<PAGE>
Rules 424(b)(3) and 424(c)
Registration No. 333-13133
PROSPECTUS SUPPLEMENT
TO PROSPECTUS SUPPLEMENT DATED APRIL 11, 1997
TO PROSPECTUS DATED OCTOBER 9, 1996
[LOGO]
U.S. Office Products (the "Company") has prepared this Prospectus Supplement
to update the Company's Prospectus Supplement dated April 11, 1997 to the
Prospectus dated October 9, 1996, covering 37,651,948 shares of the Company's
common stock, $.001 par value ("Common Stock").
From its founding through May 16, 1997, the Company completed 166
acquisitions. Most recently, these acquisitions included two businesses in the
computer network services market, one business in the office supplies market,
one business in the forms management market, four businesses in the corporate
travel market, and one business in the office furniture market, including Data
Business Forms Limited, United Envelope, Inc. and Huxley Envelope Corporation
which were acquired on April 26, 1997.
In addition, on May 22, 1997, the Company signed a definitive agreement (the
"Agreement") to acquire Mail Boxes Etc. ("MBE"). The Company will exchange one
share of its Common Stock for each share of outstanding MBE common stock in the
transaction, subject to adjustment in certain circumstances. As of May 21, 1997,
MBE had approximately 11.3 million shares of common stock outstanding. The
Company will also convert MBE employee stock options relating to approximately
1.3 million shares into options to purchase shares of the Company's Common
Stock. The closing price of the Company's Common Stock on May 21, 1997 was
$24.50. The transaction, which will be accounted for under the
pooling-of-interests method of accounting, is subject to the approval of the
shareholders of MBE and other conditions described in the Agreement.
MBE is the world's largest franchisor of business communication and postal
service centers with more than 3,300 centers operating worldwide. Currently, the
franchisees sell over $1.3 billion in products and services to their customer
base. These products and services include packing and shipping, photocopying,
faxing, mail receiving services, office supplies and other related services. The
franchisees also service large corporations requiring a national distribution
system to dispense a variety of services to their customers and field-based
employees and have an installed base of nearly 400,000-plus postal box holders
at their facilities worldwide.
Under the terms of the Agreement, the Company will exchange one share of its
stock for each share of MBE stock in the transaction if the average Company
share price remains between $23.00 and $29.00 during the 20 trading days ending
two days prior to MBE's shareholder meeting, provided that the closing of the
merger occurs within five business days of such meeting. If the average Company
share price during such 20-day trading period is above $29.00, MBE shareholders
will receive a fraction of a share of Company stock with a value of $29.00.
There is no adjustment in the exchange rate if the average trading price of the
Company's Common Stock during the 20-day trading period is less than $23.00. In
such event, MBE may, however, terminate the Agreement unless the Company, within
three days after receipt of written notice from MBE of MBE's intention to so
terminate, shall have elected to adjust its exchange rate to be equal to the
quotient of $23.00 divided by the Company average trading price during the
20-day trading period ending two days prior to MBE's shareholder meeting,
provided that the closing of the merger occurs within five business days of such
meeting.
<PAGE>
Simultaneously with the execution of the Agreement, certain of the major
stockholders (and their affiliates) of MBE owning approximately 34% of MBE's
outstanding shares delivered letters, dated May 22, 1997 (the "Letter
Agreements"), to the Company pursuant to which such parties, among other things,
(i) agreed to vote or cause to be voted the shares of MBE common stock owned or
controlled by them in favor of the transaction, (ii) appointed the Company as
proxy for and on behalf of them to vote their shares of MBE common stock for the
transaction, and (iii) agreed not to sell, transfer, pledge or otherwise dispose
of any of their shares of MBE common stock or any interest therein without the
consent of the Company. The Letter Agreements were executed by Michael Dooling,
MBE's Chairman of the Board, Anthony W. DeSio, MBE's Vice Chairman of the Board
and Chief Executive Officer, and United Parcel Service of America, Inc.
The following financial statements related to the Company and to certain of
the acquisitions described above are included as part of this Prospectus
Supplement: (i) the Company's unaudited pro forma combined financial information
as of January 25, 1997 and for each of the years ended April 30, 1996, 1995, and
1994 and for the nine months ended January 25, 1997 and January 31, 1996; (ii)
the financial statements of Data Business Forms Limited as of December 31, 1996
and March 31, 1997 (unaudited) and for the year ended December 31, 1996 and for
the three months ended March 31, 1997 and 1996 (unaudited); (iii) the financial
statements of United Envelope Co., Inc. and its affiliate, Rex Envelope Co.,
Inc., as of December 31, 1996 and March 31, 1997 and 1996 (unaudited) and for
the year ended December 31, 1996 and for the three months ended March 31, 1997
and 1996 (unaudited); and (iv) the financial statements of Huxley Envelope
Corporation as of December 31, 1996 and March 31, 1997 (unaudited) and for the
year ended December 31, 1996 and for the three months ended March 31, 1997 and
1996 (unaudited). In addition, the financial statements of Mail Boxes Etc. as of
April 30, 1996 and 1995 and for the years ended April 30, 1996, 1995 and 1994
and as of January 31, 1997 and for the nine months ended January 31, 1997
(unaudited) are incorporated by reference herein from the report on Form 10-K of
Mail Boxes Etc. for the fiscal year ended April 30, 1996 and the report on Form
10-Q of Mail Boxes Etc. for the interim period ended January 31, 1997 (File
No. 0-14821) and attached as an exhibit to this Prospectus Supplement.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 29, 1997.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to, where
applicable, acquisitions completed through May 16, 1997 and the pending
acquisition of Mail Boxes Etc. The unaudited pro forma combined balance sheet
gives effect to the 27 businesses acquired by the Company after January 25,
1997 (the "Fiscal 1997 Post 3rd Quarter Acquisitions") and the pending
acquisition of Mail Boxes Etc. (the "Fiscal 1998 Pending Acquisition"), as if
all such acquisitions had occurred as of the Company's most recent balance
sheet date, January 25, 1997.
The pro forma combined statement of income for the year ended April 30,
1996 gives effect to (i) the 26 acquisitions completed during fiscal 1996
which were business combinations accounted for under the purchase method of
accounting (the "Fiscal 1996 Purchased Companies") as if all such
acquisitions had been made on May 1, 1995; (ii) the 77 acquisitions completed
during fiscal 1997 which were business combinations accounted for under the
purchase method of accounting (the "Fiscal 1997 Purchased Companies") as if
all such acquisitions had been made on May 1, 1995; (iii) the 10 acquisitions
completed after January 25, 1997 which were combinations accounted for under
the pooling-of-interests method of accounting as if all such acquisitions had
been made on May 1, 1995 (the "Fiscal 1997 Post 3rd Quarter Pooled
Companies", which together with the Fiscal 1997 Purchased Companies are
referred to as the "Fiscal 1997 Completed Acquisitions"); (iv) the Fiscal
1998 Pending Acquisition to be accounted for under the pooling-of-interests
method of accounting, as if such acquisition had been made on May 1, 1995;
(v) the sales by the Company in February and March 1996 (the "February
Offerings") of 5,543,045 shares of Common Stock and 5 1/2% Convertible
Subordinated Notes due 2001 (the "February Notes") in the principal amount of
$143.75 million as if such sales had been made on May 1, 1995; (vi) the sales
by the Company of 5 1/2% Convertible Subordinated Notes due 2003 in May and
June 1996 (the "May Notes") in the principal amount of $230 million as if
such sales had been made on May 1, 1995; (vii) the sale by the Company in
September 1996 (the "September Stock Sale") of 1,250,000 shares of the Common
Stock as if such sale had been made on May 1, 1995; and (viii) the sales by
the Company in February and March 1997 of 8,682,331 shares of Common Stock as
if such sales had been made on May 1, 1995.
The historical financial statements of the Company for the nine month
periods ended January 25, 1997 and January 31, 1996 and the fiscal year ended
April 30, 1996 give retroactive effect to the results of the 30 companies
acquired by the Company during the nine months ended January 25, 1997 and the 14
companies acquired during fiscal 1996 which were business combinations accounted
for under the pooling-of-interests method of accounting. The historical
financial statements of the Company for the fiscal years ended April 30, 1995
and 1994 give retroactive effect to the results of 23 of the companies acquired
by the Company during the nine months ended January 25, 1997 and the 14
companies acquired during fiscal 1996 which were business combinations accounted
for under the pooling-of-interests method of accounting. (Seven of the companies
acquired by the Company during the nine months ended January 25, 1997, which
were business combinations accounted for under the pooling-of-interests method
of accounting, were not included in the historical financial statements of the
Company for the fiscal years ended April 30, 1995 and 1994 because they were
considered to be individually insignificant (the "Insignificant Companies")).
The pro forma combined statement of income for the year ended April 30,
1996 includes (i) the audited financial statements of the Company for the
year ended April 30, 1996; (ii) the unaudited financial information of the
Fiscal 1996 Purchased Companies for the period from May 1, 1995 to the
consummation date; (iii) the unaudited financial information for the Fiscal
1997 Purchased Companies for the most recently completed fiscal year, except
that unaudited financial information for the year ended April 30, 1996 is
included for each such acquisition where the entity's fiscal year end is not
within 93 days of the Company's year end; (iv) the unaudited financial
information of the Fiscal 1997 Post 3rd Quarter Pooled Companies for the most
recently completed fiscal year; and (v) the audited financial statements of
the Fiscal 1998 Pending Acquisition for the year ended April 30, 1996.
F-1
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The pro forma combined statement of income for the nine months ended
January 25, 1997 includes the unaudited financial information of the Company
and gives effect to (i) the 77 acquisitions completed during fiscal 1997
accounted for under the purchase method of accounting for the period May 1,
1996 to the consummation date; (ii) the 10 acquisitions completed after
January 25, 1997 which were combinations accounted for under the
pooling-of-interests method of accounting as if all such acquisitions had
been made on May 1, 1996; and (iii) the unaudited financial information of
the Fiscal 1998 Pending Acquisition as if made on May 1, 1996.
The pro forma combined statement of income for the nine months ended
January 31, 1996 includes the unaudited financial information of the Company
and gives effect to the Fiscal 1996 Purchased Companies, the Fiscal 1997
Completed Acquisitions and the Fiscal 1998 Pending Acquisition, as if all such
acquisitions had been made on May 1, 1995.
The pro forma combined statement of income for the years ended April 30,
1995 and 1994 includes the historical financial information of the Company
and gives effect to the Insignificant Companies, the Fiscal 1997 Post 3rd
Quarter Pooled Companies and the Fiscal 1998 Pending Aacquisition as if all
such acquisitions had been made on May 1, 1993.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
period, as assumed, or the future results of the Company. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this report and in other
reports filed by the Company.
F-2
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED BALANCE SHEET
January 25, 1997
(000's)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR
U.S. OFFICE 1997 1998 PRO FORMA
PRODUCTS COMPLETED PENDING PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ------------ ----------- ------------- ---------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 56,462 $ 4,451 $ 4,659 $ (7,448)(a) $ -- $ 275,522 (b) $ --
(58,124)(a) (275,522)(b)
Short term investments............. 25,386 (25,386)(a)
Restricted cash-franchisee deposits 1,726 1,726 1,726
Accounts receivable................ 336,434 57,588 6,105 -- 400,127 400,127
Lease receivable................... 30,442 30,442 30,442
Inventory.......................... 250,795 30,240 698 -- 281,733 281,733
Prepaid and other current
assets.......................... 52,831 2,538 13,231 -- 68,600 68,600
----------- ------------ ----------- ------------- --------- ------------- -----------
Total current assets........... 726,964 94,817 51,805 (90,958) 782,628 -- 782,628
Property and equipment, net........ 202,678 30,743 5,110 -- 238,531 238,531
Intangible assets, net............. 585,841 6,432 398 21,356 (a) 614,027 614,027
Lease receivables.................. 44,423 6,449 50,872 50,872
Other assets, including equity
investments...................... 68,401 9,547 19,455 -- 97,403 97,403
----------- ------------ ----------- ------------- ---------- ------------- -----------
Total assets................... $1,628,307 $ 141,539 $ 83,217 $(69,602) $1,783,461 $ -- $1,783,461
----------- ------------ ----------- ------------- --------- ------------- -----------
----------- ------------ ----------- ------------- --------- ------------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term debt...................$ 367,225 $ 21,476 $ -- (60,463)(a) $ 328,238 $(275,522)(b) 52,716
Accounts payable.................. 172,555 25,372 1,104 -- 199,031 199,031
Accrued compensation.............. 38,966 3,679 -- -- 42,645 42,645
Other accrued liabilities......... 69,342 15,621 10,583 -- 95,546 95,546
----------- ------------ ----------- ------------- ---------- ------------- ------------
Total current liabilities....... 648,088 66,148 11,687 (60,463) 665,460 (275,522) 389,938
Long-term debt...................... 389,453 23,047 4,023 (23,047)(a) 393,476 393,476
Notes payable to related parties.... -- --
Deferred income taxes............... 7,633 5,221 -- -- 12,854 12,854
Other long -term liabilities........ 6,106 563 -- -- 6,669 6,669
----------- ------------ ----------- ------------- ---------- ------------- ------------
Total liabilities............... 1,051,280 94,979 15,710 (83,510) 1,078,459 (275,522) 802,937
Minority Interest................... 4,941 -- -- -- 4,941 4,941
Stockholders' equity
Common stock...................... 51 13,050 15,931 (28,960)(a) 72 9 (b) 81
Additional paid-in capital........ 496,189 2,457 -- 48,468 (a) 547,114 275,513 (b) 822,627
Cumulative Translation Adjustment. (3,772) -- -- -- (3,772) (3,772)
Retained earnings................. 79,618 25,453 51,576 -- 156,647 156,647
Equity of Purchased Companies....... 5,600 -- (5,600)(a) -- --
----------- ------------ ----------- ------------- ---------- ------------- ------------
Total stockholders' equity........ 572,086 46,560 67,507 13,908 700,061 275,522 975,583
----------- ------------ ----------- ------------- ---------- ------------- ------------
Total liabilities and
stockholders' equity........... $1,628,307 $ 141,539 $ 83,217 $(69,602) $1,783,461 $ -- $1,783,461
----------- ------------ ----------- ------------- ---------- ------------- ------------
----------- ------------ ----------- ------------- ---------- ------------- ------------
</TABLE>
See accompanying notes to the pro forma combined financial statements.
F-3
<PAGE>
U.S. Office Products Company
Pro-Forma Combined Statement of Income
For the nine months ended January 25, 1997
(000's)
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR
---------------------------
U.S. OFFICE 1997 1998 PRO FORMA
PRODUCTS COMPLETED PENDING PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
---------------- ------------ ----------- ----------- ------------ ----------- ----------
Revenues $ 1,807,652 $ 624,990 $ 50,665 2,483,307 2,483,307
Cost of revenues 1,295,249 442,956 26,818 1,765,023 1,765,023
--------------- ---------- ------------ ----------- ---------- -------- ----------
Gross profit 512,403 182,034 23,847 -- 718,284 -- 718,284
Selling, general and
administrative expenses 418,516 157,920 11,100 2,147 (c) $ 581,887 581,887
(7,796) (d)
Litigation settlement
expenses incurred by
Mail Boxes Etc. 5,000 5,000 5,000
Nonrecurring acquisition
costs 10,957 -- -- (10,957) (e) -- --
Nonrecurring
restructuring costs -- -- -- --
Discontinuation of
printing division at
subsidiary -- -- -- --
--------------- ---------- --------- --------- ---------- -------- ----------
Operating income 82,930 24,114 7,747 16,606 131,397 -- 131,397
Other (income) expense:
Interest expense 32,083 6,761 -- (3,162) (f) 35,682 (14,103) (l) 21,579
Interest income (6,437) (475) (709) 7,621 (f) -- --
Foreign currency gain (3,420) (3,420) (3,420)
Other (193) (1,327) -- (1,520) (1,520)
Equity in Net Income of
Affiliated Company (265) (1,009) (h) (1,274) (1,274)
--------------- ---------- --------- -------- ---------- -------- ----------
Income (loss)before
provision for income
taxes and extraordinary item 61,162 19,155 8,456 13,156 101,929 14,103 116,032
Provision for income
taxes 24,159 5,837 3,299 10,050 (i) 43,345 5,641 48,986
--------------- ---------- -------- --------- ---------- -------- ----------
Income before
extraordinary item 37,003 13,318 5,157 3,106 58,584 8,462 67,046
--------------- ----------- -------- --------- ---------- -------- ----------
--------------- ----------- -------- --------- ---------- -------- ----------
Weighted average shares
outstanding 49,759 73,862 (j) 82,544 (m)
Net income per share
before extraordinary
item $ 0.74 $ 0.79 $ 0.81
</TABLE>
See accompanying notes to the pro forma combined financial statements.
F-4
<PAGE>
U.S. Office Products Company
Pro-Forma Combined Statement of Income
For the Year Ended April 30, 1996
(000's)
(Unaudited)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
<S> <C> <C> <C> <C> C> <C> <C> <C>
U.S.
OFFICE 1996 1997 1998 PRO FORMA
PRODUCTS PURCHASED COMPLETED PENDING PRO FORMA OFFERING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ADJUSTMENTS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------- ----------- --------- ----------- ---------
Revenues.................... 1,386,212 307,954 1,401,112 59,107 3,154,385 3,154,385
Cost of revenues............ 1,016,640 214,072 995,117 31,071 2,256,900 2,256,900
--------- ------- --------- --------- ----------- --------- ------ ---------
Gross profit................ 369,572 93,882 405,995 28,036 -- 897,485 -- 897,485
Selling, general and
administrative expenses... 314,314 84,070 340,802 14,361 9,045 (c) 743,536 -- 743,536
............................ (16,524)(d)
............................ (2,532)(e)
Nonrecurring acquisition
costs..................... 8,078 -- -- -- (8,078)(e) --
Nonrecurring restructuring
costs..................... 8,092 -- -- 8,092 8,092
Discontinuation of printing
division at subsidiary.... 682 -- -- -- 682 682
--------- ------- --------- --------- ------- ------ ------- --------
Operating income............ 46,498 1,720 65,193 13,675 18,089 145,175 -- 145,175
Other (income) expense:
Interest expense............ 15,322 2,761 15,904 5,265 (f) 39,252 (18,804) 20,448
Interest income............. (4,034) -- (782) (674) 5,490 (f) -- --
Other....................... (1,140) (24) (1,802) (671)(g) (3,637) (3,637)
Equity in NI of Affiliated
Company................... -- (1,155)(h) (1,155) (1,155)
Income (loss) before
provision for --------- ------- --------- ---------- ------- ------ ------- ---------
income taxes.............. 36,350 (1,017) 51,873 14,349 9,160 110,715 18,804 129,519
Provision for income taxes.. 7,123 45 13,183 5,620 21,140 (i) 47,111 7,522 54,633
--------- ------- --------- --------- ------- ------ ------- ---------
Net income (loss)........... 29,227 (1,062) 38,690 8,729 (11,980) 63,604 11,282 74,886
--------- ------- --------- --------- ------- ------ ------- ---------
--------- ------- --------- --------- ------- ------ ------- ---------
Weighted average shares
outstanding............... 36,781 72,794 (j) 81,476 (m)
Net income per share........ 0.79 .87 0.92
</TABLE>
F-5
See accompanying notes to the pro forma combined financial statements.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 31, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
U.S. OFFICE 1996 1997 1998 PRO FORMA
PRODUCTS PURCHASED COMPLETED PENDING PRO FORMA OFFERING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ---------- ------------ ----------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $975,128 $293,615 $1,065,041 $44,065 $2,377,849 $2,377,849
Cost of revenues. 719,908 206,593 757,294 23,124 1,706,919 1,706,919
--------- -------- ---------- ------- -------- ---------- -------- ----------
Gross profit... 255,220 87,022 307,747 20,941 -- 670,930 670,930
Selling, general
and
administrative
expenses....... 213,123 78,348 256,468 10,828 6,837 (c) $ 558,879 558,879
(6,725)(d)
Nonrecurring
acquisition
costs.......... 6,094 -- -- -- (6,094)(e) -- --
Nonrecurring
restructuring
charges........ 8,092 -- -- 8,092 8,092
Discontinuation
of Printing
Division
at Subsidiary.. 682 -- -- -- 682 682
--------- -------- ---------- ------- -------- --------- -------- ----------
Operating
income...... 35,321 582 51,279 10,113 5,982 103,277 103,277
Other (income)
expense:
Interest
expense..... 9,503 2,776 12,960 -- 10,443 (f) 35,682 (14,103)(l) 21,579
Interest
income...... (1,405) (37) (954) (441) 2,837 (f) -- --
Other......... (1,402) (1,622) (1,424) -- (4,448) (4,448)
Equity in net
income of
affiliated
company........ (866)(h) (866) (866)
Income (loss)
before
provision for --------- -------- -------- ---------- -------- ---------- -------- ----------
income taxes.. 28,625 (535) 40,697 10,554 (6,432) 72,909 14,103 87,012
Provision for
income
taxes......... 5,226 244 10,148 4,132 11,228 (i) 30,978 5,641 36,619
--------- -------- ---------- ---------- -------- ---------- -------- ----------
Net income
(loss)....... $ 23,399 $ (779) $ 30,549 $ 6,422 $(17,660) $ 41,931 $ 8,462 $ 50,393
--------- -------- ---------- ---------- -------- ---------- -------- ----------
--------- -------- ---------- ---------- -------- ---------- -------- ----------
Weighted average
shares
outstanding.... 34,395 72,627 (j) 81,309(m)
Net income per
share.......... $ 0.68 $ 0.58 $ 0.62
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes to the pro forma combined financial statements.
F-6
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL
------------------------
1997 FISCAL
POST 2ND 1998
U.S. OFFICE QTR. PENDING PRO-FORMA
PRODUCTS POOLINGS ACQUISITION ADJUSTMENTS TOTAL
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 798,709 $ 252,943 $ 50,351 $ -- $ 1,102,003
Cost of revenues........................................... 586,989 183,228 27,109 797,326
----------- ------------ -------- ----------- ------------
Gross profit............................................. 211,720 69,715 23,242 -- 304,677
Selling, general and administrative expenses............... 181,845 60,557 12,508 254,910
----------- ------------ -------- ----------- ------------
Operating income......................................... 29,875 9,158 10,734 -- 49,767
Other (income) expense:
Interest expense......................................... 7,108 692 7,800
Interest income.......................................... (682) (354) (447) (1,483)
Other.................................................... (1,122) (2,174) (3,296)
----------- ------------ ------- ----------- ------------
Income before provision for income taxes................... 24,571 10,994 11,181 -- 46,746
Provision for income taxes................................. 3,184 1,245 4,411 11,728 (k) 20,568
----------- ------------ ------- ----------- ------------
Net income................................................. $ 21,387 $ 9,749 6,770 $ (11,728) $ 26,178
----------- ------------ ------- ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to the pro forma combined financial statements.
F-7
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1994
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FISCAL
--------------------------
1997
POST 2ND 1998
U.S. OFFICE QTR. PENDING PRO-FORMA
PRODUCTS POOLINGS ACQUISITIONS ADJUSTMENTS TOTAL
----------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 597,511 $ 195,327 $43,660 $ -- $ 836,498
Cost of revenues............................................. 427,308 136,291 24,316 587,915
----------- ------------ --------- ----------- ----------
Gross profit............................................... 170,203 59,036 19,344 -- 248,583
Selling, general and administrative expenses................. 151,979 55,056 9,818 216,853
----------- ------------ --------- ----------- ----------
Operating income........................................... 18,224 3,980 9,526 -- 37,730
Other (income) expense:
Interest expense............................................ 4,943 630 5,573
Interest income............................................. (405) (121) (642) (1,168)
Other....................................................... (1,154) (2,786) (3,940)
-- -- --
----------- ------------ --------- ----------- ----------
Income before provision for income taxes..................... 14,840 6,257 10,168 -- 31,265
Provision for income taxes................................... 2,095 1,110 4,136 6,416(k) 13,757
----------- ------------ --------- ----------- ----------
Net income................................................... $ 12,745 $ 5,147 6,032 $(6,416) $ 17,508
----------- ------------ --------- ----------- ----------
----------- ------------ --------- ----------- ----------
</TABLE>
See accompanying notes to the pro forma combined financial statements.
F-8
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a)(i) Adjustment to reflect purchase price adjustments and repayment of
certain long-term debt associated with the Fiscal 1997 Purchased
Companies noted below. The portion of the consideration assigned to
goodwill ($21,356) in transactions accounted for as purchases
represents the excess of the cost over the fair value of the net
assets acquired. The Company amortizes goodwill over a period of 40
years. The recoverability of the unamortized goodwill is assessed on
an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(ii) Adjustment to reflect the reduction in short-term and long-term debt
of certain acquired companies and existing short-term debt of the
Company.
(b) Adjustment to reflect $275,522 of net proceeds from the sales of
8,682 shares of Common Stock by the Company in February and March
1997 (net of expenses and underwriting discount) and the utilization
of the proceeds to repay short-term debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1996 Purchased
Companies and the Fiscal 1997 Purchased Companies. The goodwill is being
amortized over an estimated life of 40 years.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEAR ENDED ------------------------
APRIL 30, JANUARY 25, JANUARY 31,
1996 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fiscal 1996 Purchased Companies............................................ $ 1,570 $ -- $ 688
Fiscal 1997 Purchased Companies............................................ 7,475 2,147 6,149
----------- ----------- -----------
$ 9,045 $ 2,147 $ 6,837
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(d) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions.
(e) Adjustment to reflect the reduction of (i) nonrecurring acquisition
costs related to pooling-of-interests business combinations of $8,078 for the
year ended April 30, 1996, $10,957 and $6,094 for the nine months ended January
25, 1997 and January 31, 1996, respectively, and (ii) certain other
restructuring charges from certain acquisitions of $2,532 for the year ended
April 30, 1996.
(f) Adjustment to reflect an increase (decrease) in interest expense
resulting from the utilization of excess cash from the Fiscal 1998 Pending
Acquisition and the utilization of the proceeds from the sales of the February
Notes and the May Notes to effect acquisitions as if such debt had been
outstanding for the entire period. In addition, the adjustment reflects an
increase in interest expense resulting from the amortization of debt issue costs
over the terms of the February Notes and the May Notes. Adjustment also reflects
a decrease in interest income resulting from the utilization of the proceeds
from the issuance of the Common Stock and the February Notes in the February
Offerings and the May Notes to effect certain transactions and refinance
existing debt.
F-9
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
(g) Adjustment to reflect the elimination of the minority interest
representing 49% of the net income of Blue Star Group Limited for the year ended
April 30, 1996.
(h) Adjustment to reflect the 49% equity interest in the net income of
Dudley Stationery Limited.
(i) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 42%. The
difference between the effective tax rate of 42% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based on 72,794, 73,862, and 72,627 shares of Common
Stock and Common Stock equivalents outstanding for the year ended April 30,
1996 and the nine months ended January 25, 1997 and January 31, 1996,
respectively. The amounts are comprised of 51,352 shares outstanding for each
of the periods, 20,773 shares issued for acquisitions completed and the
acquisition to be completed subsequent to January 25, 1997 and 669, 1,737,
and 502 common stock equivalents considered to be outstanding related to
stock options, for the year ended April 30, 1996, and the nine month periods
ended January 25, 1997 and January 31, 1996, respectively.
(k) Adjustment to reflect the income taxes for certain acquisitions
accounted for under the poolings-of-interest method which were taxed as
subchapter S corporations as if these companies had been subject to taxation
as C corporations. As a result of being subchapter S corporations, any tax
liabilities prior to acquisition were the responsibility of the individual
company stockholder.
(l) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds of $275,522 from the sales in February and March
1997 by the Company of 8,682 shares of Common Stock to repay short term debt at
an effective rate of 6.825%.
(m) Adjustment to include in weighted average shares outstanding the 8,682
shares that were sold by the Company in February and March 1997.
F-10
<PAGE>
AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Directors of
Data Business Forms Limited
We have audited the balance sheet of Data Business Forms Limited ("DBF") as
at December 31, 1996 and the statements of income and retained earnings and
changes in financial position for the year then ended. 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 an audit to
obtain reasonable assurance 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 all material
respects, the financial position of DBF as at December 31, 1996 and the
results of its operations and the changes in its financial position for the
year then ended in accordance with accounting principles generally accepted
in Canada.
/s/ Ernst & Young
-----------------
Chartered Accountants
Toronto, Canada
January 31, 1997, except
as to note 2 which is as
of April 26, 1997.
F-11
<PAGE>
- -------------------------------------------------------------------------------
DATA BUSINESS FORMS LIMITED
[caad 214]INCORPORATED UNDER THE LAWS OF ONTARIO
BALANCE SHEET
- -------------------------------------------------------------------------------
(Canadian $ 000's)
<TABLE>
<CAPTION>
DEC. 31 MAR. 31
1996 1997
NOTES $ $
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current
Cash 51 616
Accounts receivable 25,323 24,457
Inventories 4 15,809 17,552
Prepaid expenses and other assets 622 893
--------- --------- -----------
Total current assets 41,805 43,518
Property, plant and equipment 5 23,249 24,376
Deferred pension benefit 6 4,907 4,907
Deferred financing fees 484 439
--------- --------- -----------
Total Assets 70,445 73,240
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank overdraft 2,223 2,990
Current portion of long-term debt 7 3,858 3,858
Accounts payable and accrued liabilities 9,424 12,465
Accrued compensation and related expenses 3,688 2,986
Income and other taxes payable 8 5,097 1,378
Deferred revenue 3,220 3,214
Accrued restructuring and integration costs 2,523 2,454
--------- --------- -----------
Total current liabilities 30,033 29,345
Long-term debt 7 17,854 19,623
Deferred income taxes 8 5,100 5,100
Share capital 9 10,652 10,652
Retained earnings 6,806 8,520
--------- --------- -----------
Total Liabilities and Shareholders' Equity 70,445 73,240
--------- --------- -----------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-12
<PAGE>
- -------------------------------------------------------------------------------
DATA BUSINESS FORMS LIMITED
Incorporated under the laws of Ontario
STATEMENT OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------
(Canadian $ 000's)
<TABLE>
<CAPTION>
YEAR ENDED 3 MONTHS ENDED 3 MONTHS ENDED
DEC. 31 MARCH 31 MAR. 31
1996 1996 1997
$ $ $
NOTES (UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE 165,548 43,017 43,141
OPERATING EXPENSES
Paper, carbon and ink 70,977 18,965 18,505
Manufacturing salaries and benefits 29,774 7,458 7,898
Occupancy costs and other 16,852 4,310 4,324
--------- --------- --------- -----------
117,603 30,733 30,727
GROSS MARGIN 47,945 12,284 12,414
EXPENSES
Selling commissions and expenses 20,556 5,050 5,091
General and administration expenses 9,371 2,462 2,831
--------- --------- --------- -----------
EARNINGS BEFORE DEPRECIATION AND
AMORTIZATION 18,018 4,772 4,492
Depreciation and amortization 5 5,498 1,253 1,303
--------- --------- --------- -----------
EARNINGS BEFORE INTEREST AND TAXES 12,520 3,519 3,189
Interest expense 7 3,962 924 508
Provision for (recovery of) income taxes
Current 8 4,603 938 967
Deferred 8 (1,306) -- --
--------- --------- --------- -----------
NET INCOME 5,261 1,657 1,714
--------- --------- --------- -----------
Retained earnings, beginning of the period 1,564 1,564 6,806
Dividends on preference shares (19) (19) --
Retained earnings, end of the period 6,806 3,202 8,520
--------- --------- --------- -----------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-13
<PAGE>
DATA BUSINESS FORMS LIMITED
Incorporated under the laws of Ontario
STATEMENT OF CHANGES IN FINANCIAL POSITION
- -------------------------------------------------------------------------------
(CANADIAN $ 000'S)
<TABLE>
<CAPTION>
YEAR ENDED 3 MONTHS ENDED 3 MONTHS ENDED
DEC. 31 MAR. 31 MAR. 31
1996 1996 1997
NOTES $ $ $
-------- ---------- ------------- ----------- --
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income 5,261 1,657 1,714
Depreciation of fixed assets 4,837 1,199 1,258
Amortization of deferred financing fees 661 54 45
Deferred income taxes 8 (1,306) -- --
--------- --------- -------- ----------- --
9,453 2,910 3,017
5,176 (3,827) (1,767)
Net changes in working capital balances (490) (10) (69)
Restructuring and integration expenditures
--------- --------- --------- ---------- --
Cash provided by operating activities 14,139 6,727 1,181
--------- --------- ---------- --------- --
INVESTING ACTIVITIES
Capital expenditures
Proceeds from sales of land and buildings 5 (2,995) (556) (2,385)
Acquisition--Printers' Choice 1 5,554 -- --
(415) -- --
--------- --------- ----------- -------- --
Cash provided by (used in) investing activitie 2,144 (556) (2,385)
--------- --------- ----------- -------- --
FINANCING ACTIVITIES
Issue (repayments) of long-term debt 7 (17,439) (6,825) 1,769
Repurchases of share capital 8 (50) -- --
Dividends on preference shares (19) (19) --
Deferred financing fees (62) -- --
--------- --------- ----------- -------- --
Cash used in financing activities (17,570) (6,844) 1,769
--------- --------- ------------ ------- --
INCREASE (DECREASE) IN CASH (1,287) (673) 565
--------- --------- ------------ ------- --
Cash, beginning of period 1,338 1,338 51
Cash, end of period 51 665 616
--------- --------- ------------ ------- --
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
</TABLE>
F-14
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(CANADIAN $000'S)
1. CORPORATE PROFILE
Since its inception in 1959, Data Business Forms Limited ("the company ")
has evolved into a versatile document management and business communications
provider with 12 plants, 3 regional print centres, 16 sales offices and 1,100
employees to serve in excess of 15,000 customers from coast to coast in Canada.
The company offers a wide variety of value added print and electronic products
and related services which include traditional business forms, labels, direct
mail products, security documents and facility and print management.
On February 8, 1995, management purchased the shares, debt and related
pension assets of the company from Maclean Hunter Limited, a wholly-owned
subsidiary of Rogers Communications Inc.
During 1996, the company was awarded a Bank of Montreal outsourcing
project which will begin in February 1997 with estimated annual sales of
$25,000. This project requires the integration of 2 dedicated print centers
and 1997 commitments of up to $2,500 in capital and $2,250 of working capital.
On November 30, 1996, the company's Distributor division acquired Printers'
Choice, a short-run print shop in Montreal with annual sales of $1,500. The
purchase price, including integration costs, was $415 and has been accounted for
using the purchase method.
2. SUBSEQUENT EVENT
On April 26, 1997, the shareholders agreed to exchange all of the
company's common shares for common shares of US Office Products Company.
Immediately prior to this exchange, the preference shares were
repurchased by the company and the DBF Employee Trust shares were
distributed. In addition, the credit facilities described in note 7 were
refinanced by an advance from U.S. Office Products Company.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada. The more significant accounting
policies followed in the preparation of the financial statements are set out
below:
INTERIM FINANCIAL INFORMATION
Interim financial information for the periods of three months ending
March 31, 1997 and 1996 are unaudited. In the opinion of management, this
information reflects all adustments, consisting only of adjustments of a
normal recurring nature necessary for fair presentation of such financial
statements. Financial results for these interim periods are not necessarily
indicative of results for a full year.
CASH AND BANK OVERDRAFT
Cash balances are kept on hand to ensure the smooth funding of payroll and
suppliers. The bank overdraft represents outstanding cheques only. Funding for
the company is obtained from the revolving credit facility.
INVENTORIES
Raw materials inventories, principally paper, carbon and ink, are valued at
the lower of cost and replacement cost. Printed finished goods and work in
progress, consisting mainly of business forms, computer paper and labels, are
recorded at the lower of cost and net realizable value. Cost is determined using
the first-in, first-out method.
F-15
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(CANADIAN $000'S)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITAL ASSETS
Property, plant and equipment are initially recorded at purchase cost.
Repairs and maintenance are expensed as incurred. Depreciation is computed using
straight-line or diminishing balance method over the estimated useful lives of
the capital assets as outlined below:
ASSET BASIS RATE
- ------------------------------ ------------------- -------------
Buildings Diminishing balance 5%
Leasehold improvements Straight-line lease term
Office furniture and equipment Diminishing balance 20%
Presses and printing equipment Straight-line 10 years
Computer hardware and software Straight-line 2 to 5 years
DEFERRED FINANCING FEES
The costs of obtaining bank and other debt financing are deferred and
amortized on a straight-line basis over the term of the debt to which they
relate.
INCOME TAXES
The deferral method is used in accounting for income taxes whereby timing
differences between income reported in the financial statements and taxable
income result in deferred income taxes.
4. INVENTORIES
1996
$
---------
Paper, carbon and ink............................ 4,330
Work-in-progress................................. 1,323
Forms, computer paper and labels................. 10,156
---------
15,809
---------
---------
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996
COST ACCUMULATED BOOK
DEPRECIATION VALUE
$ $ $
----------- ------------- ------------
<S> <C> <C> <C>
Land.................................................................... 441 -- 441
Buildings and leaseholds................................................ 975 216 759
Office furniture and equipment.......................................... 756 210 546
Presses and printing equipment.......................................... 24,527 6,231 18,296
Computer hardware and software.......................................... 5,192 1,985 3,207
----------- ------------- ----------
31,891 8,642 23,249
----------- ------------- ----------
----------- ------------- ----------
</TABLE>
Of the 7 plants owned by the company at the beginning of 1996, 5 were sold
during the year.
F-16
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(CANADIAN $000'S)
6. PENSION PLAN
On November 18, 1996, the Pension Commission of Ontario approved the
transfer of assets and liabilities from the Maclean Hunter pension plan to the
Data Business Forms pension plan for the 550 company employees who were active
members on February 8, 1995. At December 31, 1996 approximately 625 employees
were members of plan. The initial acquisition of the company included a payment
of $4,000 for the pension surplus and the final payment of $907 will be made
when the transfer is completed. The liability for the $907 was recognized along
with an adjustment to the deferred pension benefit asset in 1996.
At December 31, 1996, the estimated present value of accrued pension
benefits attributed to the transferees' services and the estimated market value
of the related pension fund assets are still to be determinied.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996
UTILIZED
DUE DATE INTEREST RATE FACILITY $
--------------- --------------- --------- -----------
<S> <C> <C> <C> <C>
Revolving credit................................. Nov. 6, 1998 Prime + 1.00% $ 27,000 6,045
Term loan........................................ see below Prime + 1.50% $ 13,000 9,167
Subordinated loan................................ see below 13.35% $ 6,500 6,500
------ --------- -----------
9.60% $ 46,500 21,712
Current portion of long-term debt................ 3,858
-----------
Long-term debt................................... 17,854
-----------
-----------
</TABLE>
Monthly principal repayments of the term loan are $155 with the final
payment of $5,762 due in November 1998. Additional principal payments were made
during 1996 utilizing the $1,820 proceeds from the sales of the Don Mills and
Winnipeg plants.
Quarterly principal repayments of the subordinated loan are $500 with the
final payment due March 31, 2000. An additional principal payment of $6,500 was
made during 1996.
All loan facilities are collateralized by a lien on all present and future
assets of the company. The loan agreements contain various restrictive financial
tests and covenants with which the company is in compliance.
The company is committed to an interest rate swap agreement covering the
period from January 27, 1997 to January 26, 1998. This agreement will be used as
a hedge against $15,000 of variable rate loans and is set at a fixed rate of
8%. The company does not use derivative financial instruments for speculative
purposes.
The fair market values of the long-term debt and the interest rate swap
agreement approximate book values.
F-17
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(CANADIAN $000'S)
8. INCOME TAXES
A reconciliation between statutory and accounting income taxes follows:
1996
$
--------
Income before taxes................................. 8,558
--------
Income tax provision (statutory rate @44.6%)........ 3,817
Adjustments to income taxes:
Manufacturing and processing credit............... (853)
Other............................................. 333
--------
Income tax provision................................ 3,297
--------
--------
Current income taxes payable exceeds the net provision by $1,306 in 1996 due
mainly to the fact that depreciation for accounting purposes exceeded the
related deduction for income tax purposes.
9. SHARE CAPITAL
<TABLE>
<CAPTION>
1996
STATED
ISSUED VALUE
SHARE CAPITAL AUTHORIZED # $
- -------------------------------------------------------------- ----------- --------- -----------
<S> <C> <C> <C>
Preference shares............................................. 4 4 336
Common shares :
Class A shares........................................... 26,000 26,000 2,600
Class B shares........................................... unlimited 39,738 4,024
Treasury shares--Class B................................. 500 500 (50)
Class D shares........................................... unlimited 33,762 3,742
-----------
10,652
-----------
-----------
</TABLE>
The 5.5% cumulative, non-voting preference shares are redeemable at a
value based upon a formula equal to a multiple of western divisional
earnings. The expected redemption value of $615 is likely to be paid during
1997. These shares rank ahead of all classes of common shares for capital
distributions.
Class A shares are entitled to one vote per share and are subject to a
put after March 31, 2000 and a call following March 31, 2001 based upon a
valuation formula equal to the greater of a multiple of earnings before
interest and taxes less debt outstanding and appraised value. There is
nominal paid-up capital associated with these shares.
F-18
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(CANADIAN $000'S)
9. SHARE CAPITAL (CONTINUED)
Class B and D shares are entitled to one vote per share and are ranked
equally with Class A shares except in the case of the dissolution,
liquidation or winding-up of the company in which case the shares rank in
descending order from A to D. The paid-up capital of the Class B and D shares
was $3,644 at December 31, 1996.
Of the Class D shares, 17,826 are held by the DBF Employee Trust. A
portion of these shares will be allocated annually to a group of senior
management based on a formula related to subordinated debt repayments.
In accordance with the company's articles of incorporation, share
transfers are prohibited without the approval of the Board of Directors.
10. COMMITMENTS
The company leases printing equipment, real estate, trucks and office
equipment in connection with its sales and manufacturing activities. Future
lease commitments are as follows :
$
-------
1997............................................... 3,216
1998............................................... 2,720
1999............................................... 1,725
2000............................................... 1,067
2001............................................... 925
Beyond............................................. 2,314
-------
-------
Associated with the Bank of Montreal outsourcing project (see note 1), the
company has committed to capital expenditures of up to $2,500 in 1997.
F-19
<PAGE>
DATA BUSINESS FORMS LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Canadian $000's)
11. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA AND
UNITED STATES
The accounting policies in Note 3 conform with generally accepted accounting
principles ("GAAP") in Canada and are consistent in all material respects
with United States GAAP with the exceptions listed below. As permitted by
Regulation S-X the company has not attempted to quantify these differences.
Income taxes
SFAS No.109 requires the liability method under which temporary differences
are tax effected at current rates. Under Canadian GAAP, timing differences
are tax effected at the rates in effect when they arise. When the business
was purchased from Maclean Hunter Limited (see note 1), the book value of
deferred taxes was carried forward. Under United States GAAP, a deferred asset
or liability would have been recognized for differences between the tax and book
basis of the assets in the purchase business combination.
Inventory
The company has not included overhead in inventory costing which is
acceptable for Canadian GAAP, not for United States GAAP.
Restructuring and integration
Included in the restructuring and integration reserve are severance costs
with benefit arrangements that had not been communicated to the respective
employees. This liability would not have been recognized for United States
GAAP purposes at December 31, 1996.
Early prepayment penalty on debt
The company incurred an early prepayment penalty on debt which would be
treated as an extraordinary item for United States GAAP purposes.
Share capital
Class A shares and preference shares (see note 9) would be presented separate
from share capital on the balance sheet for United States GAAP purposes.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
United Envelope Co., Inc.
525 West 52nd Street
New York, New York 10019
We have audited the accompanying combined balance sheet of United Envelope
Co., Inc. and its affiliate, Rex Envelope Co., Inc., as at December 31, 1996,
and the related combined statements of income, changes in shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies, whose
financial statements are combined herein, are related through common
ownership and control. In addition, each has pledged certain assets and
guaranteed certain 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 affiliate as at December 31, 1996, and the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
NEW YORK, NEW YORK
February 28, 1997, except for Note Q, as to which
the date is April 14, 1997
F-21
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
COMBINED BALANCE SHEETS
(In 000's)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
(unaudited)
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash................................................................................ $ 763 $ 963
Accounts receivable, pledged, less allowance for doubtful accounts of $202,758--
Note B............................................................................. 12,087 13,899
Inventories--Notes A and C.......................................................... 2,921 3,627
Prepaid expenses and other current assets........................................... 310 267
Due from TLG Realty, LLC--Note D.................................................... 116 74
Due from related companies--Note E.................................................. 118 113
------------ -----------
Total Current Assets.............................................................. 16,315 18,943
Cash Surrender Value of Insurance on Officers' Lives, Net of Loans Payable of $522.... 769 796
Property, Plant and Equipment, at Cost, Less Accumulated Depreciation of $4,874 and
$4,930--Notes A and F............................................................... 1,175 1,136
Leased Property Under Capital Lease, Less Accumulated Depreciation of $3,833 and
$3,917--Note K...................................................................... 1,167 1,084
Due from TLG Realty, LLC--Note D...................................................... 1,424 1,463
Other Assets--Note G.................................................................. 903 641
------------ -----------
TOTAL ASSETS.................................................................... $ 21,753 $ 24,063
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable, banks, collateralized--Note H........................................ $ 4,800 $ 5,300
Accounts payable--Note I 4,806 5,677
Accrued expenses and other current liabilities...................................... 1,297 1,467
Liability for income taxes--Note J.................................................. 248 246
Distributions payable to shareholders--Note J....................................... 256 611
Obligation under capital lease--current portion--Note K............................. 491 505
Due to Huxley Envelope Corporation--Note L.......................................... 93 --
Due to Apple Industrial Condominium................................................. -- 84
------------ -----------
Total Current Liabilities......................................................... 11,991 13,890
Obligation Under Capital Lease--Note K................................................ 1,474 1,342
------------ -----------
Total Liabilities................................................................. 13,465 15,232
------------ -----------
Commitments--Notes K and M
Subsequent Events--Note Q
Shareholders' Equity
Common stock......................................................................... 2,847 2,847
Capital stock of affiliate........................................................... 5 5
Retained earnings--Note O............................................................ 5,436 5,979
------------ -----------
Total Shareholders' Equity........................................................ 8,288 8,831
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 21,753 $ 24,063
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's)
<TABLE>
COMMON STOCK
---------------------
UNITED REX RETAINED TOTAL
ENVELOPE ENVELOPE EARNINGS- SHAREHOLDERS'
CO., INC. CO., INC. COMBINED EQUITY
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.................... $ 2,847 $ 5 $ 3,549 $ 6,401
Net income...................................... 3,746 3,746
Distributions to shareholders--Note J........... (1,859) (1,859)
-------- ----- -------- ------
Balance at December 31, 1996.................... 2,847 5 5,436 8,288
Net income (unaudited).......................... 1,087 1,087
Distributions to shareholders (unaudited)....... (544) (544)
-------- ----- -------- ------
Balance at March 31, 1997 (Unaudited)........... $ 2,847 $ 5 $ 5,979 $ 8,831
-------- ----- -------- ------
-------- ----- -------- ------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME
(In 000's)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
(UNAUDITED)
------------ --------- ---------
<S> <C> <C> <C>
Net sales.................................................................... $ 77,138 $ 22,136 $ 19,579
Cost of goods sold........................................................... 57,300 17,636 14,562
------------ --------- ---------
Gross profit................................................................. 19,838 4,500 5,017
Selling, shipping, general and administrative expenses....................... 14,921 3,668 3,650
------------ --------- ---------
Operating income............................................................. 4,917 832 1,367
Interest expense............................................................. 687 203 144
------------ --------- ---------
Income before income taxes................................................... 4,230 629 1,223
Provision for income taxes--Note J........................................... 484 76 136
------------ --------- ---------
Net income................................................................... $ 3,746 $ 553 $ 1,087
------------ --------- ---------
------------ --------- ---------
Pro Forma Income Data:
Income before income taxes................................................... $ 4,230 $ 629 $ 1,223
Proforma provision for income taxes (unaudited).............................. 1,861 277 538
------------ --------- ---------
Proforma net income (unaudited).............................................. $ 2,369 $ 352 $ 685
------------ --------- ---------
------------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
(In 000's)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------- ------ -----
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income...................................................................... $ 3,746 $ 553 $1,087
------ ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, including assets under capital lease........... 639 152 139
Provision for doubtful accounts receivable.................................... 250 113 --
Changes in noncash operating assets and liabilities:
Decrease (increase) in accounts receivable.................................. 1,424 (1,697) (1,813)
(Increase) decrease in inventories.......................................... (127) 531 (706)
Decrease in prepaid income taxes............................................ 26 1 --
(Increase) decrease in prepaid expenses and other current assets............ (95) (3) 43
Decrease in other assets--deferred income taxes............................. 16 -- --
(Increase) in security deposits............................................. (1) -- --
(Increase) in due from Fishlang Realty, LLC................................. -- (8) --
Decrease in due from TLG Realty, LLC........................................ -- -- 43
(Increase) decrease in due from related companies........................... (118) -- 5
Decrease in loans receivable, included in other assets...................... 18 73 262
(Decrease) increase in accounts payable..................................... (1,519) 586 871
Increase in accrued expenses and other current liabilities.................. 346 106 169
(Decrease) in due to Huxley Envelope Corporation............................ (56) -- (93)
Increase (decrease) in liability for income taxes........................... 215 (33) (2)
Increase in due to Apple Industrial Condominium............................. -- -- 84
------ ------- -------
Total Adjustments......................................................... 1,018 (179) (998)
------ ------- -------
Net cash provided by operating activities................................. 4,764 374 89
------ ------- -------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
(In 000's) (Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------- ------ -----
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Investing Activities
Acquisitions of property, plant and equipment................................. $ (69) $ (64) $ (17)
(Increase) decrease in cash surrender value, net of loans payable............. (147) 30 (26)
Decrease in employee loans, included in other assets.......................... 5 6 --
(Increase) in due from TLG Realty, LLC........................................ (1,255) -- (40)
------ ------- -------
Net cash (used in) investing activities..................................... (1,466) (28) (83)
------ ------- -------
Cash Flows from Financing Activities
Cash proceeds from short-term secured borrowings from bank.................... 4,300 150 500
Principal payments of short-term secured borrowings from bank................. (5,142) (150) --
Principal payments of long-term debt, including capital lease obligation...... (758) (126) (118)
Dividends paid................................................................ (1,642) (275) (188)
------ ------- -------
Net cash (used in) provided by financing activities......................... (3,242) (401) 194
------ ------- -------
Net increase (decrease) in cash................................................. 56 (55) 200
Cash at beginning of period..................................................... 707 707 763
------ ------- -------
Cash at End of Period........................................................... $ 763 $ 652 $ 963
------ ------- -------
------ ------- -------
Supplementary Information:
Income taxes paid during the period........................................... $ 226 $ 109 $ 138
------ ------- -------
------ ------- -------
Interest paid during the period............................................... $ 562 $ 182 $ 138
------ ------- -------
------ ------- -------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
NATURE OF OPERATIONS
The Company manufactures and prints envelopes for sale to commercial
customers throughout the United States.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of United Envelope
Co., Inc. ("United") and Rex Envelope Co., Inc. ("Rex") (the "Company"). Two
shareholders who own 90.9% of the outstanding shares of United own 100% of the
outstanding shares of Rex. Significant intercompany accounts and transactions
are eliminated in combination.
The affiliated companies, whose financial statements are combined herein,
are related through common ownership and control. In addition, each has pledged
certain assets and guaranteed certain long-term indebtedness of the other as
described in Note H. 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.
INVENTORIES
Inventories are stated at the lower of cost, generally by the first-in,
first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by straight-line and accelerated methods
at rates based upon the estimated useful lives of the respective assets.
PRO FORMA NET INCOME (UNAUDITED)
The pro forma information presented in the combined statements of income
reflect the pro forma effects of income taxes at an effective rate of 44%, as if
the company had been a taxable entity in all tax jurisdictions.
INTERIM FINANCIAL INFORMATION
Interim financial information for the periods of three months ended March
31, 1997 and 1996 are unaudited. In the opinion of management, this information
reflects all adjustments, consisting only of adjustments of a normal recurring
nature, necessary for fair presentation of such financial statements. Financial
results for interim periods are not necessarily indicative of results for a full
year.
F-27
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
NOTE B--ACCOUNTS RECEIVABLE, PLEDGED
The Company has granted a continuing lien on all accounts receivable as
collateral to secure indebtedness to Fleet Bank ("Fleet") and Chase Manhattan
Bank ("Chase"). See Note H.
NOTE C--INVENTORIES
Inventories, consisting of envelopes and paper, amount to $2,921 as at
December 31, 1996.
NOTE D--DUE FROM TLG REALTY, LLC
In August 1996, Fishlang Realty, LLC, an entity owned by the majority
shareholders of United, changed its name to TLG Realty, LLC. ("TLG"). The
balance due as at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
TOTAL CURRENT NONCURRENT
---------- --------- -----------
<S> <C> <C> <C>
Loan receivable(1)............................................................ $ 235 $ 61 $ 174
Loan receivable(2)............................................................ 1250 1250
Accommodation advances........................................................ 55 55
---------- --------- -----------
Total, Net............................................................... $ 1540 $ 116 $ 1424
---------- --------- -----------
---------- --------- -----------
</TABLE>
(1) The amount represents the balance of a $425 loan to TLG in 1994 for the
purchase of facilities rented to United. The note is payable in 10 remaining
quarterly installments of $15 and a final principal installment of $83 due
September 17, 1999, with interest at 3/4% above the prime rate.
(2) The proceeds of the loan were used by TLG to provide funds for working
capital to a related company in connection with TLG's acquisition of a 66.7%
interest in the related company effective August 1, 1996. The obligation to
TLG is evidenced by an interest bearing note. See Note E.
See Notes K and M for additional information concerning TLG.
F-28
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE E--DUE FROM RELATED COMPANIES
The amount due from related companies as at December 31, 1996 results from
the following:
Balance due from sales.................................... $ 111
Accommodation advances.................................... 7
---------
Total..................................................... $ 118
---------
---------
For the year ended December 31, 1996, sales by the Company to a related
company amounted to approximately $805. As at December 31, 1996, the related
company is obligated to TLG (see Note D) under an interest-bearing note which
will be repaid to TLG based upon the related Company's available cash flow. The
loan approximates the underlying net assets of the related company as at
December 31, 1996.
NOTE F--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
ACCUMULATED BOOK
COST DEPRECIATION VALUE
---------- ------------ ----------
<S> <C> <C> <C>
Machinery and fixtures...................................................... $ 4,517 $ 4,030 $ 487
Transportation and delivery equipment....................................... 77 27 50
Leasehold improvements principally to property under capital lease.......... 1,455 817 638
---------- ------------ ----------
Total.................................................................. $ 6,049 $ 4,874 $ 1,175
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
Depreciation and amortization, including assets under capital lease,
amounted to $639 in 1996.
NOTE G--OTHER ASSETS
Other assets as at December 31, 1996 consist of the following:
Loans receivable, officers [payable on demand with
interest at 5.63% (1996) per annum]......................... $ 731
Loans receivable from employees(1)............................ 25
Security deposits............................................. 54
State of Israel bonds......................................... 9
Goodwill...................................................... 4
Deferred income taxes(2)...................................... 80
---------
Total.................................................... $ 903
---------
---------
(1) Loans receivable from employees are the result of advances made by the
Company.
(2) United provides deferred income taxes in connection with a timing difference
related to a capital lease. See Notes J and K.
F-29
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE H--NOTES PAYABLE, BANKS, COLLATERALIZED
The Company is indebted to Fleet and Chase for notes payable, evidencing
secured loans, in the amount of $4,800 as at December 31, 1996. The notes
payable to Fleet, amounting $2,400, bear interest at 7.88% per annum and are due
June 2, 1997. The notes payable to Chase, aggregating to $2,400, consist of
notes payable of $1,300, with interest at 7.5% due February 2, 1997, and $1,100,
with interest at 7.53% due March 11, 1997, respectively. The liability is
collateralized by a lien on the accounts receivable of the Company.
NOTE I--ACCOUNTS PAYABLE
Accounts payable, amounting to $4,806 as at December 31, 1996, consist of
amounts due to trade creditors on open account.
NOTE J--INCOME TAXES AND DISTRIBUTIONS PAYABLE TO SHAREHOLDERS
The shareholders of the Company have elected, under Subchapter S of the
Internal Revenue Code and related state statutes, to assume the liability for
federal and certain state taxes on their income tax returns. Accordingly, no
federal and certain state income taxes have been provided on such "Subchapter S"
income. In consideration of the assumption by its shareholders of the Company's
income tax liability, the Company makes distributions to its shareholders for
the payment of income taxes applicable to Subchapter S income. For the year
ended December 31, 1996, the Company declared dividends of $1,859 from the
current year Subchapter S earnings. Distributions payable to shareholders at
December 31, 1996, amounting to $256, consist of the balance of the current year
dividends on Subchapter S income.
The liability for income taxes as at December 31, 1996, amounting to $248,
consists of the current period provision, less prepayments. The combined income
tax provision for the year ended December 31, 1996 amounted to $484.
United provides deferred New York State and New York City income taxes in
connection with a timing difference related to the capital lease obligation
referred to in Note K. As at December 31, 1996, the net accumulated deferred
charge for income taxes amounts to $80, and has been included among "Other
Assets." See Note G.
NOTE K--OBLIGATION UNDER CAPITAL LEASE AND RELATED GUARANTEE
On June 1, 1985, United Envelope Co., Inc. entered into a lease agreement
with TLG Realty, LLC ("TLG") (formerly Fishlang Realty, LLC), a limited
liability company whose members are officer/ shareholders of United, under which
United leases from TLG the Company's main facility in New York City. The cost of
the acquisition and construction of the facility was financed by TLG from the
sale by the Industrial Development Agency of the City of New York of $5,000 of
Industrial Development Revenue Bonds ("Bonds") to the National Westminster Bank
USA ("NatWest") (subsequently Fleet, as successor to NatWest.) The lease, which
meets the criteria for capitalization, has been capitalized by United. Rental
payments under the lease are $58 a month as at December 31, 1996.
F-30
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE K--OBLIGATION UNDER CAPITAL LEASE AND RELATED GUARANTEE (CONTINUED)
Leased property under the capital lease as at December 31, 1996 consists of
the following:
Land and buildings........................................... $ 5000
Less: Accumulated depreciation............................... 3833
---------
Net Book Value.......................................... $ 1167
---------
---------
Under the terms of related agreements, United is obligated to make rental
payments in amounts sufficient to enable the Bond Trustee to make Bond principal
installment and interest payments as they become due.
The Bonds are payable together with interest in quarterly principal
installments of $105 through April 1, 2000.
On March 28, 1990, United entered into an interest rate swap agreement with
NatWest which effectively changes the interest rate exposure on the indebtedness
to a fixed 7.59% per annum over the remaining term of the loan.
Future minimum payments under the above lease consisted of the following as
at December 31, 1996:
YEARS ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------- ----------
1997.................................................... $ 690
1998.................................................... 690
1999.................................................... 690
2000.................................................... 288
----------
Minimum lease payments.................................. 2,358
Amounts representing interest at 11.38%................. 393
----------
Present Value of Minimum Lease Payments................. $ 1,965
----------
----------
Current portion.......................................... $ 491
Long-term portion........................................ 1,474
----------
Total............................................... $ 1,965
----------
----------
United has guaranteed the payment of the principal and interest on the
Bonds, and the Bonds are secured by the facility and an assignment of the lease
between TLG and United.
F-31
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE K--OBLIGATION UNDER CAPITAL LEASE AND RELATED GUARANTEE (CONTINUED)
Until the obligation under capital lease is paid in full, the Company must
maintain at all times the following financial covenants (as defined in the
related agreement):
Minimum ratio of combined current assets to combined
current liabilities........................................ 1.3 to 1.0
Minimum working capital...................................... $3,000
Minimum tangible net worth................................... $4,845
Maximum ratio of total combined liabilities to tangible
net worth.................................................. 2.54 to 1.0
The Company must maintain as at the last day of each of its fiscal years a
ratio of (i) combined net income plus the expense for depreciation and
amortization less dividends and capital expenditures for such year to (ii) the
required payments of principal to be paid on the current portion of long-term
indebtedness during such year amounting to 1.5.
Also, the agreement contains certain restrictions relating to the purchase
and sale of assets and the creation of additional indebtedness by United and
TLG.
As at December 31, 1996, the Company was in compliance with the above
financial covenants.
NOTE L--DUE TO HUXLEY ENVELOPE CORPORATION
The net balance due to Huxley Envelope Corporation ("Huxley"), an affiliated
company, amounted to $93 as at December 31, 1996.
Sales by the Company to Huxley amounted to approximately $467 in 1996. Sales
by Huxley to the Company amounted to approximately $6,986 in 1996.
NOTE M--COMMITMENTS
EMPLOYMENT AGREEMENT
Effective January 1, 1994, the Company entered into an employment agreement
with Isaac Moinester. The agreement obligates the Company to pay Mr. Moinester
for the period from January 1, 1995 through March 31, 1997 annual compensation
of $250 plus additional annual compensation equal to 12% of the combined net
income of the Company (as defined), with minimum additional annual compensation
of $100. In the event of his employment termination or death prior to March 31,
1997, the annual compensation and additional compensation cease. The agreement
also provides for payments of $100 annually to Mr. Moinester, or his survivors,
for ten years beginning April 1, 1997 or one month after his employment
termination or death.
F-32
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE M--COMMITMENTS (CONTINUED)
OPERATING LEASES
United Envelope Co., Inc. is additionally obligated to TLG, under a
five-year operating lease for factory, warehouse and office space located at 525
West 52nd Street for annual rentals of $128 per annum which began October 1,
1994. See Notes D and K.
The Company is obligated under an operating lease for factory, warehouse and
office space located at 111 Eighth Avenue, New York, New York, occupied by Rex,
for a term of approximately ten years with annual rentals ranging from $434 to
$536. Fleet Bank has issued, on behalf of the Company, a letter of credit in the
amount of $178 as security to the landlord pursuant to this lease.
Rex Envelope Co., Inc. is obligated under an operating lease expiring April
30, 2002 for factory, warehouse and office space located at 74 Charlton Street,
New York, New York, for annual rentals of $275 with rental increases of 5% per
annum from May 1, 1988. In January 1995, Rex subleased the aforementioned
facility through April 29, 2002. Annual subrentals under the lease increase from
$170 for the first year to $208 for the final year.
Minimum rental payments under the above leases consist of the following:
YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------------------------------- ----------
1997..................................................... $ 924
1998..................................................... 985
1999..................................................... 980
2000..................................................... 904
2001..................................................... 926
Thereafter............................................... 2,104
----------
Total............................................... $ 6,823
----------
----------
Aggregate minimum future rentals under the aforementioned sublease
approximate $1,032.
Total rent expense charged to operations for the year ended December 31,
1996 was $1,020.
LETTER OF CREDIT
Fleet has issued a letter of credit in the amount of $10 on behalf of the
Company.
F-33
<PAGE>
UNITED ENVELOPE CO., INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
(In 000's)
(CONTINUED)
NOTE N--RETIREMENT PLANS
United and Rex have qualified defined contribution profit sharing plans
covering certain nonunion salaried employees. Subject to certain limitations,
the annual contributions by the Companies are at the discretion of the Boards of
Directors. Participants in the plans may make voluntary contributions.
Contributions to the plans are made by the Companies based upon fixed
percentages of the salaries and of the voluntary contributions of eligible
employees. The plans provide generally for normal retirement at age 65. The cost
of the plans charged to operations was $138 for the year ended December 31,
1996. The Companies' policy is to fund accrued retirement costs.
Rex also sponsored a qualified defined benefit pension plan which has been
terminated. Accrued pension cost, amounting to $10 as at December 31, 1996, has
been provided for the actuarially determined estimated unfunded liability on
termination of the pension plan.
United also contributes to the Printing Specialists and Paper Products Union
(Local #447) and the International Brotherhood of Teamsters (Local #807) plans,
covering its union employees, pursuant to the terms of collective bargaining
agreements. Pension costs included in employee welfare, amounting to $76 for the
year ended December 31, 1996, were based upon the rates in the union contracts.
Under the Multiemployer Pension Plan Amendments Act of 1980, withdrawing
employers become liable for their allocable share of the plan's unfunded vested
liability. The amount of such contingent liabilities, if any, has not been
determined as at December 31, 1996.
NOTE O--RETAINED EARNINGS
Combined retained earnings of the Company, amounting to $5,436 as at
December 31, 1996, consist of "Subchapter C" retained earnings from which
dividends, if paid, will be taxable to shareholders and previously taxed
"Subchapter S" retained earnings, as follows:
TOTAL UNITED REX
---------- ---------- ---------
"Subchapter C" retained earnings........... $ 1,247 $ 995 $ 252
"Subchapter S" retained earnings........... 4,189 3,691 498
---------- ---------- ---------
Total................................. $ 5,436 $ 4,686 $ 750
---------- ---------- ---------
---------- ---------- ---------
NOTE P--INTEREST EXPENSE
Interest expense aggregated $687 for the year ended December 31, 1996.
NOTE Q--SUBSEQUENT EVENTS
The Company's shareholders have signed a letter of understanding to
proceed with negotiation of a definitive agreement to exchange their common
stock interest in the Company for shares of common stock of an acquiring
company. The exchange of stock is subject to full legal and financial due
diligence review by the acquiring company. The letter may be terminated by
either party in the event the proposed acquisition has not been completed by
April 25, 1997.
During April 1997, the Company commenced negotiations to purchase the assets
of a company engaged in business activities similar to those of the Company for
cash of approximately $450.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Huxley Envelope Corporation
Industrial Park Blvd.
Mt. Pocono Industrial Park
Mt. Pocono, Pennsylvania 18344
We have audited the accompanying balance sheet of Huxley Envelope
Corporation as at December 31, 1996, and the related statements of income,
changes in shareholder equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Huxley Envelope
Corporation as at December 31, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As referred to in Note A to the financial statements, the Company changed
its method of computing depreciation for machinery and equipment in 1996.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 7, 1997, except for Note L,
as to which the date is April 14, 1997
F-35
<PAGE>
HUXLEY ENVELOPE CORPORATION
BALANCE SHEETS
(In 000's)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1997
1996 (UNAUDITED)
- ------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
ASSETS--PLEDGED--NOTE B
Current Assets
Cash............................................................ $ 246 $ 45
Accounts receivable, net........................................ 2463 2931
Inventories--Notes A and C...................................... 3044 3543
Due from related companies--Note D.............................. 93 --
Prepaid and refundable income taxes--Note E..................... 6 --
Prepaid expenses and other current assets....................... 38 209
------ -----------
Total Current Assets.......................................... 5890 6728
Due from Pocono Envelope Company.................................. -- 575
Property and Equipment, Net--Notes A and F........................ 2752 3208
Other Assets, Partially Pledged--Note G........................... 549 62
------ -----------
TOTAL ASSETS.................................................. $ 9191 $ 10573
------ -----------
------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loan payable, The CIT Group/Business Credit, Inc.,
collateralized--Note H......................................... $ 2763 $ 3093
Term loans payable, The CIT Group/Business Credit, Inc.,
collateralized -current portion--Note I........................ 988 628
Term loan payable, PNC Bank--current portion--Note I............ 120 250
Equipment note payable, collateralized--current portion-- Note I 7 8
Dividends payable--Note E....................................... 45 189
Accounts payable................................................ 1527 1367
Liability for income taxes--Note E.............................. -- 32
Deferred income, noncompete agreement--current portion--Note J.. 25 25
Accrued expenses and other current liabilities.................. 258 199
------ -----------
Total Current Liabilities..................................... 5733 5791
------ -----------
Long-term Debt
Term loans payable, The CIT Group/ Business Credit,
Inc., collateralized--Note I.................................. 949 1874
Term loan payable, PNC Bank--Note I............................. 620 833
Equipment note payable, collateralized--Note I.................. 2 --
------ -----------
Total Long-term Debt.......................................... 1571 2707
------ -----------
Deferred Income--Noncompete Agreement--Note J..................... 40 33
------ -----------
Total Liabilities............................................. 7344 8531
------ -----------
Commitments--Note K
Subsequent Events--Note L
Shareholders' Equity
Common Stock, No Par Value:
Authorized 2,000 shares; issued and outstanding 1,350 shares... 1250 1250
Retained earnings................................................. 597 792
------ -----------
Total Shareholders' Equity.................................... 1847 2042
------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 9191 $ 10573
------ -----------
------ -----------
</TABLE>
See accompanying notes to financial statements.
HUXLEY ENVELOPE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's, except shares)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
NUMBER EARNINGS TOTAL
OF (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995..................................... 1350 $ 1250 $ (15) $ 1235
Net income....................................................... 1306 1306
Distributions to shareholders--Note E............................ (694) (694)
----- ----------- --- ------
Balance at December 31, 1996..................................... 1350 1250 597 1847
Net income (unaudited)........................................... 390 390
Distributions to shareholders (unaudited)........................ (195) (195)
----- ----------- --- ------
Balance at March 31, 1997 (Unaudited)............................ 1350 $ 1250 $ 792 $ 2042
----- ----------- --- ------
----- ----------- --- ------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
HUXLEY ENVELOPE CORPORATION
STATEMENTS OF INCOME
(In 000's)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Net sales........................................................................ $ 21844 $ 5407 $ 5841
Cost of goods sold............................................................... 17589 4280 4640
------------- --------- ---------
Gross profit................................................................... 4255 1127 1201
------------- --------- ---------
Operating Expenses
Selling........................................................................ 1008 249 293
General and administrative..................................................... 1412 380 358
------------- --------- ---------
Total Operating Expenses..................................................... 2420 629 651
------------- --------- ---------
Operating income................................................................. 1835 498 550
Other (expense) income........................................................... (171) (7) 6
------------- --------- ---------
Income before taxes and interest................................................. 1664 491 556
Interest expense................................................................. 461 105 134
------------- --------- ---------
Income before income taxes....................................................... 1203 386 422
Provision for income taxes--Note E............................................... 15 31 32
------------- --------- ---------
Income before cumulative effect of a change in accounting principle.............. 1188 355 390
Cumulative effect on prior year of changing to a different depreciation
method--Note A................................................................. 118 118 --
------------- --------- ---------
Net income....................................................................... $ 1306 $ 473 $ 390
------------- --------- ---------
------------- --------- ---------
Pro forma net income assuming the new depreciation method is applied
retroactively--Note A.......................................................... 1188 $ 355
------------- ---------
------------- ---------
Pro Forma Income Data, Assuming Pro Forma Provision for Income Taxes:
Income before income taxes..................................................... $ 1203 $ 386 $ 422
Pro forma provision for income taxes (unaudited)............................... 493 158 173
------------- --------- ---------
Pro Forma Net Income Excluding Cumulative Effect Adjustment (Unaudited).......... 710 $ 228 $ 249
------------- --------- ---------
------------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
HUXLEY ENVELOPE CORPORATION
STATEMENT OF CASH FLOWS
(In 000's)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash Flows from Operating Activities
Net income...................................................................... $ 1306 $ 473 $ 390
------ --------- ---------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change........................................ (118) (118) --
Depreciation and amortization................................................. 332 76 128
(Decrease) in deferred income on sale of assets............................... (25) (7) (7)
Changes in noncash operating assets and liabilities:
(Increase) in accounts receivable........................................... (533) (747) (468)
(Increase) in inventories................................................... (423) (294) (499)
Decrease (increase) in prepaid expenses and other current assets............ 28 (177) (171)
Decrease in due from related companies...................................... 56 150 93
(Increase) in due from Pocono Envelope Company.............................. (92) (44) (575)
Decrease in other assets.................................................... 16 75 488
Decrease in due from shareholders........................................... 49 49 --
Decrease in prepaid and refundable taxes.................................... 50 55 6
Increase (decrease) in accounts payable..................................... 654 10 (160)
(Decrease) in accrued expenses and other current liabilities................ (126) (127) (27)
------ --------- ---------
Total Adjustments......................................................... (132) (1099) (1192)
------ --------- ---------
Net cash provided by (used in) operating activities....................... 1174 (626) (802)
------ --------- ---------
Cash Flows from Investing Activities
Acquisitions of equipment....................................................... (1,154) -- (584)
Deposit on purchase of equipment................................................ (246) -- --
------ --------- ---------
Net cash (used in) investing activities................................... (1400) -- (584)
------ --------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt........................................ 771 -- 1135
Increase in short-term borrowings............................................... 1047 767 102
Principal payments of long-term debt............................................ (717) (142) --
Dividends paid.................................................................. (649) -- (52)
------ --------- ---------
Net cash provided by financing activities................................. 452 625 1185
------ --------- ---------
Net increase (decrease) in cash................................................... 226 (1) (201)
Cash at beginning of period....................................................... 20 20 246
------ --------- ---------
Cash at End of Period............................................................. $ 246 $ 19 $ 45
------ --------- ---------
------ --------- ---------
Supplemental Information:
Cash payments for interest...................................................... $ 458 $ 105 $ 134
------ --------- ---------
------ --------- ---------
Cash (recoveries of) payments for income taxes.................................. $ (34) $ 1 $ 2
------ --------- ---------
------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
HUXLEY ENVELOPE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN 000'S)
NATURE OF OPERATIONS
The Company manufactures and prints envelopes for sale to commercial
customers throughout the United States.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost, (first-in, first-out method), or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by straight-line and accelerated methods at rates
based upon the estimated useful lives of the respective assets.
Depreciation of machinery and equipment has been computed by the
straight-line method in 1996. Depreciation of machinery and equipment in
prior years was computed by accelerated methods. The Company believes the new
method more appropriately reflects the timing of the economic benefits to be
received from these assets over their estimated useful lives and has applied
the new method retroactively to machinery and equipment acquired in 1995. The
effect of the change in 1996 was to increase net income by approximately
$289. The adjustment of $118 to apply retroactively the new method is
included in income of 1996. The pro forma amounts shown on the statement of
income have been adjusted for the effect of retroactive application on
depreciation had the new method been in effect.
PRO FORMA NET INCOME (UNAUDITED)
The pro forma information presented in the statements of income reflect the
pro forma effects of income taxes at an effective rate of 41%, as if the
company had been a taxable entity in all tax jurisdictions.
INTERIM FINANCIAL INFORMATION
Interim financial information for the periods of three months ended March 31,
1997 and 1996 are unaudited. In the opinion of management, this information
reflects all adjustments, consisting only of adjustments of a normal
recurring nature, necessary for fair presentation of such financial
statements. Financial results for interim periods are not necessarily
indicative of results for a full year.
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 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.
NOTE B--PLEDGE OF ASSETS
The Company has pledged substantially all its assets as collateral for
indebtedness owing to The CIT Group/Business Credit, Inc. ("CITBC"). See
Notes H and I.
F-39
<PAGE>
HUXLEY ENVELOPE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S)
NOTE C--INVENTORIES, PLEDGED
Inventories as at December 31, 1996 are as follows:
Raw materials.................... $1616
Work in process.................. 72
Finished product................. 1356
-----
Total........................ $3044
-----
-----
NOTE D--DUE FROM RELATED COMPANIES, PLEDGED
The Company sells finished product to Rex Envelope Co., Inc. ("Rex") and
purchases contract labor and services from United Envelope Co., Inc.
("United"), companies affiliated through certain common stock ownership. The
balance due from the related companies amounts to $93 as at December 31,
1996. Sales to the Company amounted to approximately $467 in 1996. Sales by
the Company to the affiliates amounted to approximately $6,986 for the year
ended December 31, 1996.
NOTE E--INCOME TAXES, DUE FROM SHAREHOLDERS AND DIVIDENDS
The shareholders of the Company elected, under Subchapter S of the Internal
Revenue Code and applicable state statutes, to assume the liability for
federal and certain state taxes on the Company's income. Accordingly, no
federal income taxes have been provided on such "Subchapter S" income which
amounted to $1,188 for the year ended December 31, 1996.
Prepaid and refundable income taxes, amounting to $6 as at December 31, 1996,
represent prepayments less the current provision for state and local income
taxes.
In accordance with the Company's policy of distributing Subchapter S income
to its shareholders, dividends were declared amounting to $694 in 1996.
NOTE F--PROPERTY AND EQUIPMENT, PLEDGED
Property and equipment as at December 31, 1996 are summarized as follows:
Machinery and equipment...................... $3026
Transportation and delivery equipment........ 21
Deposit on machinery (represents
approximately 50% of total cost)........... 246
-----
3293
Less: Accumulated depreciation............... 541
-----
Net Book Value............................... $2752
-----
-----
Depreciation amounted to $331 for the year ended December 31, 1996.
F-40
<PAGE>
HUXLEY ENVELOPE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S)
NOTE G--OTHER ASSETS, PARTIALLY PLEDGED
Other assets as at December 31, 1996 consist of the following:
Due from Pocono Envelope Company (1)................................. $383
Deferred financing costs, net of amortization........................ 55
Deferred organization costs, net of amortization..................... 9
Security deposits.................................................... 7
Loans to employees related to relocation--noncurrent
portion (2)........................................................ 95
----
Total.......................................................... $549
----
----
(1) The amount due from Pocono Envelope Company, a company affiliated through
common stock ownership, represents security deposits totalling $250 and
advance rents on premises which the Company occupied in 1995. See related
Note K.
(2) The current portion of such loans amounts to $27 and is included among
Prepaid Expenses and Other Current Assets.
Note H--Loan Payable, The CIT Group/Business Credit, Inc., Collateralized
The balance payable of $2,763 as at December 31, 1996, represents amounts due
under a line of credit provided to the Company by CITBC. The line of credit
is collateralized by assignments of substantially all the assets of the
Company. The balance payable bears interest at prime plus 1/2% per annum.
Under the terms of the related financing agreement, CITBC is committed to
make revolving loans to the Company up to the lesser of (i) $4,000 plus the
principal repaid to CITBC by the Company on the term loans referred to in
Note I, or (ii) amounts based upon certain designated percentages of the
Company's eligible accounts receivable and inventory, as defined. The related
financing agreement subjects the Company to certain covenants that are
described in Note I.
NOTE I--LONG-TERM DEBT, COLLATERALIZED
LONG-TERM DEBT CONSISTS OF:
INTEREST RATE TOTAL CURRENT LONG-TERM
------------- ------- --------- ---------
CITBC Loans (1):
Term loan A Prime +1/4% $ 1080 $ 820 $ 260
Term loan B 8.9641% 738 134 604
Term loan C 8.9641% 119 34 85
------- ------- -------
Term CITBC Loans 1937 988 949
Term Loan--PNC Bank (2) 740 120 620
Equipment loans (3) 9 7 2
------- ------- -------
Total $ 2686 $ 1115 $ 1571
------- ------- -------
------- ------- -------
F-41
<PAGE>
HUXLEY ENVELOPE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S)
NOTE I--LONG-TERM DEBT, COLLATERALIZED (CONTINUED)
(1) The Company is indebted to CITBC for term loans totaling $1,937 as at
December 31, 1996. Term loan A is payable in 16 quarterly principal
installments which commenced September 1, 1995. The remaining quarterly
payments, as amended, consist of five payments of $205 each and a final
payment of $55. Term loan B, which commenced July 28, 1995, is payable
in eighty-four monthly principal payments of $11 each. Term loan C,
which commenced July 28, 1995, is payable in fifty-four monthly
principal payments of $3 each. The loans are collateralized by
substantially all of the assets of the Company. See Note B.
Until the loans are paid in full, the Company must meet the following
financial requirements set forth in the related financing agreement for the
periods designated in the table below.
<TABLE>
<CAPTION>
MINIMUM
MINIMUM MINIMUM INTEREST MINIMUM MAXIMUM
WORKING NET COVERAGE CURRENT LEVERAGE
CAPITAL WORTH RATIO (A) RATIO RATIO (B)
--------- --------- --------- -------- ---------
<C> <C> <C> <S> <C> <C>
For the Periods:
02/28/95--03/31/96 $ 900 $ 1000 1.7 to 1.0 1.1 to 1.0 6.0 to 1.0
04/01/96--12/30/96 1100 1300 1.9 to 1.0 1.1 to 1.0 6.0 to 1.0
12/31/96--12/30/97 1300 1400 1.9 to 1.0 1.1 to 1.0 6.0 to 1.0
12/31/97 and thereafter 1500 1600 1.9 to 1.0 1.1 to 1.0 6.0 to 1.0
</TABLE>
- ------------------------
(a) Ratio of earnings before all interest and taxes to interest.
(b) Ratio of total liabilities to net worth
The financing agreement also contains certain restrictions on the Company
relating to, among other things, the purchase and sale of assets,
creation of additional indebtedness, maximum compensation to executive
officers and minimum life insurance on officers. The Company is in
compliance with the loan covenants and restrictions or has obtained the
appropriate waivers.
(2) The Company is indebted to PNC Bank on a term loan payable in sixty
monthly installments of $16, including interest at 8.69% per annum, with
the final installments due in October 2001. Under the terms of the
related loan agreement and other loan agreements between Pocono Envelope
Company and PNC (see Note K), the loan is collateralized by specific
equipment of the Company and the Company is subject to the above
described covenants. The Company is in compliance with such covenants or
has obtained the appropriate waivers from PNC.
(3) The equipment loans are payable in monthly installments, including
interest through May 1998.
F-42
<PAGE>
HUXLEY ENVELOPE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S)
NOTE I--LONG-TERM DEBT, COLLATERALIZED (CONTINUED)
Maturities of the long-term portion are as follows:
YEARS ENDING DECEMBER 31,
---------------------------
1998 $ 572
1999 324
2000 321
2001 287
2002 67
------
Total $ 1571
------
------
NOTE J--NONCOMPETE AGREEMENT
In connection with the sale of certain equipment in a prior year, the Company
also entered into a noncompete agreement with the buyer. Under the agreement,
the Company agreed not to compete with the buyer's business for a period of 5
years in exchange for $125. Such amount is being amortized to income over the
term of the agreement. Amortization for the year ended December 31, 1996
amounted to $25.
NOTE K--COMMITMENTS
Lease with and Guarantee of Indebtedness of Pocono Envelope Company ("Pocono")
The Company has guaranteed indebtedness of Pocono to PNC Bank and the
Pennsylvania Industrial Development Authority aggregating approximately
$3,266 as at December 31, 1996. Such indebtedness arose in connection with
Pocono's original acquisition and construction of manufacturing premises
which Huxley occupied in June 1995 and additional construction in 1996. The
related loan agreement requires rental payments from Huxley to Pocono in
amounts equal to Pocono's monthly aggregate principal and interest payments
which commenced in 1996. Total aggregate payments in 1996 on the indebtedness
of Pocono was approximately $325. As at December 31, 1996, definitive
financing and leasing arrangements with respect to the premises are subject
to future negotiations.
Total rent expense for the year ended December 31, 1996 was $388. The expense
includes $325 of rent payments to Pocono.
NOTE L--SUBSEQUENT EVENTS
The Company's shareholders have signed a letter of understanding to proceed
with negotiation of a definitive agreement to exchange their common stock
interest in the Company for shares of common stock of an acquiring company.
The exchange of stock is subject to full legal and financial due diligence
review by the acquiring company. The letter may be terminated by either party
in the event the proposed acquisition has not been completed by April 25,
1997.
F-43
<PAGE>
Exhibit 1
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1996 and 1995, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. 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, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended April 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Diego, California
June 4, 1996
1
<PAGE>
Mail Boxes Etc.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
April 30,
--------------------
Assets 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current Assets: Cash and cash equivalents $ 1,416 $ 391
Restricted cash--franchisee deposits 2,073 1,614
Short-term investments 21,825 10,037
Accounts receivable, net of allowance for doubtful accounts of $1,507 and $1,212, at
April 30, 1996 and 1995, respectively 6,799 6,723
Receivable from National Media Fund 770 1,600
Inventories 544 983
Current portion of notes receivable 6,756 6,065
Current portion of net investment in sales-type and direct financing leases 2,414 2,489
Deferred income taxes 1,846 1,454
Re-acquired area and center rights held for resale 638 1,016
Other 1,063 1,005
--------- ---------
Total current assets 46,144 33,377
Notes receivable, net 10,831 11,429
Net investment in sales-type and direct financing leases 7,518 8,840
Property and equipment:
Land 1,200 1,200
Building and improvements 4,201 4,178
Office furniture and equipment 4,018 3,486
Vehicles 209 195
--------- ---------
Total property and equipment 9,628 9,059
Less accumulated depreciation and amortization 4,247 3,444
--------- ---------
Net property and equipment 5,381 5,615
Excess of cost over assets acquired, net of accumulated amortization of $549 and $492 at
April 30, 1996 and 1995, respectively 441 498
Re-acquired area rights, net of accumulated amortization of $240 and $79 at April 30, 1996
and 1995, respectively 3,240 3,031
Deferred income taxes 1,307 651
Other assets 904 853
--------- ---------
Total assets $ 75,766 $ 64,294
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,096 $ 1,151
Franchisee deposits 2,619 2,153
Royalties, referrals and commissions payable 2,515 2,449
Accrued employee expenses and related taxes 1,963 1,463
Other accrued expenses 2,012 1,174
Income taxes payable 838 717
Current maturities of long-term debt 958 1,705
--------- ---------
Total current liabilities 13,001 10,812
Long-term debt, net of current maturities 1,402 1,337
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and
outstanding -- --
Common stock, no par value, 40,000,000 shares authorized, with 11,139,698 and
11,058,387 shares issued outstanding at April 30, 1996 and 1995, respectively 14,944 14,455
Retained earnings 46,419 37,690
--------- ---------
Total shareholders' equity 61,363 52,145
--------- ---------
Total liabilities and shareholders' equity $ 75,766 $ 64,294
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
2
<PAGE>
Mail Boxes Etc.
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Revenue:
Royalty and marketing fees $ 30,947 $ 24,673 $ 19,972
Franchise fees 8,557 8,670 7,837
Sales of supplies and equipment 10,839 10,020 10,820
Interest income on leases and other 6,975 5,424 3,972
Company centers 1,789 1,564 1,059
--------- --------- ---------
Total revenue 59,107 50,351 43,660
Cost and Expenses:
Franchise operations 14,881 12,506 10,480
Franchise development 5,883 5,090 3,896
Cost of supplies and equipment sold 8,465 7,915 8,914
Marketing 4,068 4,630 3,713
General and administrative 10,293 7,878 6,105
Company centers 1,842 1,598 1,026
--------- --------- ---------
Total cost and expenses 45,432 39,617 34,134
--------- --------- ---------
Operating income 13,675 10,734 9,526
Interest on investments and other 674 447 642
--------- --------- ---------
Income before provision for income taxes 14,349 11,181 10,168
Provision for income taxes 5,620 4,411 4,136
--------- --------- ---------
Net income $ 8,729 $ 6,770 $ 6,032
--------- --------- ---------
--------- --------- ---------
Net income per common share $ 0.77 $ 0.60 $ 0.49
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding 11,403 11,357 12,433
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes
3
<PAGE>-
Mail Boxes Etc.
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Common stock
-------------------- Retained
Shares Amount Earnings Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1993 12,267 $ 24,620 $ 24,888 $ 49,508
Exercise of employee stock options 72 429 429
Common stock repurchased (770) (6,317) (6,317)
Income tax benefit from stock option activity 463 463
Net income 6,032 6,032
--------- --------- --------- ---------
Balance, April 30, 1994 11,569 19,195 30,920 50,115
Exercise of employee stock options and other 146 928 928
Common stock repurchased (657) (5,681) (5,681)
Income tax benefit from stock option activity 13 13
Net income 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995 11,058 14,455 37,690 52,145
Exercise of employee
stock options and other 221 2,135 2,135
Common stock repurchased (140) (1,922) (1,922)
Income tax benefit from stock option activity 276 276
Net income 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996 11,139 $ 14,944 $ 46,419 $ 61,363
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes
4
<PAGE>
Mail Boxes Etc.
Consolidated Statements of Cash flows
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended ApriL 30,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Operating Activities:
Net income $ 8,729 $ 6,770 $ 6,032
Adjustments to reconcile net
income to net cash provided
from (used in) operating
activities:
Depreciation and amortization 1,030 1,024 1,054
Gain on sale of equipment under sales type lease agreements (558) (681) (965)
Increase in allowance for bad debts 880 1,236 658
Loss on retirement of fixed assets 4 122 22
Deferred income taxes (1,054) (1,023) (843)
Changes in assets and liabilities:
Restricted cash (459) (252) 624
Accounts and notes receivable (1,049) (7,386) (4,772)
Receivable from National Media Fund 830 (1,600) --
Assets leased to franchisees and inventories (1,235) (1,999) (3,689)
Re-acquired area and center rights held for resale 378 261 (427)
Other current assets (58) 421 (724)
Other assets 152 173 (206)
Accounts payable 945 419 (295)
Franchisee deposits 466 747 (630)
Royalties, referrals and commissions payable 66 610 160
Accrued employee expenses and related taxes 500 697 (173)
Other accrued expenses 838 821 17
Income taxes payable 397 730 (189)
--------- --------- ---------
Net cash flows provided
from (used in)
operating activities 10,802 1,090 (4,346)
Investing Activities:
Net change in short-term investments (11,773) 389 5,685
Additions to property and equipment (472) (477) (438)
Principal payments received on sales-type leases 3,628 3,223 3,893
Re-acquired area rights (185) (887) --
--------- --------- ---------
Net cash flows provided
from (used in) investing activities (8,802) 2,248 9,140
Financing Activities:
Borrowing under line of credit 3,720 3,800 --
Repayments under line of credit (4,550) (2,200) --
Repayments on notes payable (146) (54) --
Repurchase of common shares (1,922) (5,681) (6,317)
Proceeds from the issuance of common stock 1,923 937 429
--------- --------- ---------
Net cash flows used in financing activities (975) (3,198) (5,888)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 1,025 140 (1,094)
Cash and cash equivalents at beginning
of year 391 251 1,345
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,416 $ 391 $ 251
--------- --------- ---------
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for income taxes $ 6,348 $ 5,479 $ 5,965
Interest expense 155 98 32
Supplemental Schedule of Non-Cash and Financing Activities
Equipment sold under sales-type leases $ 2,232 $ 2,724 $ 4,596
Cost of equipment sold under sales-type leases 1,674 2,043 3,631
Notes payable issued in connection with re-acquired area rights 185 1,495 --
Accounts and notes forgiven in connection with re-acquired area rights -- 468 --
Exchange of area rights -- 260 --
</TABLE>
See accompanying notes
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November,
1983, as a California corporation. It operates domestically through one
wholly-owned subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants
territorial franchise rights for the operation or sale of service centers
specializing in postal, packaging, business and communication services. The
purchase price paid by the Company to acquire this subsidiary exceeded the
subsidiary's net assets by $858 thousand; the excess is being amortized on
the straight-line method over 20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. Subsequent to the end of the year MBE acquired
the remaining interest in the United Kingdom. All accounts of this foreign
subsidiary have been measured using U.S. dollars as the functional currency.
The gains and losses arising from the measurement of the foreign subsidiary's
account have not been significant.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company 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
collectable over an extended period and no reasonable basis exists for
estimating collectibility.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1996, the Company had advanced $770 thousand to the
National Media Fund to fund certain national advertising programs. These
advances, including interest, are to be repaid to the Company during FY97 based
on the collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective for fiscal years beginning after December
15, 1993. The Company adopted the new standard beginning May 1, 1994. The
cumulative effect of the adoption of Statement No. 115 was immaterial.
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, the Company had no investments that
were classified as trading or held to maturity as defined by Statement 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 cash and the estimated fair value of available
for sale securities by balance sheet classification at April 30, 1996:
<TABLE>
<S> <C>
Cash and cash equivalents (In thousands):
Cash $ 1,339
Money market fund 77
Short-term investments (In thousands):
U.S. Government guaranteed securities 4,000
Mutual fund preferred equity securities 17,825
---------
Total cash, cash equivalents and short-term investments $ 23,241
---------
---------
</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.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount plus any other monies deposited with
MBE by its franchisees. These amounts are either not refundable or they are not
related to a sale.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
Receivables from franchisees include trade receivables, lease receivables
and notes receivable. Credit is extended based on an evaluation of the
franchisee's financial condition. Sales-type and direct financing leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that amounts owed be paid when a center is
transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. Credit
losses are provided for in the financial statements.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
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 thousand and $1.0 million in such individual and area rights
at April 30, 1996 and 1995, 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 as
opposed to pooling transactions. 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 30, 1996
no adjustment is necessary. The Company had an investment of $3.2 million in
such area rights at April 30, 1996. Area franchise rights held as long-term
investments are amortized over a period of 20 years.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building 31.5 years
12.5-31.5
Building improvements years
Office furniture and equipment 3-5 years
Vehicles 3 years
</TABLE>
NEW ACCOUNTING STANDARDS
During 1995, Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation." The statement allows companies to
measure compensation cost in connection with employee stock compensation plans
using a fair value based method or to continue to use an intrinsic value based
method, which generally does not result in compensation expense. The Company
plans to continue using the intrinsic value based method.
During FY96, the Company adopted SFAS No. 121, Accounting for the Impairment
of Long--Lived Assets. The effect of the adoption of SFAS 121 was not material.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes."
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual
franchisees, due at varying dates through 2004. $ 11,170 $ 10,220
Notes with interest rates ranging from 8%-14%, from area franchisees,
due at varying dates through 2004. 6,611 6,220
Notes with interest rates ranging from 8.5%--11.75%, from master
licensees, due at varying dates through 2001. 1,806 2,469
--------- ---------
19,587 18,909
Less portion due within one year (6,756) (6,065)
Less allowance for uncollectible notes (2,000) (1,415)
--------- ---------
$ 10,831 $ 11,429
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30: $ 2,041 $ 1,537
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1996,
are as follows (in thousands): 1997--$6,756; 1998--$3,838; 1999--$3,188;
2000--$2,321; 2001--$1,566 and thereafter -$1,918.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At April 30, 1996, the Company is obligated to fund approximately $350
thousand under certain financing programs offered to franchisees.
3.NET INVESTMENT SALES -TYPE AND DIRECT FINANCING LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type and direct financing leases
at April, 30:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received $ 13,241 $ 15,429
Less unearned income (3,309) (4,100)
--------- ---------
Net investment in sales-type and direct financing leases 9,932 11,329
Less portion due within one year (2,414) (2,489)
--------- ---------
$ 7,518 $ 8,840
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30: $ 1,420 $ 1,525
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1996, are as follows
(in thousands): 1997-- $3,608; 1998--$3,176; 1999 -$2,506; 2000--$1,759;
2001--$1,122; and thereafter--$1,070.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1996, $0.8 million has been borrowed and $6.2
million is available for borrowing under the line of credit.
The line of credit is unsecured and bears interest at a rate based on LIBOR
plus certain basis points (6.61% at April 30, 1996). The agreement expires on
September 1, 1998, at which time all outstanding borrowing can be converted to a
three-year term loan, which would be payable in equal monthly installments. The
line of credit agreement contains various covenants, including limitations on
additional indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $23 thousand including interest at 8% to 8.5% per
annum. Included in notes payable is $816 thousand payable to a former area
franchisee. Aggregate principal maturities on notes payable at April 30, 1996
are as follows (in thousands): 1997--$162; 1998--$176; 1999--$174;
2000--$154; 2001-- $167; and thereafter--$670.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 5,324 $ 4,352 $ 3,841
State 1,344 1,088 1,138
--------- --------- ---------
6,668 5,440 4,979
Deferred:
Federal (913) (890) (732)
State (135) (139) (111)
--------- --------- ---------
(1,048) (1,029) (843)
--------- --------- ---------
$ 5,620 $ 4,411 $ 4,136
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $752 thousand has been
credited to common stock.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of April 30 are:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
-------------------------------
Valuation reserves $ 2,646 $ 1,679 $ 628
State taxes 339 295 352
Deferred compensation 168 131 96
--------- --------- ---------
Total deferred tax assets $ 3,153 $ 2,105 $ 1,076
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
State tax, net of federal tax benefit 5.5% 5.6% 6.5%
Other (1.3%) (0.1%) 0.2%
----- ----- -----
39.2% 39.5% 40.7%
----- ----- -----
----- ----- -----
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1996, 394 thousand options were exercisable and the Company
had nearly 3.0
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million shares available for future grant under the stock option plan for
employees and 160 thousand shares available for future grant under the stock
option plans for outside directors. Transactions under the stock option plans
during FY96, FY95 and FY94 are summarized as follows:
<TABLE>
<CAPTION>
PRICE PER
NUMBER OF SHARES SHARE
------------------- --------------
<S> <C> <C>
(IN THOUSANDS)
Outstanding at April 30, 1993 768 $ 2.91-20.50
Granted 227 10.50-12.75
Exercised (72) 2.91- 9.43
Cancelled (76) 7.03-13.75
----- --------------
Outstanding at April 30, 1994 847 4.13-20.50
Granted 258 6.81- 9.88
Exercised (146) 4.13- 7.74
Cancelled (45) 6.81-13.75
----- --------------
Outstanding at April 30, 1995 914 4.13-20.50
Granted 441 8.25-18.88
Exercised (221) 4.13-13.75
Cancelled (21) 9.44-13.75
----- --------------
Outstanding at April 30, 1996 1,113 $ 4.13-20.50
----- --------------
----- --------------
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises $ 6,397 $ 6,774 $ 6,310
Area franchises 292 58 218
Master licenses & international fees 957 1,170 1,142
Transfer and renewal fees 911 668 167
--------- --------- ---------
$ 8,557 $ 8,670 $ 7,837
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1996--$11,686; 1995--$9,689; and 1994--$8,126.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $450 thousand, $420 thousand and
$120 thousand for the years ended April 30, 1996, 1995 and 1994, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1996, 1995 and
1994 were equal to 50% of the employee's contributions.
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar
life insurance policy for his benefit. The Company contributed $100 thousand
in both FY96 and FY95, towards the funding of this policy. The Company has
retained an equity interest in this policy equal to the extent of its
contributions. Consequently, there is no effect on the Company's earnings as
a result of these contributions. Contributions after FY96 will be determined
annually by the Board of Directors.
11. LITIGATION
The Company has become subject to various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
A significant portion of the franchisees' revenues is generated by UPS
services. The Company receives royalty revenue based on revenues earned by the
franchisees. The Company recognized royalty and marketing fee revenues generated
from UPS services of $9.3 million, $7.4 million and $5.9 million for the years
ended April 30, 1996, 1995, and 1994, respectively.
13. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 12,937 $ 15,240 $ 16,329 $ 15,275
Total cost and expenses 10,279 11,804 11,870 11,479
Provision for income taxes 1,036 1,345 1,751 1,488
Net income 1,622 2,091 2,708 2,308
Earnings per share .14 .18 .24 .20
</TABLE>
<TABLE>
<CAPTION>
FY95 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 9,845 $ 12,900 $ 14,837 $ 13,216
Total cost and expenses 7,963 10,225 11,087 10,342
Provision for income taxes 768 1,088 1,434 1,121
Net income 1,114 1,587 2,316 1,753
Earnings per share .10 .14 .20 .16
</TABLE>
14
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, APRIL
1997 30
(UNAUDITED) 1996
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,659 $ 1,416
Restricted cash--franchisee deposits 1,726 2,073
Short-term investments 25,386 21,825
Accounts receivable, net 6,105 6,799
Receivable from National Media Fund -- 770
Inventories 698 544
Current portion of notes receivable 7,109 6,756
Current portion of net investment in sales-type and direct financing
leases 2,349 2,414
Deferred income taxes 1,846 1,846
Re-acquired area and center rights held for resale 784 638
Other current assets 1,143 1,063
--------- -----------
Total current assets 51,805 46,144
Notes receivable, net 10,601 10,831
Net investment in sales-type and direct financing leases 6,449 7,518
Property and equipment, net 5,110 5,381
Excess of cost over assets acquired, net 398 441
Re-acquired area rights 6,530 3,240
Deferred income taxes 1,307 1,307
Other assets 1,017 904
--------- -----------
Total assets $ 83,217 $ 75,766
--------- -----------
--------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,104 $ 2,096
Franchisee deposits 2,308 2,619
Royalties, referrals and commissions payable 3,647 2,515
Accrued employee expenses and related taxes 1,620 1,963
Other accrued expenses 1,731 2,012
Income taxes payable 847 838
Current maturities of debt and notes payable 430 958
--------- -----------
Total current liabilities 11,687 13,001
Long-term debt, net of current maturities 4,023 1,402
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized,
with none issued and outstanding -- --
Common stock, no par value, 40,000,000 shares authorized, with
11,264,878 and 11,139,698 shares issued outstanding at January 31,
1997 and April 30, 1996, respectively 15,931 14,944
Retained earnings 51,576 46,419
--------- -----------
Total shareholders' equity 67,507 61,363
--------- -----------
Total liabilities and shareholders' equity $ 83,217 $ 75,766
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
15
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
01/31/97 01/31/96 01/31/97 01/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees $ 11,063 $ 10,088 $ 26,648 $ 23,390
Franchise fees 2,211 1,871 6,742 6,293
Sales of supplies and equipment 3,049 2,163 9,978 8,048
Interest income on leases and other 2,190 1,584 6,341 4,947
Company centers 325 458 956 1,387
--------- --------- --------- ---------
Total revenues 18,838 16,164 50,665 44,065
Cost and Expenses:
Franchise operations 5,521 4,871 14,010 11,370
Franchise development 1,392 1,150 4,345 3,902
Cost of supplies and equipment sold 2,273 1,619 7,462 6,426
Marketing 1,452 907 4,513 3,081
General and administrative 2,246 2,843 6,587 7,747
Company centers 320 480 1,001 1,426
Litigation settlement expenses -- -- 5,000 --
--------- --------- --------- ---------
Total cost and expenses 13,204 11,870 42,918 33,952
Operating Income 5,634 4,294 7,747 10,113
Interest on investments and other 233 165 709 441
--------- --------- --------- ---------
Income before provision for income taxes 5,867 4,459 8,456 10,554
Provision for income taxes 2,310 1,751 3,299 4,132
--------- --------- --------- ---------
Net income $ 3,557 $ 2,708 $ 5,157 $ 6,422
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share: $ .30 $ .24 $ .44 $ .56
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding 11,798 11,495 11,782 11,410
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
16
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net income $5,157 $ 6,422
Adjustments to reconcile net income to net cash provided from (used in) operating
activities:
Depreciation and amortization 805 769
Gain on sale of equipment under sales-type lease agreements (361) (437)
Changes in assets and liabilities:
Restricted cash 347 234
Accounts and notes receivable 466 (1,026)
Receivable from National Media Fund 770 (1,220)
Assets leased to franchisees and inventories (1,362) (1,082)
Re-acquired area and center rights (46) 526
Other current assets (80) 72
Other assets (316) (145)
Accounts payable (992) 796
Franchisee deposits (311) (123)
Royalties, referrals and commissions payable 1,132 1,178
Accrued employee expenses and related taxes (343) 166
Other accrued expenses and litigation (188) 829
Income taxes payable 9 (227)
--------- ---------
Net cash flows provided from operating activities 4,687 6,732
Investing Activities:
Net change in short-term investments (3,561) (5,074)
Additions to property and equipment (307) (246)
Principal payments received on sales-type leases 2,703 2,815
Re-acquired area rights (439) (135)
--------- ---------
Net cash flows used in investment activities (1,604) (2,640)
Financing Activities:
Borrowings under revolving loan 930 3,520
Repayments under revolving loan (1,700) (2,300)
Repayments on notes payable (260) (103)
Repurchase of common shares (283) (1,129)
Proceeds from the issuance of common shares 1,473 997
--------- ---------
Net cash flows provided from financing activities 160 985
Increase in cash and cash equivalents 3,243 5,077
Cash and cash equivalents at beginning of period 1,416 391
--------- ---------
Cash and cash equivalents at end of period $4,659 $ 5,468
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes $3,351 $ 4,737
Interest 171 118
Supplemental Schedule with Non-Cash Investment and Financing
Activities:
Equipment sold under sales-type agreements $1,568 $ 1,821
Additions to debt for acquisition of equipment -- 109
Additions to debt for acquisition of Area rights 1,343 --
</TABLE>
See accompanying notes.
17
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1.BASIS OF PRESENTATION:
Note 1.Presentation
The condensed consolidated balance sheet as of January 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
nine-month periods ended January 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the nine-month periods then ended have
been prepared by Mail Boxes Etc. (the "Company") without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In addition, certain
Risk Factors may also impact future financial reports. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the 1996 Annual Report
on Form 10-K, as well as the Risk Factors discussed in the Form 10-K report.
The results of operations for the quarter and the nine months ended January
31, 1997 are not necessarily indicative of the operating results for the full
year.
Certain reclassifications have been made to prior period balances to conform
to current period presentations.
Note 2.Litigation
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court.
Under the settlement agreement, the Company agreed to pay $4 million in cash
and deliver an aggregate amount of 39,080 shares of its common stock over a
period of two years. This settlement expense is reflected in the Company's
financial results for the second quarter ended October 31, 1996, by establishing
a $5 million reserve.
The Company is still involved in various other lawsuits and potential claims
from its franchisees and employees which arise in the ordinary course of the
Company's business. While the Company cannot predict the outcome of all other
matters, management does not believe that the disposition of these other matters
will have a material adverse effect on the Company's results of operations or
financial position.
18
