interest received 106,638 18,035 106,188 18,035
Foreign exchange gains 38,192 - 38,192 -
After charging:
Auditor remuneration:
Audit services 22,000 15,000 22,000 15,000
Other services 45,000 9,000 45,000 9,000
Bad debts - written off 24,133 23,447 22,913 23,447
Directors' fees 11,667 - 11,667 -
Depreciation 326,326 202,393 326,251 202,393
Interest 50,665 28,662 50,665 28,662
Rentals 325,477 313,025 323,119 313,025
Amortization of goodwill 15 6,450 - - -
Foreign exchange losses - 33,697 - 33,697
NET PROFIT BEFORE TAX 1,704,548 2,544,136 1,668,050 2,602,895
TAX 5 585,168 859,063 572,146 859,063
------- ------- ------- -------
NET PROFIT AFTER TAX 1,119,380 1,685,073 1,095,904 1,743,832
Minority share of subsidiary losses/
(profits) (349) 11,752 - -
NET PROFIT 1,119,031 1,696,825 1,095,904 1,743,832
========= ========= ========= =========
</TABLE>
The accompanying notes form part of and are to be read in conjunction with these
financial statements.
Page 4
<PAGE>
PC DIRECT LIMITED
- -----------------
STATEMENT OF MOVEMENTS IN EQUITY
- --------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Equity at 1 April 2,502,367 1,368,042 2,549,374 1,368,042
Net profit after tax 1,119,031 1,696,825 1,095,904 1,743,832
Share issue 2,159,000 - 2,159,000 -
--------- --------- --------- ---------
Dividends paid 5,780,398 3,064,867 5,804,278 3,111,874
- (562,500) - (562,500)
--------- --------- --------- ---------
Equity at 31 March 5,780,398 2,502,367 5,804,278 2,549,374
========= ========= ========= =========
</TABLE>
The accompanying notes form part of and are to be read in conjunction with these
financial statements.
Page 5
<PAGE>
PC DIRECT LIMITED
- -----------------
STATEMENT OF CASH FLOWS
- -----------------------
AS AT 31 MARCH 1996
- -------------------
<TABLE>
<CAPTION>
Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Cash was provided from:
Receipts from customers 53,121,971 45,473,890 52,981,659 45,488,281
Interest 106,638 18,035 106,188 18,035
Other income 97,926 124,689 97,926 124,689
------ ------- ------ -------
53,326,535 45,616,614 53,185,773 45,631,005
Cash was applied to:
Cash paid to suppliers and employees (52,772,320) (43,036,976) (52,640,572) (43,050,733)
Interest (50,075) (28,662) (50,075) (28,662)
Income tax paid (402,207) (1,120,296) (402,059) (1,120,296)
-------- ---------- -------- ----------
(53,224,602) (44,185,934) (53,092,706) (44,199,691)
----------- ----------- ----------- ------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES 101,933 1,430,680 93,067 1,431,314
======= ========= ====== =========
CASH FLOWS FROM INVESTING
ACTIVITIES
Cash was applied to:
Purchase of fixed assets
Investment in subsidiary company (3,642,345) (588,731) (3,521,314) (574,321)
- - (183,960) (122,231)
---------- -------- ---------- --------
NEW CASH FLOWS FROM INVESTING
ACTIVITIES (3,642,345) (588,731) (3,705,274) (696,552)
========== ======== ========== ========
CASH FLOWS FROM FINANCING
ACTIVITIES
Cash was provided from:
Issue of shares
Finance leases 2,159,000 - 2,159,000 -
BNZ mortgage 145,004 - 145,004 -
1,240,000 - 1,240,000 -
Cash was applied to:
Dividends paid - (562,500) - (562,500)
--------- -------- --------- --------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 3,544,004 (562,500) 3,544,004 (562,500)
========= ======== ========= ========
</TABLE>
Page 6
<PAGE>
PC DIRECT LIMITED
- -----------------
STATEMENT OF CASH FLOWS (continued)
- -----------------------------------
AS AT 31 MARCH 1996
- -------------------
<TABLE>
<CAPTION>
Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUMMARY OF NET CASH FLOWS FROM:
Operating activities 101,933 1,430,680 93,067 1,431,314
Investing activities (3,642,345) (588,731) (3,705,274) (696,552)
Financing activities 3,544,004 (562,500) 3,544,004 (562,500)
--------- -------- --------- --------
Increase (decrease) in cash 3,592 279,449 (68,203) 172,262
Cash at beginning of period 489,326 209,877 382,139 209,877
------- ------- ------- -------
Cash at end of period 492,918 489,326 313,936 382,139
======= ======= ======= =======
RECONCILIATION OF NET CASH FLOWS FROM
OPERATING ACTIVITIES
Net profit after Tax 1,119,031 1,696,825 1,095,904 1,743,832
ADD
Depreciation and loss on disposal 385,475 202,393 385,400 202,393
Increase in due to related company - - - 97,940
Decrease in inventory 489,281 - 492,225 -
Increase in accounts payable - 1,954,372 - 1,915,456
Increase in amount due to directors - 50,519 - 50,519
Increase in tax payable - 128,139 - 128,139
Decrease in due from related companies - 207,096 - 207,096
Increase in minority interest 11,914 151,731 - -
Decrease in deferred tax 363,785 - 363,785 -
--------- --------- --------- ---------
1,250,455 2,694,250 1,241,410 2,601,543
DEDUCT
Decrease in accounts payable 265,045 - 27,469 -
Decrease in GST payable 21,657 9,637 24,473 9,637
Decrease in due to related companies - - 256,532 -
Decrease in tax payable 128,139 - 128,139 -
Increase in accounts receivable 1,748,518 121,903 1,690,566 107,512
Increase in amount due from directors 51,509 - 51,509 -
Increase in tax receivable 52,685 - 65,559 -
Increase in inventories - - - -
Increase in deferred tax - 2,439,484 - 2,407,541
- 389,371 - 389,371
--------- --------- --------- ---------
2,267,553 2,960,395 2,244,247 2,914,061
Net cash flows from operating activities 101,933 1,430,680 93,067 1,431,314
======= ========= ====== =========
</TABLE>
The accompanying notes form part of and are to be read in conjunction with these
financial statements.
Page 7
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS
- ---------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
1. STATEMENT OF ACCOUNTING POLICIES
Reporting Entity
PC Direct Limited is registered under the Companies Act 1955. The group
consists of PC Direct Limited, its subsidiary Orbit Software Ltd., and
its in-substance subsidiary, PC Direct (Taiwan) Co. Ltd. The financial
statements of PC Direct Limited have been prepared in accordance with
the Companies Act 1955 and Financial Reporting Act 1993.
Measurement Base
The accounting principles recognized as appropriate for the measurement
and reporting of earnings and financial position, on a historical cost
basis, have been followed by the company.
Basis of Consolidation
The consolidated financial statements have been prepared using the
purchase method. All significant inter-company items and transactions
have been eliminated.
PC Direct (Taiwan) Co. Ltd. is considered to be an in-substance
subsidiary as it is merely an extension of the company's operations. PC
Direct Limited funds 80% of administrative costs of PC Direct (Taiwan)
Co. Ltd. and PC Direct Australia, an unrelated party, funds the
remaining 20%. PC Direct (Taiwan) Co. Ltd. has a 31 December year end
and has been consolidated using the unaudited financial statements for
the year ended 31 December 1995.
Orbit Software Ltd. is an independent operation of the parent. PC Direct
Limited owns all the shares in Orbit Software Ltd. at balance date.
Orbit Software Ltd. has a 31 March year end and has been consolidated
using unaudited accounts for the year ended 31 March 1996.
Goodwill
Goodwill arising on the acquisition of Orbit Software Ltd. is to be
amortized on a straight line basis over 20 Years.
Fixed Assets
Fixed assets are recorded at historical cost less accumulated
depreciation.
Depreciation
Fixed assets are depreciated on a straight line basis, at rate which
will write off the cost over their estimated useful lives as follows:
Plant and Equipment 5 Years
Leasehold Improvements 5 Years
Information Technology 3 Years
Buildings 33 Years
Page 8
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
Inventories
Inventories are valued at the lower of cost determined on a first in
first out basis and net realizable value. Cost of work in progress
includes direct materials, direct labor and a portion of the
manufacturing overhead.
Tax
The income tax expense charged to the statement of financial performance
includes both current and deferred tax calculated using the liability
method.
Tax effect accounting has been applied on a comprehensive basis to all
timing differences. A debit balance in the deferred tax account, arising
from timing differences or income tax benefits from income tax losses,
is only recognized if there is virtual certainty of realization.
Accounts Receivable
Accounts receivable are shown at their net realizable value.
Foreign Currency Transactions
Transactions in foreign currencies are converted into New Zealand
dollars at the rate of exchange ruling at the date of the transaction.
At balance date, foreign currency monetary assets and liabilities are
translated at the closing rate and exchange variations arising from
these transactions are included in the statement of financial
performance as operating items.
Cash Flow Statement
Operating cash flows represent cash received from customers and paid to
suppliers and employees and all other cash flows that are not related to
investing or financing activities.
Investing cash flows represent cash flows arising from the acquisition
and divestment of investments and productive assets.
Financing cash flows represent cash flows arising from cash transactions
affecting the capital structure of the company, cash flows from debt
financing activities and dividends.
Financial Instruments
The company has the following classes of financial instruments:
[_] Cash and bank
[_] Trade and other accounts receivable and payable
[_] Finance leases
[_] Bank of New Zealand Ltd mortgage
These financial instruments are valued at their estimated net realizable
value.
Page 9
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
Finance Leases
Finance leases are capitalized and interest expense is accounted for on
an actuarial basis.
Comparative Figures
Certain comparative figures have been reclassified to conform to the
financial presentation adopted in the current year.
Changes In Accounting Policy
There have been no material changes in accounting policies during the
year. All policies have been applied on a basis consistent with those in
previous years.
Early Adoption of Financial Reporting Standards
The company has elected to adopt the amendments to FRS 9 notified in the
Government Gazette dated 30 May 1996.
Page 10
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
2. NATURE OF BUSINESS
PC Direct Limited is in the business of personal computer assembly and
sales. These activities are carried on in New Zealand.
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ---- ---- ----
<S> <C> <C> <C> <C>
3. SHARE CAPITAL
Authorized, Issued and
Fully Paid
Ordinary A shares of $1 each 2,312,288 62,500 2,312,288 62,500
========= ====== ========= ======
</TABLE>
On 1 April 1995 the issued share capital was increased to $2,000,000
fully paid $1 ordinary A shares by means of a taxable bonus issued from
retained earnings.
On 3 May 1995 a further 312,288 fully paid $1 ordinary A shares were
issued and PCD Investments Ltd ,a wholly owned subsidiary of Direct
Capital Management Ltd, a New Zealand publicly listed company, purchased
25% of the ordinary A shares of the company. The issue included a
premium on the shares of $ 1,846,712.
4. FIXED ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Plant and equipment at cost 819,497 378,547 803,634 364,137
Accumulated depreciation (207,557) (119,002) (203,603) (119,002)
-------- -------- -------- --------
611,940 259,545 600,031 245,135
Leasehold alterations at cost 374,004 350,104 374,004 350,104
Accumulated depreciation (165,069) (122,884) (165,069) (122,884)
-------- -------- -------- --------
208,935 227,220 208,935 227,220
Information technology at cost 594,694 649,617 593,743 649,617
Accumulated depreciation (312,294) (204,532) (312,250) (204,532)
-------- -------- -------- --------
282,400 445,085 281,493 445,085
Buildings 2,242,298 - 2,242,298 -
Accumulated depreciation (29,403) - (29,403) -
------- -- ------- --
2,212,895 - 2,212,895 -
Land 750,000 - 750,000 -
Total fixed assets 4,066,170 931,850 4,053,354 917,440
========= ======= ========= =======
</TABLE>
Page 11
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
----- ----- ----- -----
<S> <C> <C> <C> <C>
5. INCOME TAX
Net profit before tax 1,704,548 2,544,136 1,668,050 2,602,895
========= ========= ========= =========
Tax at 33 cents on the dollar 562,501 839,565 550,457 858,955
Tax effect of permanent differences 22,667 19,498 21,689 108
------- -------- ------- --------
Taxation Charge 585,168 859,063 572,146 859,063
======= ======== ======= ========
The taxation charge is represented by:
Current tax 221,383 1,248,434 208,361 1,248,434
Deferred tax 363,785 (389,371) 363,785 (389,371)
------- -------- ------- --------
585,168 859,063 572,146 859,063
======= ======== ======= ========
6. DEFERRED TAX
Opening Balance 389,371 - 389,371 -
Deferred tax (363,785) 389,371 (363,785) 389,371
-------- ------- -------- -------
Closing Balance 25,586 389,371 25,586 389,371
======= ======= ======== =======
7. ACCOUNTS RECEIVABLE
Trade accounts receivable 3,431,683 1,665,048 3,359,340 1,665,048
Other receivables 19,232 37,349 19,232 22,958
--------- --------- --------- ---------
3,450,915 1,702,397 3,378,572 1,688,006
========= ========= ========= =========
8. INVENTORIES
Stock on hand 4,317,827 4,737,232 4,282,940 4,705,289
Stock in transit 614,522 684,398 614,522 684,398
--------- --------- --------- ---------
4,932,349 5,421,630 4,897,462 5,389,687
========= ========= ========= =========
9. ACCOUNTS PAYABLE
Trade accounts payable 4,537,216 4,757,011 4,436,601 4,355,350
Other payables 1,152,140 1,197,390 1,152,140 1,260,860
--------- --------- --------- ---------
5,689,356 5,954,401 5,588,741 5,616,210
========= ========= ========= =========
</TABLE>
Page 12
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
----- ----- ------ -----
<S> <C> <C> <C> <C>
10. OPERATING LEASE COMMITMENTS
Lease commitments under non-
cancellable operating leases
include:
Less than 1 year 201,884 346,411 201,884 322,751
1 to 2 years 189,699 308,877 189,699 308,877
2 to 5 years 42,817 69,365 42,817 69,365
5 years and over - - - -
------- ------- ------- -------
434,400 724,653 434,400 700,993
======= ======= ======= =======
11. FINANCE LEASE COMMITMENTS
Lease commitments under non-
cancellable finance leases include:
Less than 1 year 31,138 - 31,138 -
1 to 2 years 34,563 - 34,563 -
2 to 5 years 79,303 - 79,303 -
5 years and over - - - -
------- ------- ------- -------
145,004 - 145,004 -
======= ======= ======= =======
12. IMPUTATION CREDIT ACCOUNT
Balance 1 April 1,399,323 556,079 1,399,323 556,079
Add: Income taxes paid 400,676 1,120,296 400,528 1,120,296
Less: imputation credits attaching
to taxable bonus issue (954,291) - (954,291) -
to dividend - (277,052) - (277,052)
-------- -------- -------- --------
Balance 31 March 845,708 1,399,323 845,560 1,399,323
======= ========= ======= =========
At balance date the imputation
credits available to the
shareholders of the parent
company were:
Through direct shareholding in the
parent company 845,560 1,399,323 845,560 1,399,323
Through Orbit Software Ltd. 148 - - -
845,708 1,399,323 845,560 1,399,323
======= ========= ======= =========
</TABLE>
Page 13
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
13. RELATED PARTY TRANSACTIONS
Management fees of $529,362 were forgiven by Michael Peng a director
and shareholder of the company.
The company purchases hardware components from PC Direct (Taiwan) Co.
Ltd on normal trade terms. At balance date the amount owing is $140,683
(1995 $397,215).
The company purchases software from and sells computer hardware to
Orbit Software Ltd., a wholly owned subsidiary company, on normal
trade terms.
14. MORTGAGE
The company has a mortgage with the Bank of New Zealand Ltd. totaling
$1,240,000 (1995 Nil) secured by Lot 67 DP163133 CT 98B/645 (North
Auckland Registry). The interest rate at balance date is 8.80% and the
term is 5 years.
15. GOODWILL
<TABLE>
<CAPTION>
Notes Consolidated Parent
1996 1995 1996 1995
$ $ $ $
---- ---- ---- ----
<S> <C> <C> <C> <C>
Opening Balance - - - -
Goodwill on acquisition 129,000 - - -
Amortization 6,450 - - -
------- -- -- --
Closing Balance 122,550 - - -
======= == == ==
</TABLE>
Page 14
<PAGE>
PC DIRECT LIMITED
- -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
FOR THE YEAR ENDED 31 MARCH 1996
- --------------------------------
16. FINANCIAL INSTRUMENTS
Foreign Exchange Risk
Financial instruments that subject the company to foreign exchange risk
consists primarily of accounts payable.
No off balance sheet financial instruments are utilized by the company
to hedge this exposure.
Credit Risk
Financial instruments which potentially subject the company to credit
risk consist primarily of accounts receivable. No collateral is required
by the company to support financial instruments subject to credit risk.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers included in the company's
customer base. The company places its cash, short term investments and
foreign exchange dealings with high credit quality financial
institutions.
Interest Rate Risk
The following borrowings of the company are sensitive to changes in
interest rates: finance leases, bank loans and overdrafts.
The company manages this risk by adopting a policy of ensuring that its
exposure to changes in interest rates is on a floating rate basis.
Fair Values
The carrying amount of cash, accounts receivable, accounts payable,
finance leases and bank loans approximates fair value. Adequate
provisions are held in respect of accounts receivable.
Page 15
<PAGE>
BAY STATE COMPUTER GROUP, INC.
--------------------
FINANCIAL STATEMENTS FOR THE
YEARS ENDED MARCH 31, 1996 AND 1995
(With Independent Auditor's Report Thereon)
<PAGE>
[LOGO OF PMN APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
----------------------------
BAY STATE COMPUTER GROUP, INC.
Boston, Massachusetts
We have audited the accompanying balance sheets of Bay State Computer Group,
Inc. as of March 31, 1996 and 1995, and the related statements of earnings 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 Bay State Computer Group, Inc.
as of March 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
[SIGNATURE APPEARS HERE]
Certified Public Accountants
May 23, 1996, except for Note N
as to which the date is
October 14, 1996
[LETTERHEAD OF PARENT, MCLAUGHLIN & NANGLE APPEARS HERE]
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
March 31 June 30
-------------------------- --------------------------
ASSETS 1996 1995 1996 1995
------ ----------- ------------- ------------ ------------
(As Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 205,212 $ 94,332 $ -- $ --
Accounts receivable, net of allowance for doubt-
ful accounts of $25,000 in 1996 and 1995 11,812,629 8,088,601 10,345,594 7,977,147
Inventory 1,699,307 1,101,552 2,121,383 1,924,005
Prepaid expenses and other current assets 84,021 68,847 37,458 122,490
Due from affiliates 851,337 89,596 1,279,669 507,618
Refundable income taxes -- -- 92,790 42,214
Deferred income taxes 84,500 48,000 84,500 48,000
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 14,737,006 9,490,928 13,961,394 10,621,474
LEASED EQUIPMENT, net of accumulated
depreciation of $64,710 in 1996
and $58,166 in 1995 8,725 28,760 33,525 5,355
FURNITURE, EQUIPMENT, AND IMPROVEMENTS 262,577 424,825 262,459 419,549
OTHER ASSETS 143,178 97,718 176,497 97,718
----------- ----------- ----------- -----------
$15,151,486 $10,042,231 $14,433,875 $11,144,096
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable to bank $ 5,700,000 $ 3,200,000 $ 5,342,472 $ 4,667,583
Note payable to stockholder 1,200,000 428,906 1,200,000 437,483
Accounts payable 5,089,706 4,597,997 3,922,059 3,850,420
Accrued expenses and payroll withholdings 846,878 392,849 646,386 412,516
Federal and state income taxes 311,737 60,786 -- --
Deferred revenue 261,624 249,549 254,628 242,441
Due to affiliates 39,034 240,946 73,418 144,845
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 13,448,979 9,171,033 11,438,963 9,755,288
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Authorized, 12,500 shares;
Issued and outstanding, 1,000 shares 20,000 20,000 20,000 20,000
Retained earnings 1,682,507 851,198 2,974,912 1,368,808
----------- ----------- ----------- -----------
1,702,507 871,198 2,994,912 1,388,808
----------- ----------- ----------- -----------
$15,151,486 $10,042,231 $14,433,875 $11,144,096
=========== =========== =========== ===========
</TABLE>
[LOGO OF PMN APPEARS HERE]
See notes to financial statements.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
--------------------------------------------
<TABLE>
<CAPTION>
Year ended March 31 Quarter ended June 30
---------------------------- --------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
(As Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales $56,623,077 $39,918,093 $16,036,905 $12,413,790
Service and engineering 2,478,173 1,908,612 2,445,633 526,733
Equipment lease income 122,521 149,427 38,523 29,626
Interest income 105,644 40,725 22,158 25,370
Other income 163,699 60,420 8,647 6,678
----------- ----------- ----------- -----------
59,493,114 42,077,277 18,551,866 13,002,197
COSTS AND EXPENSES:
Cost of equipment sales 49,061,953 35,208,144 14,939,798 10,861,369
Service and engineering 1,417,621 1,039,599 409,853 309,522
Operating expenses 7,142,020 4,851,256 1,790,965 1,204,329
Inventory adjustment -- 93,691 -- --
Interest expense 268,455 215,760 73,812 59,190
Depreciation and amortization 245,632 170,038 45,033 17,177
----------- ----------- ----------- -----------
58,135,681 41,578,488 17,259,461 12,451,587
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 1,357,433 498,789 1,292,405 550,610
----------- ----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT):
Current 562,624 222,209 -- 33,000
Deferred ( 36,500) 21,700 -- --
----------- ----------- ----------- -----------
526,124 243,909 -- 33,000
----------- ----------- ----------- -----------
NET EARNINGS 831,309 254,880 1,292,405 517,610
RETAINED EARNINGS,
beginning of period 851,198 596,318 1,682,507 851,198
----------- ----------- ----------- -----------
RETAINED EARNINGS,
end of period $ 1,682,507 $ 851,198 $ 2,974,912 $ 1,368,808
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year ended March 31 Quarter ended June 30
------------------------- -------------------------
1996 1995 1996 1995
----------- ------------ ------------ -----------
(As Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 831,309 $ 254,880 $1,292,405 $ 517,610
Adjustments to reconcile
net earnings to net cash provided
by (used by) operating activities:
Depreciation and amortization 245,632 170,038 45,033 17,177
Provision for doubtful accounts -- ( 20,000) -- --
Provision for obsolete inventory 35,000 ( 40,415) -- ( 300)
Deferred income taxes ( 36,500) 21,700 -- --
Net (increase) decrease in:
Accounts receivable (3,724,028) ( 3,791,479) 1,467,035 111,454
Inventory ( 632,755) ( 212,613) ( 422,076) ( 822,153)
Leased equipment 20,035 ( 19,308) ( 24,800) 23,405
Prepaid expenses and other current assets ( 15,174) ( 4,427) 46,563 ( 53,643)
Due from stockholder -- 3,000 -- --
Due to/from affiliates ( 405,298) 541,575 610,685 ( 298,003)
Refundable federal and state income taxes -- 31,585 ( 92,790) ( 42,214)
Other assets ( 24,096) ( 74) ( 33,319) --
Net increase (decrease) in:
Accounts payable and accrued expenses 945,738 2,325,628 ( 1,368,139) ( 727,910)
Accrued interest ( 188,906) 31,771 -- 8,577
Federal and state income taxes 250,951 60,786 ( 311,737) ( 60,786)
Deferred revenue 12,075 55,615 ( 6,996) ( 7,108)
------------ ------------ ------------ ------------
Total adjustments (3,517,326) ( 846,618) ( 90,541) ( 1,851,504)
------------ ------------ ------------ ------------
Net cash provided by (used by)
operating activities (2,686,017) ( 591,738) ( 1,201,864) ( 1,333,894)
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from stockholder -- 87,400 -- --
Net advances to affiliates ( 558,355) -- ( 1,004,633) ( 216,120)
Acquisitions of furniture,
equipment and improvements ( 83,384) ( 408,453) ( 44,915) ( 11,901)
Increase in cash surrender
value of officers' life
insurance ( 21,364) ( 30,410) -- --
Proceeds from surrender of
officers' life insurance
policies -- 38,249 -- --
------------ ------------ ------------ ------------
Net cash used by investing
activities ( 663,103) ( 313,214) ( 1,049,548) 228,021)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to
stockholder 1,200,000 -- -- --
Repayment of note payable to
stockholder ( 240,000) -- -- --
Net borrowings under line-of-credit
agreement 2,500,000 879,776 ( 357,528) 1,467,583
------------ ------------ ------------ ------------
Net cash provided by (used by)
financing activities 3,460,000 879,776 ( 357,528) 1,467,583
------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH 110,880 ( 25,176) ( 205,212)( 94,332)
CASH, beginning of year 94,332 119,508 205,212 94,332
------------ ------------ ------------ ------------
CASH, end of year $ 205,212 $ 94,332 $ -- $ --
============ ============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Continued)
<TABLE>
<CAPTION>
Year ended March 31 Quarter ended June 30
------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(As Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the
year for:
Interest $390,988 $182,966 $ 73,812 $ 50,613
======== ======== ======== ========
Income taxes $311,673 $129,838 $404,527 $136,000
======== ======== ======== ========
</TABLE>
See notes to financial statements.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
A. Summary of Significant Accounting Policies:
------------------------------------------
Business activity:
-----------------
The Company designs, sells, installs and maintains local and wide area
computer networks and telecommunications equipment.
The Company conducts its business throughout the United States, Europe and
Canada, and they extend credit to their customers during the normal course
of business.
The Company has Value Added Reseller relationships with Sun Microsystems,
Inc., Digital Equipment Corp., Oracle Corp., Compaq Computer Corp.,
Hewlett-Packard Co., Microsoft Corp., Novell, Inc., Bay Networks, Inc.,
Cabletron Systems, Inc., Cisco, Inc., Dell Computer Corp., NEC
Technologies, Inc., and Seagate Technology, Inc.
Cash equivalents:
----------------
For the purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments with a maturity of three months or
less, when purchased, to be cash equivalents.
Inventory:
---------
Inventory held for resale is stated at the lower of cost or market, using
the specific identification method.
Leased equipment:
----------------
Leased equipment is recorded at cost and depreciated over the term of the
rental agreement, less residual value at the end of the agreement, using
the straight-line method. When leased equipment is sold, the sale is
recorded in equipment sales, and the remaining undepreciated cost is
recorded in cost of equipment sales.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
A. Summary of Significant Accounting Policies - (continued):
------------------------------------------
Furniture, equipment, and improvements:
--------------------------------------
These assets are reported at cost, less accumulated depreci ation and
amortization. Depreciation expense is computed by using an accelerated
method and by the straight-line method, over their respective estimated
useful lives ranging from two to seven years. Costs of maintenance,
repairs and minor additions are expensed as incurred.
Revenue recognition:
-------------------
Income from equipment sales is recognized at the time of shipment. Income
from equipment on lease is accounted for as operating lease income.
Revenue from these leases are included in income, as earned over the term
of the lease agreements. Revenue from maintenance contracts is recognized
over the life of the contract. The billing cycle for leased equipment and
maintenance contracts varies by customer (i.e., monthly, quarterly or
yearly), resulting in deferred revenue.
Use of estimates in the preparation of financial
------------------------------------------------
statements:
----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Unaudited interim financial statements:
--------------------------------------
The Company has prepared the accompanying unaudited interim financial
statements. In the opinion of management, the Company has made all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the financial condition of the Company as of June 30,
1996 and the results of operations and cash flows for the three months
ended June 30, 1996 and 1995, as presented in the accompanying unaudited
financial statements.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
B. Prior Period Adjustments:
------------------------
Retained earnings as of March 31, 1994 and 1995, and net earnings for the
year ended March 31, 1995, have been restated to reflect the correction of
an error in classifying a note payable to the Company's principal
stockholder. A note payable and accrued interest to stockholder was
incorrectly converted to equity in a prior year. The correction results in
adjustments, as follows:
<TABLE>
<CAPTION>
Net Earnings
Retained for the Retained
Earnings Year Ended Earnings
March 31, 1994 March 31, 1995 March 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
As originally reported $ 701,547 $ 286,651 $ 988,198
Accrued interest and
interest expense ( 105,229) ( 31,771) ( 137,000)
As restated $ 596,318 $ 254,880 $ 851,198
========== ========= ==========
</TABLE>
Additional paid-in capital originally reported as $291,906 as of March 31,
1995, has been eliminated and restored as a note payable, along with accrued
interest, to stockholder.
C. Furniture, Equipment, and Improvements:
------------------------------------
Furniture, equipment, and improvements are summarized as follows:
March 31
<TABLE> ------------------------
<CAPTION> 1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment $666,768 $630,797
Field service equipment 228,871 184,127
Leasehold improvements 53,179 50,511
-------- --------
948,818 865,435
Less accumulated depreciation and
amortization 686,241 440,610
-------- --------
$262,577 $424,825
======== ========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1996 and
1995 were $245,632 and $164,901, respectively.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
D. Other Assets:
------------
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash surrender value of officers'
life insurance $105,983 $84,619
Deposits 37,195 13,099
-------- --------
$143,178 $97,718
======== ========
</TABLE>
E. Note Payable to Bank:
--------------------
Note payable to bank represents borrowings under a revolving credit
agreement that permits the Company to borrow, with certain restrictions,
based upon levels of accounts receivable and inventories, up to $6,000,000
at the prime rate or the Eurodollar rate at the Company's discretion.
Subsequent to year end, the Company's borrowing limit was increased from
$6,000,000 to $7,500,000.
Substantially all assets of the Company are pledged as collateral on this
note. The note is cross collaterized by related party entities. The Company
has also guaranteed the lines of credit for two related party entities. One
line of credit, with availability up to $1,000,000 was not used during the
year ended March 31, 1996. The other line of credit, with availability up to
$1,500,000, had no balance outstanding as of March 31, 1996. Subsequent to
year end, the $1,500,000 line of credit was transferred to the Company.
The note contains covenants on the Company's net worth, debt to equity
ratios, profitability measures, as well as other financial ratios. At March
31, 1996, the Company was in compliance with its loan covenants.
F. Note Payable to Stockholder:
---------------------------
During March 1996, the majority stockholder advanced the Company $1,200,000,
which is due upon demand. The note bears interest at the prime rate with
interest payable monthly. This note is subordinated to the Bank.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
F. Note Payable to Stockholder - (continued):
---------------------------
As of March 31, 1995, the Company was obligated to the majority stockholder
for a note payable, which was due upon demand in the amount of $240,000 and
accrued interest of $188,906. The note bore interest at 8%. The principal
and accrued interest totaling $451,780 was paid to the stockholder in
December 1995.
G. Income Taxes:
------------
The deferred tax asset has been recognized for deductible differ ences
related to the allowance for doubtful accounts, allowance for obsolete
inventory, differences in the calculation of depreciation expense, and
administrative expenses included in inventory cost for tax reporting
purposes.
H. Employee Benefit Plan:
---------------------
The Company sponsors a profit-sharing plan under the provisions of Section
401(K) of the Internal Revenue Code. The Plan entitles employees, meeting
certain eligibility requirements, to make voluntary contributions to the
Plan. Contributions cannot exceed the maximum amount allowable under
applicable provisions of the Internal Revenue Code. The Company, at its
option, may contribute to the Plan. Total Company contributions for the
years ended March 31, 1996 and 1995 amounted to $90,061 and $73,613,
respectively.
I. Commitments:
-----------
The Company is committed under a non-cancelable operating lease, expiring
March, 2001, for office and warehouse space. The lease contains an
escalation clause for increases in operating expenses.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
I. Commitments - (continued):
-----------
The following is a schedule by years of future minimum rental payments
required under this agreement as of March 31, 1996:
<TABLE>
<CAPTION>
Year ending March 31:
---------------------
<S> <C>
1997 $ 233,075
1998 260,718
1999 276,583
2000 281,872
2001 291,126
----------
$1,343,374
==========
</TABLE>
Rental expense charged to operations for the years ended March 31, 1996 and
1995 amounted to $199,269 and $193,808, respectively.
J. Concentration of Credit Risk:
----------------------------
The Company maintains cash deposits in one bank located in New England.
Deposits in the bank are insured by the Federal Deposit Insurance
Corporation, up to $100,000. Uninsured portions of balances at this bank
aggregated approximately $1,397,000 and $472,000 as of March 31, 1996 and
1995, respectively.
K. Related Party Transactions:
--------------------------
The Company shares common control with four companies, Bay State Computer
Leasing, Bay State Computer New Jersey, National Computer Exchange and
Brookvale Computer Group. The accompanying statements of earnings include
the following transactions with such affiliates:
<TABLE>
<CAPTION>
Year Ended March 31
-------------------------
1996 1995
--------- --------
<S> <C> <C>
Sales to affiliates $151,967 $949,036
Reimbursements for common expenses
and administrative fees 374,697 285,606
Commission expense 296,364 185,280
</TABLE>
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
K. Related Party Transactions - (continued):
--------------------------
As an accommodation, the Company allows certain affiliates to purchase
products under the Company's purchase agreements with selected vendors. The
balance due to vendors under this accommodation, and the offsetting balance
receivable from the affiliates, amounted to approximately $450,000 at March
31, 1996, and have been excluded from the accompanying financial statements.
L. Inventory Adjustments:
---------------------
The inventory adjustment of approximately $94,000 in the year ended March
31, 1995, represents the reduction in the value of inventory arising from
the application of the lower of cost or market principle.
M. Transactions With Major Vendors:
-------------------------------
Transactions with two major vendors accounted for approximately $23,000,000
of purchases during the year ended March 31, 1996. The amount due to these
vendors, included in accounts payable and accrued expenses, was
approximately $1,500,000 at March 31, 1996.
N. Subsequent Events:
-----------------
On September 11, 1996, the Company entered into an agreement whereby the
outstanding shares of Bay State Computer Group of New Jersey, Inc. were
converted into shares of Bay State Computer Group, Inc. This transaction
will be accounted for using the pooling of interests accounting method.
On October 14, 1996, the Company entered into an agreement whereby the
outstanding shares of common stock were converted into shares of U.S. Office
Products Company.
Effective April 1, 1996, the Company, with the approval of its shareholders,
elected to be treated as an "S" corporation. As such, the shareholders are
liable for individual federal income taxes and a portion of the state income
taxes, based on the Company's net earnings. Accordingly, for the three
months ended June 30, 1996 under S corporation status, there would be no
provision for federal income taxes; and, the provision for state income
taxes would be calculated at a rate less than the statutory corporate rate.
<PAGE>
BAY STATE COMPUTER GROUP, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED MARCH 31, 1996 AND 1995
-----------------------------------
(Continued)
N. Subsequent Events - (continued):
-----------------
The Statement of Earnings for the three months ended June 30, 1996 does not
include any provision for state income taxes, which in the opinion of
management, would not have a material effect on the results of operations.
O. Unaudited Proforma Combined Net Income Information:
--------------------------------------------------
The following unaudited proforma combined net income information is
presented as if the merger of Bay State Computer Group, Inc. and Bay State
Computer Group of New Jersey, Inc. had been effective for the years ended
March 31, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended March 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenue $63,420,158 $44,784,059
=========== ===========
Net income $ 755,891 $ 310,714
=========== ===========
</TABLE>
