<PAGE>
Rules 424(b)(3) and 424(c)
Registration No. 333-13133
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED OCTOBER 9, 1996,
PROSPECTUS SUPPLEMENTS DATED JULY 15, 1997
OCTOBER 22, 1997 AND NOVEMBER 6, 1997
[LOGO]
U.S. Office Products Company (the "Company" or "USOP") has prepared this
Prospectus Supplement to update certain information included in the Company's
Prospectus dated October 9, 1996, as supplemented by Prospectus Supplements
dated July 15, 1997, October 22, 1997 and November 6, 1997, covering 56,477,922
shares (as adjusted for a three-for-two stock split in the form of a stock
dividend on November 6, 1997) of the Company's common stock, $.001 par value
(the "Common Stock").
On November 20, 1997, the Company completed the merger (the "Merger") of its
wholly owned subsidiary, Santa Fe Acquisition Corp., with and into Mail Boxes
Etc. ("MBE"). As a result of the Merger, MBE became a wholly owned subsidiary of
the Company. In the Merger, which will be accounted for under the
pooling-of-interests method of accounting, the Company exchanged approximately
15.4 million shares of Common Stock for all of the issued and outstanding shares
of common stock of MBE.
Set forth below are (i) the Company's audited consolidated financial
statements which have been restated to reflect the acquisition of seven
businesses during the Company's first fiscal quarter, each of which was
accounted for under the pooling-of-interests method of accounting, (ii) the
Company's audited supplemental consolidated financial statements which give
retroactive effect to the acquisition of MBE, which will be accounted for under
the pooling-of-interests method of accounting, and (iii) the audited financial
statements of McCollam Printers Limited and Subsidiaries, one of the companies
acquired by the Company during its first fiscal quarter.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 28, 1997.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 26, 1997 and April 30, 1996 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain wholly-owned subsidiaries, which statements reflect total revenues of
$616.9 million and $323.1 million included in the Company's fiscal years ended
April 30, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for those
wholly-owned subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the first paragraph
of Note 4, which is as of July 26, 1997
and the first paragraph of Note 14,
which is as of November 6, 1997
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of the Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp.
We have audited the accompanying balance sheet of SFI Corp. as of December
31, 1995 and the related statements of income, stockholders' equity, and cash
flows for the year then ended, which are not included herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SFI Corp. as of December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hano Document Printers, Inc.
We have audited the accompanying balance sheet of Hano Document Printers,
Inc. as of December 31, 1995 and the related statements of income, stockholders'
equity, and cash flows for the year then ended, which are not included herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hanco
Document Printers, Inc., as of December 31, 1994 and the results of their
operations and cash flows for each of the years in the two-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Bay State Computer Group, Inc.
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 three years ended March 31, 1996, 1995
and 1994 (none of which are presented herein separately). 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 three years ended March 31, 1996, 1995, and 1994 in
conformity with generally accepted accounting principles.
PARENT, MCLAUGHLIN AND NANGLE
Boston, Massachusetts
May 23, 1996, except for Note N
as to which the date is
October 14, 1996
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Data Business Forms Limited
We have audited the balance sheet of Data Business Forms Limited ("DBF") as
of December 31, 1995 and the statements of income and retained earnings and
changes in financial position for the period from amalgamation to December 31,
1995. These financial statements are the responsibility of DBF'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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of DBF as at December 31, 1995 and the results
of its operations and the changes in its financial position for the period from
amalgamation to December 31, 1995 in accordance with generally accepted
accounting principles.
ERNST & YOUNG
Toronto, Canada,
February 6, 1996
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended march 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Newington, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
We have audited the accompanying consolidated balance sheet of MTA, Inc.
(the Company) as of December 31, 1995 and the related statements of income and
retained earnings and of cash flows for the period from January 25, 1995 (date
of incorporation) to December 31, 1995. These financial statements are
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995, and the results of its operations and its cash
flows for the period from January 25, 1995 (date of incorporation) to December
31, 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliates as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the accompanying balance sheets of Huxley Envelope
Corporation as of December 31, 1995 and 1994, and the related statements of
income and retained earnings (accumulated deficit) and cash flows for the years
then ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY LLP
New York, New York
March 4, 1996
14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JULY 26,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 186,987 $ 46,633 52,749
Accounts receivable, less allowance for doubtful accounts of $6,041,
$10,383 and $11,489, respectively................................... 253,044 384,742 443,775
Inventories........................................................... 155,406 285,756 297,390
Prepaid expenses and other current assets............................. 57,355 104,090 96,261
------------ ------------ ------------
Total current assets................................................ 652,792 821,221 890,175
Property and equipment, net............................................. 132,998 246,700 283,754
Intangible assets, net.................................................. 153,294 647,225 720,971
Other assets............................................................ 69,893 121,770 119,800
------------ ------------ ------------
Total assets........................................................ $ 1,008,977 $ 1,836,916 $ 2,014,700
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................................................... $ 152,322 $ 151,248 $ 288,982
Accounts payable...................................................... 137,798 208,678 212,316
Accrued compensation.................................................. 26,831 43,152 50,069
Other accrued liabilities............................................. 39,147 90,487 106,341
------------ ------------ ------------
Total current liabilities........................................... 356,098 493,565 657,708
Long-term debt.......................................................... 233,490 393,842 387,300
Deferred income taxes................................................... 10,141 8,676 8,744
Other long-term liabilities and minority interests...................... 7,551 9,734 8,008
------------ ------------ ------------
Total liabilities................................................... 607,280 905,817 1,061,760
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding.........................................................
Common stock, $.001 par value 500,000,000 shares authorized,
81,895,157, 107,058,156 and 109,305,243 shares issued and
outstanding, respectively........................................... 82 107 109
Additional paid-in capital............................................ 315,872 812,689 852,989
Cumulative translation adjustment..................................... 770 (5,583) (44,959)
Retained earnings..................................................... 84,973 123,886 144,801
------------ ------------ ------------
Total stockholders' equity.......................................... 401,697 931,099 952,940
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 1,008,977 $ 1,836,916 $ 2,014,700
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
---------------------------------------- ----------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues....................................... $ 1,093,634 $ 1,739,685 $ 2,908,507 $ 568,502 $ 863,595
Cost of revenues............................... 794,143 1,280,501 2,081,346 409,642 620,336
------------ ------------ ------------ ---------- ----------
Gross profit............................... 299,491 459,184 827,161 158,860 243,259
Selling, general and administrative expenses... 257,004 388,660 674,826 128,626 193,571
Non-recurring acquisition costs................ 8,057 16,245 1,656 4,405
Restructuring costs............................ 3,214 4,395
------------ ------------ ------------ ---------- ----------
Operating income........................... 42,487 59,253 131,695 28,578 45,283
Other (income) expense:
Interest expense............................. 8,842 20,523 46,302 8,832 10,504
Interest income.............................. (1,240) (4,562) (7,725) (4,439) (629)
Other........................................ (905) (619) (3,225) (169) (1,482)
------------ ------------ ------------ ---------- ----------
Income before provision for income taxes....... 35,790 43,911 96,343 24,354 36,890
Provision for income taxes..................... 4,115 8,221 36,388 7,789 15,948
------------ ------------ ------------ ---------- ----------
Income before extraordinary items.............. 31,675 35,690 59,955 16,565 20,942
Extraordinary items--losses on early
termination of credit facilities, net of
income taxes................................. 701 1,450
------------ ------------ ------------ ---------- ----------
Net income..................................... $ 31,675 $ 34,989 $ 58,505 $ 16,565 $ 20,942
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Weighted Average Common Shares outstanding..... 70,991 94,377 86,227 110,160
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Income per share before extraordinary items.... $ .50 $ .64 $ .19 $ .19
Extraordinary items............................ .01 .02
------------ ------------ ---------- ----------
Net income per share........................... $ .49 $ .62 $ .19 $ .19
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Unaudited pro forma income before extraordinary
items (see Note 10).......................... $ 20,579 $ 22,307 $ 52,218 $ 12,780 $ 20,613
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Unaudited pro forma income per share before
extraordinary items.......................... $ .31 $ .55 $ .15 $ .19
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994................ 40,831,979 $ 41 $ 28,310 $ (340) $ 62,530 $ (7,562)
Transactions of Combined Companies upon
formation of Company:
Issuance of common stock............. 5,817,000 6 (5)
Capital contribution................. 1,500
Distributions to stockholders........ (11,300)
Adjustments to stockholders'
equity............................. (12,597) 5,035 7,562
Cash dividends....................... (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering.............. 5,606,250 6 32,684
Acquisition.......................... 1,312,500 1 8,749
Transactions of Pooled Companies:
Exercise of warrants and stock
options............................ 20,345 201
Capital contributions................ 69
Cash dividends....................... (113) (16,594)
Adjustment to conform the year-ends of
Pooled Companies..................... 2,235
Cumulative translation adjustments..... 207
Net income............................. 31,675
---------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1995................ 53,588,074 54 58,798 (133) 73,359
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings..................... 14,352,067 14 174,723
Acquisitions......................... 11,120,163 11 68,607
Capital contributions................ 500
Exercise of stock options, including
tax benefits....................... 95,025 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt.............. 872,248 1 8,297
Capital contributions................ 42,019 811
Exercise of warrants and stock
options............................ 978,923 1 1,751
Cash and stock dividends............. 846,638 1 1,362 (32,273)
Adjustment to conform the year-ends of
Pooled Companies..................... 8,898
Cumulative translation adjustments..... 903
Net income............................. 34,989
---------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1996................ 81,895,157 82 315,872 770 84,973
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at April 30, 1994................ $ 82,979
Transactions of Combined Companies upon
formation of Company:
Issuance of common stock............. 1
Capital contribution................. 1,500
Distributions to stockholders........ (11,300)
Adjustments to stockholders'
equity.............................
Cash dividends....................... (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering.............. 32,690
Acquisition.......................... 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options............................ 201
Capital contributions................ 69
Cash dividends....................... (16,707)
Adjustment to conform the year-ends of
Pooled Companies..................... 2,235
Cumulative translation adjustments..... 207
Net income............................. 31,675
-------------
Balance at April 30, 1995................ 132,078
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings..................... 174,737
Acquisitions......................... 68,618
Capital contributions................ 500
Exercise of stock options, including
tax benefits....................... 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt.............. 8,298
Capital contributions................ 811
Exercise of warrants and stock
options............................ 1,752
Cash and stock dividends............. (30,910)
Adjustment to conform the year-ends of
Pooled Companies..................... 8,898
Cumulative translation adjustments..... 903
Net income............................. 34,989
-------------
Balance at April 30, 1996................ 401,697
</TABLE>
17
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 81,895,157 $ 82 $ 315,872 $ 770 $ 84,973
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,496 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,630 6,859
Capital contributions................ 160,842 2,799
Exercise of warrants and stock
options............................ 478,532 1 1,979
Retirement of common stock........... 102,309 (443) (34)
Cash dividends paid and declared..... (246) (21,356)
Adjustment to conform the year-ends of
Pooled Companies..................... 1,798
Cumulative translation adjustments..... (6,353)
Net income............................. 58,505
---------- ----------- ----------- ----------- ----------- -----------
Balance at April 26, 1997................ 107,058,156 107 812,689 (5,583) 123,886
UNAUDITED DATA:
Issuance of common stock, net of
associated expenses, in conjunction
with:
Acquisitions......................... 1,924,958 2 33,989
Exercise of stock options, including
tax benefits....................... 264,436 2,947
Employee stock purchase plan......... 57,693 832
Transactions of Pooled Companies:
Capital contributions................ 2,532
Adjustment to conform the year-ends of
Pooled Companies..................... (27)
Cumulative translation adjustments..... (39,376)
Net income............................. 20,942
---------- ----------- ----------- ----------- ----------- -----------
Balance at July 26, 1997 (unaudited)..... 109,305,243 $ 109 $ 852,989 $ (44,959) $ 144,801 $ --
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at April 30, 1996................ $ 401,697
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 2,799
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (21,602)
Adjustment to conform the year-ends of
Pooled Companies..................... 1,798
Cumulative translation adjustments..... (6,353)
Net income............................. 58,505
-------------
Balance at April 26, 1997................ 931,099
UNAUDITED DATA:
Issuance of common stock, net of
associated expenses, in conjunction
with:
Acquisitions......................... 33,991
Exercise of stock options, including
tax benefits....................... 2,947
Employee stock purchase plan......... 832
Transactions of Pooled Companies:
Capital contributions................ 2,532
Adjustment to conform the year-ends of
Pooled Companies..................... (27)
Cumulative translation adjustments..... (39,376)
Net income............................. 20,942
-------------
Balance at July 26, 1997 (unaudited)..... $ 952,940
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
---------------------------------- ----------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income......................................... $ 31,675 $ 34,989 $ 58,505 $ 16,565 $ 20,942
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 15,041 22,207 50,369 8,076 16,862
Non-recurring acquisition costs.................. 8,057 16,245 1,657 4,405
Unrealized foreign currency gain................. (3,420)
Deferred income taxes............................ (187) (113) (3,310)
Extraordinary loss............................... 701 1,450
Equity in net income of affiliate................ (782) (425)
Stock issued to pay certain acquisition
expenses....................................... 500
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (33,254) (9,136) (29,290) (22,428) (42,239)
Inventory...................................... (3,679) 1,666 (3,983) (1,665) (429)
Prepaid expenses and other current assets...... (2,511) (24,062) (11,491) (1,543) 7,874
Accounts payable............................... 12,444 5,830 (30,887) 9,216 (5,102)
Accrued liabilities............................ 6,532 4,667 5,953 6,096 7,113
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities.... 26,061 44,806 49,859 15,974 9,001
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.... (18,099) (130,178) (354,811) (205,458) (109,086)
Investment in affiliate............................ (41,270)
Payments of non-recurring acquisition costs........ (7,283) (13,588) (1,657) (2,651)
Additions to property and equipment, net of
disposals........................................ (14,265) (27,916) (53,671) (12,607) (16,508)
Cash received on sale of assets.................... 8,409
Other.............................................. 314 (4,633) (1,927) (2,404) 1,624
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities........ (32,050) (170,010) (465,267) (222,126) (118,212)
---------- ---------- ---------- ---------- ----------
</TABLE>
19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
---------------------------------- ----------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock............. $ 32,891 $ 181,530 $ 320,543 $ 3,582 $ 2,807
Proceeds from issuance of long-term debt........... 13,150 208,446 228,901 225,555 419
Payments of long-term debt......................... (12,428) (24,960) (221,094) (57,736) (5,762)
Proceeds from (payments of) short-term debt, net... 5,930 (59,189) (32,327) (31,900) 119,608
Payment to terminate credit facility............... (579) (1,235)
Payments of dividends at Pooled Companies.......... (16,648) (22,422) (20,042) (5,126) (1,319)
Capital contributed by stockholders of Pooled
Companies........................................ 69 811 2,799 1,208
Net change in cash due to conforming fiscal
year-ends of certain Pooled Companies............ 601 (1,221) (1,951) 301 (27)
Payments to stockholders of Combined Companies..... (11,300)
Capital contribution by Combined Company
stockholder...................................... 1,500 500
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities.... 13,765 282,916 275,594 135,884 115,726
---------- ---------- ---------- ---------- ----------
Effect of exchange rates on cash and cash
equivalents........................................ (180) 267 (540) 155 (399)
Net increase (decrease) in cash and cash
equivalents........................................ 7,596 157,979 (140,354) (70,113) 6,116
Cash and cash equivalents at beginning of period..... 21,412 29,008 186,987 186,987 46,633
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period........... $ 29,008 $ 186,987 $ 46,633 $ 116,874 $ 52,749
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 13,527 $ 12,713 $ 41,353 $ 3,393 $ 2,854
Income taxes paid.................................. $ 8,385 $ 9,255 $ 29,220 $ 2,811 $ 9,833
</TABLE>
20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations in fiscal years ended April 30, 1995, 1996, 1997
and for the three months ended July 27, 1996 and July 26, 1997. The fair values
of the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
----------------------------------- ----------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
--------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable................................. $ 23,462 $ 93,741 $ 105,538 $ 51,941 $ 21,918
Inventories......................................... 20,074 68,861 122,917 84,987 17,773
Prepaid expenses and other current assets........... 1,779 9,740 23,344 5,706 2,686
Property and equipment.............................. 5,459 57,372 95,615 74,144 39,513
Intangible assets................................... 21,079 127,870 506,386 252,250 104,189
Other assets........................................ 339 56,529 7,847 2,027 1,164
Short-term debt..................................... (15,038) (106,672) (24,895) (65,695) (4,417)
Accounts payable.................................... (15,627) (48,825) (103,851) (56,886) (13,293)
Accrued liabilities................................. (4,958) (21,554) (55,477) (9,668) (10,575)
Long-term debt...................................... (6,283) (17,950) (155,237) (73,622) (14,795)
Other long-term liabilities and minority interest... (437) (12,175) (1,296) (2,721) (1,086)
--------- ----------- ----------- ---------- ----------
Net assets acquired......................... $ 29,849 $ 206,937 $ 520,891 $ 262,463 $ 143,077
--------- ----------- ----------- ---------- ----------
--------- ----------- ----------- ---------- ----------
</TABLE>
The acquisitions were funded as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Common stock.............................. $ 8,750 $ 68,618 $ 166,080 $ 57,005 $ 33,991
Debt...................................... 3,000 8,141
Cash...................................... 18,099 130,178 354,811 205,458 109,086
--------- --------- --------- --------- ---------
$ 29,849 $ 206,937 $ 520,891 $ 262,463 $ 143,077
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Noncash transactions:
- - During fiscal 1996 and 1997, the Company issued 291,671 and 384,630 shares of
common stock, respectively, to repay $2,470 and $6,359 of indebtedness,
respectively.
- - During fiscal 1996 and 1997, the Company recorded additional paid-in capital
of approximately $426 and $1,250, respectively, related to the tax benefit on
stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 or debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,637 shares of common stock.
See accompanying notes to consolidated financial statements.
21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
educational and industrial customers. The Company operates throughout the United
States, as well as New Zealand, Australia and Canada and, through a 49%-owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on an
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1995, "fiscal 1996", "fiscal 1997",
"first quarter of fiscal 1997" and "first quarter of fiscal 1998" refer to the
Company's fiscal years ended April 30, 1995 and 1996, April 26, 1997 and its
three months ended July 27, 1996 and July 26, 1997, respectively. 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
in April.
22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over an estimated useful life of 40 years. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, by comparing anticipated undiscounted
future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 26, 1997, the
Exchange Contracts, in the notional amount of $3,319, hedge certain foreign
currency denominated assets. The Exchange Contracts generally have maturity
dates of 60 days or less. Discounts or premiums on the Exchange Contracts are
amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. The notional amount of the Swap Agreements was $43,000 at April 30,
1996. During fiscal 1997, the Swap Agreements were terminated resulting in a
loss of $117.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and
the 5 1/2% Convertible Subordinated Notes due 2003 are based on quoted
market prices;
- The carrying amounts of the Company's debt, other than the 5 1/2%
Convertible Subordinated Notes due 2001 and the 5 1/2% Convertible
Subordinated Notes due 2003, approximate fair value, estimated by
discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial. The Company
also leases equipment to customers under both short-term and long-term lease
agreements. Revenue related to short-term leases is recognized on a monthly
basis over the life of the lease. Certain long-term leases qualify as sales-type
leases and, accordingly, the present value of the future lease payments are
recognized as income upon delivery of the equipment to the customer.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
NET INCOME PER SHARE
Net income per share for fiscal 1996, fiscal 1997, first quarter of fiscal
1997 and first quarter of fiscal 1998 is calculated by dividing net income by
the weighted average number of common shares outstanding during the periods
including common stock equivalents, if dilutive. Net income per share for fiscal
1995 has not been presented as it is not considered meaningful due to the
acquisitions of the Combined Companies and the Company's initial public offering
in conjunction with the formation of the Company during fiscal 1995.
25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 did not have
a material effect on the Company's consolidated operating results or financial
position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net income and net income per
share, as if the fair value-based method of accounting defined in SFAS 123 has
been applied, are presented in Note 14.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This Statement establishes standards for computing
and presenting earnings per share ("EPS"). SFAS 128 simplifies the standards for
computing EPS and makes the presentation comparable to international EPS
standards by replacing the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. This Statement is required to be
adopted by the Company during fiscal 1998.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of July 26, 1997 and the results of
operations and of cash flows for the three months ended July 27, 1996 and July
26, 1997, as presented in the accompanying unaudited consolidated financial
data.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In first quarter of fiscal 1998, the Company issued 2,615,889 shares of
common stock to acquire seven companies (the "1998 Poolings") in business
combinations accounted for under the pooling-of-interests method. Certain of the
Pooled Companies previously reported on fiscal years ending other than April 25,
1998.
In fiscal 1996 and 1997, the Company issued 12,661,278 and 33,163,164 shares
of common stock, respectively, to acquire 14 (the "1996 Poolings") and 40 (the
"1997 Poolings") companies, respectively, in business combinations accounted for
under the pooling-of-interests method. The Company's consolidated financial
statements give retroactive effect to the acquisitions of the Pooled Companies
for all periods
26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
presented. Certain of the Pooled Companies previously reported on fiscal years
ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996 and April 27, 1997, the year-ends of the
1996 Poolings, the 1997 Poolings and the 1998 Poolings were changed to April 30,
1996, April 26, 1997 and April 25, 1998, respectively, resulting in adjustments
to retained earnings of $2,235, $8,898, $1,798 and $(27) during fiscal 1995,
fiscal 1996, fiscal 1997 and first quarter of 1998, respectively. Following is a
summary of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE THREE
-------------------------------- MONTHS ENDED
APRIL 30, APRIL 30, APRIL 26, JULY 26,
1995 1996 1997 1997
--------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues..................................... $ 55,126 $ 245,737 $ 20,380 $ (658)
Costs and expenses........................... 52,891 236,839 18,582 (631)
--------- ---------- --------- -----
Net adjustment........................... $ 2,235 $ 8,898 $ 1,798 $ (27)
--------- ---------- --------- -----
--------- ---------- --------- -----
</TABLE>
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
For the year ended April 30, 1995
Revenues.......................................... $ 120,479 $ 973,155 $ 1,093,634
Net income........................................ $ 1,514 $ 30,161 $ 31,675
For the year ended April 30, 1996
Revenues.......................................... $ 488,670 $ 1,251,015 $ 1,739,685
Net income........................................ $ 7,828 $ 27,161 $ 34,989
For the year ended April 26, 1997
Revenues.......................................... $ 2,175,170 $ 733,337 $ 2,908,507
Net income........................................ $ 36,246 $ 22,259 $ 58,505
For the three months ended July 27, 1996
(unaudited):
Revenues.......................................... $ 316,351 $ 252,151 $ 568,502
Net income........................................ $ 6,034 $ 10,531 $ 16,565
For the three months ended July 26, 1997
(unaudited):
Revenues.......................................... $ 846,960 $ 16,635 $ 863,595
Net income........................................ $ 23,740 $ (2,798) $ 20,942
</TABLE>
27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions accounted for under the purchase method for an
aggregate purchase price of $29,849, consisting of $18,099 of cash, $3,000 of
notes payable and 1,312,500 shares of common stock with a market value of
$8,750. The total assets related to these six acquisitions were $72,192,
including goodwill of $21,079. The results of these acquisitions have been
included in the Company's results form their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions accounted for under the
purchase method for an aggregate purchase price of $206,937, consisting of
$130,178 of cash, $8,141 of debt and 11,120,163 shares of common stock with a
market value of $68,618. The total assets related to these 34 acquisitions were
$414,113, including goodwill of $127,870. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisition.
In fiscal 1997, the Company made 77 acquisitions accounted for under the
purchase method for an aggregate purchase price of $520,891 consisting of
$354,811 of cash, and 8,685,450 shares of common stock with a market value of
$166,080. The total assets related to these 77 acquisitions were $861,647,
including goodwill of $506,386. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.......................................................... $ 3,147,862 $ 3,298,415
Income before extraordinary items................................. 49,983 74,254
Net income........................................................ 49,282 72,804
Income per share before extraordinary items....................... .46 .68
Net income per share.............................................. .46 .67
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley.
28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of the acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and July 26, 1997:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ -- $ -- $ -- $ --
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (111) (87) (4,197) (4,395)
----------- ------ ----------- ---------
Balance at July 26, 1997 (unaudited)........ $ 1,482 $ 3,839 $ 5,759 $ 11,080
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
July 26, 1997:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995
Additions............................. $ 641 $ 469 $ 2,104 $ 3,214
Utilizations.......................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996............... 641 469 1,422 2,532
Additions............................. 1,337 308 2,750 4,395
Utilizations.......................... (943) (698) (3,615) (5,256)
------ ----- ----------- ---------
Balance at April 26, 1997............... 1,035 79 557 1,671
Utilizations.......................... (146) (62) (3) (211)
------ ----- ----------- ---------
Balance at July 26, 1997 (unaudited).... $ 889 $ 17 $ 554 $ 1,460
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- -----------
<S> <C> <C>
Land................................................................. $ 8,024 $ 35,184
Buildings............................................................ 47,382 60,757
Furniture and fixtures............................................... 90,703 194,278
Warehouse equipment.................................................. 44,905 31,443
Equipment under capital leases....................................... 7,174 13,164
Leasehold improvements............................................... 13,313 23,672
---------- -----------
211,501 358,498
Less: Accumulated depreciation....................................... (78,503) (111,798)
---------- -----------
Net property and equipment........................................... $ 132,998 $ 246,700
---------- -----------
---------- -----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $12,009,
$16,011 and $32,645, respectively.
30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JULY 26,
1996 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill................................................ $ 147,639 $ 655,856 $ 730,656
Other................................................... 15,386 14,346 17,927
---------- ---------- -----------
163,025 670,202 748,583
Less: Accumulated amortization.......................... (9,731) (22,977) (27,612)
---------- ---------- -----------
Net Intangible Assets............................... $ 153,294 $ 647,225 $ 720,971
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Amortization expense for fiscal years 1995, 1996 and 1997 was $1,640, $5,518
and $14,546, respectively, and $5,653 for the three months ended July 26, 1997.
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.8% at April
30, 1996 and 7.6% at April 26, 1997................................. $ 26,197 140,090
Annual renewal loans provided by banks and other financial
institutions of foreign subsidiary secured by lease receivables of
foreign subsidiary. Interest rates ranging from 7.8% to 10.2% at
April 30, 1996...................................................... 89,456
Bank lines of credit of foreign subsidiary operations secured by
assets of those operations. Interest rates ranging from 9.2% to 9.8%
at April 30, 1996. 12,731
Other................................................................. 6,780 2,060
Current maturities of long-term debt.................................. 17,158 9,098
---------- ----------
Total short-term debt............................................. $ 152,322 $ 151,248
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "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. 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
31
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%,
convertible into shares of common stock at any time prior to
maturity at a conversion price of $31.60 per share, subject to
adjustment in certain events........................................ $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%,
convertible into shares of common stock at any time prior to
maturity at a conversion price of $19.00 per share, subject to
adjustment in certain events........................................ $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest
rates ranging from 8.0% to 10.0%, maturities from October 1996
through 2003........................................................ 38,341 1,782
Other................................................................. 56,706 20,374
Capital lease obligations............................................. 11,851 7,034
---------- ----------
250,648 402,940
Less: Current maturities of long-term debt............................ (17,158) (9,098)
---------- ----------
Total long-term debt.............................................. $ 233,490 $ 393,842
---------- ----------
---------- ----------
</TABLE>
The 5 1/2% Convertible Subordinated Notes due 2003 (the "2003 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after May 22, 1998, but may not be redeemed prior to May 15, 1999
unless the closing price of the common stock is at least 150% of the conversion
price for a period of time prior to the notice of redemption. Costs incurred in
connection with the issuance of the 2003 Notes are included in other assets and
are being amortized over the seven year period of maturity. The fair value of
the 2003 Notes at April 26, 1997, based upon quoted market prices, totaled
$184,000.
The 5 1/2% Convertible Subordinated Notes due 2001 (the "2001 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after February 3, 1998, but may not be redeemed prior to February
2, 1999 unless the closing price of the common stock is at least 150% of the
conversion price for a period of time prior to the notice of redemption. Costs
incurred in connection with the issuance of the 2001 Notes are included in other
assets and are being amortized over the five year period of maturity. The fair
value of the 2001 Notes at April 26, 1997, based upon quoted market prices,
totaled $147,344.
32
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998...................................................... $ 9,098
1999...................................................... 10,492
2000...................................................... 2,296
2001...................................................... 144,989
2002...................................................... 940
Thereafter................................................ 235,125
---------
Total maturities of long-term debt...................... $ 402,940
---------
---------
</TABLE>
NOTE 10--INCOME TAXES
Domestic and foreign income before provision for income taxes and
extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
Domestic..................................................... $ 33,597 $ 39,478 $ 68,578
Foreign...................................................... 2,193 4,433 27,765
--------- --------- ---------
Total...................................................... $ 35,790 $ 43,911 $ 96,343
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- ---------
Income taxes currently payable:
Federal..................................................... $ 2,789 $ 6,890 $ 24,164
State....................................................... 704 608 3,797
Foreign..................................................... 809 836 11,737
----------- ----------- ---------
4,302 8,334 39,698
----------- ----------- ---------
Deferred income tax expense (benefit)......................... (187) (113) (3,310)
----------- ----------- ---------
Total provision for income taxes.......................... $ 4,115 $ 8,221 $ 36,388
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
33
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory............................................................. $ 1,280 $ 1,293
Allowance for doubtful accounts....................................... 1,516 2,345
Net operating loss carryforward....................................... 3,192 3,192
Accrued liabilities................................................... 3,289 3,860
---------- ---------
Total current deferred tax assets................................... 9,277 10,690
---------- ---------
Long-term deferred tax liabilities:
Property and equipment................................................ (5,087) (4,560)
Intangible assets..................................................... (441) (670)
Internal Revenue Service tax assessment............................... (3,383) (3,383)
Other................................................................. (1,230) (63)
---------- ---------
Total long-term deferred tax liabilities............................ (10,141) (8,676)
---------- ---------
Subtotal............................................................ (864) 2,014
Valuation allowance................................................. (5,468)
---------- ---------
Net deferred tax asset (liability).................................. $ (6,332) $ 2,014
---------- ---------
---------- ---------
</TABLE>
At April 30, 1996, a valuation allowance had been recorded, related to
deferred tax assets of a Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of this Pooled Company
during fiscal 1997, the valuation allowance was reversed resulting in a lower
provision for income taxes.
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
34
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
U.S. federal statutory rate.................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.......... 4.1 5.9 2.9
Subchapter S corporation income not subject to corporate level
taxation..................................................... (31.0) (30.5) (8.1)
Foreign earnings not subject to U.S. taxes..................... (0.6) 2.0
Minority interest in foreign taxes............................. 2.5
Nondeductible goodwill......................................... 1.4 2.6 3.1
Nondeductible acquisition costs................................ 1.1 5.3
Reversal of valuation allowance................................ (5.8)
Other.......................................................... 2.0 2.7 3.3
----- ----- ---
Effective income tax rate...................................... 11.5% 18.7% 37.7%
----- ----- ---
----- ----- ---
</TABLE>
One Combined Company and certain Pooled Companies were organized as
subchapter S corporations prior to the closing of their acquisitions by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. Accordingly, the Combined Company and the
specific Pooled Companies provided no federal income tax expense prior to these
acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Combined Company and the specific Pooled
Companies had been subject to federal income taxes for the entire periods
presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------- --------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Income before extraordinary items per
consolidated statement of income..... $ 31,675 $ 35,690 $ 59,955 $ 16,565 $ 20,942
Pro forma income tax provision
adjustment........................... 11,096 13,383 7,737 3,785 329
--------- --------- --------- --------- ---------
Pro forma income before extraordinary
items................................ $ 20,579 $ 22,307 $ 52,218 $ 12,780 $ 20,613
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
35
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 2,080 $ 55,212
1999................................................................... 2,017 46,038
2000................................................................... 1,164 36,721
2001................................................................... 726 25,617
2002................................................................... 492 19,033
Thereafter............................................................. 3,433 58,804
--------- ----------
Total minimum lease payments........................................... 9,912 $ 241,425
----------
----------
Less: Amounts representing interest.................................... (2,878)
---------
Present value of net minimum lease payments............................ $ 7,034
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$20,099, $31,135 and $51,827, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 13--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was $1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $3,089, $3,292 and $2,524, respectively,
related to these plans.
36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated financial
statements have been adjusted to reflect the stock split. In February 1996, the
Company's stockholders approved the amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 25,000,000 to 100,000,000 shares. In August 1996, the
Company's stockholders approved the amendment to the Company's Restated
Certified of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 to 500,000,000. In October 1997, the Board of Directors
of the Company approved a three for two split of the Company's common stock
which was effective on November 6, 1997. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the Company.
The maximum number of options to purchase common stock granted in any calendar
or fiscal year under the Plan, as amended, is equal to 20% of the aggregate
number of shares of the Company's common stock outstanding at the time an award
is granted, less, in each case, the number of shares subject to previously
outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interest of
stockholders of the Company. A total of 750,000 shares of common stock have been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 162,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB 25 in accounting for its stock option plans.
Accordingly, because the exercise prices of the options have equaled the market
price on the date of grant, no compensation expense has been recognized for
stock options granted. Had compensation cost for the Company's stock options
been recognized based upon the fair value of the stock options on the grant date
under the methodology prescribed by SFAS 123, the Company's net income and net
income per share would have been impacted as indicated in the following table.
The pro forma results shown below reflect only the impact of options granted in
fiscal 1996 and 1997.
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Net income:
As reported........................................................... $ 34,989 $ 58,505
Pro forma............................................................. 32,830 45,867
Net income per share:
As reported........................................................... $ .49 $ .62
Pro forma............................................................. .46 .49
</TABLE>
37
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $8.29 and $11.37 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994........... 125,498 $ .45 125,498 $ .45
Granted........................... 944,250 5.95
Canceled.......................... (10,500) 6.67
------------
Balance at April 30, 1995........... 1,059,248 5.29 177,998 1.89
Granted........................... 4,146,887 6.25
Exercised......................... (95,025) 6.25
Canceled.......................... (24,300) 8.47
------------
Balance at April 30, 1996........... 5,086,810 11.18 324,798 3.77
Granted........................... 6,729,165 20.41
Exercised......................... (197,744) 8.39
Canceled.......................... (73,445) 12.65
------------
Balance at April 26, 1997......... 11,544,786 16.60 1,598,228 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ---------------------- ------------ ----------- ----------- ---------- -----------
<C> <C> <S> <C> <C> <C>
$0.45 to $6.66...... 884,497 7.1 years $ 5.09 476,630 $ .45
$6.67 to $13.33..... 2,660,399 8.6 years 9.42 702,303 9.70
$13.34 to $20.00.... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.66.... 3,737,004 9.3 years 23.27 105,429 20.65
$26.67 to $29.92.... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92..... 11,544,786 9.0 years 16.60 1,598,228 10.10
------------ ----------
------------ ----------
</TABLE>
38
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802, and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options are generally exercisable beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares under option and
generally expire ten years from the date of grant.
NOTE 15--SEGMENT REPORTING
INDUSTRY SEGMENT
The Company currently operates in two reportable industry segments: office
products and print management. The office products industry segment involves the
sales and distribution of office and related supplies and equipment, catalog,
contract and remanufactured furniture, office coffee and beverage products and
services and various types of business machines. The print management industry
segment involves the manufacturing, distribution, management and printing of
business forms, envelopes and promotional products. The other industry segments
that the Company operates in include technology solutions, education products
and corporate travel services. The following table sets forth information as to
the Company's operations in its different industry segments:
<TABLE>
<CAPTION>
OFFICE PRINT
PRODUCTS MANAGEMENT OTHER TOTAL
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Revenues............................. $ 685,316 $ 139,732 $ 268,586 $ 1,093,634
Operating income..................... 20,978 5,571 15,938 42,487
Identifiable assets.................. 238,397 51,906 93,290 383,593
Depreciation and amortization........ 5,573 4,478 4,990 15,041
Capital expenditures................. 6,479 2,456 5,471 14,406
Fiscal 1996:
Revenues............................. $ 1,083,077 $ 317,033 $ 339,575 $ 1,739,685
Operating income..................... 33,197 12,388 13,668 59,253
Identifiable assets.................. 529,392 120,971 358,614 1,008,977
Depreciation and amortization........ 11,352 5,089 5,766 22,207
Capital expenditures................. 18,985 6,098 2,887 27,970
Fiscal 1997:
Revenues............................. $ 2,082,682 $ 368,378 $ 457,447 $ 2,908,507
Operating income..................... 92,168 20,300 19,227 131,695
Identifiable assets.................. 1,292,189 184,301 360,426 1,836,916
Depreciation and amortization........ 32,487 8,758 9,124 50,369
Capital expenditures................. 31,165 16,599 15,786 63,550
</TABLE>
39
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SEGMENT REPORTING (CONTINUED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
UNITED AND
STATES AUSTRALIA CANADA TOTAL
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Revenues............................. $ 1,057,939 $ 28,574 $ 7,121 $ 1,093,634
Operating income..................... 40,157 1,429 901 42,487
Identifiable assets at year-end...... 374,013 5,512 4,068 383,593
Fiscal 1996:
Revenues............................. $ 1,542,426 $ 77,141 $ 120,118 $ 1,739,685
Operating income..................... 50,343 3,533 5,377 59,253
Identifiable assets at year-end...... 766,129 188,134 54,714 1,008,977
Fiscal 1997:
Revenues............................. $ 2,078,648 $ 700,793 $ 129,066 $ 2,908,507
Operating income..................... 93,066 28,708 9,921 131,695
Identifiable assets at year-end...... 1,025,388 753,254 58,274 1,836,916
</TABLE>
40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
on the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues................................. $ 343,438 $ 420,070 $ 472,095 $ 504,082 $ 1,739,685
Gross profit............................. 89,088 109,803 123,217 137,076 459,184
Operating income......................... 6,720 16,834 23,324 12,375 59,253
Net income............................... 4,887 10,449 13,928 5,725 34,989
Net income per share..................... 0.08 0.13 0.20 0.07 0.49
Pro forma income before extraordinary
item (see Note 10)..................... 3,078 6,581 8,772 3,876 22,307
Pro forma income per share before
extraordinary item..................... $ 0.05 $ 0.09 $ 0.12 $ 0.04 $ 0.31
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues................................. $ 568,502 $ 755,378 $ 775,620 $ 809,007 $ 2,908,507
Gross profit............................. 158,860 215,604 220,080 232,617 827,161
Operating income......................... 28,578 40,195 32,007 30,915 131,695
Net income............................... 16,565 18,790 11,197 11,953 58,505
Net income per share..................... 0.19 0.21 0.12 0.11 0.62
Pro forma income before extraordinary
item (see Note 10)..................... 14,784 16,771 9,994 10,669 52,218
Pro forma income per share before
extraordinary item..................... $ 0.17 $ 0.18 $ 0.11 $ 0.10 $ 0.55
</TABLE>
NOTE 17--SUBSEQUENT EVENTS
BUSINESS COMBINATION SUBSEQUENT TO YEAR-END
On November 20, 1997, the Company acquired Mail Boxes Etc. ("MBE"), the
world's largest franchisor of business, communication and postal service centers
with more than 3,300 centers operating worldwide. The Company exchanged 1.349
shares of its common stock for each share of outstanding MBE common stock in the
acquisition. As of November 20, 1997, MBE had approximately 11.4 million shares
of common stock outstanding. The acquisition was accounted for under the
pooling-of-interests method of accounting.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisition described above had been
consummated as of the beginning of fiscal 1997. The results
41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--SUBSEQUENT EVENTS (CONTINUED)
presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation and the
inclusion of a federal income tax provision on all earnings:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 26, 1997
----------------
<S> <C>
Revenues.......................................................... $ 3,366,050
Income before extraordinary items................................. 84,339
Income per share before extraordinary items....................... .69
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying supplemental consolidated balance sheet and the related
supplemental consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
U.S. Office Products Company and its subsidiaries at April 26, 1997 and April
30, 1996 and the results of their operations and their cash flows for each of
the three fiscal years in the period ended April 26, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain wholly-owned subsidiaries, which statements
reflect total assets of $85.7 million and $75.8 million at April 26, 1997 and
April 30, 1996, respectively, total revenues of $67.8 million, $676.0 million
and $373.5 million included in the Company's fiscal years ended April 26, 1997,
April 30, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for those
wholly-owned subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 1, on November 20, 1997, U.S. Office Products Company
merged with Mail Boxes Etc. in a transaction accounted for as a pooling of
interests. The accompanying supplemental consolidated financial statements give
retroactive effect to the merger of U.S. Office Products Company with Mail Boxes
Etc.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the first paragraph
of Note 5, which is as of July 26, 1997, the first
paragraph of Note 15, which is as of November 6, 1997
and Note 1, which is as of November 20, 1997
43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes Etc.
as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mail Boxes Etc. at
April 30, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
June 6, 1997
44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known as
EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the related
statements of operations, changes in shareholders' deficit and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of the Re-Print Corporation as
of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp.
We have audited the accompanying balance sheet of SFI Corp. as of December 31,
1995 and the related statements of income, stockholders' equity, and cash flows
for the year then ended, which are not included herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SFI Corp. as of December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
47
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hano Document Printers, Inc.
We have audited the accompanying balance sheet of Hano Document Printers, Inc.
as of December 31, 1995 and the related statements of income, stockholders'
equity, and cash flows for the year then ended, which are not included herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hano Document Printers, Inc. as
of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hanco
Document Printers, Inc., as of December 31, 1994 and the results of their
operations and cash flows for each of the years in the two-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Bay State Computer Group, Inc.
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 three years ended March 31, 1996, 1995
and 1994 (none of which are presented herein separately). 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 three years ended March 31, 1996, 1995, and 1994 in conformity
with generally accepted accounting principles.
PARENT, MCLAUGHLIN AND NANGLE
Boston, Massachusetts
May 23, 1996, except for Note N
as to which the date is
October 14, 1996
50
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Data Business Forms Limited
We have audited the balance sheet of Data Business Forms Limited ("DBF") as of
December 31, 1995 and the statements of income and retained earnings and changes
in financial position for the period from amalgamation to December 31, 1995.
These financial statements are the responsibility of DBF'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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of DBF as at December 31, 1995 and the results
of its operations and the changes in its financial position for the period from
amalgamation to December 31, 1995 in accordance with generally accepted
accounting principles.
ERNST & YOUNG
Toronto, Canada,
February 6, 1996
51
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
We have audited the accompanying balance sheet of Fortran Corp. as of March 31,
1996, and 1995 and the related statements of earnings, changes in stockholders'
equity, and cash flows for the years ended March 31, 1996, 1995, and 1994 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present fairly,
in all material respects, the financial position of Fortran Corp. as of March
31, 1996, and 1995 and the results of its operations and its cash flows for
three years ended march 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Newington, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
We have audited the accompanying consolidated balance sheet of MTA, Inc. (the
Company) as of December 31, 1995 and the related statements of income and
retained earnings and of cash flows for the period from January 25, 1995 (date
of incorporation) to December 31, 1995. These financial statements are
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MTA, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
period from January 25, 1995, and the results of its operations and its cash
flows for the period from January 25, 1995 (date of incorporation) to December
31, 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and its
affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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.
As referred to in Note A on "Principles of Combination," the companies, whose
financial statements are combined, are related through common ownership and
control. In addition, each has pledged certain assets and guaranteed long-term
indebtedness of the other as described in the notes to financial statements. In
view of their close operating and financial relationship, the preparation of
combined financial statements was considered appropriate. The combined
statements, however, do not refer to a legal entity and neither of the companies
guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliates as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the accompanying balance sheets of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the related statements of income and
retained earnings (accumulated deficit) and cash flows for the years then ended
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Huxley Envelope Corporation as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY LLP
New York, New York
March 4, 1996
55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JULY 26,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 188,403 $ 50,625 $ 53,531
Short-term investments................................................ 21,825 27,342 32,281
Accounts receivable, less allowance for doubtful accounts of $7,548
and $11,717, and $12,823, respectively.............................. 260,613 391,539 450,387
Inventories........................................................... 155,950 286,203 297,844
Prepaid expenses and other current assets............................. 72,145 117,368 113,897
------------ ------------ ------------
Total current assets................................................ 698,936 873,077 947,940
Property and equipment, net............................................. 138,379 252,661 290,257
Intangible assets, net.................................................. 156,975 654,051 726,125
Other assets............................................................ 90,453 142,802 140,663
------------ ------------ ------------
Total assets........................................................ $ 1,084,743 $ 1,922,591 $ 2,104,985
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................................................... $ 153,280 $ 151,940 $ 289,424
Accounts payable...................................................... 139,894 210,041 213,310
Accrued compensation.................................................. 28,794 45,542 51,747
Other accrued liabilities............................................. 47,131 96,663 116,796
------------ ------------ ------------
Total current liabilities........................................... 369,099 504,186 671,277
Long-term debt.......................................................... 234,892 397,758 391,038
Deferred income taxes................................................... 10,141 8,676 8,744
Other long-term liabilities and minority interests...................... 7,551 9,734 8,008
------------ ------------ ------------
Total liabilities................................................... 621,683 920,354 1,079,067
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value 500,000,000 shares authorized,
97,030,480; 122,410,668; and 124,733,271 shares issued and
outstanding, respectively........................................... 97 122 124
Additional paid-in capital............................................ 330,801 829,402 870,453
Cumulative translation adjustment..................................... 770 (5,583) (44,959)
Retained earnings..................................................... 131,392 178,296 200,300
------------ ------------ ------------
Total stockholders' equity.......................................... 463,060 1,002,237 1,025,918
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 1,084,743 $ 1,922,591 $ 2,104,985
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
---------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
------------ ------------ ------------ ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 1,143,984 $ 1,798,791 $ 2,976,344 $ 583,281 $ 879,275
Cost of revenues............................... 821,251 1,311,570 2,117,042 417,291 627,739
------------ ------------ ------------ ---------- ----------
Gross profit............................... 322,733 487,221 859,302 165,990 251,536
Selling, general and administrative expenses... 269,512 403,021 695,105 132,611 199,959
Non-recurring acquisition costs................ 8,057 16,245
Restructuring costs............................ 3,214 4,395 1,656 4,405
------------ ------------ ------------ ---------- ----------
Operating income........................... 53,221 72,929 143,557 31,723 47,172
Other (income) expense:
Interest expense............................. 8,395 20,523 46,302 8,832 10,504
Interest income.............................. (1,239) (5,235) (8,688) (4,695) (951)
Other income................................. (906) (619) (3,225) (169) (1,482)
------------ ------------ ------------ ---------- ----------
Income before provision for income taxes....... 46,971 58,260 109,168 27,755 39,101
Provision for income taxes..................... 8,526 13,841 41,222 9,120 17,070
------------ ------------ ------------ ---------- ----------
Income before extraordinary items.............. 38,445 44,419 67,946 18,635 22,031
Extraordinary items--losses on early
terminations of credit facilities, net of
income taxes................................. 701 1,450
------------ ------------ ------------ ---------- ----------
Net income..................................... $ 38,445 $ 43,718 $ 66,496 $ 18,635 $ 22,031
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Weighted average common shares outstanding..... 88,515 111,901 103,801 127,684
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Net income per share before extraordinary
items........................................ $ .50 $ .61 $ .18 $ .17
Extraordinary items............................ .01 .02
------------ ------------ ---------- ----------
Net income per share........................... $ .49 $ .59 $ .18 $ .17
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Unaudited pro forma income before extraordinary
items (see Note 11).......................... $ 27,337 $ 31,053 $ 60,152 $ 14,580 $ 21,702
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Unaudited pro forma income per share before
extraordinary items.......................... $ .35 $ .54 $ .14 $ .17
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
----------- ------ ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994..................... 55,858,033 $ 56 $ 42,750 $ (340) $93,450 $(7,562) $ 128,354
Transactions of Combined Companies upon
formation of Company:
Issuance of common stock.................. 5,817,000 6 (5) 1
Capital contribution...................... 1,500 1,500
Distributions to stockholders............. (11,300 ) (11,300)
Adjustments to stockholders' equity....... (12,597) 5,035 7,562
Cash dividends............................ (222 ) (222)
Issuance of common stock, net of associated
expenses in conjunction with:
Initial public offering................... 5,606,250 6 32,684 32,690
Acquisition............................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock options.... 20,345 201 201
Cash dividends............................ (113) (16,594 ) (16,707)
Capital contributions..................... 69 69
Adjustment to conform the year-ends of
Pooled Companies.......................... 2,235 2,235
Cumulative translation adjustments.......... 207 207
Net income.................................... 38,445 38,445
----------- ------ ---------- ----------- -------- -------- -------------
Balance at April 30, 1995 68,614,128 69 73,238 (133) 111,049 184,223
Issuances of common stock, net of associated
expenses in conjunction with:
Public offerings.......................... 14,352,067 14 174,723 174,737
Acquisitions.............................. 11,120,163 11 68,608 68,619
Capital contributions..................... 500 500
Exercise of stock options, including tax
benefits................................ 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash and
repayment of debt....................... 872,248 1 8,297 8,298
Capital contributions..................... 42,019 811 811
Exercise of warrants and stock options.... 1,088,192 1 2,239 2,240
Cash and stock dividends.................. 846,638 1 1,362 (32,273 ) (30,910)
Adjustment to conform the year-ends of
Pooled Companies.......................... 8,898 8,898
Cumulative translation adjustments.......... 903 903
Net income.................................. 43,718 43,718
----------- ------ ---------- ----------- -------- -------- -------------
Balance at April 30, 1996..................... 97,030,480 97 330,801 770 131,392 463,060
(Continued)
</TABLE>
58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
----------- ------ ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996..................... 97,030,480 $ 97 $330,801 $ 770 $131,392 $ 463,060
Issuances of common stock, net of associated
expenses in conjunction with:
Public offering........................... 13,023,496 13 275,699 275,712
Direct equity investment.................. 1,875,000 2 38,111 38,113
Acquisitions.............................. 8,685,450 9 166,071 166,080
Exercise of stock options, including tax
benefits................................ 197,742 2,843 2,843
Employee stock purchase plan.............. 229,998 3,145 3,145
Transactions of Pooled Companies:
Issuances of common stock for repayment of
debt and payment of acquisition
expenses................................ 409,630 6,859 6,859
Capital contributions..................... 160,842 2,799 2,799
Exercise of warrants and stock options.... 695,721 1 3,763 3,764
Retirement of common stock................ 102,309 (443) (34 ) (477)
Cash dividends paid and declared.......... (246) (21,356 ) (21,602)
Adjustment to conform the year-ends of
Pooled Companies.......................... 1,798 1,798
Cumulative translation adjustments.......... (6,353) (6,353)
Net income.................................. 66,496 66,496
----------- ------ ---------- ----------- -------- -------- -------------
Balance at April 26, 1997..................... 122,410,668 122 829,402 (5,583) 178,296 1,002,237
Unaudited data:
Issuance of common stock, net of
associated expenses, in conjunction
with:
Acquisitions............................ 1,924,958 2 33,989 33,991
Exercise of stock options, including tax
benefits.............................. 264,436 2,947 2,947
Employee stock purchase plan............ 57,693 832 832
Transactions of Pooled Companies:
Capital contributions................... 2,532 2,532
Exercise of warrants and
stock options......................... 75,516 751 751
Adjustment to conform the year-ends of
Pooled Companies........................ (27 ) (27)
Cumulative translation adjustments........ (39,376) (39,376)
Net income.............................. 22,031 22,031
----------- ------ ---------- ----------- -------- -------- -------------
Balance at July 26, 1997 (unaudited).......... 124,733,271 $124 $870,453 $(44,959) $200,300 $$1,025,918
----------- ------ ---------- ----------- -------- -------- -------------
----------- ------ ---------- ----------- -------- -------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
----------- ----------- ----------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 38,445 $ 43,718 $ 66,496 $ 18,635 $ 22,031
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 16,065 23,237 51,415 8,335 17,140
Non-recurring acquisition loss.............................. 8,057 16,245 1,657 4,405
Unrealized foreign currency gain............................ (3,420)
Deferred income taxes....................................... (1,210) (1,167) (2,678)
Extraordinary loss.......................................... 701 1,450
Equity in net income of affiliate........................... (782) (425)
Stock issued to pay certain acquisition expenses............ 500
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (41,004) (8,475) (30,060) (22,135) (42,448)
Lease receivables....................................... (1,999) (1,235) (1,241) (606) (266)
Inventories............................................. (3,679) 1,666 (4,080) (1,665) (429)
Prepaid expenses and other current assets............... (1,161) (23,583) (11,813) (2,388) 6,787
Accounts payable........................................ 12,304 6,221 (32,056) 8,662 (6,179)
Accrued liabilities..................................... 9,390 6,468 5,791 6,537 10,680
----------- ----------- ----------- --------- ---------
Net cash provided by operating activities............. 27,151 55,608 55,767 17,032 11,296
----------- ----------- ----------- --------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (18,099) (130,178) (354,811) (205,458) (109,086)
Investment in affiliate..................................... (41,270)
Payments of non-recurring acquisition cost.................. (7,283) (13,588) (1,657) (2,651)
Additions to property and equipment, net of disposals....... (14,742) (28,388) (54,963) (12,780) (17,230)
Cash received on sale of assets............................. 8,409
Other....................................................... 3,039 (12,963) (4,476) (3,482) (3,534)
----------- ----------- ----------- --------- ---------
Net cash used in investing activities................. (29,802) (178,812) (469,108) (223,377) (124,092)
----------- ----------- ----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 28,147 181,531 321,926 2,913 3,558
Proceeds from issuance of long-term debt.................... 13,150 208,446 228,901 225,555 419
Payments of long-term debt.................................. (12,482) (25,106) (221,448) (57,809) (5,888)
Proceeds from (payments of) short-term debt, net............ 7,530 (60,019) (32,847) (32,545) 119,358
Payment to terminate credit facility........................ (579) (1,235)
Payments of dividends at Pooled Companies................... (16,648) (22,422) (20,042) (5,126) (1,319)
Capital contributed by stockholders of Pooled Companies..... 69 811 2,799 1,208
Net change in cash due to conforming fiscal year-ends of
certain Pooled Companies.................................. 601 (1,221) (1,951) 301 (27)
Payments to stockholders of Combined Companies.............. (11,300)
Proceeds from issuance of common stock in employee stock
purchase plan............................................. 1,149
Capital contribution by Combined Company stockholder........ 1,500 500
----------- ----------- ----------- --------- ---------
Net cash provided by financing activities............. 10,567 281,941 276,103 135,646 116,101
----------- ----------- ----------- --------- ---------
Effect of exchange rates on cash and cash equivalents......... (180) 267 (540) 155 (399)
Net increase (decrease) in cash and cash equivalents.......... 7,736 159,004 (137,778) (70,544) 2,906
Cash and cash equivalents at beginning of period.............. 21,663 29,399 188,403 188,403 50,625
----------- ----------- ----------- --------- ---------
Cash and cash equivalents at end of period.................. $ 29,399 $ 188,403 $ 50,625 $ 117,859 $ 53,531
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------- --------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 13,625 $ 12,868 $ 41,614 $ 3,424 $ 2,937
Income taxes paid........................................... $ 13,864 $ 15,603 $ 32,982 $ 3,155 $ 10,244
</TABLE>
The Company issued common stock, notes payable and cash in connection with
certain business combinations in fiscal years ended April 30, 1995, 1996, 1997
and for the three months ended July 27, 1996 and July 26, 1997. The fair values
of the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
----------- ----------- ----------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable........................................... $ 23,462 $ 93,741 $ 105,538 $ 51,941 $ 21,918
Inventories................................................... 20,074 68,861 122,917 84,987 17,773
Prepaid expenses and other current assets..................... 1,779 9,740 23,344 5,706 2,686
Property and equipment........................................ 5,459 57,372 95,615 74,144 39,513
Intangible assets............................................. 21,079 127,870 506,386 252,250 104,189
Other assets.................................................. 339 56,529 7,847 2,027 1,164
Short-term debt............................................... (15,038) (106,672) (24,895) (65,695) (4,417)
Accounts payable.............................................. (15,627) (48,825) (103,851) (56,886) (13,293)
Accrued liabilities........................................... (4,958) (21,554) (55,477) (9,668) (10,575)
Long-term debt................................................ (6,283) (17,950) (155,237) (73,622) (14,795)
Other long-term liabilities and minority interest............. (437) (12,175) (1,296) (2,721) (1,086)
----------- ----------- ----------- --------- ---------
Net assets acquired................................... $ 29,849 $ 206,937 $ 520,891 $ 262,463 $ 143,077
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
The acquisitions were funded as follows:
Common stock.................................................. $ 8,750 $ 68,618 $ 166,080 $ 57,005 $ 33,991
Notes payable................................................. 3,000 8,141
Cash.......................................................... 18,099 130,178 354,811 205,458 109,086
----------- ----------- ----------- --------- ---------
$ 29,849 $ 206,937 $ 520,891 $ 262,463 $ 143,077
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
Noncash transactions:
- During fiscal 1996 and 1997, the Company issued 291,671 and 384,630 shares
of common stock, respectively, to repay $2,470 and $6,359 of indebtedness,
respectively.
- During fiscal 1996 and 1997, the Company recorded additional paid-in
capital of approximately $426 and $1,250, respectively, related to the tax
benefit on stock options exercised.
- During fiscal 1996, one Pooled Company converted $1,385 or debt to common
stock.
- During fiscal 1996, one Pooled Company paid a dividend of $9,851 through
the issuance of 896,637 shares of common stock.
See accompanying notes to consolidated financial statements.
61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--BUSINESS COMBINATION WITH MAIL BOXES ETC.
Effective November 20, 1997, U.S. Office Products Company ("U.S. Office
Products" and the "Company") acquired all of the outstanding common stock of
Mail Boxes Etc. ("MBE") in exchange for 15,428,028 shares of common stock. The
acquisition was accounted for as a pooling-of-interests and accordingly, the
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of U.S. Office Products with MBE for all periods presented.
NOTE 2--BUSINESS ORGANIZATION
U.S. Office Products was founded in October 1994. The Company is a supplier
of a broad range of office and educational products and business services to
corporate, commercial, educational and industrial customers. The Company
operates throughout the United States, as well as New Zealand, Australia and
Canada and, through a 49%-owned affiliate, in the United Kingdom.
NOTE 3--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on an
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1995," "fiscal 1996," "fiscal 1997,"
"first quarter of fiscal 1997" and "first quarter of fiscal 1998" refer to the
Company's fiscal years ended April 30, 1995 and 1996, April 30, 1997 and its
three months ended July 27, 1996 and July 26, 1997, respectively. On August 20,
1996, the Company's Board of
62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over an estimated useful life of 40 years. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, by comparing anticipated undiscounted
future cash flows from operations to net book value.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company, through its wholly-owned subsidiary, MBE, repurchases franchise
rights for two primary reasons. The Company may repurchase area rights with the
intention of developing a better
63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $638 and $629 thousand in such individual and area rights at April
30, 1996 and 1997, respectively. The Company may also repurchase the area rights
with the primary intention of retaining the royalties normally shared with the
former area franchisees and maintaining such rights as long-term investments.
The area repurchases have been accounted for as purchases. The Company records
these area repurchases at cost less accumulated amortization. Periodically the
Company assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 26, 1997, no adjustment is necessary. The Company had an
investment of $3.2 million and $6.4 million in such area rights at April 30,
1996 and April 26, 1997, respectively. Area franchise rights held as long-term
investments are amortized over a period of 20 years.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 26, 1997, the
Exchange Contracts, in the notional amount of $3,319, hedge certain foreign
currency denominated assets. The Exchange Contracts generally have maturity
dates of 60 days or less. Discounts or premiums on the Exchange Contracts are
amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. The notional amount of the Swap Agreements was $43,000 at April 30,
1996. During fiscal 1997, the Swap Agreements were terminated resulting in a
loss of $117.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and
the 5 1/2% Convertible Subordinated Notes due 2003 are based on quoted
market prices;
64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- The carrying amounts of the Company's debt, other than the 5 1/2%
Convertible Subordinated Notes due 2001 and the 5 1/2% Convertible
Subordinated Notes due 2003, approximate fair value, estimated by
discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
SHORT-TERM INVESTMENTS
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities," management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Debt securities for
which the Company does not have the intent or the ability to hold to maturity
are classified as available for sale along with the Company's investments in
equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1996 and April 26, 1997, the Company had no
investments that were classified as trading or held to maturity as defined by
SFAS No. 115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of the estimated fair value of available for sale
securities by balance sheet classification:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Short-term investments:
U.S. government securities............................................ $ 4,000 $ 5,842
Mutual fund preferred equity securities............................... 17,825 21,500
--------- ---------
Total short-term investments........................................ $ 21,825 $ 27,342
--------- ---------
--------- ---------
</TABLE>
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1996 or
April 26, 1997.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial. The Company
also leases equipment to customers under both short-term and long-term lease
agreements. Revenue related to short-term leases is recognized on a monthly
basis over the life of the lease. Certain long-term leases qualify as sales-type
leases and, accordingly, the present value of the future lease payments are
recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary MBE, enters into area and
individual franchise agreements in the United States and master license
agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
Revenue is recognized using the installment method when the revenue is
collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
NET INCOME PER SHARE
Net income per share for fiscal 1996, fiscal 1997, first quarter of fiscal
1997 and first quarter of fiscal 1998 is calculated by dividing net income by
the weighted average number of common shares outstanding during the periods
including common stock equivalents, if dilutive. Net income per share for fiscal
1995 has not been presented as it is not considered meaningful due to the
acquisitions of the Combined Companies and the Company's initial public offering
in conjunction with the formation of the Company during fiscal 1995.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This Statement establishes standards for computing
and presenting earnings per share ("EPS"). SFAS 128 simplifies the standards for
computing EPS and makes the presentation comparable to international EPS
standards by replacing the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. This Statement is required to be
adopted by the Company during fiscal 1998.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of July 26, 1997 and the results of
operations and of cash flows for the three months ended July 27, 1996 and July
26, 1997, as presented in the accompanying unaudited consolidated financial
data.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In first quarter of fiscal 1998, the Company issued 2,615,889 shares of
common stock to acquire seven companies (the "1998 Poolings") in business
combinations accounted for under the pooling-of-interests method. Certain of the
Pooled Companies previously reported on fiscal years ending other than April 25,
1998.
In fiscal 1996 and 1997, the Company issued 12,661,278 and 33,163,164 shares
of common stock, respectively, to acquire 14 (the "1996 Poolings") and 40 (the
"1997 Poolings") companies, respectively, in business combinations accounted for
under the pooling-of-interests method. The Company's consolidated financial
statements give retroactive effect to the acquisitions of the Pooled Companies
for all periods presented. Certain of the Pooled Companies previously reported
on fiscal years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996 and April 27, 1997, the year-ends of the
1996 Poolings, the 1997 Poolings and the 1998 Poolings were changed to April 30,
1996, April 26, 1997 and April 25, 1998, respectively, resulting in adjustments
to retained earnings of $2,235, $8,898, $1,798 and $(27), during fiscal
68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
1995, 1996, 1997 and the first quarter of fiscal 1998, respectively. Following
is a summary of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED FOR THE THREE
-------------------------------- MONTHS ENDED
APRIL 30, APRIL 30, APRIL 26, JULY 26,
1995 1996 1997 1997
--------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues................................... $ 55,126 $ 245,737 $ 20,380 $ (658)
Costs and expenses......................... 52,891 236,839 18,582 (631)
--------- ---------- --------- -----
Net adjustment....................... $ 2,235 $ 8,898 $ 1,798 $ (27)
--------- ---------- --------- -----
--------- ---------- --------- -----
</TABLE>
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
For the year ended April 30, 1995
Revenues.......................................... $ 120,479 $ 1,023,505 $ 1,143,984
Net income........................................ $ 1,514 $ 36,931 $ 38,445
For the year ended April 30, 1996
Revenues.......................................... $ 488,670 $ 1,310,121 $ 1,798,791
Net income........................................ $ 7,828 $ 35,890 $ 43,718
For the year ended April 26, 1997
Revenues.......................................... $ 2,175,170 $ 801,376 $ 2,976,546
Net income........................................ $ 36,246 $ 30,250 $ 66,496
For the three months ended July 27, 1996
(unaudited):
Revenues.......................................... $ 316,351 $ 266,930 $ 583,281
Net income........................................ $ 6,034 $ 12,601 $ 18,635
For the three months ended July 26, 1997
(unaudited):
Revenues.......................................... $ 846,960 $ 32,315 $ 879,275
Net income........................................ $ 23,740 $ (1,709) $ 22,031
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions accounted for under the purchase method for an
aggregate purchase price of $29,849, consisting of $18,099 of cash, $3,000 of
notes payable and 875,000 shares of common stock with a market value of $8,750.
The total assets related to these six acquisitions were $72,192, including
goodwill of
69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
$21,079. The results of these acquisitions have been included in the Company's
results form their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions accounted for under the
purchase method for an aggregate purchase price of $206,937, consisting of
$130,178 of cash, $8,141 of debt and 7,413,442 shares of common stock with a
market value of $68,618. The total assets related to these 34 acquisitions were
$414,113, including goodwill of $127,870. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisition.
In fiscal 1997, the Company made 77 acquisitions accounted for under the
purchase method for an aggregate purchase price of $520,891 consisting of
$354,811 of cash, and 5,790,300 shares of common stock with a market value of
$166,080. The total assets related to these 77 acquisitions were $861,647,
including goodwill of $506,386. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.......................................................... $ 3,207,969 $ 3,366,252
Income before extraordinary items................................. 58,712 82,245
Net income........................................................ 58,011 80,795
Income per share before extraordinary items....................... .57 .65
Net income per share.............................................. .56 .63
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley.
70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of the acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996 and April 27, 1997:
<TABLE>
<CAPTION>
EMPLOYEE
SEVERANCE DISPOSAL OF
REDUNDANT AND ASSETS AND
FACILITIES RELOCATION OTHER TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996......................................... $ -- $ -- $ -- $ --
Additions....................................................... 1,593 2,484 6,712 10,789
----------- ----------- ----------- ---------
Balance at April 26, 1997......................................... 1,593 2,484 6,712 10,789
----------- ----------- ----------- ---------
Additions....................................................... 1,442 3,244 4,686
Utilizations.................................................... (111) (87) (4,197) (4,395)
----------- ----------- ----------- ---------
Balance at July 26, 1997 (unaudited).............................. $ 1,482 $ 3,839 $ 5,759 $ 11,080
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
July 26, 1997:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
--------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995
Additions................................................... $ 641 $ 469 $ 2,104 $ 3,214
Utilizations................................................ (682) (682)
----- ----- ----------- ---------
Balance at April 30, 1996..................................... 641 469 1,422 2,532
Additions................................................... 1,337 308 2,750 4,395
Utilizations................................................ (943) (698) (3,615) (5,256)
----- ----- ----------- ---------
Balance at April 26, 1997..................................... 1,035 79 557 1,671
Utilizations................................................ (146) (62) (3) (211)
----- ----- ----------- ---------
Balance at July 26, 1997 (unaudited).......................... $ 889 $ 17 $ 554 $ 1,460
----- ----- ----------- ---------
----- ----- ----------- ---------
</TABLE>
71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- -----------
<S> <C> <C>
Land..................................................................................... $ 9,224 $ 36,384
Buildings................................................................................ 51,583 65,833
Furniture and fixtures................................................................... 94,930 198,794
Warehouse equipment...................................................................... 44,905 31,443
Equipment under capital leases........................................................... 7,174 13,164
Leasehold improvements................................................................... 13,313 23,672
---------- -----------
221,129 369,290
Less: Accumulated depreciation........................................................... (82,750) (116,629)
---------- -----------
Net property and equipment............................................................... $ 138,379 $ 252,661
---------- -----------
---------- -----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $13,033,
$17,041 and $33,879, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JULY 27,
1996 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill.................................................................... $ 148,629 $ 656,846 $ 731,646
Other....................................................................... 19,856 22,290 22,802
---------- ---------- -----------
168,485 679,136 754,448
Less: Accumulated amortization.............................................. (11,510) (25,085) (28,323)
---------- ---------- -----------
Net intangible assets....................................................... $ 156,975 $ 654,051 $ 726,125
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Amortization expense for fiscal years 1995, 1996 and 1997 was $2,009,
$5,747, $14,892, respectively, and $5,756 for the three months ended July 26,
1997.
72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.8% at April 30, 1996 and 7.6% at
April 26, 1997.......................................................................... $ 27,155 $ 140,782
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates ranging
from 7.8% to 10.2% at April 30, 1996.................................................... 89,456
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996.................. 12,731
Other..................................................................................... 6,780 2,060
Current maturities of long-term debt...................................................... 17,158 9,098
---------- ----------
Total short-term debt..................................................................... $ 153,280 $ 151,940
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "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. 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. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
73
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into shares of
common stock at any time prior to maturity at a conversion price of $31.60 per share,
subject to adjustment in certain events................................................. $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into shares of
common stock at any time prior to maturity at a conversion price of $19.00 per share,
subject to adjustment in certain events................................................. $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging from 8.0%
to 10.0%, maturities from October 1996 through 2003..................................... 38,341 1,782
Other..................................................................................... 58,108 24,290
Capital lease obligations................................................................. 11,851 7,034
---------- ----------
252,050 406,856
Less: Current maturities of long-term debt................................................ (17,158) (9,098)
---------- ----------
Total long-term debt...................................................................... $ 234,892 $ 397,758
---------- ----------
---------- ----------
</TABLE>
The 5 1/2% Convertible Subordinated Notes due 2003 (the "2003 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after May 22, 1998, but may not be redeemed prior to May 15, 1999
unless the closing price of the common stock is at least 150% of the conversion
price for a period of time prior to the notice of redemption. Costs incurred in
connection with the issuance of the 2003 Notes are included in other assets and
are being amortized over the seven year period of maturity. The fair value of
the 2003 Notes at April 26, 1997, based upon quoted market prices, totaled
$184,000.
The 5 1/2% Convertible Subordinated Notes due 2001 (the "2001 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after February 3, 1998, but may not be redeemed prior to February
2, 1999 unless the closing price of the common stock is at least 150% of the
conversion price for a period of time prior to the notice of redemption. Costs
incurred in connection with the issuance of the 2001 Notes are included in other
assets and are being amortized over the five year period of maturity. The fair
value of the 2001 Notes at April 26, 1997, based upon quoted market prices,
totaled $147,344.
74
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................................. $ 9,540
1999.............................................................................. 10,944
2000.............................................................................. 2,743
2001.............................................................................. 145,446
2002.............................................................................. 1,403
Thereafter........................................................................ 236,780
---------
Total maturities of long-term debt........................................ $ 406,856
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income before provision for income taxes and
extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ----------
Domestic........................................................................ $ 44,778 $ 53,827 $ 81,403
Foreign......................................................................... 2,193 4,433 27,765
--------- --------- ----------
Total........................................................................... $ 46,971 $ 58,260 $ 109,168
--------- --------- ----------
--------- --------- ----------
</TABLE>
75
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- --------- ---------
Income taxes currently payable:
Federal......................................................................... $ 7,135 $ 12,220 $ 27,461
State........................................................................... 1,792 1,952 4,702
Foreign......................................................................... 809 836 11,737
----------- --------- ---------
9,736 15,008 43,900
----------- --------- ---------
Deferred income tax expense (benefit)............................................. (1,210) (1,167) (2,678)
----------- --------- ---------
Total provision for income taxes................................................ $ 8,526 $ 13,841 $ 41,222
----------- --------- ---------
----------- --------- ---------
Deferred taxes are comprised of the following:
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory................................................................................. $ 3,926 $ 3,179
Allowance for doubtful accounts........................................................... 1,516 2,345
Net operating loss carryforward........................................................... 3,192 3,192
Accrued liabilities....................................................................... 3,457 4,250
Other..................................................................................... 339 245
---------- ---------
Total current deferred tax assets....................................................... 12,430 13,211
---------- ---------
Long-term deferred tax liabilities:
Property and equipment.................................................................... (5,087) (4,560)
Intangible assets......................................................................... (441) (670)
Internal Revenue Service tax assessment................................................... (3,383) (3,383)
Other..................................................................................... (1,230) (63)
---------- ---------
Total long-term deferred tax liabilities................................................ (10,141) (8,676)
---------- ---------
Subtotal................................................................................ 2,289 4,535
Valuation allowance..................................................................... (5,468)
---------- ---------
$ (3,179)
Net deferred tax asset (liability)...................................................... 535
---------- ---------
---------- ---------
</TABLE>
At April 30, 1996, a valuation allowance had been recorded, related to
deferred tax assets of a Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of this Pooled Company
during fiscal 1997, the valuation allowance was reversed resulting in a lower
provision for income taxes.
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
76
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
U.S. federal statutory rate.................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.......... 4.4 5.7 3.2
Subchapter S corporation income not subject to corporate level
taxation..................................................... (23.6) (22.9) (7.1)
Foreign earnings not subject to U.S. taxes..................... (0.5) 1.8
Minority interest in foreign taxes............................. 1.9
Nondeductible goodwill......................................... 1.1 2.0 2.7
Nondeductible acquisition costs................................ 0.8 4.6
Reversal of valuation allowance................................ (5.1)
Other.......................................................... 1.3 1.8 2.7
----- ----- ---
Effective income tax rate...................................... 18.2% 23.8% 37.8%
----- ----- ---
----- ----- ---
</TABLE>
One Combined Company and certain Pooled Companies were organized as
subchapter S corporations prior to the closing of their acquisitions by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. Accordingly, the Combined Company and the
specific Pooled Companies provided no federal income tax expense prior to these
acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Combined Company and the specific Pooled
Companies had been subject to federal income taxes for the entire periods
presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income before extraordinary items per
consolidated statement of income......... $ 38,445 $ 44,419 $ 67,946 $ 18,635 $ 22,031
Pro forma income tax provision
adjustment............................... 11,108 13,366 7,794 3,785 329
--------- --------- --------- --------- ---------
Pro forma income before extraordinary
items.................................... $ 27,337 $ 31,053 $ 60,152 $ 14,850 $ 21,702
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
77
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 2,080 $ 55,212
1999................................................................... 2,017 46,038
2000................................................................... 1,164 36,721
2001................................................................... 726 25,617
2002................................................................... 492 19,033
Thereafter............................................................. 3,433 58,804
--------- ----------
Total minimum lease payments........................................... 9,912 $ 241,425
----------
----------
Less: Amounts representing interest.................................... (2,878)
---------
Present value of net minimum lease payments............................ $ 7,034
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$20,099, $31,135 and $51,827, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was $1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases
78
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 14--EMPLOYEE BENEFIT PLANS (CONTINUED)
made matching contributions on behalf of the employees. For fiscal 1995, 1996
and 1997, the subsidiaries incurred expenses totaling $3,225, $3,454 and $2,738
respectively, related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated financial
statements have been adjusted to reflect the stock split. In February 1996, the
Company's stockholders approved the amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 25,000,000 to 100,000,000 shares. In August 1996, the
Company's stockholders approved the amendment to the Company's Restated
Certified of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 to 500,000,000. In October 1997, the Board of Directors
of the Company approved a three for two stock split of the Company's common
stock which was effective on November 6, 1997. The financial statements give
retroactive effect for the split for all period presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the Company.
The maximum number of options to purchase common stock granted in any calendar
or fiscal year under the Plan, as amended, is equal to 20% of the aggregate
number of shares of the Company's common stock outstanding at the time an award
is granted, less, in each case, the number of shares subject to previously
outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interest of
stockholders of the Company. A total of 750,000 shares of common stock have been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 162,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB 25 in accounting for its stock option plans.
Accordingly, because the exercise prices of the options have equaled the market
price on the date of grant, no compensation expense has been recognized for
stock options granted. Had compensation cost for the Company's stock options
been recognized based upon the fair value of the stock options on the grant date
under the methodology prescribed by SFAS 123, the Company's net income and net
income per share would have
79
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
been impacted as indicated in the following table. The pro forma results shown
below reflect only the impact of options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Net income:
As reported........................................................... $ 43,718 $ 66,496
Pro forma............................................................. 41,379 53,270
Net income per share:
As reported........................................................... $ .62 $ .70
Pro forma............................................................. .58 .56
</TABLE>
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% .66%
Expected volatility of USOP stock........................................ 58.5% 4.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994........... 1,268,101 $ 6.66 1,268,101 $ 6.66
Granted........................... 1,292,292 5.91
Exercised......................... (196,954) 4.66
Canceled.......................... (71,205) 6.87
------------
Balance at April 30, 1995........... 2,292,234 6.40 669,057 6.90
Granted........................... 4,741,796 6.32
Exercised......................... (393,154) 6.40
Canceled.......................... (52,629) 9.22
------------
Balance at April 30, 1996........... 6,588,247 10.30 748,038 7.67
Granted........................... 7,388,826 19.75
Exercised......................... (440,564) 7.84
Canceled.......................... (301,426) 10.44
------------
Balance at April 26, 1997........... 13,235,083 15.65 2,236,305 9.30
------------
------------
</TABLE>
80
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.66..................................... 1,421,399 7.2 years $ 3.17 638,510 $ 1.72
$6.67 to $13.33.................................... 3,231,026 7.9 years 7.76 1,154,218 9.26
$13.34 to $20.00................................... 4,817,754 9.3 years 15.43 338,148 15.02
$20.01 to $26.66................................... 3,737,004 9.3 years 23.27 105,429 20.65
$26.67 to $29.92................................... 27,900 9.1 years 28.13
------------ ----------
$29.93 to $29.92................................... 13,235,083 8.7 years $ 14.50 2,236,305 9.14
------------ ----------
------------ ----------
</TABLE>
The options outstanding information includes 125,498, 1,690,297, 58,802 and
343,488 options to acquire common stock at exercise prices of $.45, $8.01,
$10.59 and $10.70, respectively, which were granted at certain Pooled Companies
prior to their respective acquisitions by the Company.
Non-qualified options are generally exercisable beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares under option and
generally expire ten years from the date of grant.
81
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 16--SEGMENT REPORTING
INDUSTRY SEGMENT
The Company currently operates in three reportable industry segments: office
products' print management and Mail Boxes Etc. The office products industry
segment involves the sales and distribution of office and related supplies and
equipment, catalog, contract and remanufactured furniture, office coffee and
beverage products and services and various types of business machines. The print
management industry segment involves the manufacturing, distribution, management
and printing of business forms, envelopes and promotional products. The Mail
Boxes Etc. industry segment involves the franchising of postal, business and
communications retail service centers which service the small office/home office
market. The other industry segments that the Company operates in include
technology solutions, education products and corporate travel services. The
following table sets forth information as to the Company's operations in its
different industry segments:
<TABLE>
<CAPTION>
OFFICE PRINT MAIL
PRODUCTS MANAGEMENT BOXES ETC. OTHER TOTAL
------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Fiscal 1995:
Revenues................. $ 685,316 $ 139,732 $ 50,350 $ 268,586 $ 1,143,984
Operating income......... 20,978 5,571 10,734 15,938 53,221
Identifiable assets...... 238,397 51,906 64,293 93,290 447,886
Depreciation and
amortization........... 5,573 4,478 1,024 4,990 16,065
Capital expenditures..... 6,479 2,456 477 5,471 14,883
Fiscal 1996:
Revenues................. $ 1,083,077 $ 317,033 $ 59,106 $ 339,575 $ 1,798,791
Operating income......... 33,197 12,388 13,676 13,668 72,929
Identifiable assets...... 529,392 120,971 72,766 358,614 1,081,743
Depreciation and
amortization........... 11,352 5,089 1,030 5,766 23,237
Capital expenditures..... 18,985 6,098 472 2,887 28,442
Fiscal 1997:
Revenues................. $ 2,082,682 $ 368,378 $ 68,039 $ 457,447 $ 2,976,546
Operating income......... 92,168 20,300 11,873 19,227 143,568
Identifiable assets...... 1,292,189 184,301 85,675 360,426 1,922,591
Depreciation and
amortization........... 32,487 8,758 1,046 9,124 51,415
Capital expenditures..... 31,165 16,599 1,292 15,786 64,842
</TABLE>
82
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 16--SEGMENT REPORTING (CONTINUED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
UNITED AND
STATES AUSTRALIA CANADA TOTAL
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Revenues............................. $ 1,108,289 $ 28,574 $ 7,121 $ 1,143,984
Operating income..................... 50,891 1,429 901 53,221
Identifiable assets at year-end...... 438,286 5,512 4,068 447,866
Fiscal 1996:
Revenues............................. $ 1,601,532 $ 77,141 $ 120,118 $ 1,798,791
Operating income..................... 64,019 3,533 5,377 72,929
Identifiable assets at year-end...... 841,895 188,134 54,714 1,084,743
Fiscal 1997:
Revenues............................. $ 2,146,687 $ 700,793 $ 129,066 $ 2,976,546
Operating income..................... 104,939 28,708 9,921 143,568
Identifiable assets at year-end...... 1,111,063 753,254 58,274 1,922,591
</TABLE>
83
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
on the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues....................... $ 356,241 $ 435,167 $ 488,259 $ 519,124 $ 1,798,791
Gross profit................... 95,589 117,144 131,741 142,747 487,221
Operating income............... 9,244 20,128 27,618 15,939 72,929
Net income..................... 6,509 12,540 16,636 8,033 43,718
Net income per share........... 0.08 0.14 0.19 0.08 0.49
Pro forma income before
extraordinary items
(see Note 10)................ 4,700 8,612 11,180 6,561 31,053
Pro forma income per share
before extraordinary items... 0.06 0.10 0.13 0.06 0.35
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues....................... $ 598,060 $ 789,472 $ 813,296 $ 775,516 $ 2,976,344
Gross profit................... 169,135 224,700 235,366 230,101 859,302
Operating income............... 31,993 39,164 37,641 34,759 143,557
Net income..................... 18,905 18,320 14,754 14,517 66,496
Net income per share........... 0.18 0.17 0.13 0.12 0.59
Pro forma income before
extraordinary items
(see Note 10)................ 17,124 16,301 13,551 13,176 60,152
Pro forma income per share
before extraordinary items... 0.16 0.15 0.12 0.11 0.54
</TABLE>
84
<PAGE>
MCCOLLAM PRINTERS LIMITED AND
SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 1997
85
<PAGE>
MCCOLLAM PRINTERS LIMITED
DIRECTORY
PRINCIPAL ACTIVITY
Printers
PRINCIPAL ADDRESS
30 Constellation Drive
Mairangi Bay Industrial Estate
Mairangi Bay
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
NAME SHAREHOLDING
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Listed Company...................................................................................... 23,721,916
------------
------------
</TABLE>
DIRECTORS
E B Allison (Chairman)
A W Harmos
S B McCollam
J P S Hislop
SECRETARY
M W Iles
AUDITORS
Grant Thornton
60 Khyber Pass
Grafton, Auckland
86
<PAGE>
MCCOLLAM PRINTERS LIMITED
ANNUAL REPORT
FOR THE YEAR ENDED 31 MARCH 1997
The Board of Directors present their Annual Report including financial
statements of the company for the year ended 31st March 1997.
As required by section 211 of the Companies Act 1993 we disclose the following
information:
- - The business of the company is Printing. The nature of the company's business
has not changed during the year under review.
- - There have been no changes in accounting policies. All policies have been
applied on bases consistent with those used in previous years.
- - Directors remuneration paid during the year or due and payable is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
S McCollam.............................................................. 199,708 223,885
Chairman................................................................ 40,000 35,000
Executive Director...................................................... -- 4,375
Non Executive Directors................................................. 45,000 45,000
</TABLE>
- - Four employees received remuneration and any other benefits of more than
$100,000 during the year (Including S McCollam).
<TABLE>
<S> <C> <C>
1 Employee............................................... 190,000 -- 200,000
2 Employees.............................................. 110,000 -- 120,000
1 Employee............................................... 100,000 -- 110,000
</TABLE>
- - The following persons were directors of the company at balance date.
No other person held the office of director at any time during the year.
E B Allison
A W Harmos
S B McCollam
J P S Hislop
For and on behalf of the Board.
<TABLE>
<S> <C>
30 May 1997
- ------------------------------------------------
Director
30 May 1997
- ------------------------------------------------
Director
</TABLE>
87
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF ACCOUNTING POLICIES
FOR THE YEAR ENDED 31ST MARCH 1997
REPORTING ENTITY
The financial statements are those of McCollam Printers Limited and its
subsidiaries, Laser Graphics Limited, McCollam Properties Limited, All-Mark
Industries Limited and Format Publishers Limited. This group is a reporting
entity for the purposes of the Financial Reporting Act 1993. The financial
statements have been prepared in accordance with that Act. All dollar amounts
are in New Zealand dollars unless specifically identified as another currency.
MEASUREMENT BASE
- The accounting principles recognised as appropriate for the measurement
and reporting of earnings and financial position on a historical cost
basis are followed by the group.
- Reliance is placed on the fact that the group is a going concern.
- Accrual accounting is used to ensure that revenues earned are matched to
expenses incurred.
SPECIFIC ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements are prepared from the accounts of the
company and its subsidiaries, Laser Graphics Limited, McCollam Properties
Limited, All-Mark Industries Limited, and Format Publishers Limited, using the
purchase method of consolidation. All significant inter-company accounts and
transactions are eliminated on consolidation.
DEPRECIATION
Depreciation is provided using the straight line method which will writeoff
all costs over their estimated economic lives, as follows:--
<TABLE>
<S> <C>
Buildings.................... 50 years
Vehicles..................... 5 years
Furniture & Fittings......... 10 years
Major Printing Presses....... 15 years
Computer and Peripherals..... 4 years
Sundry Plant................. 5--10 years
</TABLE>
GOODWILL
Goodwill arising on acquisition is amortised over the period of expected
benefit from the investment, which is expected to be 10 years.
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation.
88
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
ACCOUNTS RECEIVABLE
Accounts receivable are valued at estimated realisable value after making
full provision for identified doubtful debts.
TAXATION
Taxation charged against the surplus for the year includes both current and
deferred tax and is calculated after allowing for permanent differences.
Deferred taxation calculated using the liability method is accounted for on
timing differences between the earnings stated in the financial statements and
the assessable income computed for taxation purposes. Deferred taxation is
recognised only on those timing differences that are expected to crystallise
within the foreseeable future. By recognising these timing differences, the
taxation charged in the accounts is directly related to the surplus reported.
INVENTORIES
Inventories are valued at the lower of cost and net realisable value with
appropriate provision for damage or obsolescence. Work-in-progress and completed
printing are recorded at material cost only. Cost is determined using the
"first-in, first-out method".
CASH FLOW
Investing activities are those activities relating to the acquisition and
disposal of non current assets.
Financing activities comprise the change in equity and debt capital
structure of the group and the cost of servicing equity capital.
Operating activities include all transactions and other funds that are not
financing or investing activities.
INVESTMENTS
Investments are stated at cost.
LIABILITIES
Liabilities are stated at the estimated amounts payable and include
obligations which can be readily estimated at balance date.
Current liabilities include the amounts payable in the next financial
period.
LEASED ASSETS
Rental costs in respect of assets under operating leases are charged against
surplus in the year of cost incurrance.
CHANGES IN ACCOUNTING POLICIES
There have been no changes in accounting policies. All policies have been
applied on bases consistent with those in previous years.
89
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C> <C>
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
SALES...................................................................... 36,186,555 26,505,440
Audit Fees................................................................. (36,000) (23,750)
Bad debts
Written off.............................................................. (3,159) (30,376)
Changes in Provisions.................................................... -- 72,000
Depreciation............................................................... (2,253,438) (1,615,221)
Directors' Fees............................................................ (85,000) (84,375)
Goodwill Amortisation...................................................... (284,996) (39,166)
Interest Expense........................................................... (1,188,958) (568,796)
Interest Received.......................................................... 145,923 63,995
Leasing and Rental Expenses................................................ (345,450) (139,756)
Other Operating Expenses................................................... (27,087,106) (19,407,198)
-------------- --------------
SURPLUS BEFORE TAXATION.................................................... 5,048,371 4,732,797
Taxation................................................................... 1 (1,735,171) (1,608,214)
-------------- --------------
NET SURPLUS AFTER TAXATION................................................. 3,313,200 3,124,583
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
90
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF MOVEMENT IN EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C> <C>
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
EQUITY AT BEGINNING OF YEAR................................................ 14,834,195 12,539,724
Net Surplus................................................................ 3,313,200 3,124,583
-------------- --------------
TOTAL RECOGNISED REVENUES AND EXPENSES
FOR THE PERIOD........................................................... 3,313,200 3,124,583
Distribution to Shareholders............................................... 6 (1,058,396) (1,948,074)
Contributions from Shareholders............................................ 5,459,463 1,117,962
-------------- --------------
EQUITY AT END OF YEAR...................................................... 22,548,462 14,834,195
-------------- --------------
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
91
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C> <C>
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
SHAREHOLDERS EQUITY
Issued Capital............................................................. 2 11,860,958 10,453,290
Retained Earnings.......................................................... 2 5,826,806 3,588,002
Capital Reserves........................................................... 2 22,275 6,275
Share Premium Reserve...................................................... 2 4,838,423 786,628
-------------- --------------
TOTAL SHAREHOLDERS EQUITY.................................................. 22,548,462 14,834,195
-------------- --------------
NON-CURRENT LIABILITIES
Provision for Deferred Tax................................................. 3 1,070,133 813,034
Term Loans................................................................. 4 18,790,643 10,492,500
-------------- --------------
Total Non-Current Liabilities.............................................. 19,860,776 11,305,534
-------------- --------------
CURRENT LIABILITIES
Accounts Payable and Accruals.............................................. 4,072,455 2,657,600
Bank Overdraft............................................................. 5 -- 148,647
Provision for Dividend..................................................... 6 -- 1,202,128
Current Portion Term Liability............................................. 4 4,071,197 90,000
-------------- --------------
Total Current Liabilities.................................................. 8,143,652 4,098,375
-------------- --------------
TOTAL FUNDS EMPLOYED....................................................... 50,552,890 30,238,104
-------------- --------------
NON-CURRENT ASSETS
Investments................................................................ 7 152,499 121,028
Fixed Assets............................................................... 8 35,021,734 19,245,785
Intangible Assets.......................................................... 9 5,025,838 2,310,834
-------------- --------------
Total Non-Current Assets................................................... 40,200,071 21,677,647
-------------- --------------
CURRENT ASSETS
Cash and Bank Balances..................................................... 423,693 950,036
Accounts Receivable........................................................ 7,166,755 5,420,415
Prepayments................................................................ 120,541 85,384
Inventories................................................................ 10 2,088,358 1,733,840
Loans to Employees......................................................... 85,942 60,963
Taxation Refund............................................................ 467,530 309,819
-------------- --------------
Total Current Assets....................................................... 10,352,819 8,560,457
-------------- --------------
TOTAL ASSETS............................................................... 50,552,890 30,238,104
-------------- --------------
</TABLE>
For and on behalf of the Board
<TABLE>
<S> <C>
- ---------------------------------------- ----------------------------------------
Director Director
</TABLE>
Auckland, 30 May 1997
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
92
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C>
31 MARCH 1997 31 MARCH 1996
$ $
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers......................................................... 35,440,050 26,757,791
Interest received............................................................... 145,923 63,995
Cash was applied to:
Payments to suppliers and employees............................................. (26,863,001) (19,319,064)
Interest paid................................................................... (1,217,247) (575,267)
Taxation........................................................................ (1,635,783) (1,573,323)
GST............................................................................. (90,533) (91,504)
-------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES.......................................... 5,779,409 5,262,628
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Sale of fixed assets............................................................ 253,345 152,567
Cash was applied to:
Purchase of Investments......................................................... (31,471) (51,056)
Purchase of fixed assets........................................................ (7,611,822) (3,306,428)
Purchase of Format Publishers
(1996 All-Mark Industries).................................................... (8,976,322) (7,340,435)
-------------- --------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES....................................... (16,366,270) (10,545,352)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Other Loans..................................................................... 34,934 34,828
Loans received.................................................................. 7,000,271 5,807,500
Issue of shares................................................................. 5,459,463 1,117,962
Cash was applied to:
Repayment of loans.............................................................. (24,979) --
Dividend paid................................................................... (2,260,524) (1,515,946)
-------------- --------------
NET CASH FLOWS FROM FINANCING ACTIVITIES.......................................... 10,209,165 5,444,344
-------------- --------------
Net increase/(decrease) in cash................................................... (377,696) 161,620
Opening cash balance.............................................................. 801,389 639,769
-------------- --------------
CLOSING CASH BALANCE.............................................................. 423,693 801,389
-------------- --------------
Comprising:
Cash and Bank Balances............................................................ 423,693 950,036
Overdraft......................................................................... -- (148,647)
-------------- --------------
423,693 801,389
-------------- --------------
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
93
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
RECONCILIATION WITH REPORTED OPERATING PROFIT AFTER TAXATION
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C>
31 MARCH 1997 31 MARCH 1996
$ $
-------------- --------------
NET SURPLUS FOR THE YEAR.......................................................... 3,313,200 3,124,583
Add back non-cash items:
Depreciation.................................................................... 2,253,438 1,615,221
Goodwill amortisation........................................................... 284,996 39,166
Add Deferred Tax Movement......................................................... 257,099 336,083
-------------- --------------
6,108,733 5,115,053
Plus items included in Investing/Financing Activities............................. 575,015 2,434,463
-------------- --------------
6,683,748 7,549,516
-------------- --------------
MOVEMENTS IN WORKING CAPITAL
(Decrease)/Increase in Accounts Receivable........................................ (1,746,340) (1,343,128)
(Decrease)/Increase in Prepayments................................................ (35,157) (53,929)
(Decrease)/Increase in Inventories................................................ (354,518) (1,224,658)
(Decrease)/Increase in Loans to Employees......................................... (24,979) 34,828
(Decrease)/Increase in Taxation................................................... (158,200) (309,672)
(Decrease)/Increase in Account Payables & Accruals................................ 1,414,855 609,671
-------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES.......................................... 5,779,409 5,262,628
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
94
<PAGE>
MCCOLLAM PRINTERS LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C> <C>
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
SALES...................................................................... 21,151,173 20,938,182
-------------- --------------
Audit Fees................................................................. (18,500) (14,000)
Bad Debts
Written off.............................................................. (593) (25,376)
Changes in Provisions.................................................... -- 72,000
Depreciation............................................................... (1,087,822) (1,004,923)
Directors' Fees............................................................ (85,000) (84,375)
Dividends Received......................................................... 500,000 750,000
Interest Expense........................................................... (1,036,857) (457,475)
Interest Received.......................................................... 892,650 152,676
Leasing and Rental Expenses................................................ (308,106) (291,109)
Other Operating Expenses................................................... (16,545,802) (15,939,881)
-------------- --------------
SURPLUS BEFORE TAXATION.................................................... 3,461,143 4,095,719
Taxation................................................................... 1 (881,542) 1,118,276
-------------- --------------
NET SURPLUS AFTER TAXATION................................................. 2,579,601 2,977,443
-------------- --------------
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
95
<PAGE>
MCCOLLAM PRINTERS LIMITED
STATEMENT OF MOVEMENT IN EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
<S> <C> <C> <C>
EQUITY AT BEGINNING OF YEAR................................................ 13,711,775 11,564,444
Net Surplus................................................................ 2,579,601 2,977,443
-------------- --------------
TOTAL RECOGNISED REVENUES AND EXPENSES FOR THE PERIOD...................... 2,579,601 2,977,443
Distribution to Shareholders............................................... 6 (1,058,396) (1,948,074)
Contributions from Shareholders............................................ 5,459,463 1,117,962
-------------- --------------
EQUITY AT END OF YEAR...................................................... 20,692,443 13,711,775
-------------- --------------
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
96
<PAGE>
MCCOLLAM PRINTERS LIMITED
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
<S> <C> <C> <C>
31 MARCH 1997 31 MARCH 1996
NOTE $ $
----- -------------- --------------
SHAREHOLDERS EQUITY
Issued Capital............................................................. 2 11,860,958 10,453,290
Retained Earnings.......................................................... 2 3,970,787 2,465,582
Capital Reserves........................................................... 2 22,275 6,275
Share Premium Reserve...................................................... 2 4,838,423 786,628
-------------- --------------
TOTAL SHAREHOLDERS EQUITY.................................................. 20,692,443 13,711,775
-------------- --------------
-------------- --------------
NON-CURRENT LIABILITIES
Provision for Deferred Tax................................................. 3 943,957 757,789
Term Loans................................................................. 4 11,068,941 9,500,000
-------------- --------------
Total Non-Current Liabilities.............................................. 12,012,898 10,257,789
-------------- --------------
CURRENT LIABILITIES
Accounts Payable and Accruals.............................................. 1,463,520 1,405,998
Bank Overdraft............................................................. 5 -- 338,076
Provision for Dividend..................................................... 6 -- 1,202,128
Current Portion Term Liabilties............................................ 3,018,944 --
Intercompany Loan.......................................................... 480,298 --
-------------- --------------
Total Current Liabilities.................................................. 4,962,762 2,946,202
-------------- --------------
TOTAL FUNDS EMPLOYED....................................................... 37,668,103 26,915,766
-------------- --------------
-------------- --------------
NON-CURRENT ASSETS
Investments................................................................ 7 1,164,559 1,106,728
Fixed Assets............................................................... 8 13,457,580 11,232,805
-------------- --------------
Total Non-Current Assets................................................... 14,622,139 12,339,533
-------------- --------------
CURRENT ASSETS
Cash and Bank Balances..................................................... 101,953 650,323
Accounts Receivable........................................................ 3,659,432 3,394,657
Intercompany Loans......................................................... 18,470,038 9,857,864
Loans to Employees......................................................... 36,000 40,883
Prepayments................................................................ 68,870 25,853
Inventories................................................................ 10 347,829 329,485
Taxation Refund............................................................ 361,842 277,168
-------------- --------------
Total Current Assets....................................................... 23,045,964 14,576,233
-------------- --------------
TOTAL ASSETS............................................................... 37,688,103 26,915,766
-------------- --------------
-------------- --------------
</TABLE>
For and on behalf of the Board
<TABLE>
<S> <C>
Director Director
</TABLE>
Auckland
30 May 1997
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
97
<PAGE>
MCCOLLAM PRINTERS LIMITED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
31 MARCH 1997 31 MARCH 1996
$ $
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers......................................................... 20,915,817 20,994,407
Interest received............................................................... 892,650 156,676
Dividend received............................................................... 500,000 750,000
Cash was applied to:
Payments to suppliers and employees............................................. (16,945,002) (16,371,238)
GST............................................................................. (57,307) (75,506)
Interest paid................................................................... (1,036,857) (463,945)
Taxation........................................................................ (780,048) (1,049,610)
-------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES.......................................... 3,489,253 3,936,784
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Sale of fixed assets............................................................ 16,000 29,565
Cash was applied to:
Purchase of investment.......................................................... (57,831) (51,056)
Purchase of fixed assets........................................................ (3,312,597) (2,179,164)
Additional Format Publishers
(1996 All-Mark Industries)...................................................... (8,976,322) (6,678,000)
Additional capital in subsidiary................................................ -- (600,000)
-------------- --------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES....................................... (12,330,750) (9,478,655)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Loans received.................................................................. 5,432,394 6,000,000
Issue of shares................................................................. 5,459,463 1,117,962
Cash was applied to:
Dividend paid................................................................... (2,260,524) (1,515,946)
-------------- --------------
NET CASH FLOWS FROM FINANCING ACTIVITIES.......................................... 8,631,333 5,602,016
Net increase/(decrease) in cash................................................... (210,164) 60,145
Opening cash balance.............................................................. 312,117 251,972
-------------- --------------
CLOSING CASH BALANCE.............................................................. 101,953 312,117
Comprising:
Bank Balances..................................................................... 101,953 650,193
Overdraft......................................................................... -- (338,076)
-------------- --------------
101,953 312,117
-------------- --------------
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
98
<PAGE>
MCCOLLAM PRINTERS LIMITED
RECONCILIATION WITH REPORTED NET PROFIT AFTER TAXATION
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
31 MARCH 1997 31 MARCH 1996
$ $
-------------- --------------
<S> <C> <C>
NET SURPLUS FOR THE YEAR.......................................................... 2,579,601 2,977,443
Add back non-cash items
Depreciation.................................................................. 1,087,822 1,004,923
Movement in Tax Balances...................................................... 186,168 336,340
-------------- --------------
3,853,591 4,318,706
Plus items included in Investing/Financing Activities............................. 5,096,999 7,278,000
-------------- --------------
8,950,590 11,596,706
-------------- --------------
MOVEMENTS IN WORKING CAPITAL
Increase in Loans Receivable...................................................... 3,499,242 --
(Decrease) / Increase in Accounts Payable......................................... (264,775) 63,253
(Decrease)/ Loans payable......................................................... (8,607,291) (7,319,227)
(Decrease)/Increase in Inventories................................................ (18,344) 127,166
(Increase) in Prepayments......................................................... (43,017) (6,471)
(Decrease) in Accounts Payable & Accruals......................................... 57,522 (256,970)
(Decrease) in Taxation............................................................ (84,674) (267,673)
-------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES.......................................... 3,489,253 3,936,784
-------------- --------------
</TABLE>
The Statement of Accounting Policies and Notes form part of,
and should be read in conjunction with these Financial Statements.
99
<PAGE>
McCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS
For the Year Ended 31st March 1997
1 TAXATION
(a) INCOME TAX EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
GROUP PARENT
---------------------- ----------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before taxation........................................ 5,048,371 4,732,797 3,461,143 4,095,719
---------- ---------- ---------- ----------
Taxation at 33%............................................... 1,665,962 1,561,823 1,142,177 1,351,587
Tax effect tax loss offset.................................... -- -- (97,461) --
Non deductible expenses (tax effect).......................... 74,567 47,543 3,720 14,977
Taxation adjustment re dividend received...................... -- -- (165,000) (247,500)
Taxation overprovided in prior year........................... (5,358) (1,152) (1,894) (788)
---------- ---------- ---------- ----------
Taxation expense.............................................. 1,735,171 1,608,214 881,542 1,118,276
---------- ---------- ---------- ----------
Adjusted by:
Timing Differences (Tax effect)............................. (257,099) (336,083) (186,168) (336,340)
---------- ---------- ---------- ----------
Current Portion of Tax Change................................. 1,478,092 1,272,131 695,374 781,936
---------- ---------- ---------- ----------
</TABLE>
(b) IMPUTATION CREDITS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
GROUP PARENT
----------------------- -----------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Opening Balance.............................................. 1,982,553 1,155,889 1,566,630 894,276
Imputation credits attached to Dividends Received............ -- -- 246,269 369,403
Taxation Paid................................................ 1,660,885 1,596,271 780,050 1,059,893
Imputation credits attached to Dividends Paid................ (1,113,393) (746,659) (1,113,393) (746,659)
Tax Refund................................................... (32,832) (22,948) -- (10,283)
----------- ---------- ----------- ----------
Closing Balance.............................................. 2,497,213 1,982,553 1,479,556 1,566,630
----------- ---------- ----------- ----------
</TABLE>
2 SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
GROUP AND
PARENT
-------------
<S> <C>
ISSUED CAPITAL AS AT 31 MARCH 1996............................................. 10,453,290
261,336 ordinary shares of 50c each fully paid issued, to Group executives in
terms of the executive share option scheme 19 December 1996.................. 130,668
2,554,000 ordinary shares of 50c each fully paid issued in part payment for the
acquisition of Format Publishers Ltd, 1st February 1997...................... 1,277,000
-------------
ISSUED CAPITAL AS AT 31 MARCH 1997............................................. 11,860,958
-------------
-------------
</TABLE>
100
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
2 SHAREHOLDERS EQUITY (CONTINUED)
AUTHORISED SHARE CAPITAL
On 2 November 1994 the authorised share capital of McCollam Printers Limited
was increased to $25,000,000 by the creation of 34,456,088 50c shares ranking
equally in all respects with the existing ordinary shares in the capital of the
company.
As at the 31 March 1997 26,278,084 shares of 50c remain unissued.
(The ordinary shares carry full voting rights)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
GROUP PARENT
------------------------ ------------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
RETAINED EARNINGS $ $ $ $
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Opening balance............................................ 3,588,002 2,411,493 2,465,582 1,436,213
Net profit after taxation.................................. 3,313,200 3,124,583 2,579,601 2,977,443
Interim dividend paid...................................... (1,058,396) (745,946) (1,058,396) (745,946)
Final dividend provided.................................... -- (1,202,128) -- (1,202,946)
Transfer in Capital Reserve................................ (16,000) -- (16,000) --
----------- ----------- ----------- -----------
CLOSING BALANCE............................................ 5,826,806 3,588,002 3,970,787 2,465,582
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL RESERVES GROUP AND PARENT
- --------------------------------------------------------------------------- -----------------
<S> <C>
BALANCE AS AT 31 MARCH 1996................................................ 6,275
Capital Gain on Sale of Assets............................................. 16,000
-------
BALANCE AS AT 31 MARCH 1997................................................ $ 22,275
-------
-------
</TABLE>
The directors are of the opinion that the capital reserves would be
distributable tax free.
<TABLE>
<CAPTION>
SHARE PREMIUM RESERVE GROUP AND PARENT
- --------------------------------------------------------------------------- -----------------
<S> <C>
Balance at 31 March 1996................................................... 786,628
Share premium arising on the issue of 2,554,000 shares to the vendors of
Format Publishers Ltd and the exercise of 261,336 options under the
Executive Share option scheme............................................ 4,051,795
-----------------
BALANCE AS AT 31 MARCH 1997................................................ $ 4,838,423
-----------------
-----------------
</TABLE>
101
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
3 DEFERRED TAXATION
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
GROUP PARENT
----------------------- ------------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Opening Balance.................................................... 813,034 476,951 757,789 421,449
Current Period Movement............................................ 257,099 336,083 186,168 336,340
---------- ----------- ----------- -----------
CLOSING BALANCE.................................................... 1,070,133 813,034 943,957 757,789
---------- ----------- ----------- -----------
</TABLE>
4 LOANS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
GROUP PARENT
-------------------------- ------------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Bank Loans................................................. 17,697,500 10,582,500 14,050,000 9,500,000
Other Financial Institutions............................... 5,164,340 -- 37,885 --
------------ ------------ ------------ ----------
22,861,840 10,582,500 14,087,885 9,500,000
Less Current Portion....................................... 4,071,197 90,000 3,018,944 --
------------ ------------ ------------ ----------
TERM PORTION............................................... 18,790,643 10,492,500 11,068,941 9,500,000
------------ ------------ ------------ ----------
</TABLE>
The bank loans to the group have been provided by the ANZ Banking Group and
are secured by debenture charges over the assets of all Group Companies, except
All-Mark Industries Ltd, together with a first mortgage over McCollam Properties
Limited's freehold land. Cross guarantees between McCollam Printers Limited,
Laser Graphics Limited and McCollam Properties Limited have been provided.
These loans are for 2 years. Interest rates on the loans were 8.99% per
annum.
5 BANK OVERDRAFT
The bank overdraft is secured by debenture charges in favour of the ANZ
Banking Group Ltd over the assets of all Group Companies, except All-Mark
Industries Ltd. Cross guarantees between McCollam Printers Limited, Laser
Graphics Limited, McCollam Properties Limited have been provided. Interest rates
charged are currently 10.0% per annum. This is a floating rate set by the bank.
6 DIVIDENDS
An interim dividend was declared and paid from reserves during the year
totalling $1,058,396. There was no final dividend declared for the year.
102
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
7 INVESTMENTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
GROUP PARENT
------------------------ ----------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Shares in Subsidiaries............................................ -- -- 1,055,672 1,055,672
Other Investments................................................. 152,499 121,028 108,887 51,056
----------- ----------- ---------- ----------
152,499 121,028 1,164,559 1,106,728
----------- ----------- ---------- ----------
</TABLE>
8 FIXED ASSETS
<TABLE>
<CAPTION>
GROUP
----------------------------------------
ACCUMULATED
COST DEPRECIATION BOOK VALUE
AS AT 31 MARCH 1997 $ $ $
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Plant................................................................... 28,593,883 4,429,139 24,164,744
Land and buildings...................................................... 6,951,560 108,501 6,843,059
Other fixed assets...................................................... 6,285,269 2,271,338 4,013,931
------------ ------------ ------------
TOTAL FIXED ASSETS...................................................... 41,830,712 6,808,978 35,021,734
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
GROUP
----------------------------------------
ACCUMULATED
COST DEPRECIATION BOOK VALUE
AS AT 31 MARCH 1996 $ $ $
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Plant................................................................... 16,582,162 3,089,385 13,492,777
Land and buildings...................................................... 3,801,805 61,964 3,739,841
Other fixed assets...................................................... 3,481,516 1,468,349 2,013,167
------------ ------------ ------------
ASSETS.................................................................. 23,865,483 4,619,698 19,245,785
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
GROUP
----------------------------------------
ACCUMULATED
COST DEPRECIATION BOOK VALUE
AS AT 31 MARCH 1997 $ $ $
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Plant................................................................... 14,523,909 2,634,314 11,889,595
Other Fixed Assets...................................................... 3,032,597 1,464,612 1,567,985
------------ ------------ ------------
TOTAL FIXED ASSETS...................................................... 17,556,506 4,098,926 13,457,580
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
GROUP
----------------------------------------
ACCUMULATED
COST DEPRECIATION BOOK VALUE
AS AT 31 MARCH 1996 $ $ $
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Plant................................................................... 12,325,926 1,933,036 10,392,890
Other Fixed Assets...................................................... 1,817,666 977,751 839,915
------------ ------------ ------------
TOTAL FIXED ASSETS...................................................... 14,143,592 2,910,787 11,232,805
------------ ------------ ------------
</TABLE>
103
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
8 FIXED ASSETS (CONTINUED)
Other fixed assets include motor vehicles, leasehold improvements, office
equipment and furniture and fittings.
The Directors consider that values recorded for land and buildings represent
their fair value.
9 INTANGIBLE ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
GROUP PARENT
---------------------- ----------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Goodwill at cost.............................................. 5,350,000 2,350,000 -- --
Accumulated amortisation...................................... (324,162) (39,166) -- --
---------- ---------- ---------- ----------
TOTAL INTANGIBLE ASSETS....................................... 5,025,838 2,310,834 -- --
---------- ---------- ---------- ----------
</TABLE>
The increase in goodwill arose from the acquisition of Format Publishers Ltd
and is made up as follows:
<TABLE>
<S> <C>
Intellectual Property Rights.................................... 378,166
Other........................................................... 2,621,834
---------
$3,000,000
---------
---------
</TABLE>
The goodwill is being amortised over 10 years.
10 INVENTORIES
<TABLE>
<CAPTION>
AS AT
------------------------------------------------
GROUP PARENT
---------------------- ------------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Raw materials..................................................... 763,106 853,970 292,176 259,448
Work-in-progress.................................................. 124,667 147,359 55,653 70,037
Finished Goods.................................................... 1,200,585 732,511 -- --
---------- ---------- ----------- -----------
TOTAL INVENTORIES................................................. 2,088,358 1,733,840 347,829 329,485
---------- ---------- ----------- -----------
</TABLE>
11 ACQUISITION OF SUBSIDIARIES
On 1st February 1997, the business and goodwill of Format Publishers Limited
was acquired for $8,976,322.
104
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
11 ACQUISITION OF SUBSIDIARIES (CONTINUED)
This consideration was paid to the vendors as follows:--
<TABLE>
<CAPTION>
GROUP AND PARENT
-----------------
<S> <C>
The issue of 2,554,000 ordinary fully paid shares of $2.00................. 5,108,000
Cash....................................................................... 3,868,322
-----------------
$ 8,976,322
-----------------
-----------------
</TABLE>
The trading results of this business have been included in the consolidated
statement of financial performance since that date.
Format Publishers Limited is a printing company.
12 RELATED PARTY TRANSACTIONS
All operating companies have paid professional fees to the accounting and
legal firms of which J P S Hislop and A W Harmos, Directors, are partners. The
fees were charged on normal terms and conditions. Payment is made on a normal
monthly basis.
Group Companies providing goods and services to each other in the normal
course of business. All significant inter-company sales have been eliminated on
consolidation.
13 FINANCIAL INSTRUMENTS
CREDIT RISK
Financial instruments which potentially subject the group to credit risk
principally consist of bank balances and accounts receivable.
The group performs credit evaluations on all customers requiring credit and
generally does not require collateral. The group is not exposed to any
concentrations of credit risk.
FOREIGN EXCHANGE RISK
There was no significant foreign exchange risk at balance date.
CREDIT FACILITIES AND INTEREST RATE RISK
The group has a total bank funding facility of $20,507,500. [As at balance
date $17,697,500 has been borrowed by the group.] Interest rates on fixed term
funding are set at a margin above the 30 day bank bill rate. Overdraft interest
rates are 10.0% per annum.
FAIR VALUE
There is no material difference between the carrying amounts and the
estimated fair values of the group's financial assets and liabilities as at 31
March 1997.
105
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
14 COMMITMENTS AND CONTINGENT LIABILITIES
McCollam Printers Limited and Laser Graphics Limited have executed
debentures in favour of the ANZ Banking Group and McCollam Properties Limited
has granted a first mortgage over its freehold property in favour of the bank.
These facilities were granted to secure bank funding. Cross guarantees have been
provided by McCollam Printers Limited, Laser Graphics Limited, McCollam
Properties Limited. Allmark Industries Limited committed to purchase of plant
totalling $1,222,707 at balance date.
15 LEASE COMMITMENTS
OPERATING LEASE COMMITMENTS
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
GROUP PARENT
----------------------- ------------------------
31 MARCH 31 MARCH 31 MARCH 31 MARCH
1997 1996 1997 1996
$ $ $ $
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Non-Cancellable operating lease rentals are payable as follows
Not later than one year............................................ 302,086 183,921 54,903 57,238
Later than one year but not later than two years................... 574,672 80,887 43,397 54,903
Later than two years but not later than five years................. 1,431,410 12,655 -- 9,077
</TABLE>
16 EMPLOYEE SHARE PURCHASE SCHEME
On 11 November 1994 McCollam Printers Limited established an Employee Share
Purchase Scheme which operates under Section DF7 of the Income Tax Act 1994 for
the benefit of eligible employees of the operating companies of the group.
176,000 fully paid ordinary shares of 50c, representing .9% of paid up
capital in McCollam Printers Ltd were purchased by the Trustee at a cost of
$1.02 per share. McCollam Printers Limited advanced the sum of $179,520 to the
Trustees to finance the purchase of the shares and is to be repaid from the
proceeds of shares transferred to participating employees. This loan is on
demand and interest free.
Participating employees are entitled to finance purchases of shares through
interest free loans from their employing company. These loans are to be repaid
through payroll deductions over a maximum of three years after which the shares
will be transferred to the respective employees. As at 31 March 1997, shares
remaining in the scheme have been allocated as follows:-
<TABLE>
<S> <C> <C>
To employees of McCollam Printers Ltd...................... 76,600
To employees of Laser Graphics Ltd......................... 41,300
To employees of All Mark Industries Ltd.................... 17,500
Held by the Trustee for the benefit of future eligible
employees................................................ 38,400
---------
173,800
---------
---------
</TABLE>
The above shares are not subject to put or call options.
The voting rights relating to these shares remain with the Trustee of the
scheme until the shares are transferred to the employee in accordance with the
scheme's rules.
106
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
16 EMPLOYEE SHARE PURCHASE SCHEME (CONTINUED)
McCollam Properties Limited is the Trustee for the Employees Share Purchase
Scheme. McCollam Printers Limited has the power to appoint the Trustee(s) of the
scheme.
17 EXECUTIVE SHARE OPTION SCHEME
The group has granted options to 14 executives to subscribe for a total of
713,000 shares in the group. 150,000 of the options have been granted to Steven
McCollam. No consideration is payable by employees in respect of the options.
The executives may exercise up to 1/3rd of the options issued to them each
year for three years. The option price for all executives except Steven McCollam
in each of the three years is as follows:--
Year 1 -- $1.26
Year 2 -- $1.32
Year 3 -- $1.39
The options for Steven McCollam are exercised in the same terms as for the
executives with the exception that his option prices are as follows:--
Year 1 -- $1.32
Year 2 -- $1.45
Year 3 -- $1.60
During the year executives exercised options for 261,336 shares in
accordance with the scheme and paid the company $351,463.
18 SUBSIDIARY COMPANIES
At 31 March 1997 the operating subsidiaries of McCollam Printers Limited and
their activities were as follows:--
<TABLE>
<CAPTION>
PERCENTAGE NATURE OF
HOLDING ACTIVITIES
----------- --------------------------------------------------
<S> <C> <C>
Laser Graphics Limited............................ 100% Pre-press company producing filmwork and plates
McCollam Properties Limited....................... 100% Property owning company
All-Mark Industries Limited....................... 100% Label printing and variable information systems
company
Format Publishers Limited......................... 100% Printing company
</TABLE>
All subsidiaries have 31 March balance dates.
107
<PAGE>
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 31ST MARCH 1997
19 SUBSEQUENT EVENTS
The following subsequent events occurred after balance date:--
The premises at 30 Constellation Drive, Mirangi Bay, owned by McCollam
Properties Limited was sold and leased back to McCollam Printers Limited
and Laser Graphics Limited.
The shares in McCollam Printers Limited were acquired, effective 4 June
1997, by Blue Star Group Limited and McCollam Printers Limited was
delisted from the Stock Exchange, and a new board of Directors was
appointed.
108
<PAGE>
OTHER STATUTORY INFORMATION
DISCLOSURE OF INTEREST
The following general disclosures of interest pursuant to Section 140(2) of
the Companies Act 1993 have been received.
<TABLE>
<S> <C>
Mr A W Harmos................... Partner: Russell McVeagh McKenzie Bartleet & Co.
Mr J P S Hislop................. Director: Hector Lang Investments Ltd (formerly McCollam
Group Holdings Ltd). Partner: Blackmore Hearne & Virtue
Mr S B McCollam................. Director: Hector Lang Investments Ltd (formerly McCollam
Group Holdings Ltd).
Mr E B Allison.................. Chairman: Gallager Mailing Services Limited
Chairman: Wang New Zealand Limited
Chairman: Zuellig New Zealand Limited
Director: Designer Textiles Limited
Director: New Zealand Dairy Group of Companies
</TABLE>
SHARE DEALINGS
The Board has received the following disclosure of dealings in the company's
ordinary shares pursuant to Section 148 of the Companies Act 1993.
ACQUISITIONS/DISPOSALS
<TABLE>
<CAPTION>
NUMBER OF
SHARES CONSIDERATION DATE
----------- ------------- ---------
<S> <C> <C> <C>
Mr S B McCollam............................................................ 50,000 $ 72,500 18/12/96
</TABLE>
DIRECTORS' INDEMNITY AND INSURANCE
The company has insured all the Directors of its subsidiaries against
liabilities to other parties, (except the company or a related party of the
company) that may arise from their positions as Directors. The insurance does
not cover liabilities arising from criminal actions.
109
<PAGE>
AUDIT REPORT
TO THE SHAREHOLDERS OF
MCCOLLAM PRINTERS LIMITED AND ITS SUBSIDIARIES
We have audited the financial statements on pages 3 to 25. The financial
statements provide information about the past financial performance and
financial position of the Company and Group as at 31 March 1997. This
information is stated in accordance with the accounting policies set out on
pages 3 to 4.
BOARD OF DIRECTORS' RESPONSIBILITIES
The board is responsible for the preparation of financial statements which
give a true and fair view of the financial position of the Company and Group as
at 31 March 1997 and of the results of their operations and cash flows for the
year ended 31 March 1997.
AUDITORS' RESPONSIBILITIES
It is our responsibility to express, on a test basis, evidence relevant to
the amounts and disclosures in the financial statements. It also includes
assessing:
- The significant estimates and judgements made by the Board in the
preparation of the financial statements, and
- Whether the accounting policies are appropriate to the Company and Group
circumstances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing
standards in New Zealand. We planned and performed our audit so as to obtain all
the information and explanations which we considered necessary. We obtained
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or error. In
forming our opinion we also evaluated the overall adequacy of the presentation
of information in the financial statements.
Other than in our capacity as auditors we have no relationship with, or
interests in, the Company or any of its subsidiaries.
UNQUALIFIED OPINION
We have obtained all the information and explanations we have required.
In our opinion:
- Proper accounting records have been kept by the Company as far as appears
from our examination of those records: and
- The financial statements on pages 3 to 25.
- Comply with generally accepted accounting practice; and
- Give a true and fair view of the financial position of the Company and
Group as at 31 March 1997 and the results of their operations and cash
flows for the year ended on that date.
Our audit was completed on 30 May 1997 and our unqualified opinion is
expressed as at that date.
GRANT THORNTON
AUCKLAND
30 May 1997
110
